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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-12
PENDARIES PETROLEUM LTD.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON SHARES OF ULTRA PETROLEUM CORP.
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(2) Aggregate number of securities to which transaction applies:
14,577,033 COMMON SHARES
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$2.57 was the average of the bid and ask price of Ultra Petroleum Corp.
share price on 10/27/00.
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(4) Proposed maximum aggregate value of transaction:
$37,462,974.81
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(5) Total fee paid:
$7,487.70
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[Pendaries Petroleum Ltd. Logo]
SHARE EXCHANGE PROPOSED - YOUR VOTE IS VERY IMPORTANT
Dear Shareholder:
Our board of directors has unanimously approved an arrangement agreement in
which all of the outstanding Pendaries common shares will be exchanged for
common shares of Ultra Petroleum Corp. The share exchange is referred to as an
"arrangement." If approved by our shareholders, Pendaries will then become a
wholly-owned subsidiary of Ultra and shareholders of Pendaries will be entitled
to receive 1.58 Ultra common shares in return for each Pendaries common share
they currently own. Outstanding Ultra common shares will remain unchanged in the
exchange.
Pendaries will hold a special shareholders' meeting to consider and vote on
the arrangement proposal. Pendaries and Ultra shareholder approval of the
arrangement proposal is required to complete the arrangement.
Our board of directors believes that the arrangement is in your and
Pendaries' best interests and recommends that you vote FOR approval of the
arrangement.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please take the time to vote by completing the enclosed proxy card and
mailing it to us c/o our transfer agent, CIBC Mellon Trust Company, Proxy
Department, 200 Queen's Quay East, Unit 6, Toronto, Ontario M5A 4K9, facsimile
number (416) 368-2502. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be counted as a vote FOR the
arrangement proposal. If you do not instruct your broker how to vote any shares
held for you in "street name," your shares will not be voted at the special
meeting.
The date, time and place of the shareholders' special meeting is:
December 28, 2000
10:00 a.m., local time
The Houston City Club
One City Club Drive
Nine Greenway Plaza,
Houston, Texas 77046
The attached proxy statement gives you detailed information about the
proposed arrangement. We encourage you to carefully read this entire document,
including all of its appendices, and we especially encourage you to read the
section on "Risk Factors" beginning on page 11 of the attached proxy statement.
We at Pendaries enthusiastically back this compelling combination of these
two oil and natural gas exploration and production companies, and we join with
the members of our board of directors in urging that you vote FOR the
arrangement. I thank you for your support.
Robert E. Rigney
Chairman of the Board and Chief Executive Officer
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[Pendaries Petroleum Ltd. Logo]
Notice of Special Meeting of Shareholders
To Be Held December 28, 2000
To the Shareholders of Pendaries Petroleum Ltd.:
A special meeting of shareholders of Pendaries Petroleum Ltd. will be held
on Thursday, December 28, 2000, at 10:00 a.m., local time, at The Houston City
Club, One City Club Drive, Nine Greenway Plaza, Houston, Texas 77046, for the
following purposes:
. to consider, pursuant to an order of The Court of Queen's Bench of New
Brunswick dated December ____, 2000, and, if deemed advisable, to
pass, with or without variation, a special resolution referred to as
the "arrangement resolution," under section 128 of the Business
Corporations Act (New Brunswick), referred to in the attached proxy
statement as the "New Brunswick Act," involving the "arrangement," the
principle element of which is the acquisition by Ultra Petroleum Corp.
of the outstanding common shares of Pendaries; and
. to transact such other business as may properly be brought before the
special meeting and any adjournments or postponements thereof.
The arrangement is described in the accompanying proxy statement. The full
text of the arrangement resolution is set out in Appendix A to the proxy
statement.
Holders of record of Pendaries common shares at the close of business on
December 1, 2000 will be entitled to vote at the special meeting or any
adjournment or postponement thereof. A shareholder may be entitled to be paid
the fair value of his shares if he dissents to the arrangement resolution and
the arrangement becomes effective.
Our board of directors has determined that the arrangement is in the best
interests of our shareholders. Our board of directors unanimously recommends
that you vote to approve the arrangement and the transactions contemplated by
the arrangement resolution at the special meeting.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please take the time to vote by completing the enclosed proxy card and
mailing it to us c/o our transfer agent, CIBC Mellon Trust Company, Proxy
Department, 200 Queen's Quay East, Unit 6, Toronto, Ontario M5A 4K9, facsimile
number (416) 368-2502. The form of proxy must be received by no later than 5:00
p.m. (Toronto time) on December 27, 2000 or, if the special meeting is adjourned
or postponed, by no later than 5:00 p.m. (Toronto time) on the second business
day before the day fixed for the adjourned or postponed special meeting. If you
do not instruct your broker how to vote any shares held for you in "street
name," your shares will not be voted at the special meeting.
Please sign, date and return the proxy card immediately whether or not you
plan to attend the special meeting in person. A stamped envelope is enclosed for
this purpose. Your prompt return of the proxy card will ensure a quorum and save
us the expense of further solicitation.
By order of the board of directors
Houston, Texas Robert E. Rigney
December 1, 2000 Chairman of the Board and Chief Executive Officer
The accompanying proxy statement provides additional information relating
to the matters to be dealt with at the special meeting and is deemed to form
part of this Notice.
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TABLE OF CONTENTS
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Page
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Currency..................................................................................................................... 1
Important Information........................................................................................................ 1
Summary Term Sheet........................................................................................................... 2
The Companies...................................................................................................... 2
The Proposed Arrangement, Exchange Ratio and Directors and Officers after Closing.................................. 2
The Pendaries Special Meeting and Shareholder Approval............................................................. 2
The Ultra Special Meeting and Shareholder Approval................................................................. 3
Reasons for the Transaction........................................................................................ 3
Alternatives Considered............................................................................................ 4
Fairness Opinion................................................................................................... 5
Ultra and Pendaries Stock Prices................................................................................... 5
Risk Factors....................................................................................................... 5
Court Approval..................................................................................................... 5
Effective Time of the Arrangement.................................................................................. 5
Stock Exchange Listings............................................................................................ 5
Dissenters' Rights................................................................................................. 6
Certain Tax Considerations for Pendaries Shareholders.............................................................. 6
The Credit Agreement............................................................................................... 7
Questions and Answers about the Arrangement.................................................................................. 8
Risk Factors................................................................................................................. 11
Risks Relating to the Arrangement.................................................................................. 11
U.S. Tax Risks Relating to the Arrangement......................................................................... 12
Risks Relating to Ultra's Business................................................................................. 12
Risks Relating to Pendaries' Business.............................................................................. 16
Risks Relating to Our Industry..................................................................................... 18
Forward-Looking Statements................................................................................................... 20
The Arrangement.............................................................................................................. 21
General............................................................................................................ 21
Background of the Arrangement...................................................................................... 21
Brief Description of the Transaction............................................................................... 22
Reasons for the Transaction and Recommendation of Our Board of Directors........................................... 22
Fairness Opinion of Loewen, Ondaatje, Mccutcheon Limited, Pendaries' Financial Advisor............................. 24
Ultra after the Arrangement........................................................................................ 27
Pendaries Shareholder Approval of the Arrangement Resolution....................................................... 27
Ultra Shareholder Approval of the Arrangement...................................................................... 27
Court Approval of the Arrangement and Completion of the Arrangement................................................ 27
Fractional Interests............................................................................................... 28
Treatment of Outstanding Pendaries Stock Options................................................................... 28
Accounting Treatment............................................................................................... 29
Consequences under Securities Laws; Resale of Ultra Common Shares.................................................. 29
Fees and Expenses.................................................................................................. 29
Dissenters' Rights................................................................................................. 29
Procedures for Exchange of Share Certificates by Pendaries Shareholders............................................ 30
</TABLE>
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<TABLE>
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The Arrangement Agreement.................................................................................................... 32
Conditions of the Arrangement...................................................................................... 32
Termination........................................................................................................ 32
Arrangement Mechanics.............................................................................................. 33
The Special Meeting.......................................................................................................... 34
Time, Place and Date............................................................................................... 34
Purpose of the Special Meeting..................................................................................... 34
Solicitation of Proxies............................................................................................ 34
Voting by Proxies.................................................................................................. 34
Record Date, Quorum and Entitlement to Vote........................................................................ 35
Required Vote to Approve the Arrangement Resolution................................................................ 35
Voting Securities and Principal Holders Thereof.................................................................... 35
Revocability of Proxies............................................................................................ 35
Access to Pendaries Corporate Files................................................................................ 36
Other Matters...................................................................................................... 36
The Credit Agreement......................................................................................................... 37
Amount of Loan; Use of Proceeds.................................................................................... 37
Security for the Loan; Term of the Loan............................................................................ 37
Events of Default.................................................................................................. 37
Consequences of a Default.......................................................................................... 37
Ultra Selected Consolidated Financial and Operating Data..................................................................... 38
Pendaries Selected Consolidated Financial and Operating Data................................................................. 40
Unaudited Pro Forma Condensed Combined Financial Statements of Ultra and Pendaries........................................... 41
Comparative Market Data...................................................................................................... 46
Selected Comparative per Share Data.......................................................................................... 47
Pendaries Petroleum Ltd...................................................................................................... 48
The Company........................................................................................................ 48
Description of Share Capital....................................................................................... 48
Management's Discussion and Analysis of Financial Condition and Results of Operations of Pendaries........................... 48
General............................................................................................................ 48
Results of Operations.............................................................................................. 48
Liquidity and Capital Resources.................................................................................... 49
Principal Shareholders of Pendaries.......................................................................................... 52
Directors and Executive Officers of Pendaries................................................................................ 53
Ultra Petroleum Corp......................................................................................................... 54
The Company........................................................................................................ 54
Recent Developments................................................................................................ 55
Description of Property............................................................................................ 55
Net Oil and Natural Gas Production, Average Price and Average Production Cost...................................... 55
Gross and Net Productive Wells..................................................................................... 56
Gross and Net Developed and Undeveloped Acres...................................................................... 56
Exploratory Wells and Developed Wells.............................................................................. 57
Estimated Net Quantities of Proved Reserves and Present Value of Estimated Future Net Reserves..................... 58
Legal Proceedings.................................................................................................. 59
</TABLE>
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<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations of Ultra............................... 59
General............................................................................................................ 59
Results of Operations.............................................................................................. 61
Liquidity and Capital Resources.................................................................................... 62
Capital Expenditures............................................................................................... 62
Description of Ultra Capital Stock........................................................................................... 62
Common Shares...................................................................................................... 62
Preferred Stock.................................................................................................... 63
Principal Shareholders of Ultra.............................................................................................. 64
Directors and Executive Officers of Ultra.................................................................................... 65
Certain Relationships and Related Transactions..................................................................... 65
Comparison of Shareholders' Rights........................................................................................... 66
Place of Meetings and Shareholders................................................................................. 66
Dissent Rights of Shareholders..................................................................................... 66
Vote Required for Extraordinary Transactions....................................................................... 67
Calling a Shareholders' Meeting.................................................................................... 67
Oppression Remedy.................................................................................................. 67
Derivative Action.................................................................................................. 68
Director Qualifications............................................................................................ 68
Fiduciary Duties of Directors...................................................................................... 68
Shareholder Voting Rights.......................................................................................... 69
Consent of Shareholders in Lieu of Meeting......................................................................... 69
Inspection Rights.................................................................................................. 69
Pre-emptive Rights................................................................................................. 69
Dividends and Repurchases of Shares................................................................................ 70
Amendments to Governing Instruments................................................................................ 70
Indemnification of Directors, Officers and Others.................................................................. 70
Director Liability................................................................................................. 71
Proposal of Shareholders........................................................................................... 71
Mandatory Solicitation of Proxies.................................................................................. 72
Financial Assistance............................................................................................... 72
Canadian Federal Income Tax Considerations................................................................................... 72
Holders of Pendaries Common Shares Resident in Canada.............................................................. 73
Holders of Pendaries Common Shares Not Resident in Canada.......................................................... 74
U.S. Federal Income Tax Considerations for U.S. Holders...................................................................... 75
Passive Foreign Investment Company Status.......................................................................... 76
The Exchange Under the Arrangement................................................................................. 77
Dissenting U.S. Holders............................................................................................ 78
Disposition of Ultra Shares........................................................................................ 78
Dividends.......................................................................................................... 79
Information Reporting and Backup Withholding....................................................................... 79
Legal Matters................................................................................................................ 79
Where You Can Find More Information.......................................................................................... 79
Other Information About Pendaries - Documents Incorporated by Reference............................................ 79
Documents Available Without Charge From the Companies.............................................................. 80
Other Matters................................................................................................................ 81
</TABLE>
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Appendices:
<S> <C>
Appendix A - Arrangement Resolution for Pendaries Shareholders
Appendix B - Interim Order of The Court of Queen's Bench of New Brunswick
Appendix C - Notice of Application for Final Order
Appendix D - Arrangement Agreement
Appendix E - Plan of Arrangement
Appendix F - Fairness Opinion of Loewen, Ondaatje, McCutcheon Limited
Appendix G - New Brunswick Dissenters' Rights Provisions
Appendix H - Excerpt from Ultra Proxy Circular dated May 2, 2000
Appendix I - Ultra December 31, 1999 Form 20-F
Appendix J - Ultra June 30, 1999 Form 20-F
Appendix K - Ultra First, Second and Third Quarter Interim Financial Statements for 2000
Appendix L - Letter of Transmittal
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CURRENCY
Unless otherwise indicated, all dollar amounts in this proxy statement are
expressed in U.S. dollars. The following table shows the rates of exchange for
a Canadian dollar per US$1 in effect at the end of certain periods. The high
and low rates of exchange for the periods and the average rate of exchange for
the periods are also shown. The average for the period was calculated by
averaging the noon buying rate or noon spot rate, as applicable, on the last
business day of each month during the period. All rates are based on the noon
buying rate, certified by the Federal Reserve Bank of New York for customs
purposes in New York City for cable transfers in Canadian dollars.
<TABLE>
<CAPTION>
Year Ended December 31 (Canadian Dollars) Nine Months Ended
----------------------------------------- -----------------
1999 1998 1997 1996 1995 September 30, 2000
------ ------ ------ ------- ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
High for the period 1.5302 1.5770 1.4398 1.3822 1.4238 1.5081
Low for the period 1.4440 1.4075 1.3357 1.3310 1.3285 1.4341
Average for the period 1.4827 1.4894 1.3893 1.3644 1.3689 1.4712
End of period 1.4440 1.5375 1.4288 1.3697 1.3655 1.5070
</TABLE>
On ________, 200_, the noon buying rate in Canadian dollars reported by the
Federal Reserve Bank of New York was US$1 = Cdn$1.____.
IMPORTANT INFORMATION
THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION WHERE AN OFFER OR
SOLICITATION WOULD BE ILLEGAL.
IN DECIDING HOW TO VOTE, YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT. NEITHER PENDARIES NOR ULTRA HAS AUTHORIZED ANY PERSON TO
PROVIDE YOU WITH ANY INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN
THIS PROXY STATEMENT.
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT SPEAKS ONLY AS OF THE DATE
INDICATED ON THE COVER OF THIS DOCUMENT UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES.
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SUMMARY TERM SHEET
This summary highlights selected information from this document and may not
contain all of the information that is important to you. You should read this
entire document carefully, including documents incorporated by reference and
attached as appendices and the other documents to which this document refers to
fully understand the arrangement. See "Where You Can Find More Information" on
page 79.
The Companies
Pendaries Petroleum Ltd.
Pendaries Petroleum Ltd. was incorporated under the laws of Canada on
August 29, 1996 and was continued under the laws of the Province of New
Brunswick on September 9, 1996. We are a Houston-based independent oil and
natural gas exploration company with interests in two oil concession blocks in
the Bohai Bay, China. At September 30, 2000, we had seven employees in Houston,
Texas and one employee in Beijing, China. Our corporate headquarters is located
at 8 Greenway Plaza, Suite 910, Houston, Texas 77046 and our phone number is
(713) 355-2900. For more information about Pendaries, see "Pendaries Petroleum
Ltd." and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Pendaries" on page 48.
Ultra Petroleum Corp.
Ultra Petroleum Corp. was incorporated on November 14, 1979 under the laws
of the Province of British Columbia and continued on March 1, 2000 under the
laws of the Yukon Territory. Ultra is an oil and natural gas exploration
company which, since its inception, has derived 90% of its income from the sale
of natural gas. The bulk of Ultra's natural gas leases are located in Wyoming.
Ultra's corporate headquarters is located at 16801 Greenspoint Park Drive, Suite
370, Houston, Texas 77060 and its phone number is (281) 876-0120. Ultra has 14
full-time employees. For more information about Ultra, see "Ultra Petroleum
Corp." on page 54 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 59.
The Proposed Arrangement, Exchange Ratio and Directors and Officers After
Closing
The arrangement agreement provides for an arrangement in which each
Pendaries common share will be exchanged for 1.58 Ultra common shares. After
the arrangement is consummated, Pendaries will be a wholly-owned subsidiary of
Ultra. The total number of Ultra common shares received by Pendaries
shareholders will be equal to approximately 21% of the Ultra common shares
outstanding immediately after the closing of the arrangement.
Following completion of the arrangement, the senior management of Ultra
will consist of Michael Watford as Chairman, CEO and President, Bobby Fogle
(currently Pendaries' Vice-President, Finance) as Vice-President, Accounting and
Fox Benton, III as Vice-President, Finance. In addition, upon completion of the
arrangement, Robert E. Rigney will be appointed as a director of Ultra, and if
expansion of the size of the Ultra board of directors is approved by Ultra's
shareholders, a second current member of the Pendaries board of directors will
be nominated for election as a director of Ultra.
The arrangement agreement is attached as Appendix D and the plan of
arrangement is attached as Appendix E to this document. Please carefully read
the arrangement agreement and the plan of arrangement. These documents are the
legal documents that govern the arrangement, the principal element of which is
an exchange of all outstanding Pendaries common shares for Ultra common shares.
The Pendaries Special Meeting and Shareholder Approval
. December 28, 2000, 10:00 a.m., local time, at The Houston City Club,
One City Club Drive, Nine Greenway Plaza, Houston, Texas 77046.
. You can vote at the Pendaries special meeting if you owned Pendaries
common shares at the close of business on December 1, 2000.
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. Approval of the arrangement and the transactions contemplated by the
arrangement agreement, including the share exchange, requires the
affirmative approval of the holders of at least two-thirds of the
shares voted at this meeting in person or by proxy, assuming there is
a quorum of at least 25% of the shares.
. As of October 25, 2000, Pendaries' directors and executive officers
beneficially owned approximately 17.4% of the outstanding Pendaries
common shares.
. Our officers and directors have indicated that they intend to vote in
favor of the arrangement proposal.
The Ultra Special Meeting and Shareholder Approval
. Date, time, place: December 15, 2000, 10:00 a.m., local time, at
Houston Marriott North, 255 North Sam Houston Parkway East, Houston,
Texas 77060.
At the special meeting, the Ultra shareholders will be asked to approve the
arrangement. The arrangement must be approved by more than 50% of the votes
cast by the holders of Ultra common shares, present or voting by proxy at the
meeting. See "The Arrangement -- Ultra Shareholder Approval of the Arrangement"
on page 27.
Reasons for the Transaction
. the consideration offered to our shareholders in connection with the
arrangement, valued as of October 13, 2000, the effective date of the
arrangement agreement, at US$2.54 per Ultra common share, based on
the closing price for Ultra common shares on The Toronto Stock
Exchange, referred to in this proxy statement as "TSE", represented a
premium of approximately 15% over our closing price of US$3.50 on
October 13, 2000 on The American Stock Exchange, referred to in this
proxy statement as "AMEX" for a Pendaries common share and a premium
of approximately 31% to the average closing price on AMEX for the 10
days preceding the date the arrangement agreement was entered into;
. the opinion of Loewen, Ondaatje, McCutcheon Limited, referred to in
this proxy statement as "Loewen, Ondaatje," dated October 13, 2000
that the consideration payable under the arrangement is fair, from a
financial point of view, to our shareholders;
. the risks and potential rewards associated with, as an alternative to
the arrangement, continuing to execute our business and strategic
plans as an independent entity, including the likelihood that in the
absence of this or another transaction, we will run out of cash by the
end of the first quarter 2001, or possibly the middle of the second
quarter of 2001 and therefore will lose our assets and have to file
for bankruptcy;
. the ability of our shareholders to continue to participate in a widely
held public company which has a larger market capitalization and
greater liquidity than us; and
. the ability of our shareholders to have a continued interest in the
Bohai Bay properties, as well as an interest in the properties that
Ultra currently holds.
For additional discussion of the reasons for the arrangement and the
determination of the board of directors to recommend the arrangement, see "The
Arrangement--Reasons for the Transaction and Recommendation of our Board of
Directors."
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Alternatives Considered
Because of our limited cash resources, our board of directors determined in
June 1999 to investigate potential merger options as well as raising additional
capital. During 1999 and 2000, we explored numerous financing alternatives,
including public and private equity sales, long or short-term loans and mergers
with various potential partners. All but one of these
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efforts, the arrangement with Ultra, failed to produce a transaction that our
board of directors believed would benefit our shareholders.
Fairness Opinion
Loewen, Ondaatje has acted as financial advisor to Pendaries in connection
with the arrangement. Loewen, Ondaatje has provided its opinion to the special
committee and the board of directors of Pendaries that, based upon and subject
to the various considerations set forth in its opinion, the consideration
offered by Ultra for the acquisition of the common shares of Pendaries pursuant
to the arrangement is fair, from a financial point of view, to the holders of
common shares of Pendaries. The special committee recommended to the board of
directors of Pendaries that it approve the arrangement agreement and the
transactions contemplated by the arrangement agreement and the board of
directors of Pendaries unanimously recommends that Pendaries shareholders vote
FOR the Pendaries arrangement resolution approving the arrangement.
Ultra and Pendaries Stock Prices
As of October 13, 2000, the day the transaction was approved by our board
of directors, Ultra's closing stock price on the TSE was Cdn $3.85 per share, or
approximately US $2.54. On the same day, the Pendaries closing stock price on
AMEX was US $3.50 per share. See "Selected Comparative Per Share Data" on page
47 and "Comparative Market Data" on page 46 for information about the
historical and pro forma share prices of Ultra and Pendaries.
Risk Factors
There are certain risk factors that should be considered by you as a
Pendaries shareholder in evaluating whether to approve the arrangement. These
investment considerations relate both to the arrangement and an investment in
Ultra common shares. See "Risk Factors" beginning on page 11.
Court Approval
An arrangement under the Business Corporations Act (New Brunswick),
referred to in this proxy statement as the "New Brunswick Act," requires
approval by The Court of Queen's Bench of New Brunswick. Before mailing this
proxy statement, we obtained the interim order of The Court of Queen's Bench
providing for the calling and holding of our shareholders' special meeting and
other procedural matters. Subject to the approval of the resolution relating to
the arrangement by our shareholders at the special meeting, and the approval of
the arrangement by the Ultra shareholders at the Ultra special meeting, the
hearing in respect of the final order of The Court of Queen's Bench is scheduled
to take place on or about December 29, 2000 at 10:00 a.m. in The Court of
Queen's Bench of New Brunswick, referred to in this proxy statement as "The
Court of Queen's Bench," at 110 Charlotte Street, Saint John, New Brunswick. See
"The Arrangement-- Court Approval of the Arrangement and Completion of the
Arrangement" on page 27.
Effective Time of the Arrangement
The arrangement will be completed as soon as practicable after receipt of
the requisite approvals from our shareholders, the Ultra shareholders and The
Court of Queen's Bench and after all other conditions to the arrangement have
been satisfied or waived. We currently expect that the effective time of the
arrangement will occur on or about January 2, 2001. See "The Arrangement --
Court Approval of the Arrangement and Completion of the Arrangement" on page 27.
Stock Exchange Listings
The TSE has been notified of the proposed arrangement and has conditionally
approved the listing of the Ultra common shares to be issued to our shareholders
as part of the arrangement, subject to the satisfaction of the customary
requirements of the TSE. We anticipate that Pendaries common shares will be
delisted from AMEX and the TSE on or shortly after the effective date of the
arrangement. Ultra has applied for listing of its common shares on AMEX. We do
not know, however, whether the Ultra common shares will be approved for listing.
The listing of Ultra common shares on
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AMEX is not a condition to the consummation of the arrangement. See "The
Arrangement - Consequences Under Securities Laws; Resale of Ultra Common Shares"
on page 29.
Dissenters' Rights
Pendaries shareholders who properly exercise their dissenters' rights will
be entitled to be paid the fair value, as measured on the day preceding the
special meeting, of their common shares by Pendaries. The dissent procedures
require that a Pendaries shareholder who wishes to dissent must be a registered
shareholder and must provide Pendaries with a written objection to the
arrangement resolution before 5:00 p.m. on the business day preceding the
Pendaries special meeting (not on the day of the meeting). It is important that
registered Pendaries shareholders strictly comply with this requirement. See
"The Arrangement -- Dissenters' Rights" on page 29.
Certain Tax Considerations for Pendaries Shareholders
Pendaries shareholders should carefully read the information under
"Canadian Federal Income Tax Considerations" beginning on page 72 and "U.S.
Federal Income Tax Considerations For U.S. Holders" beginning on page 75, which
qualifies the information set forth below. You are urged to consult with your
own tax advisor.
Canada
Holders of Pendaries Common Shares Resident in Canada
Generally, a holder of Pendaries common shares who exchanges Pendaries
common shares for Ultra common shares, who is resident in Canada for the
purposes of the Canadian Tax Act and any applicable tax treaty, and who holds
those Pendaries common shares as capital property, will not realize any capital
gain or capital loss by virtue of that exchange unless such holder chooses to
report any portion of that capital gain or capital loss in that holder's income
tax return filed for the taxation year in which the exchange occurs.
Holders of Pendaries Common Shares not Resident in Canada
Generally, a holder of Pendaries common shares who exchanges Pendaries
common shares for Ultra common shares, who is not resident in Canada for the
purposes of the Canadian Tax Act and any applicable tax treaty, and who holds
those Pendaries common shares as capital property and does not hold such shares
in connection with carrying on a business in Canada, will not be subject to
Canadian tax in respect of the exchange unless those Pendaries common shares
constitute "taxable Canadian property" to that holder and such holder chooses to
report any portion of that capital gain or capital loss in that holder's
Canadian income tax return filed for the taxation year in which the exchange
occurs.
United States
A U.S. holder generally will not recognize gain or loss on the exchange
under the arrangement of Pendaries shares solely for Ultra shares if the U.S.
holder timely makes a qualified election to be currently taxable on such U.S.
holder's pro rata share of Pendaries' ordinary earnings, excluding net capital
gain, and net capital gain for each year at ordinary and long-term capital gain
rates, respectively. A U.S. holder generally will recognize gain, but not loss,
on the exchange of Pendaries shares solely for Ultra shares equal to the
difference between the fair market value of the U.S. holder's Ultra shares
immediately after the exchange and the U.S. holder's basis in its Pendaries
shares exchanged therefor, if the U.S. holder does not timely make a qualified
election. Any gain recognized will generally be allocated ratably to all days
in the U.S. holder's holding period for the shares. Any amount allocated to the
current tax year of the U.S. holder and any period in the U.S. holder's holding
period before the first day of the first tax year of Pendaries for which it was
a PFIC is includible in the U.S. holder's gross income as ordinary income in the
current tax year. Any amount allocated to each other period is includible in
the U.S. holder's current tax year gross income as ordinary income, subject to
tax at the highest marginal tax rate applicable to the U.S. holder in the year
such income was so attributed, and subject to an interest charge on taxes deemed
deferred by such U.S. holder. Dissenters to the exchange under the arrangement
are subject to special U.S. tax treatment.
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THE CREDIT AGREEMENT
In addition to the arrangement agreement governing the arrangement, Ultra
has entered into a credit agreement with our wholly-owned subsidiary, Sino-
American Energy Corporation, as borrower, and Pendaries, as guarantor. Sino-
American owns our Bohai Bay properties. Under the credit agreement Ultra has
agreed to loan Sino-American up to $5.0 million between October 13, 2000 and
either the closing of the arrangement with Ultra, the closing of a transaction
with another party or December 31, 2001, whichever comes first. Sino-American
may request to draw against the $5.0 million whenever its cash reserve would
drop below $500,000 without the loan funds. Pendaries, as guarantor of the
loan, has pledged all of the stock of Sino-American to Ultra to secure the loan.
Therefore, a default under the credit agreement would result in the loss of all
of the Sino-American stock and the loss of all of our assets. Ultra has the
right to pay cash calls we are required to pay under the operating agreements
governing the Bohai Bay properties if we are unable to pay them. If Ultra pays
the cash calls, Ultra has the right to foreclose on these assets. As of October
27, 2000, we had borrowed $500,000 from Ultra under the credit agreement.
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QUESTIONS AND ANSWERS ABOUT THE ARRANGEMENT
The following questions and answers highlight selected information
regarding the transactions described in this proxy statement and may not contain
all information that is important to you as you consider the merits of the
transactions. For a more complete description of the terms of the transactions,
please read this entire document carefully and the documents referred to in this
proxy statement.
Q: What am I being asked to vote on at the special meeting?
A: You are being asked to approve the arrangement agreement that provides for
the exchange of Pendaries common shares for common shares of Ultra,
resulting in Pendaries becoming a wholly-owned subsidiary of Ultra.
Q: What will I receive when the arrangement occurs?
A: You will receive 1.58 Ultra common shares for each Pendaries common share
that you hold.
Q: Are there risks associated with the arrangement that I should consider in
deciding how to vote?
A: Yes. There are risks associated with all business combinations, including
the arrangement. You should be aware that the number of Ultra common
shares that Pendaries shareholders will receive is fixed and will not
change as the market prices of Pendaries common shares and Ultra common
shares fluctuate in the period before the arrangement. Accordingly, the
value of the Ultra common shares that Pendaries shareholders will receive
in return for their Pendaries common shares may be either less than or more
than the current market price of those Ultra common shares. There are also
a number of other risks that are discussed elsewhere in this document.
Please read with particular care the more detailed description of the risks
associated with the arrangement beginning on page 11.
Q: What will happen if the arrangement is not approved by the Pendaries or
Ultra shareholders?
A: The arrangement will not occur, the $5.0 million available to Pendaries
under its line of credit with Ultra is only expected to last through the
end of the first quarter 2001, orpossibly into the middle of the second
quarter of 2001 and, unless Pendaries is able to find another source of
funding, Ultra will be able to foreclose on our Bohai Bay properties upon
payment by Ultra of a cash call or December 31, 2001, whichever comes
first.
Q: When will the arrangement be complete?
A: We and Ultra are working to complete the arrangement as soon as possible
after the special meeting. We expect to complete the arrangement in
January 2001 if our shareholders approve the arrangement at the special
meeting. After the shareholders approve the arrangement and before the
arrangement can be consummated, a court in Canada must determine the
fairness of the transaction to our shareholders.
Q: What will happen in the arrangement?
A: In the arrangement, Pendaries will become a wholly-owned subsidiary of
Ultra. Pendaries shareholders will become Ultra shareholders and will own
approximately 21% of the Ultra common shares that are outstanding after the
arrangement. Current Ultra shareholders will own the remaining shares
representing approximately 79% of the outstanding common shares of Ultra.
Q: What will happen to Ultra common shares in the arrangement?
A: Nothing. Each Ultra common share outstanding will remain outstanding as an
Ultra common share.
Q: Will the Ultra common shares trade on an exchange after the arrangement?
A: The TSE has been notified of the proposed arrangement and has conditionally
approved
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the listing of the Ultra common shares issued to our shareholders as part
of the arrangement, subject to the satisfaction of the customary
requirements of the TSE We anticipate that common shares in our company
will be delisted on or shortly afterthe effective date of the arrangement.
See "Comparative Market Data." Ultra has applied to AMEX to list its common
shares. We do not know if AMEX will approve the listing. The listing of
Ultra shares on AMEX is not a condition to consummation of the agreement.
Q: How do I vote my shares?
A: After reading and considering the information contained in this document,
you should fill out and sign your proxy card, then mail your completed
signed proxy card in the enclosed return envelope as soon as possible so
your shares can be voted at the special meeting of Pendaries shareholders.
If you intend to vote to approve the arrangement, you should mark the box
on the proxy card to indicate that you vote FOR the arrangement. OUR BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR THE ARRANGEMENT.
You should return your proxy card whether or not you intend to attend the
special meeting. If you attend the special meeting and are a registered
shareholder, you may revoke your proxy at any time before it is voted and
vote in person.
Q: If I sign my proxy card, who will be voting my shares?
A: When you sign the proxy card, Robert E. Rigney or Bobby J. Fogle, both of
whom are officers and directors of Pendaries, or an individual appointed by
you are/is appointed as your representative(s) to vote your common shares
at the meeting. At the meeting, Robert E. Rigney, Bobby J. Fogle or the
individual appointed by you will vote your common shares as you instruct on
your proxy card. If an issue comes up for vote at the meeting that is not
on the proxy card, Robert E. Rigney, Bobby J. Fogle or the individual
appointed by you will vote the common shares covered by your proxy card in
accordance with the judgment of our board of directors.
Q: What if I don't vote?
A: If you sign, date and mail your proxy card without indicating how you want
to vote, your proxy will be voted in favor of thearrangement agreement and
the transactions contemplated by the arrangement agreement. If you fail to
vote in any of the ways outlined in the proxy card, or if you fail to
instruct your broker how to vote shares held for you in the broker's name,
the effect will be that your shares will not be voted.
Q: Can I change my vote after I have mailed my proxy?
A: Yes. You may change your vote at any time before the proxy card is voted
at the special meeting. You can do this either by (1) submitting to our
corporate secretary or the chairman of the meeting a written notice of
revocation or a completed later dated proxy card or (2) attending the
special meeting and voting in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will not be able to vote your shares without instructions from
you. You should follow directions provided by your broker to vote your
shares.
Q: Should I send in my Pendaries share certificates now?
A: Yes. If you intend to vote for the arrangement, please send your Pendaries
common share certificates with the letter of transmittal attached as
Appendix L. See the instructions on page 30 of this proxy statement.
Q: Who pays the cost of soliciting the proxies?
A: Pendaries will pay the costs of this proxy solicitation. We will request
banks, brokerage houses and other custodians, nominees, or fiduciaries
holding common stock in their name to send proxy materials to, and obtain
proxies from, their principals.
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Q: To whom should I address questions?
A: If you have questions, you should contact our corporate secretary, Phil
Henry, at (713) 355-2900.
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RISK FACTORS
You should carefully consider the following risk factors before you decide
whether to vote to approve the arrangement. You should fully review all of the
information we have included in this proxy statement, its appendices and the
documents incorporated by reference before casting your vote.
Risks Relating to the Arrangement
If our shareholders do not approve the arrangement, we may not be able to find
additional sources of capital and may not survive.
In October 2000, we entered into a credit agreement to borrow up to $5.0
million from Ultra, secured by the stock of Sino-American, our wholly owned
operating subsidiary. Sino-American owns our Bohai Bay properties. Under the
terms of this credit agreement, if we do not close the arrangement with Ultra,
the loan from Ultra has to be repaid in full by December 31, 2001. We currently
estimate that we will have borrowed and used the full $5.0 million under the
credit agreement by the end of the first quarter 2001, or possibly the middle of
the second quarter of 2001. If the arrangement is not approved before our cash
is depleted, we would have to find another source of capital. We will still be
obligated, however, to fund our share of the costs under the Bohai Bay operating
agreements to retain our interests. If the arrangement does not occur, Ultra
has no obligation to provide to us any funding in excess of the $5.0 million
loan, and we believe that it is unlikely that we will be able to find an
alternate source of financing. Under the terms of the credit agreement, Ultra
has the right to pay cash calls we are required to pay under the operating
agreements governing the Bohai Bay properties if we are unable to pay them. If
Ultra pays the cash calls, Ultra has the right to foreclose upon these assets
through foreclosure on the Sino-American shares. In addition, in the unlikely
event that we are able to find an alternate source to fund a cash call, we would
be in violation of the credit agreement, and Ultra would have the right to
foreclose on the Bohai Bay properties. If we repay the loan to Ultra prior to a
cash call, Ultra will not have the right to foreclose on our assets. However,
our management has pursued various sources of capital since 1998, including
public and private equity, long and short term loans and potential mergers. We
believe it is highly unlikely that another source could be found on satisfactory
terms. In the event another source could not be found, Ultra would have the
right to foreclose on the stock of Sino-American and we would have to file
bankruptcy. In that case, shareholders would be unable to sell their Pendaries
common shares.
As a result of the fixed exchange ratio, the market value of Ultra common shares
that Pendaries shareholders will receive may vary from the date that the
arrangement agreement was entered into.
The exchange ratio is a fixed ratio that will not be adjusted as a result of
any increase or decrease in the price of either Pendaries common shares or Ultra
common shares. The price of Ultra common shares at the time the arrangement is
completed may be higher or lower than its price on the date of this document or
on the date of a special meeting of Pendaries shareholders. Any change in the
price of Ultra common shares will affect the value of the consideration you
receive for your Pendaries common shares. The prices of Ultra and Pendaries
common shares may be affected by:
. changes in the business, operations, or prospects of Pendaries or
Ultra;
. market assessment of the benefits of the arrangement;
. the likelihood that the arrangement will be completed;
. regulatory considerations;
. oil and natural gas prices; and
. general market and economic conditions
Most of these factors are beyond our control.
Because the arrangement will be completed only after special meetings of both
Pendaries and Ultra shareholders and a subsequent court hearing on the fairness
of the transaction, the price of the Ultra common shares on the date of the
Pendaries special meeting may not be indicative of the price of Ultra common
shares at the time the arrangement is completed.
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Uncertainties exist in integrating our companies' business operations.
The arrangement transaction involves the integration of two companies that have
previously operated independently. We cannot assure you that Ultra will be able
to integrate our operations without encountering difficulties or that the
benefits expected from the integration will be realized. Ultra will face a
number of special risks in integrating our business, including:
. the possibility that management may be distracted from regular business
concerns by the need to integrate operations and accounting and
information systems;
. problems concerning assimilating and retaining the employees of the
combined company; and
. potential adverse short-term or long-term effects on operating results.
U.S. Tax Risks Relating to the Arrangement
If a U.S. holder does not timely make a qualified election for U.S. federal
income tax purposes, they will recognize gain, but not loss, on the exchange of
Pendaries shares for Ultra shares under the arrangement.
We believe that Pendaries will be classified as a Passive Foreign Investment
Company, known as a "PFIC," for its current taxable year beginning on January 1,
2000. We also believe that the exchange of Pendaries common shares for Ultra
common shares will qualify as a tax-free reorganization under U.S. law and that
each U.S. holder will generally not recognize gain or loss on the exchange of
Pendaries common shares solely for Ultra shares but only if the U.S. holder
timely makes a qualified election for U.S. federal income tax purposes to be
currently taxable on such U.S. holder's pro rata share of Pendaries' ordinary
earnings, excluding net capital gain, for each year at ordinary capital gain
rates, and on net capital gain for each year at long-term capital gain rates.
If a U.S. holder fails to make a timely election, the U.S. holder generally will
recognize gain, but not loss, on the exchange of Pendaries common shares for
Ultra common shares equal to the difference between the fair market value of the
U.S. holder's Ultra common shares immediately after the exchange and the U.S.
holder's basis in its Pendaries common shares exchanged therefor. We have not
asked, nor do we intend to ask, for a ruling from the IRS that the exchange will
qualify as a tax-free reorganization. There is always a risk that the IRS'
interpretation of the reorganization transaction could be unfavorable.
Dissenters to the exchange under the arrangement are subject to special U.S. tax
treatment.
If the IRS determines that Pendaries was a Passive Foreign Investment
Corporation prior to January 1, 2000, a U.S. holder would be required to
recognize ordinary income, if any, on the exchange of Pendaries common shares
for Ultra common shares and an interest charge would be imposed.
We believe that Pendaries was not a PFIC prior to January 1, 2000. If the
IRS determines Pendaries was a PFIC prior to January 1, 2000, U.S. holders would
be required to recognize ordinary income, if any, on the exchange under the
arrangement and an interest charge would be imposed on taxes deemed deferred by
U.S. holders. We have not asked, and do not intend to ask, for a ruling from
the IRS addressing whether Pendaries was a PFIC prior to January 1, 2000. In
addition, we have not asked for a tax opinion as to whether each individual U.S.
holder would be subject to this tax. There is always a risk that the IRS could
determine that Pendaries was a PFIC prior to January 1, 2000 or that any
individual U.S. holder would be subject to this tax. For a more detailed
explanation of the tax consequences to U.S. holders under the PFIC rules, read
the discussion under "U.S. Federal Income Tax Considerations for U.S. Holders."
Risks Relating to Ultra's Business
Ultra may continue to incur significant costs and may not be able to realize a
significant portion of the value of its properties due to environmental factors.
In 1998, the United States Bureau of Land Management, the "BLM," initiated an
Environmental Impact Study, or "EIS," for Ultra's Pinedale Anticline area in the
Green River Basin of Wyoming. An EIS evaluates the effects an industry's
activities will have on the environment in which the activity is proposed. The
EIS encompasses approximately 200,000 gross acres north of the Jonah Field,
where most of Ultra's exploration and development is taking place. The EIS
includes an analysis of the geological and reservoir characteristics of the area
plus environmental studies related to wildlife, surface use, and socio-economic
and air quality issues. On July 27, 2000, the Bureau issued the final EIS,
which allows for
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the drilling of 700 producing surface locations within the EIS areas. The EIS
does not authorize the drilling of particular wells; rather, Ultra must submit
applications to the BLM's Pinedale field manager for permits to drill and for
other required authorizations, such as rights-of-ways for pipelines, for each
specific well or pipeline location. Development activities in the Pinedale
Anticline area, as on all federal leaseholds, remain subject to regulatory
agency approval. In making its determination on whether to approve specific
drilling or development activities, the BLM applies the requirements outlined in
the EIS.
The EIS imposes limitations and restrictions on activities in the Pinedale
Anticline area and proposes mitigation guidelines, standard practices for
industry activities and best management practices for sensitive areas. The EIS
also provides for annual reviews to compare actual impacts to what was projected
in the EIS and to make any adjustments in mitigation if necessary. The review
team is comprised of operators, local residents and other affected persons. The
BLM's field manager may also impose additional limitations and mitigation
measures as is deemed reasonably necessary to mitigate the impacts of drilling
and production operations in the area.
To date, Ultra has been required to expend significant resources in order to
satisfy applicable environmental laws and regulations in the Pinedale Anticline
area and other areas of operation under the jurisdiction of the BLM, and it is
expected that Ultra's costs of complying with these regulations will continue to
be substantial. Compliance costs under the EIS and any revisions to the EIS
could become material. In addition, any additional limitations and mitigation
measures could increase production costs further, delay exploration, development
and production activities or curtail exploration, development and production
activities altogether.
Environmental and other governmental regulation may materially increase costs
and reduce future net revenues.
Ultra's operations are subject to numerous laws and regulations governing the
discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may:
. require that Ultra acquire permits before commencing drilling;
. restrict the substances that can be released into the environment in
connection with drilling and production activities;
. limit or prohibit drilling activities on protected areas such as wetlands
or wilderness areas; and
. require remedial measures to mitigate pollution from former operations,
such as plugging abandoned wells.
Under these laws and regulations, Ultra could be liable for personal injury
and clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. Ultra maintains limited insurance
coverage for sudden and accidental environmental damages, but does not maintain
insurance coverage for the full potential liability that could be caused by
sudden and accidental environmental damages. Accordingly, Ultra may be subject
to liability or may be required to cease production from properties in the event
of environmental damages.
A significant percentage of Ultra's operations are conducted on public lands.
These operations are subject to a variety of on-site security regulations as
well as other permits and authorizations issued by the BLM, the Wyoming
Department of Environmental Quality and other agencies. A portion of Ultra's
acreage is affected by winter lease stipulations that prohibit exploration,
drilling and completing activities generally from November 15 to May 15, but do
allow production activities all year round. To drill wells in Wyoming, Ultra is
required to file an Application for Permit to Drill with the Wyoming Oil and Gas
Commission. Drilling on acreage controlled by the federal government requires
the filing of a similar application with the BLM. These permitting requirements
may adversely affect Ultra's ability to complete its drilling program at the
cost and in the time period currently anticipated. On large-scale projects,
lessees may be required to perform environmental impact statements to assess the
environmental impact of potential development, which can delay project
implementation and/or result in the imposition of the environmental restrictions
that could have a material impact on cost or scope.
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A significant portion of Ultra's drilling program must be suspended during the
winter in Wyoming, and its production may be interrupted by severe weather,
causing delays and increasing the cost of operations.
Ultra's operations are conducted principally in the Rocky Mountain region.
The weather in this region can be extreme and may cause interruption in Ultra's
exploration and production operations. Moreover, severe weather can result in
damage to facilities, entailing longer operational interruptions and significant
capital investment. Likewise, Ultra's Rocky Mountain operations are subject to
disruption from winter storms and severe cold fronts which can limit operations
involving fluids and impair access to Ultra's facilities.
Ultra invests heavily in exploration, which is riskier than acquisition of
already producing properties.
Ultra historically invests a significant portion of its capital budget in
drilling exploratory wells in search of unproved oil and natural gas reserves.
The exploratory wells drilled by Ultra may not be productive and Ultra may not
recover all or any portion of its investments. To increase the chances for
exploratory success, Ultra often invests in seismic or other geoscience data to
assist it in identifying potential drilling objectives. Additionally, the cost
of drilling, completing and testing exploratory wells is often not known at the
time of Ultra's initial investment. Depending on complications encountered
while drilling, the final cost of the wells may significantly exceed that which
Ultra originally estimates.
A fall in natural gas prices could have a significant negative impact on Ultra's
financial results.
Ultra derives its revenue principally from the sale of natural gas. As a
result, Ultra's revenues are determined, to a large degree, by prevailing
natural gas prices. Ultra sells the majority of its natural gas in the open
market at prevailing market prices, or pursuant to market price contracts. The
market price for natural gas is dictated by supply and demand, and Ultra cannot
predict or control the price it receives for its natural gas. Moreover, market
prices for natural gas vary significantly by region. For example, natural gas
in the Rocky Mountain region, where Ultra produces most of its natural gas,
historically sells for less than natural gas in the Midwest and Northeast.
Accordingly, Ultra's income and cash flows will be greatly affected by changes
in natural gas prices and by regional pricing differentials. Ultra will
experience reduced cash flows and may experience operating losses when natural
gas prices are low. Under extreme circumstances, Ultra's natural gas sales may
not generate sufficient revenue to meet Ultra's, and, on a post-arrangement
basis, the combined companies', financial obligations and fund planned capital
expenditures. Moreover, significant price decreases could negatively affect
Ultra's reserves by reducing the quantities of reserves that are recoverable on
an economic basis, necessitating write downs to reflect the realizable value of
the reserves in the low price environment.
Loss of the services of Ultra's management could harm Ultra and its ability to
raise needed capital.
Ultra depends, and will continue to depend for the foreseeable future, on the
services of its executive officers, particularly Michael D. Watford. Mr.
Watford has extensive experience in successfully raising capital in the capital
markets, which is a critical element in Ultra's future. Ultra could be
adversely affected if it were to lose his services. Ultra has an employment
agreement with Mr. Watford which began February 1, 1999 and has an initial three
year term. After the first three year term, the contract renews automatically
for successive one year terms unless either side gives a termination notice at
least 90 days before the end of any term.
Ultra may not be able to replace reserves.
Ultra's future success, and, if the arrangement is consummated, the success
of Ultra and Pendaries combined, depends upon the ability to find, develop and
acquire oil and natural gas reserves that are economically recoverable. As a
result, Ultra must locate and develop or acquire new oil and natural gas
reserves to replace those being depleted by production. Ultra must do this even
during periods of low oil and natural gas prices when it is difficult to raise
the capital necessary to finance these activities. Without successful
exploration or acquisition activities, Ultra's reserves, production and revenues
will decline rapidly. Ultra may not be able to find and develop or acquire
additional reserves at an acceptable cost.
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Factors beyond Ultra's control affect its ability to market oil and natural gas.
The ability to market oil and natural gas depends on numerous factors beyond
Ultra's control. These factors include:
. the extent of domestic production and imports of oil and natural gas;
. the proximity of natural gas production to natural gas pipelines;
. the availability of pipeline capacity; the demand for oil and natural gas
by utilities and other end users;
. the availability of alternative fuel sources; the effects of inclement
weather;
. state and federal regulations of oil and natural gas marketing; and
. federal regulation of natural gas sold or transported in interstate
commerce.
Because of these factors, Ultra may be unable to market all of the oil and
natural gas it produces, including, on a post-arrangement basis, oil and natural
gas that may be produced from the Bohai Bay properties. In addition, it may be
unable to obtain favorable prices of the oil and natural gas it produces.
As a result of drilling and operating risks, Ultra may not be able to discover
or economically produce oil and natural gas.
Ultra's oil and natural gas operations, including its operations on a post-
arrangement basis, are subject to all of the risks and hazards typically
associated with drilling for, and production and transportation of, oil and
natural gas. These risks include the necessity of spending large amounts of
money for identification and acquisition of properties and for drilling and
completion of wells. In the drilling of exploratory or development wells,
failures and losses may occur before any deposits of oil or natural gas are
found. The presence of unanticipated pressure or irregularities in formations,
blow-outs or accidents may cause such activity to be unsuccessful, resulting in
a loss of Ultra's investment in such activity. If oil or natural gas is
encountered, it may not be produced in economic quantities sufficient to justify
the cost of continuing operations or it can be marketed satisfactorily.
The drilling plans described in this proxy statement are subject to change.
This proxy statement includes descriptions of Ultra's and Pendaries' future
drilling plans with respect to their prospects. A prospect is a property on
which Ultra's or Pendaries' geoscientists have identified what they believe,
based on available seismic and geological information, to be indications of
hydrocarbons. Ultra's and Pendaries' prospects are in various stages of review.
Whether Ultra ultimately drills a prospect, including, on a post-arrangement
basis, prospects currently identified by Pendaries, may depend on the following
factors:
. receipt of additional seismic data or reprocessing of existing data;
. material changes in oil and natural gas prices;
. the costs and availability of drilling equipment;
. success or failure of wells drilled in similar formations or which would
use the same production facilities;
. availability and cost of capital;
. changes in the estimates of costs to drill or complete wells;
. Ultra's ability to attract other industry partners to acquire a portion
of the working interest to reduce exposure to costs and drilling risks;
. decisions of Ultra's joint working interest owners; and
. restrictions imposed by the BLM.
Ultra will continue to gather data about its prospects, and additional
information may cause Ultra to alter its drilling schedule or determine that a
prospect should not be pursued at all.
Because of the concentration of Ultra's oil and natural gas operations, Ultra
may be subject to risks other oil and natural gas companies are not exposed to.
Ultra's core assets, and the focus of its oil and natural gas operations, are
in the Green River Basin of southwest Wyoming on its land position of 271,966
gross acres covering an area of approximately 425 square miles. During the two
past fiscal years ended June 30, and continuing through fiscal 2000, nearly all
of Ultra's drilling activity has occurred, and
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will continue to occur, in the Green River Basin. Ultra's concentration in this
area, while considered a competitive advantage by Ultra, entails risks as well.
These risks include non-diversification of Ultra's resources, exploration risks
that are inherent in deep, tight natural gas resources, such as highly complex
drilling and completion procedures that must be carefully executed, as well as
significant environmental regulations and oversight by regulatory authorities in
the Green River Basin. If the arrangement is consummated, Ultra's assets will
be slightly more diversified. The arrangement and resulting acquisition of
Pendaries and the Bohai Bay properties may not mitigate the effects of the
concentration of Ultra's oil and natural gas operations.
Ultra may be unable to raise capital necessary to replace reserves and conduct
exploration and development activities.
Ultra's continued ability to explore and develops its properties, including,
on a post-arrangement basis, the Bohai Bay properties, and to replace reserves
depends upon its continued ability to raise significant additional capital.
Some of these arrangements could be expensive to Ultra. Ultra may not be able
to raise additional capital because of factors such as the market demand for its
securities, the state of financial markets for independent oil companies,
including the markets for debt, oil and natural gas prices and general market
conditions. See "Ultra Petroleum Corp. -- Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of Ultra's
capital budget and "Pendaries Petroleum Ltd. - Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
Pendaries' capital budget.
One of Ultra's directors may have a conflict of interest in connection with
Ultra's operations.
Mr. John Hislop is a Director of Gemini Energy Corp. Gemini and Ultra are
partners with varying working interests in three prospects in the Green River
Basin, Sublette County, Wyoming. Mr. Hislop is engaged and will continue to be
engaged in the search for oil and natural gas and oil and natural gas properties
on behalf of entities outside of Ultra, and situations may arise where he will
be in direct competition with Ultra and, on a post-arrangement basis, the
combined companies.
Ultra follows the full cost method of accounting, which could result in a charge
to earnings.
Ultra follows the full cost method of accounting for its oil and natural gas
properties. Under such method, the net book value of Ultra's properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after tax future net revenues from proved oil and
natural gas properties, discounted at 10% per year. In calculating discounted
future net revenues, oil and natural gas prices in effect at the time of the
calculation are held constant, except for changes which are fixed and
determinable by existing contracts. The net book value is compared to the
ceiling on a quarterly basis. The excess, if any, of the net book value above
the ceiling is required to be written off as an expense. Under SEC full cost
accounting rules, any write-off recorded may not be reversed even if higher oil
and natural gas prices increase the ceiling applicable to future periods.
Future price decreases could result in reductions in the carrying value of such
assets and an equivalent charge to earnings.
Risks Relating to Pendaries' Business
Because of Kerr-McGee's control over the Bohai Bay project, the pace of
exploration it sets could affect when and if production commences and ultimately
might strain our capital resources or delay the project or force all working
interest owners to sell their interest in the property.
Because we are not the operator and hold only a minority interest of 18.2% in
one block and 15% in the other block, we cannot control the pace of exploration
or development in our Bohai Bay properties or major decisions affecting drilling
of wells or the plan for development and production, although contract
provisions give us consent rights in some matters. Kerr-McGee's influence over
these matters can affect the pace at which we spend money on this project. If
Kerr-McGee loses interest in this project, then unless the Bohai Bay properties
are sold to another party, the pace of development of the blocks could slow down
or stop altogether and the blocks may never be developed. We do not have
sufficient funds to purchase Kerr-McGee's interests in these blocks if they were
offered to us. On the other hand, if Kerr-McGee decides to accelerate
development of this project, we could be required to provide cash to meet our
share of costs at a faster pace than anticipated, which might exceed our ability
to raise funds. If, because of this, we were unable to pay our share of costs,
we
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could lose or be forced to sell our Bohai Bay properties. If the arrangement
is consummated, Ultra will succeed to our non-operator interest and will
likewise be unable to control the development and operation of the Bohai Bay
properties. If the properties owned by Kerr-McGee were offered to Ultra, Ultra
may not have sufficient funds to acquire them or Ultra may not be able to pay
its share of costs to operate the properties.
If our estimates of the quantities of hydrocarbons in our reserve estimates
prove to be too high, or if oil prices fall appreciably, development of our two
Bohai Bay properties might become uneconomic.
Our exploration and development activities in the Bohai Bay involve two very
large blocks, with most of the exploration and development activity in the area
being undertaken by companies that are many times larger than we are. The costs
of exploration and development are very large, requiring over $200 million to be
paid by all the working interest owners before the first cash flow is expected
and significant additional amounts before positive cash flow is expected. The
very substantial nature of these costs requires large quantities of reserves to
justify building production facilities. If our estimates of the quantities of
reserves prove to be too high, then revised lower estimates may mean that the
project cannot be completed economically, which might lead us or Kerr-McGee to
abandon the projects.
World oil prices have been extremely volatile in recent years. The high
current prices for oil follow prices at their lowest level in over a decade in
the third quarter of 1998 that remained at depressed levels through much of
1999. While the estimated profitability of our development of the Bohai Bay
properties does not depend on oil prices remaining at current levels, if oil
prices dropped to levels seen in late 1998, the economic viability of the
project could be called into question and the project could be put on hold or
canceled.
The determination that the Bohai Bay properties cannot be economically
developed would likely result in Pendaries' bankruptcy and, on a post-
arrangement basis, could have a material adverse effect on Ultra. In addition,
if the arrangement is consummated, Ultra may not be capable of funding its share
of the operating costs.
Political, economic or international factors affecting China could lead to a
hostile investment climate, resulting in loss of our economic interests in the
Bohai Bay or unwillingness of third parties to invest in us.
Ownership of property interests and production operations in areas outside
the United States are subject to various risks inherent in foreign operations.
These risks may include:
. currency restrictions and exchange rate fluctuations;
. loss of revenue, property and equipment as a result of expropriation,
nationalization, war or insurrections;
. increases in taxes and governmental royalties;
. renegotiation of contracts with governmental entities and quasi-
governmental agencies;
. change in laws and policies governing operations of foreign based
companies;
. labor problems; and
. other uncertainties arising out of foreign government sovereignty over
our international operations.
Tensions between China and its neighbors or various Western countries,
especially the United States, changes in internal Chinese leadership, social or
political disruptions within China, a downturn in the Chinese economy, or a
change in Chinese laws or attitudes toward foreign investment could make China
an unfavorable environment in which to invest. Although all the foreign interest
owners in the Bohai Bay properties have the right to sell production in the
world market, the regulation of the concession by China, and the possible
participation by China National Offshore Oil Company or "CNOOC" as a large
working interest owner, make Chinese internal and external affairs important to
our investment in the Bohai Bay. If any of these negative events were to occur,
it could lead to a decision that there is an intolerable level of risk in
continuing with the investment, or we may be unable to attract equity investors
or lenders, or satisfy any then existing lenders.
In addition, in the event of a dispute arising from foreign operations, we
may be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons to the jurisdiction of the courts of
the United States.
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There are operating risks specific to offshore drilling that could lead to
financial losses or failure.
Offshore operations, such as our Bohai Bay properties, are subject to a
variety of operating risks specific to the marine environment, such as
capsizing, collisions and/or loss from typhoons or other adverse weather
conditions. These conditions can cause substantial damage to facilities and
interrupt production. As a result, we could incur substantial liabilities that
could result in financial losses or failure.
Our operations could be shut down if we violate environmental laws or suffer an
environmental accident.
Although we believe our operations in China comply with applicable
environmental regulations, those regulations may change or become more
stringent. We could suffer an accident or environmental contamination that
could lead to severe financial penalties, causing us to shut down our operations
for significant periods of time, thus resulting in financial losses or loss of
our interest.
Risks Relating To Our Industry
Oil and natural gas prices have become increasingly volatile and significant
declines adversely affect financial results and condition.
Prices for oil and natural gas have become increasingly volatile, illustrated
most recently by the significant declines and low prices experienced during the
second half of 1998 and early 1999. Natural gas prices affect Ultra more than
oil prices, as natural gas has comprised over 90% of Ultra's production since
its inception. On the other hand, Pendaries' reserves in the Bohai Bay are
principally oil reserves. A significant decline in oil and natural gas prices
would have the following negative effects:
. cash flows would be reduced, decreasing funds available for capital
expenditures employed to replace reserves or increase production;
. certain reserves would be no longer economic to produce, leading to both
lower proved reserves and cash flow;
. lenders could reduce the borrowing base under credit facilities because
of lower oil and natural gas reserve values, reducing liquidity and
possibly requiring mandatory loan repayments; and
. access to other sources of capital, such as equity or long-term debt,
could be severely limited or unavailable in a low price environment.
Consequently, revenues and earnings would suffer. Most of the factors which
affect price volatility are beyond our control, such as demand, worldwide
economic conditions, weather conditions, supply levels, import prices, political
conditions in major oil producing regions, especially the Middle East, and
actions taken by OPEC.
Operating hazards and uninsured risks can lead to substantial losses.
Oil and natural gas exploration involves a high degree of risk. Although
Ultra as well as the operators of Pendaries' and Ultra's properties carry
insurance to cover the costs of accidents, such insurance may not be sufficient
to cover all losses, including:
. severe injuries or death to workers;
. damage to or loss of formations, which is usually not covered by
insurance and which losses sometimes cannot be recovered;
. significant increases in the costs of drilling due to accidents such as
losing tools in the hole, downhole fires, blowouts or cratering of the
hole; and
. uncontrolled flow of oil or natural gas, pollution, and mistakes in
drilling which increase costs or result in lowered productivity and
profitability from a well or wells.
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You should not place undue reliance on reserve information because reserve
information represents estimates.
The financial statements included or incorporated by reference in this report
contain estimates of Ultra's and Pendaries' oil and natural gas reserves and the
discounted future net revenues from those reserves. There are numerous
uncertainties inherent in estimating quantities of proved oil and natural gas
reserves, including many factors beyond the control of Ultra and Pendaries.
Those estimates are based on several assumptions that the United States
Securities and Exchange Commission, or the "SEC," requires oil and natural gas
companies to use including, for example, constant oil and natural gas prices.
Such estimates are inherently imprecise indications of future net revenues.
Actual future production, revenues, taxes, operating expenses, development
expenditures and quantities of recoverable oil and natural gas reserves might
vary substantially from those assumed in the estimates. Any significant
variance in these assumptions could materially affect the estimated quantity and
value of reserves. In addition, reserves might be subject to revisions based
upon future production, results of future exploration and development,
prevailing oil and natural gas prices and other factors. Moreover, estimates of
the economically recoverable oil and natural gas reserves, classifications of
such reserves, and estimates of future net cash flows, prepared by different
engineers or by the same engineers at different times, may vary substantially.
Information about reserves constitutes forward-looking information. See
"Forward-Looking Statements."
Competitive industry conditions may negatively affect our ability to conduct
operations.
The oil and natural gas industry is highly competitive. Ultra and Pendaries
compete in the areas of property acquisitions and the development and production
of oil and natural gas with major oil companies and other independent oil and
natural gas concerns, as well as with individual producers and operators. Many
of these competitors have substantially greater financial and other resources
than Ultra or Pendaries and, on a post-arrangement basis, the combined
companies.
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FORWARD-LOOKING STATEMENTS
This proxy statement includes forward-looking statements. Forward-looking
statements use forward-looking terms such as "believe," "expect," "may,"
"intend," "will," "project," "budget," "should," or "anticipate" or other
similar words. These statements discuss "forward-looking" information such as:
. future availability of capital, cash flow and borrowings;
. estimated crude oil and natural gas reserves;
. pursuit of potential future acquisitions or drilling opportunities;
. anticipated capital expenditures and budgets;
. future production of crude oil and natural gas;
. business strategies;
. future liquidity; and
. expected benefits as a result of the arrangement.
These forward-looking statements are based on assumptions that we believe are
reasonable, but they are open to a wide range of uncertainties and business
risks which could affect the future results of the combined company following
the arrangement, including the following:
. fluctuations of the prices received or demand for oil and natural gas;
. uncertainty of drilling pace and results, reserve estimates and reserve
replacement;
. operating hazard attendant to the oil and natural gas business;
. acquisition risks;
. unexpected substantial variances in capital requirements;
. environmental matters;
. climatic conditions;
. competition; and
. general economic and business conditions.
Other factors that could cause actual results to differ materially from those
anticipated are discussed in our and Ultra's periodic filings with the SEC,
including our Annual Report on Form 10-K for the year ended December 31, 1999
and Ultra's Forms 20-F for the year ended June 30, 1999 and the period ended
December 31, 1999.
When considering these forward-looking statements, you should keep in mind
the risk factors and other cautionary statements in this proxy statement. We
will not update these forward-looking statements unless the securities laws
require us to do so.
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THE ARRANGEMENT
General
This section of the proxy statement describes the material terms of the
arrangement. You should, however, read the plan of arrangement, the arrangement
agreement and the related agreements attached as appendices to this proxy
statement.
Background of the Arrangement
For the past two years, our management has focused on the need for additional
funds for exploration and development of our Bohai Bay properties. In 1998, we
entered into a letter of intent with an investment bank for the sale of our
common shares in a public offering. However, shortly after signing the letter of
intent, oil prices dropped sharply and the investment bank determined that it
would be unable to conduct a successful offering on our behalf at that time.
In June 1999, our board of directors determined to investigate other
alternatives to ensure that we had sufficient capital to meet our obligations to
fund our share of the exploration efforts on the Bohai Bay properties. As a
result, we engaged in various discussions regarding the sale of equity, the
borrowing of funds, or entering into potential business combinations. None of
these discussions led to a transaction that the board of directors believed was
in the best interests of our shareholders, other than the current discussions
with Ultra.
In February 1999, Mr. Michael Watford, Chief Executive Officer of Ultra,
contacted Mr. Robert Rigney, Chief Executive Officer of Pendaries, and suggested
that the two companies meet to consider a possible business combination. As a
result, in March 1999, Mr. Fred Tietz, President of Pendaries and Mr. Larry
Byrd, Pendaries' consulting petroleum engineer, visited Ultra's offices in
Denver, Colorado to review Ultra's properties and reserves. Following the
meeting, neither Ultra nor Pendaries thought it was appropriate at that time to
pursue a transaction, although Mr. Watford and Mr. Rigney maintained contact
over the next 12 months.
In March 2000, both Mr. Watford and Mr. Rigney determined that it was
appropriate to further explore a business combination between Pendaries and
Ultra. At the request of our board of directors, our management began to
conduct extensive due diligence as to the financial condition and reserves of
Ultra. Ultra's management began to conduct a similar analysis of Pendaries.
In July 2000, Mr. Roger Heckman, Ultra's petroleum engineer, and Mr. Bob
Gaston, Ultra's geophysicist, met in Houston with our technical staff and
representatives of Ryder Scott Company, our independent engineering consultants.
Mr. Tietz, Mr. Byrd and Mr. Greg Cleveland, our contract geophysicist, met in
Denver with Ultra's technical staff to review Ultra's oil and natural gas
reserves.
On July 11, 2000 and July 12, 2000, the finance committee of our board of
directors met to assess the various alternatives available to maximize our
shareholder value. At this meeting, the finance committee decided that it was
important to continue discussions with Ultra. On July 11, 2000, two of our
independent directors, Mr. Paul Farrar and Mr. James Roe, met with Mr. Watford
and Mr. Fox Benton, III, the Business Development Manager of Ultra, to conduct
further due diligence on Ultra.
On August 21, 2000 and August 22, 2000, Mr. Tietz and Mr. Byrd conducted a
field check of Ultra's developed and undeveloped Wyoming properties. During
that same time, Mr. Cleveland conducted a final geophysical review of Ultra's
properties.
On August 28, 2000, our board of directors formally established a special
committee of independent directors consisting of Mr. Farrar, Mr. Roe and Mr. Ben
Barnes. The special committee was responsible for overviewing the process of
entering into any agreement regarding a possible change of control, reviewing
the terms of any such transaction and advising our board of directors as to
whether any such transaction would be in our best interests.
In addition, on August 28, 2000, our management presented to our board of
directors a proposed letter of intent between us and Ultra. The letter of
intent contemplated that Ultra would make available a US$5.0 million credit
facility to
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Sino-American Energy Corporation, our wholly-owned subsidiary, and that we and
Ultra would also enter into an agreement that would result in Ultra acquiring
all of our outstanding shares.
Management presented to our board of directors the benefits available to us
through a merger with Ultra and the conclusions reached through the extensive
due diligence of Ultra. Following the presentation, the special committee met
and, based on the presentation made by management and the lack of viable
alternatives to the proposed transaction, recommended that our board of
directors authorize us to enter into the letter of intent. The board of
directors then authorized entering into the letter of intent. The letter of
intent was signed later that day.
On September 13, 2000, having interviewed two investment banking firms, the
special committee engaged Loewen, Ondaatje as its financial advisor.
During the month of September and early October, numerous telephone and in-
person meetings were conducted amongst our representatives and Ultra as the
parties negotiated definitive loan and arrangement documentation. The special
committee met frequently during the course of this period with its legal and
financial advisors to discuss the terms of the proposed documentation and the
principal outstanding issues between the parties and to receive updates from
representatives of Loewen, Ondaatje as to their analysis of the fairness of the
proposed transaction.
On October 13, 2000, the special committee met with its legal and financial
advisors. At this meeting, Loewen, Ondaatje indicated that it would be prepared
to render an opinion to the effect that the consideration being offered under
the arrangement was fair, from a financial point of view, to our shareholders.
Based on the financial advice provided by Loewen, Ondaatje and the analysis and
work previously performed by the special committee, the special committee
unanimously concluded that the arrangement was fair to our shareholders and in
our best interests and unanimously recommended that our board of directors
authorize us to enter into the proposed arrangement agreement.
Following the meeting of the special committee, our board of directors met
with its legal and financial advisors. At this meeting, our legal advisors gave
a presentation as to the terms and structure of the arrangement and reviewed the
principal documentation proposed to be entered into in connection with the
arrangement. In addition, Loewen, Ondaatje gave a presentation as to the
assumptions, analysis and methodology used in connection with assessing the
fairness from a financial point of view of the consideration being offered to
our shareholders. Following consideration of a number of factors, including
those specified under "Reasons for the Arrangement and Recommendation of the
Board of Directors" below, and on the basis of advice received from our legal
and financial advisors, including the fairness opinion received from Loewen,
Ondaatje, our board of directors present at the meeting unanimously concluded
that the arrangement was fair to our shareholders and in our best interests and
approved entering into the arrangement agreement.
The arrangement agreement was entered into effective October 13, 2000. Also
effective October 13, Pendaries, Sino-American and Ultra entered into a credit
agreement under which Ultra agreed to loan Sino-American up to $5.0 million with
Pendaries as guarantor of such loan. A press release to such effect was issued
by Pendaries prior to the beginning of trading on the next business day, October
16, 2000.
Brief Description of the Transaction
The arrangement agreement is attached as Appendix D to this document. Please
carefully read the arrangement agreement. The arrangement agreement is the
legal document that governs the arrangement. The arrangement agreement provides
for a share exchange in which each Pendaries common share will be exchanged for
1.58 Ultra common shares. After the arrangement, Pendaries will be a wholly-
owned subsidiary of Ultra.
Reasons for the Transaction and Recommendation of our Board of Directors
Our board of directors has considered the proposed arrangement at length. Our
board of directors believes the terms of the arrangement are fair to our
shareholders. Our board of directors came to this determination based on the
report of its special committee of directors and the opinion of Loewen,
Ondaatje, the financial advisor to our special committee and our board of
directors, that the consideration payable under the arrangement is fair, from a
financial point of view, to our shareholders. Our board of directors
unanimously recommends that our shareholders vote FOR the resolution approving
the arrangement.
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Each of our directors has advised us that he will vote the Pendaries common
shares held or controlled by him or her, directly or indirectly, in favor of the
arrangement resolution.
In reaching its determination and making this recommendation, our board of
directors considered a number of factors:
. the consideration offered to our shareholders in connection with the
arrangement, valued as of October 13, 2000, the effective date of the
arrangement agreement, at US$3.50 per Pendaries common share, based on the
closing price for Ultra common shares on the TSE represented a premium of
approximately 15% over the closing price on October 13, 2000 on AMEX for a
Pendaries common share and a premium of approximately 31% to the average
closing price on AMEX for the 10 days preceding the date the arrangement
agreement was entered into;
. Loewen, Ondaatje's opinion dated October 13, 2000 as to the fairness to our
shareholders, from a financial point of view, of the consideration to be
received by our shareholders;
. the risks and potential rewards associated with, as an alternative to the
arrangement, continuing to execute our business and strategic plans as an
independent entity, including the likelihood that in the absence of this or
another transaction, we will run out of cash by the end of the first quarter
2001, or possibly the middle of the second quarter of 2001and therefore will
lose our assets and have to file for bankruptcy;
. the ability of our shareholders to continue to participate in a widely held
public company which has a larger market capitalization and greater liquidity
than us;
. the ability of our shareholders to have a continued interest in the Bohai Bay
properties, as well as an interest in the natural gas properties that Ultra
currently holds;
. Ultra's access to additional cash through its unused line of credit and its
positive cash flow from its existing properties, which can be used to fund
the ongoing exploration costs of our Bohai Bay properties;
. the combined companies' greater access to the capital markets to support
future growth;
. the views of our financial advisers and management as to the lack of
prospects for other acquirers that might enter into a transaction that would
result in superior value to our shareholders;
. the history of success of Ultra's chief executive officer, Michael Watford,
as the chief executive officer of a much larger public company, Nuevo Energy
Company, providing important access to and credibility with investment
analysts and institutional investors;
. the ability of Canadian and U.S. holders of our common shares who hold their
common shares as capital property to exchange their Pendaries common shares
for Ultra common shares under the arrangement on a tax-deferred basis under
Canadian and U.S. federal income tax legislation. See "Canadian Federal
Income Tax Considerations" and "U.S. Federal Income Tax Considerations for
U.S. Holders" elsewhere in this proxy statement; and
. the safeguards for ensuring that the arrangement is fair as it must be
approved by a special resolution passed by not less than two-thirds of the
votes cast at the special meeting by our shareholders, and by The Court of
Queen's Bench which will consider, among other things, the fairness of the
arrangement to our shareholders.
The foregoing discussion of the information and factors considered by our
board of directors sets out the material factors considered by our board of
directors. In reaching the determination to approve and recommend the
arrangement, our board of directors did not assign any relative or specific
weights to the foregoing factors which were considered, and individual directors
may have given different weights to different factors. Our board of directors
is, however, unanimous in its recommendation to our shareholders that the
arrangement resolution be approved at the meeting.
Our board of directors realizes that there are certain risks associated with
the arrangement, including those referenced under "Risk Factors." However, our
board of directors believes that the positive factors should outweigh those
risks, although there can be no assurances in this regard.
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Fairness Opinion of Loewen, Ondaatje, McCutcheon Limited, Pendaries' Financial
Advisor
In the course of evaluating the arrangement, the Pendaries board of directors
appointed a special advisory committee made up of the three independent board
members, Paul Farrar, James Roe and Ben Barnes. The special committee
interviewed two different investment banking firms and ultimately engaged
Loewen, Ondaatje, McCutcheon Limited, or "Loewen, Ondaatje," to help it evaluate
the fairness of the arrangement, from a financial point of view, including the
fairness of the share exchange ratio to the Pendaries shareholders. In
selecting Loewen, Ondaatje, the special committee took into consideration
Loewen, Ondaatje's 30 years of experience in the investment banking business
specializing in financing and advising intermediate and junior companies,
including many companies in the natural gas resource industry, and their
extensive experience in preparing valuations and fairness opinions.
On October 13, 2000, Loewen, Ondaatje delivered a written opinion to the
Pendaries special committee and the board of directors of Pendaries, that, based
upon and subject to the various assumptions, limitations and other matters set
forth in the opinion, as of such date, the exchange ratio as contemplated by the
arrangement is fair to the shareholders of Pendaries from a financial point of
view. No limitations were imposed by Pendaries upon Loewen, Ondaatje with
respect to investigations made or procedures followed by Loewen, Ondaatje in
rendering its opinion.
Loewen, Ondaatje has received Cdn $150,000 (approximately US $100,000) for
its services and will be reimbursed for all reasonable expenses, not to exceed
$30,000, incurred in connection with its services under its engagement agreement
with Pendaries including the reasonable fees and disbursements of its counsel
and other advisors. In addition, Pendaries has agreed to indemnify Loewen,
Ondaatje, its affiliates, agents and personnel against certain liabilities and
expenses arising out of its engagement and the transaction to which the
engagement relates. The fees payable to Loewen, Ondaatje under its engagement
agreement are not contingent in whole or in part on the success of the
arrangement.
The full text of Loewen, Ondaatje's opinion, which sets out, among other
things, the assumptions made, matters considered, limitations of the review
undertaken and various qualifications in connection with the opinion, is
attached as Appendix F. Loewen, Ondaatje's opinion solely addresses the
fairness of the exchange ratio to be received by the holders of Pendaries common
shares from a financial point of view and is not intended to be, and does not
constitute, a recommendation to any shareholder as to how such shareholder
should vote with respect to the arrangement or any matters related thereto.
This summary of Loewen, Ondaatje's opinion is qualified in its entirety by
reference to the full text of Loewen, Ondaatje's opinion. Shareholders of
Pendaries are urged to read Loewen, Ondaatje's opinion carefully and in its
entirety.
In preparing its opinion, Loewen, Ondaatje considered such factors and
conducted such analyses, investigations, research and testing of assumptions as
were deemed by Loewen, Ondaatje to be appropriate in the circumstances. The
preparation of a fairness opinion is a complex process and is not necessarily
amenable to partial analysis or summary description. Loewen, Ondaatje believes
that its analyses must be considered as a whole and that selecting portions of
its analyses or the factors considered by it, without considering all factors
and analyses together, could create an incomplete or misleading view of the
processes and approaches underlying Loewen, Ondaatje's opinion.
In rendering its opinion, Loewen, Ondaatje relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to and reviewed by it, including
all information provided by Pendaries and its employees, representatives and
affiliates. Loewen, Ondaatje further relied upon the assurance of Pendaries
management that there are no material facts not contained in or referred to in
the information provided to Loewen, Ondaatje which could reasonably be expected
to affect materially the assumptions used, the procedures adopted or the scope
of the review undertaken by Loewen, Ondaatje in providing its opinion.
With respect to forecasts of future financial condition and operating results
of Ultra, Loewen, Ondaatje assumed, at the direction of Ultra's management and
without independent verification or investigation, that these forecasts provided
to Loewen, Ondaatje were reasonably prepared on a basis reflecting the best
available information, estimates and judgment of Ultra's management. With
respect to forecasts of future financial condition and operating results of
Pendaries, Loewen, Ondaatje, assumed, at the direction of Pendaries' management
and without independent verification or investigation, that these forecasts
provided to Loewen, Ondaatje were reasonably prepared on a basis reflecting the
best available information, estimates and judgment of Pendaries' management.
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Loewen, Ondaatje neither made nor obtained any independent evaluations or
appraisals of the assets or the liabilities of Pendaries or its affiliated
entities. Loewen, Ondaatje did not express any opinion as to the underlying
valuation, future performance or long term viability of Pendaries or the
combined operation following the completion of the arrangement or as to the
price at which Ultra common shares will trade subsequent to the completion of
the arrangement. Loewen, Ondaatje's opinion is necessarily based on the
information that was available to Loewen, Ondaatje and general economic,
financial and stock market conditions and circumstances as they existed and
could be evaluated by Loewen, Ondaatje as of the date of Loewen, Ondaatje's
opinion.
In arriving at its opinion, Loewen, Ondaatje reviewed and relied without
further verification upon the following:
. the arrangement agreement dated October 13, 2000;
. Annual Reports to shareholders of Pendaries for the fiscal years ended
December 31, 1999, 1998 and 1997;
. Annual Reports to shareholders of Ultra for the transition period ended
December 31, 1999 and the fiscal years ended June 30, 1999, 1998 and 1997;
. the Proxy Statement of Pendaries dated March 10, 2000;
. the Management Proxy Circular/Information Circular of Ultra dated April 17,
2000;
. a report titled "Estimated Reserves and Future Net Revenue Attributable to
the CFD 2-1 and CFD 11-1 Fields Bohai Bay, China" by Ryder Scott Company
dated January 1, 2000 and prepared for Sino-American Energy Corporation (a
wholly-owned subsidiary of Pendaries);
. a report titled "Estimate of Reserves and Future Revenue to the Ultra
Petroleum Corporation Interest in Certain Oil and Gas Properties located in
Jonah and Pinedale Fields, Sublette County, Wyoming as of January 1, 2000" by
Netherland, Sewell & Associates, Inc.;
. various internal information of Pendaries including geological information
and budgets for 2000 and 2001;
. various internal information of Ultra including geological information and
budgets for 2000 and 2001;
. estimates of reserves updated to July 1, 2000 prepared by Ultra;
. discussions with senior management of Pendaries and Ultra with respect to
planned production and exploration operations, financial condition and future
prospects of Pendaries and Ultra;
. publicly available information relating to the business, operations,
financial performance and stock trading history of Pendaries, Ultra, and
other selected public companies;
. information with respect to other transactions of a comparable nature
considered by Loewen, Ondaatje to be relevant in the circumstances; and
. such other information, investigations and analyses as Loewen, Ondaatje
considered necessary or appropriate in the circumstance.
Loewen, Ondaatje further assumed that all of the conditions required to
implement the arrangement will be met and the arrangement will be consummated.
The following represents a brief summary of the financial analyses undertaken
by Loewen, Ondaatje in rendering its opinion.
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Net Asset Value Analysis
Loewen, Ondaatje compared the net asset valuations of Pendaries and Ultra,
based principally upon evaluation of their respective oil and natural gas
reserves. Reserve reports subsequently confirmed by Netherland, Sewell and
Associates before the six-month period ended December 31, 1999 were prepared by
Gilbert Lausten Jung Associates Ltd., the reserve report for Ultra for the
period ended December 31, 1999 was prepared by Netherland, Sewell and Associates
and the reserve report for the period ended June 30, 2000 was prepared by Ultra.
Assumptions used for this analysis included a constant pricing assumption
presuming $23 per barrel oil price for both companies, which is a 26.8% discount
from the October 4, 2000 closing West Texas Intermediate crude oil price of
$31.43 per barrel. Similarly, this analysis used natural gas prices of $3.90 per
Mcf, a 25.5% discount from the October 4, 2000 closing Henry Hub natural gas
price of $5.235 per Mcf. The base case assumption discounted reserves of
Pendaries at 15% per annum while the upside case discounted those reserves at
10% per annum. In both the base case and upside case, Ultra's reserves were
discounted at a rate of 10% per annum. Proved non-producing reserves were
discounted for risk by 20%, probable reserves were discounted for risk by 50%
and possible reserves were discounted for risk by 90%, except that Ultra's
possible reserves in the upside case were discounted for risk by only 80%.
Based upon these criteria, the base case net asset value per share for Ultra
was determined to be US $3.62 and for Pendaries was US $6.88 resulting in an
implied exchange ratio of 1.9 Ultra shares per Pendaries share. The upside case
analysis resulted in a net asset value per share for Ultra of US $4.24 and for
Pendaries of US $7.85, resulting in an implied exchange ratio of 1.85 Ultra
shares per Pendaries share.
Comparable Company Reserve Value Analysis
Loewen, Ondaatje performed a comparable company analysis for both Ultra and
Pendaries based on the market value of reserves. In Ultra's case, the most
relevant comparable for determination of Ultra's value was determined to be the
price paid by Alberta Energy for McMurry Oil on June 1, 2000. In that
transaction, Alberta Energy paid approximately $0.804 per Mcfe for proved
reserves and a $0.61 per Mcfe for "established reserves," with "established
reserves" calculated as the sum of proved reserves and one-half the value of
probable reserves.
The valuation of Pendaries based on comparable company reserve value
comparisons used a group of eight Canadian public companies with foreign assets,
consisting of Bow Valley Energy Ltd., Gulfstream Resources Canada Limited,
Hurricane Hydrocarbons Ltd., Lundin Oil AB, Panafrican Energy Corporation Ltd.,
Petrolex Energy Corporation, Seven Seas Petroleum Inc. and Transatlantic
Petroleum Corp. These companies were considered comparable to Pendaries because
they have comparable amounts of established reserves and their properties are
largely non-Canadian. These comparable companies had an average value of US
$2.56 per barrel for proved reserves (base case) and a value of US $1.48 per
barrel for established reserves (upside case). These values were determined by
dividing the total market capitalization of these companies by the proved
reserves and the established reserves, respectively. The base case comparison
of Pendaries and Ultra, based solely upon the market's valuation of the
companies in relationship to proved reserves, generated a value per share for
Pendaries of US $2.03 per share and for Ultra of US $1.82 per share, or an
implied exchange ratio of 1.11 Ultra shares per Pendaries share. The upside
case comparison, based solely on the market's valuation of the companies in
relationship to established reserves, generated a value for Pendaries of US
$1.97 per share and for Ultra of US $2.13 per share, or an implied exchange
ratio of 0.93 Ultra shares per Pendaries share.
Trading Price Analysis
Historical trading prices were reviewed for both Pendaries and Ultra for the
sixty trading days (base case) and the ten trading days (upside case) preceding
announcement of the arrangement agreement. The 60 day preceding average base
case resulted in a valuation for Pendaries of US $2.86 per share and a valuation
for Ultra of US $2.03 per share, or an implied exchange ratio of 1.41 Ultra
shares per Pendaries share. The upside case based on the ten preceding trading
days resulted in a market value for Pendaries of US $2.94 per share and a market
value for Ultra of US $2.63 per share resulting in an implied exchange ratio of
1.12 Ultra shares per Pendaries share.
Weighted Average Valuation
The comparison weighting of the base cases for the net asset value analysis,
comparable company reserve value analysis and trading price analysis gave a
rating of 50% to the net asset value analysis, 30% to the comparable company
reserve value analysis and 20% to the market analysis, resulting in a weighted
average value for Pendaries of US $4.62 per share
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and a weighted average value for Ultra of US $2.76 per share, or an implied
exchange ratio of 1.67 Ultra shares per Pendaries share. Likewise, using the
upside case valuations for Pendaries and Ultra and the same relative weighting,
the value for Pendaries was determined to be US $5.10 per share and the value
for Ultra US $3.28 per share, or an implied exchange ratio of 1.55 Ultra shares
per Pendaries share.
Loewen, Ondaatje also considered that the availability of capital for
Pendaries is limited; the fact that the political risk might result in a higher
discount rate for Pendaries' valuation; the fact that potential reserves for
Pendaries are less certain than for Ultra, which might lower Pendaries'
valuation; and the prospect that Ultra's reserves are expected to increase
significantly by year end 2000 as a result of current drilling activity. Given
the various forms of analysis and the weighting discussed above, along with
other considerations and a complete review of information on Ultra and
Pendaries, it was the conclusion and recommendation of Loewen, Ondaatje that the
exchange ratio proposed in the arrangement agreement falls within the range of
such values determined by Loewen, Ondaatje and that in Loewen, Ondaatje's
opinion, the offer contained therein is fair from a financial point of view to
Pendaries' shareholders.
Ultra After the Arrangement
Directors and Officers
Following completion of the arrangement, the senior management of Ultra will
consist of Michael D. Watford as Chairman, CEO and President, Bobby Fogle,
currently Pendaries' Vice-President, Finance, as Vice-President, Accounting and
Fox Benton, III as Vice-President, Finance. Mr. Robert E. Rigney will serve as
a consultant to Ultra. Under the arrangement agreement, subject to the
fiduciary duties of the Ultra directors, Pendaries will have the right to
designate two nominees who are currently Pendaries directors to the Ultra board
of directors. Pendaries intends to designate Mr. Rigney, and subject to the
approval of the Ultra shareholders, one of Pendaries' independent directors.
Principal Holder of Securities
John Hislop, an Ultra director, is the president and a director of Ultra
Holdings, Inc., which holds approximately 23% of Ultra's outstanding common
shares. See "Principal Shareholders of Ultra," on page 64.
Pendaries Shareholder Approval of the Arrangement Resolution
The special meeting of our shareholders will be held at 10:00 a.m. (Houston
time) on December 28, 2000 at The Houston City Club, One City Club Drive, Nine
Greenway Plaza, Houston, Texas 77046. At this special meeting, our shareholders
will be asked to approve the arrangement resolution. Each holder of Pendaries
common shares is entitled to one vote for each Pendaries common share regarding
the arrangement resolution.
According to the interim order of The Court of Queen's Bench, the arrangement
resolution must be approved by at least two-thirds of the votes cast by the
holders of Pendaries common shares, present or voting by proxy at the meeting.
As of October 25, 2000, our issued and outstanding share capital consisted of
9,225,970 Pendaries common shares. See "The Special Meeting."
Ultra Shareholder Approval of the Arrangement
The special meeting of the Ultra shareholders will be held at 10:00 a.m.
(Houston time) on December 15, 2000 at The Houston Marriott North, 235 North Sam
Houston Parkway, Houston, Texas 77060. At this special meeting, the Ultra
shareholders will be asked to approve the arrangement. The arrangement must be
approved by more than 50% of the votes cast by the holders of Ultra common
shares, present or voting by proxy at the meeting. Each holder of Ultra common
shares is entitled to one vote for each Ultra common share regarding the
arrangement.
Court Approval of the Arrangement and Completion of the Arrangement
An arrangement under the New Brunswick Act requires approval by The Court of
Queen's Bench. Before mailing this proxy statement, we will have obtained the
interim order of The Court of Queen's Bench providing for the calling and
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holding of our special meeting of shareholders and other procedural matters. A
copy of this interim order is attached as Appendix B to this proxy statement.
Subject to our shareholder approval of the arrangement resolution presented
at the special meeting, and Ultra's shareholder approval of the arrangement
presented at the Ultra special meeting, the hearing in respect of the final
order of The Court of Queen's Bench is scheduled to take place on or about
December 29, 2000 at 10:00 a.m. (Saint John time) in The Court of Queen's Bench
at 110 Charlotte Street, Saint John, New Brunswick. Any Pendaries shareholder
who wishes to appear and make submissions at the hearing for the final order is
required to appear at the hearing in person or by a New Brunswick lawyer and may
present affidavit or other documentary evidence, provided a copy of such
evidence is served upon us or our lawyer, Kenneth B. McCullogh, Q.C., Stewart
McKelvey Stirling Scales, 44 Chipman Hill, 10/th/ Floor, P.O. Box 7289 Station
"A", Saint John, New Brunswick E2L 4S6, at least four days before the date set
for the hearing of the final order, and proof of such service is filed with the
Clerk of The Court of Queen's Bench before the hearing. The Court of Queen's
Bench will consider, among other things, the fairness and reasonableness of the
arrangement. The Court of Queen's Bench may approve the arrangement in any
manner The Court of Queen's Bench may direct, subject to compliance with such
terms and conditions, if any, The Court of Queen's Bench deems fit.
Assuming the final order is granted and the other conditions to closing
contained in the arrangement agreement are satisfied or waived, we anticipate
that the following will occur substantially simultaneously:
. the steps set forth in the plan of arrangement will be completed;
. articles of arrangement for Pendaries will be filed with the Director
under the New Brunswick Act to give effect to the arrangement;
. the Ultra common shares payable to our shareholders will be delivered by
the CIBC Mellon Trust Company; and
. various other documents necessary to consummate the arrangement will be
executed and delivered.
Subject to the foregoing, it is expected that the effective date of the
arrangement will occur as soon as practicable after the final order has been
obtained. It is currently expected that the effective date will occur on or
about January 2, 2001.
Fractional Interests
No certificates representing fractional Ultra common shares will be issued.
In the event that the exchange ratio would result in a holder of our common
shares being entitled to a fractional Ultra common share, an adjustment will be
made to the next highest whole number of Ultra common shares and a certificate
for the resulting whole number of Ultra common shares will be issued. In
calculating such fractional share, all Pendaries common shares held by a
beneficial holder of Pendaries common shares will be aggregated.
Treatment of Outstanding Pendaries Stock Options
On September 30, 2000, Pendaries had 575,500 outstanding options of which
264,500 were in-the-money. Options are "in-the-money" if the market price of a
common share is more than the exercise price of the option. The exercise prices
of Pendaries options, all of which are vested, range from US $.59 to US $12.54
with various expiration dates through April 20, 2005.
Upon the effectiveness of the arrangement, all outstanding Pendaries options
will be canceled.
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Accounting Treatment
The arrangement will be treated as a "purchase" for accounting purposes.
Therefore, the purchase price will be allocated to Pendaries' assets and
liabilities based on their estimated fair market values at the completion of the
arrangement.
Consequences under Securities Laws; Resale of Ultra Common Shares
United States. The issuance of Ultra common shares to Pendaries shareholders
will not be registered under U.S. federal securities laws. These shares will be
issued in reliance upon the exemption provided by Section 3(a)(10) of the
Securities Act of 1933. Section 3(a)(10) exempts securities issued in exchange
for one or more bona fide outstanding securities from the general requirement of
registration where the terms and conditions of the issuance and exchange of
those securities have been approved by any court, after a hearing upon the
fairness of the terms and conditions of the issuance and exchange at which all
persons to whom the securities will be issued have the right to appear.
In connection with the arrangement, The Court of Queen's Bench will conduct a
hearing to determine the fairness of the terms and conditions of the
arrangement, including the proposed issuance of Ultra's common shares in
exchange for Pendaries' common shares. The Court of Queen's Bench entered its
interim order on______________, 200__. If the arrangement is approved by our
shareholders, a hearing on the fairness of the arrangement will be held on
December 29, 2000 by The Court of Queen's Bench. See "The Arrangement --
Court Approval of the Arrangement and Completion of the Arrangement" on page 27.
There will be no U.S. federal securities law restrictions upon the resale or
transfer of the shares by shareholders, except for those shareholders who are
considered "affiliates" of Pendaries or Ultra, as that term is defined in Rule
144 and Rule 145 adopted under the Securities Act. Ultra common shares received
by those shareholders who are considered to be "affiliates" of Pendaries or
Ultra may be resold without registration only as provided for by Rule 145 or as
otherwise permitted under the Securities Act. Persons who may be considered to
be affiliates of Pendaries or Ultra generally include individuals or entities
that control, are controlled by, or are under common control with Pendaries or
Ultra and may include the executive officers and directors of Pendaries or Ultra
as well as its principal shareholders.
Canada. Ultra is currently a reporting issuer in British Columbia and
Ontario. Ultra will apply to the securities regulatory authorities in each of
Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia and Newfoundland for
rulings and/or orders for it to be deemed to be a reporting issuer in those
provinces. This will permit our shareholders to resell, in each of the Canadian
provinces, the Ultra common shares they receive as a result of the arrangement,
without restriction, unless the person is a "control person." These resales are
permitted only if no unusual effort is made to prepare the market for any such
resale or to create a demand for the Ultra common shares and no extraordinary
commission or consideration is paid in respect thereof.
Upon completion of the arrangement, Pendaries will be a direct, wholly-owned
subsidiary of Ultra. Accordingly, after the effective date of the arrangement,
Ultra intends to cause Pendaries to apply to the securities regulatory
authorities in Canada to cease to be a reporting issuer, so as to no longer be
subject to statutory financial and reporting requirements under Canadian
securities laws.
Fees and Expenses
The combined estimated fees and expenses of Pendaries and Ultra in connection
with the arrangement, including financial advisors' fees, filing fees, legal and
accounting fees and printing and mailing costs, is approximately $600,000. These
fees and expenses are reflected in the unaudited pro forma condensed Combined
Financial Statements included elsewhere in this proxy statement.
Dissenters' Rights
As indicated in the notice of the Pendaries meeting and under the terms of
the interim order of The Court of Queen's Bench, you are entitled to be paid the
fair value of all, but not less than all, of your shares in accordance with
section 131 of the New Brunswick Act if you dissent to the arrangement and the
arrangement becomes effective. You are not entitled to dissent with respect to
the arrangement if you vote any of such
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shares in favor of the proposal, and therefore, the special resolution
authorizing the arrangement. The execution or exercise of a proxy does not
constitute a written objection for purposes of the New Brunswick Act.
The following summary is not a complete statement of the procedures to be
followed by a dissenting shareholder under the New Brunswick Act and the interim
order. The New Brunswick Act requires strict adherence to the procedures and
failure to do so may result in the loss of all dissenter's rights. Accordingly,
each shareholder who might desire to exercise dissenter's rights should
carefully consider and comply with the provisions of section 131 and consult his
legal adviser. The full text of section 131 of the New Brunswick Act is set out
in Appendix G to this proxy statement.
A registered holder of our common shares who wishes to dissent in respect of
his or her common shares must provide to Pendaries, c/o CIBC Mellon Trust
Company, Proxy Department, 200 Queen's Quay East, Unit 6, Toronto, Ontario M5A
4K9, facsimile number (416) 368-2502, prior to 5:00 p.m. on the business day
preceding the Pendaries special meeting or any adjournment, or postponement
thereof, a written objection to the arrangement resolution. It is important to
note that registered Pendaries shareholders must strictly comply with this
requirement, as it is different from the statutory dissent provisions of the New
Brunswick Act, which permits a registered shareholder to provide Pendaries with
a written objection as late as at the Pendaries meeting. The sending of a
written objection does not deprive a registered Pendaries shareholder of his or
her right to vote on the arrangement resolution at the Pendaries special
meeting, but a vote either in person or by proxy against the arrangement
resolution at the Pendaries special meeting does not constitute a written
objection pursuant to section 131 of the New Brunswick Act. Failure to vote
either in person or by proxy against the arrangement resolutions will not
constitute a waiving of a shareholders' rights under Section 131 of the New
Brunswick Act, but a vote in favor of the arrangement resolution at the
Pendaries meeting will deprive the registered Pendaries shareholder of further
rights under section 131 of the New Brunswick Act.
Within 10 days after the arrangement proposal is approved by our
shareholders, Pendaries must notify the dissenting shareholder, who is then
required, within 20 days after receipt of such notice, or if he does not receive
such notice within 20 days after he learns of the approval of the arrangement
proposal, to send to Pendaries a written notice containing his name and address,
the number and class of shares in respect of which he dissents and a demand for
payment of the fair value of such shares and, within 30 days after sending such
written notice, to send Pendaries or its transfer agent, CIBC Mellon Trust
Company, the appropriate share certificate or certificates. If the arrangement
proposal contemplated in the special resolution becomes effective, Pendaries is
required to determine the fair value of the shares as of the close of business
on the day before the arrangement resolution is adopted by Pendaries'
shareholders at the Pendaries shareholders' meeting and to make a written offer
to pay such amount to the dissenting shareholder. If such offer is not made or
not accepted within 50 days after the proposal and the special resolution
becomes effective, Pendaries may apply to The Court of Queen's Bench to fix the
fair value of such shares. There is no obligation on Pendaries to apply to The
Court of Queen's Bench. If Pendaries fails to make such an application, a
dissenting shareholder has the right to so apply within a further 20 days. If
an application is made by either party, the dissenting shareholder will be
entitled to be paid the amount fixed by The Court of Queen's Bench. The fair
value of the Pendaries common shares as determined for such purpose by a court
will not necessarily be the same as and could vary significantly from the fair
market value of such shares as determined for the arrangement.
Persons who wish to dissent and who are beneficial owners of Pendaries common
shares registered in the name of a broker, custodian, nominee or other
intermediary should be aware that ONLY A REGISTERED SHAREHOLDER IS ENTITLED TO
DISSENT. A shareholder who beneficially owns Pendaries common shares but is not
the registered holder thereof, should contact the registered holder for
assistance.
Procedures for Exchange of Share Certificates by Pendaries Shareholders
Exchange of Pendaries Share Certificates
If your Pendaries common shares are registered in the name of a broker,
investment dealer, bank, trust company or other nominees, you should contact
that nominee for instructions and assistance in delivering those common shares.
Enclosed with this proxy statement is a letter of transmittal (on pink
paper). The letter of transmittal, when properly completed and duly executed
and returned, together with a certificate or certificates for Pendaries common
shares and all other required documents, to CIBC Mellon Trust Company, will
enable you to obtain, subject to the completion of the
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proposed arrangement, a certificate representing 1.58 Ultra common shares for
each Pendaries common share that you previously held.
Any use of the mail to transmit your certificate for Pendaries common shares
and a related letter of transmittal and other required documents is at your
risk. If you mail these documents, we recommend that registered mail, with
return receipt requested and properly insured, be used.
We recommend that if you wish to receive certificates for your Pendaries
common shares, you deposit with CIBC Mellon Trust Company at Proxy Department,
200 Queen's Quay East, Unit 6, Toronto, Ontario M5A 4K9, facsimile number (416)
368-2502, a properly completed and signed letter of transmittal, together with a
certificate or certificates for Pendaries common shares and all other required
documentation, as soon as practicable.
Certificates representing the appropriate number of Ultra common shares
issuable to a former holder of our common shares who has complied with the
procedures set out above will, as soon as practicable after the effective date
of the arrangement, (a) be forwarded to the holder at the address specified in
the letter of transmittal by first class mail; or (b) be made available at the
offices of CIBC Mellon Trust Company, for pick-up by the holder as requested by
the holder, in the letter of transmittal.
If the arrangement is not approved by the court, the Ultra shareholders or
the Pendaries shareholders, your Pendaries stock certificate will be returned to
you by mail.
Lost Certificates
In the event that any certificate for our common shares is lost, stolen or
destroyed, the registered holder of that certificate should contact CIBC Mellon
Trust Company, 6th Floor, 320 Bay Street, Toronto, Ontario M5H 4A6, telephone
number (416) 643-5576, facsimile number (416) 643-5570 regarding the issuance of
a replacement certificate upon the holder satisfying such requirements as may be
imposed by Pendaries in connection with the issuance of the replacement
certificate.
The person to whom a replacement certificate representing our common shares
is to be issued, as a condition precedent to the issuance thereof, shall be
required to give a bond satisfactory to us and Ultra in such amount as we and
Ultra may direct or otherwise indemnify us and Ultra in a manner satisfactory to
us and Ultra against any claim that may be made against us and Ultra with
respect to the certificate alleged to have been lost, stolen or destroyed.
Loss of Right to Ultra Common Shares if Pendaries Certificates Are Not
Submitted.
If a holder of our common shares does not submit the holder's Pendaries share
certificates by December 31, 2008, the Pendaries share certificate will cease to
represent a claim or interest of any kind as a security holder of Pendaries or
Ultra. After December 31, 2008, Ultra common shares to which the holder of
Pendaries share certificates was entitled will be deemed to have been
surrendered to Ultra for no consideration, together with all entitlements to
dividends and distributions in respect of such Ultra common shares.
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THE ARRANGEMENT AGREEMENT
The following is a summary of some of the material terms in the arrangement
agreement. The arrangement agreement and the plan of arrangement are the legal
documents that govern the arrangement. They are attached as Appendices D and E.
Conditions of the Arrangement
Completion of the arrangement is dependent upon the fulfillment of a number
of conditions, including the following:
. the arrangement resolution shall have been passed by at least two-thirds of
the Pendaries common shares voted at the Pendaries special meeting, at which
a quorum is present in person or by proxy and the arrangement shall have been
passed by more than 50% of the Ultra shares voted at the Ultra special
meeting;
. the final order of The Court of Queen's Bench shall have been granted in form
and substance satisfactory to both us and Ultra, acting reasonably;
. the number of Ultra common shares to be issued by Ultra in exchange for our
common shares pursuant to the arrangement shall not be greater than
15,000,000;
. holders of not more than 5% of the number of our common shares outstanding as
of the date of the arrangement agreement shall have exercised any rights of
dissent granted under the interim order in relation to the arrangement;
. CNOOC shall not have asserted any rights with respect to or arising from the
arrangement which rights, if upheld, could be expected to have a material
adverse effect on us or Ultra;
. the TSE shall have accepted notice of the arrangement and the transactions
contemplated by the arrangement agreement and the Ultra common shares
issuable to holders of our common shares pursuant to the arrangement shall
have been conditionally approved for listing on the TSE;
. on the effective date of the arrangement, Ultra's board of directors shall
have appointed the following new officers of Ultra: Bobby Fogle as Vice-
President, Accounting and Fox Benton, III as Vice-President, Finance;
. opinions of legal counsel shall have been provided;
. on the effective date of the arrangement, the number of Ultra directors shall
have been increased from three to four, and an individual designated by us
shall have been appointed as a director to fill the vacancy created by such
increase; and
. We and Ultra shall have obtained all consents, approvals and authorizations
required or necessary in connection with the transactions contemplated in the
arrangement agreement.
The arrangement agreement permits each party to waive any conditions that are
for its benefit.
Termination
The arrangement agreement may be terminated in a number of circumstances,
including the following:
. by either us or Ultra, if any condition for its benefit is not satisfied at
or before the expiry date;
. by the mutual agreement of us and Ultra;
. by either us or Ultra if any law is passed that makes consummation of the
transactions contemplated by the arrangement agreement illegal or otherwise
prohibited;
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. by Ultra if our board of directors has withdrawn, modified or changed in a
manner adverse to Ultra its approval or recommendation of the arrangement,
unless our shareholders have approved the arrangement prior to such
termination or Ultra has suffered a material adverse change, or Ultra has
made a misrepresentation or breached a covenant such that we would be
entitled to rely on the failure of certain conditions as a reason not to
complete the arrangement;
. by us if our board of directors has withdrawn, modified or changed in a
manner adverse to Ultra its approval or recommendation of the arrangement,
unless our shareholders have approved the arrangement prior to such
termination;
. by us if Ultra's board of directors has withdrawn, modified or changed in a
manner adverse to us its approval or recommendation of the arrangement,
unless the Ultra shareholders have approved the arrangement prior to such
termination or we have suffered a material adverse change or we have made a
misrepresentation or breached a covenant such that Ultra would be entitled to
rely on the failure of certain conditions as a reason not to complete the
arrangement;
. by Ultra if Ultra's board of directors has withdrawn, modified or changed in
a manner adverse to us its approval or recommendation of the arrangement,
unless the Ultra shareholders have approved the arrangement prior to such
termination; and
. by either us or Ultra by notice to the other party if either our shareholder
approval or the Ultra shareholder approval is not obtained by reason of the
failure to obtain the respective required vote.
Arrangement Mechanics
At the effective time of the arrangement, the following events will occur in
the following order:
. all Pendaries common shares, other than those held by Ultra or its affiliates
or those held by dissenting shareholders, shall be and shall be deemed to be
transferred to Ultra in exchange for Ultra common shares on the basis of 1.58
Ultra common shares for each one Pendaries common share; and
. all options to purchase Pendaries common shares shall be cancelled.
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THE SPECIAL MEETING
Time, Place and Date
Our special meeting of shareholders will be held at 10:00 a.m. (Houston time)
on December 28, 2000 at The Houston City Club, One City Club Drive, Nine
Greenway Plaza, Houston, Texas 77046 as set forth in the accompanying notice of
special meeting.
Purpose of the Special Meeting
At the special meeting, our shareholders will be asked to consider and, if
determined advisable, approve the Pendaries arrangement resolution.
Solicitation of Proxies
This proxy statement is furnished in connection with the solicitation of
proxies by our management for use at the special meeting. The solicitation will
be made primarily by mail. Pendaries representatives may solicit proxies
personally or by telephone. Pendaries will bear the cost of solicitation.
Voting by Proxies
The persons named in the enclosed form of proxy are officers of Pendaries.
If you wish to appoint another person to represent you at the special meeting,
you may do so by inserting that person's name in full in the blank space
provided in the form of proxy.
A properly completed and signed proxy confers discretionary authority upon
the named proxy nominee regarding any amendments or variations to the matters
identified in the accompanying notice of special meeting and any other matter
which may properly come before the special meeting or an adjournment or
postponement thereof. As of the date of this proxy statement, our management is
not aware of any such amendments or variations, or other matters to be presented
for action at the special meeting.
The management representatives designated in the enclosed proxy will vote in
accordance with your instructions. If no instructions are marked, the common
shares represented by a proxy given to management will be voted FOR the
Pendaries arrangement resolution and in accordance with management's
recommendation regarding amendments or variations of the matters set out in the
accompanying notice of special meeting or any other matters which may properly
come before the special meeting.
Generally, only registered holders of our common shares, or the persons they
appoint as their proxies are permitted to attend and vote at the special
meeting. However, Pendaries common shares may be beneficially owned by a person
and registered either in the name of an intermediary such as, among others,
banks, trust companies, securities dealers or brokers and trustees or
administrators of self-administered RRSPs, RRIPs, RESPs and similar plans, or in
the name of a clearing agency, such as the Canadian Depositary for Securities
Limited, of which the intermediary is a participant.
In accordance with the requirements of National Policy Statement No. 41 of
the Canadian Securities Administrators, Pendaries has distributed copies of the
accompanying notice of special meeting, this proxy statement, and the form of
proxy for use in connection with the special meeting to the clearing agencies
and intermediaries for distribution to non-registered holders of our common
shares who have not waived the right to receive them. Such non-registered
holders of our common shares may be forwarded a proxy already signed by the
intermediary, or a voting instruction form to allow them to direct the voting of
the common shares they beneficially own in lieu of the form of proxy published
by us. Should a non-registered shareholder who receives either a proxy or a
voting instruction form from an intermediary wish to attend and vote at the
special meeting, in person, or have another person attend and vote on their
behalf, they should strike out the names of the persons named in the proxy and
insert their or such other person's name in the blank space provided or, in the
case of a voting instruction form, follow the corresponding
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instructions on the form. In either case, non-registered shareholders should
carefully follow the instructions of their intermediaries.
Shareholders who do not expect to attend the special meeting in person are
requested to complete, sign, date and return the enclosed form of proxy in the
addressed envelope enclosed by mail or hand delivery or by facsimile to
Pendaries, c/o CIBC Mellon Trust Company, Proxy Department, 200 Queen's Quay
East, Unit 6, Toronto, Ontario M5A 4K9, facsimile number (416) 368-2502. The
form of proxy must be received by no later than 5:00 p.m., Toronto time, on
December 27, 2000 or, in the event that the special meeting is adjourned or
postponed, by no later than 5:00 p.m., Toronto time, on the second business day
before the day fixed for the adjourned or postponed special meeting.
Record Date, Quorum and Entitlement to Vote
The record date for the purpose of determining the shareholders entitled to
receive this proxy statement and to vote at the special meeting has been fixed
as 5:00 p.m. (Houston, Texas time) on December 1, 2000.
Our by-laws require that a quorum be present at any meeting of our
shareholders. A quorum shall be at least three shareholders present in person
or by proxy and entitled to vote, or their proxies, holding not less than 25% of
the issued and outstanding common shares.
Each shareholder as of the record date will be entitled to attend the special
meeting in person or by proxy and to cast one vote for each common share held by
the shareholder as of the record date. If a holder of common shares has
transferred any common shares after the record date and the transferee of such
shares establishes ownership of them and demands in writing, not later than the
close of business on December 18, 2000, ten days or less before the meeting, to
be included in the list of shareholders entitled to vote at the special meeting,
the transferee will be entitled to vote such common shares at the special
meeting.
Required Vote to Approve the Arrangement Resolution
The arrangement resolution must be approved by at least 66 2/3% of the votes
cast by our shareholders present in person or by proxy and entitled to vote at
the special meeting, excluding spoiled, illegible and/or defective votes and
abstentions. Broker nonvotes are not included in the determination of the
number of shares present and voting or as a vote with respect to the arrangement
resolution.
Voting Securities and Principal Holders Thereof
As of the record date, there were issued and outstanding _____ common shares.
As of the record date, our directors and officers as a group beneficially
owned or exercised voting control or direction over _____ common shares carrying
_____% of the number of votes entitled to be cast at the special meeting by our
shareholders. All of our officers and directors plan to vote in favor of the
arrangement resolution.
To the best of the knowledge of our directors and officers, as of the record
date, no person or company beneficially owned or exercised voting control or
direction over our common shares carrying more than 10% of the number of votes
entitled to be cast at the special meeting by our shareholders.
Revocability of Proxies
A registered shareholder who has given a proxy may revoke the proxy by: (a)
completing and signing a proxy bearing a later date and depositing it as
described above, and (b) by depositing a written instrument of revocation
executed by him or her or by his or her attorney authorized in writing or a
completed proxy (i) at the office of Pendaries, Suite 910, 8 Greenway Plaza,
Houston, Texas 77046, any time up to and including 5:00 p.m. (Houston time) on
the last business day preceding the date of the Pendaries special meeting or any
adjournment or postponement thereof, or (ii) with the
35
<PAGE>
Chairman of the Pendaries special meeting prior to the commencement of the
meeting on the day of the meeting, or any adjournment or postponement thereof;
or (c) in any other manner permitted by law.
A non-registered Pendaries shareholder may revoke a voting instruction form
or a waiver of the right to vote and receive materials for the special meeting
given to an intermediary at any time by written notice to the intermediary.
However, an intermediary is not required to act on any such revocation that is
not received by the intermediary at least seven days before the Pendaries
special meeting.
Access to Pendaries Corporate Files
Pendaries has not made any provision in connection with the arrangement to
grant shareholders access to its corporate records or to obtain counsel or
appraisal services at its expense.
Other Matters
The enclosed form of proxy confers discretionary authority upon the persons
named as proxies with respect to any other business properly before the special
meeting. At the date of this proxy statement, our management and boards of
directors are not aware of any other business to be brought before the special
meeting.
36
<PAGE>
THE CREDIT AGREEMENT
Amount of Loan; Use of Proceeds
Effective October 13, 2000, Ultra entered into a credit agreement with our
wholly-owned subsidiary, Sino-American, as borrower and Pendaries as guarantor.
The credit agreement provides that Ultra will lend Sino-American up to $5.0
million to use for cash calls from Kerr-McGee China Petroleum Ltd., the operator
of our Bohai Bay properties and for other working capital needs. As of October
27, Sino-American has borrowed $500,000 under the credit agreement.
Security for the Loan; Term of the Loan
The loan is secured by a pledge by Pendaries of all of the stock of Sino-
American. The loan must be repaid no later than December 31, 2001 if the
arrangement does not occur. However, if we enter into an arrangement or similar
transaction with another party before December 31, 2001, the loan would have to
be repaid at the time the other transaction closed.
Events of Default
The events of default include failure to make a payment of principal when due
or of interest or fees within three days after interest or fee payments are due,
a bankruptcy filing or similar insolvency proceeding by either Sino-American or
us, failure to pay our cash call obligations with respect to our Bohai Bay
properties, a misrepresentation under the credit agreement, a loan of an amount
in excess of $5.0 million and other events of default typical of loan
transactions of this type.
Consequences of a Default
Under the loan agreement and related loan documents, if Sino-American
defaults on the loan, Ultra will have the right to foreclose on the Sino-
American stock. If this were to occur, we would no longer hold any Sino-
American stock, and would have no assets.
37
<PAGE>
ULTRA SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
In 1999 Ultra changed its fiscal year from June 30 to December 31. The
selected consolidated financial and operating data below is derived from the
consolidated balance sheets of Ultra as of June 30, 1995, 1996, 1997, 1998 and
1999, December 31, 1998 and 1999, and September 30, 1999 and 2000, and the
consolidated statements of operations for the years ended June 30, 1995, 1996,
1997, 1998 and 1999, the six-month periods ended December 31, 1998 and 1999 and
the nine-month periods ended September 30, 1999 and 2000. The Selected
Consolidated Financial and Operating Data is derived from Ultra's financial
statements prepared using Canadian generally accepted accounting principles on a
basis consistent with the audited consolidated financial statements and the
accompanying notes of Ultra. All amounts are in U.S. dollars. This data should
be read in conjunction with "Ultra Petroleum Corp. Management's Discussion and
Analysis of Financial Condition and Results of Operation" herein and the
consolidated financial statements of Ultra and notes thereto included as an
appendix to this proxy statement.
<TABLE>
<CAPTION>
Nine-Months Ended
Year Ended June 30, Six-months ended December 31, September 30,
------------------------------------------------- ----------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------------- ------------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Natural gas sales - $ 257 $ 406 $ 3,471 $ 6,352 $ 3,020 $ 4,352 $ 5,234 $ 8,072
Oil sales - 13 21 174 670 111 434 772 858
-------- -------- -------- -------- -------- ------------- ------------- -------- --------
270 427 3,645 7,022 3,131 4,786 6,006 8,930
Expenses:
Production expenses and
taxes - 41 78 953 2,571 1,185 1,329 1,993 2,132
Depletion and depreciation - 46 77 1,377 1,794 1,175 1,186 1,063 1,733
Ceiling test write-down - - - 2,081 3,417 3,417 - - -
Loss on abandonment of oil
and natural gas property - 921 - 6,115 - - - - -
Bad debt expense (recovery) - - - 2,019 - (36) 2,019
General and administrative 132 521 1,382 3,406 5,861 3,972 1,668 2,642 1,777
Interest - - - 406 577 241 344 487 517
-------- -------- -------- -------- -------- ------------- ------------- -------- --------
132 1,529 1,537 14,338 16,239 9,990 4,491 8,204 6,159
Operating Income (loss) (132) (1,259) (1,110) (10,693) (9,217) (6,859) 295 (2,198) 2,771
Other Income (Expense):
Interest 20 3 14 121 152 136 17 197 15
Other - - - - 135 - - - -
Lawsuit settlement - - - - - - (1,876) - -
-------- -------- -------- -------- -------- ------------- ------------- -------- --------
20 3 14 121 287 136 (1,859) 197 15
Net Income (loss) $ (112) $(1,256) $(1,096) $(10,572) $(8,930) $(6,723) $(1,564) $(2,001) $ 2,786
======== ======== ======== ======== ======== ============= ============= ======== ========
Income (loss) Per Share:
Basic and fully diluted $ (0.01) $ (0.08) $ (0.04) $ (0.26) $ (0.16) $ (0.12) $ (0.03) $ (0.04) $ 0.05
</TABLE>
38
<PAGE>
Selected Consolidated Financial and Operating Data (continued)
<TABLE>
<CAPTION>
Nine-Months Ended
Year Ended June 30, Six-months ended December 31, September 30,
------------------------------------------------- ----------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------------- ------------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
(at end of period)
Current assets $ 467 $ 276 $ 5,040 $ 18,177 $ 4,696 $14,048 $ 3,859 $ 5,491 $ 6,101
Oil and natural gas 7,842 8,680 16,304 37,392 33,297 31,174 33,773 35,675 44,583
properties /(1)(2)/
Current liabilities 920 993 1,305 10,070 3,997 8,234 3,664 4,844 5,836
Long-term debt - - - 10,246 7,100 8,350 8,467 9,354 16,517
Total Assets 8,309 8,956 22,542 56,137 38,462 46,017 38,062 41,925 51,169
Shareholders' equity /(1)(2)/ 7,839 7,962 21,237 35,372 27,014 29,034 25,632 27,401 28,591
</TABLE>
/(1)/ Had Ultra followed U.S. GAAP, the carrying value of the oil and natural
gas properties would not be materially different than under Canadian GAAP. Under
U.S. GAAP, Ultra is required to discount future net revenues at 10% for purposes
of calculating any required ceiling test write-down. Under Canadian GAAP, future
net revenues are not discounted, however, they are reduced for estimated future
general and administrative expenses and interest. In the years ended June 30,
1995, 1996, 1997, 1998, and 1999, the six-month periods ended December 31, 1998
and 1999 and the nine-month periods ended September 30, 1999 and 2000, the
calculations of the ceiling limitations under Canadian GAAP approximated that
determined under U.S. GAAP.
/(2)/ Total shareholders' equity and oil and natural gas properties under U.S.
GAAP would be $0.2 million lower in all periods presented, due to the manner in
which escrowed shares were accounted for in fiscal 1995.
39
<PAGE>
PENDARIES SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data below is derived from the
consolidated balance sheets of Pendaries as of December 31, 1995, 1996, 1997,
1998, and 1999 and September 30, 1999 and 2000, and consolidated statements of
operations for the years ended December 31, 1995, 1996, 1997, 1998 and 1999 and
the nine-month periods ended September 30, 1999 and 2000. The Pendaries
Selected Consolidated Financial and Operating Data is derived from Pendaries'
financial statements using Canadian generally accepted accounting principles on
a basis consistent with the audited consolidated financial statements and the
accompanying notes of Pendaries. All amounts are in U.S. dollars. The data
should be read in conjunction with "Pendaries Petroleum Ltd. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of Pendaries and notes thereto.
<TABLE>
<CAPTION>
Nine-Months Ended
September 30,
Year Ended December 31, (unaudited)
--------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas income $ - $ 77 $ 607 $ 465 $ 348 $ 322 $ -
------- ------- ------- ------- ------- ------- --------
Expenses:
Oil and natural gas operating - 11 241 176 218 213 -
General and administrative 315 1,049 2,175 2,408 1,396 1,075 1,197
Depreciation, depletion and
amortization 3 54 321 291 162 140 30
Capital raising costs - - - 299 - - 551
Stock option settlement - - - 450 - - -
Exchange (gain) loss - 71 48 91 53 (38) 35
------ ------- ------- ------- ------- ------- -------
318 1,185 2,785 3,715 1,829 1,390 1,813
Operating Loss 518 1,108 2,178 3,250 1,481 1,068 1,813
Other Income:
Consulting fees 558 220 - - - - -
Interest income 9 65 912 540 325 241 162
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 249 (823) (1,266) (2,710) (1,156) (827) (1,651)
Income tax recovery
(provision) (87) 419 382 - - - -
------ ------- ------- ------- ------- ------- -------
Net Income/(Loss) $ 162 $ (404) $ (884) $(2,710) $(1,156) $ (827) $(1,651)
====== ======= ======= ======= ======= ======= =======
Net Income (Loss) Per Share: $.08 $(.08) $(.10) $(.31) $(.13) $(.09) $(.18)
Basic and fully diluted
Balance Sheet Data
(at end of period)
Current assets $ 785 $17,973 $15,133 $ 7,873 $ 6,984 $ 6,287 $ 898
Oil and natural gas properties $2,797 $ 8,546 $16,285 $21,129 $20,327 $21,926 $25,451
Current liabilities $ 60 $ 407 $ 276 $ 160 $ 78 $ 73 $ 142
Total assets $3,654 $26,684 $31,500 $28,842 $27,682 $28,007 $26,571
Shareholders' equity $3,467 $25,895 $31,224 $28,682 $27,604 $27,934 $26,429
U.S. GAAP
Net Income/(Loss) $ 162 $ (404) $ (884) $(5,455) $(1,156) $ (827) $(1,651)
Net Income/(Loss) Per Share:
Basic and fully diluted $ .08 $ (.08) $ (.10) $ (.62) $ (.13) $ (.09) $ (.18)
Property and equipment $2,854 $ 8,611 $16,135 $17,918 $17,678 $18,566 $22,832
Total assets $3,654 $26,684 $31,500 $26,097 $24,937 $25,262 $23,826
Shareholders' equity $3,467 $25,895 $31,224 $26,117 $24,859 $25,189 $23,684
</TABLE>
40
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ULTRA AND PENDARIES
In 1999 Ultra changed its fiscal year from June 30 to December 31. The
following tables set forth preliminary unaudited pro forma condensed combined
financial data which are presented to give effect to the arrangement. The
statement of operations data assumes that the arrangement was consummated at the
beginning of the period presented. The balance sheet data assume that the
arrangement was consummated on September 30, 2000. The purchase price is a
preliminary estimate using the October 16, 2000 share price of Ultra converted
at that day's exchange rate. See Note C. Under Canadian GAAP, the purchase
price is determined using the Ultra stock price at the date of closing. This
purchase price may materially change in the future so this is only an estimate.
The unaudited pro forma condensed combined financial data are not necessarily
indicative of the results of operations or the financial position which would
have occurred had the arrangement been consummated at the beginning of the
earliest period presented, nor are they necessarily indicative of future results
of operations or financial position. The unaudited pro forma condensed combined
financial data should be read in conjunction with the historical consolidated
financial statements of Pendaries and Ultra incorporated by reference or
included as an appendix to this proxy statement.
Ultra Petroleum and Pendaries Petroleum
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year ended December 31, 1999
<TABLE>
<CAPTION>
Ultra Pendaries
-------------------------------------------- -------------------
Six months ended Twelve months ended
-------------------------- --------------------------------------
Arrangement Adjusted
6-30-99 (A) 12-31-99 (A) 12-31-99 12-31-99 Adjustments Balance
------------ ------------- ----------------- ------------------- ---------------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Oil and natural gas income $ 3,891 $ 4,786 $ 8,677 $ 348 - $ 9,025
------------ ------------- ----------------- ------------------- ---------------- ----------
TOTAL REVENUE 3,891 4,786 8,677 348 - 9,025
EXPENSES
Oil and natural gas operating 1,386 1,329 2,715 218 - 2,933
Depletion and depreciation 620 1,186 1,806 162 - 1,968
Bad debt expenses 2,019 (35) 1,984 - - 1,984
General and administrative expenses 1,889 1,668 3,557 1,449 - 5,006
------------ ------------ ----------------- ------------------- ---------------- ----------
TOTAL EXPENSES 5,914 4,148 10,062 1,829 - 11,891
OTHER INCOME (EXPENSE)
Interest and other income 151 18 169 325 - 494
Interest expense (335) (344) (679) - - (679)
Lawsuit settlement - (1,876) (1,876) - - (1,876)
------------ ------------ ----------------- ------------------ ---------------- ---------
Total other income (expense) (184) (2,202) (2,386) 325 - (2,061)
NET LOSS $(2,207) $(1,564) $ (3,771) $(1,156) - $(4,927)
============ ============= ================= ================== ================ ==========
LOSS PER SHARE
Shares outstanding 55,670 56,671 56,751 8,849 - 71,746
Basic loss per share $ (0.03) $ (0.03) $(0.07) $ (0.13) - $ (0.07)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
41
<PAGE>
Ultra Petroleum and Pendaries Petroleum
Unaudited Pro Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 2000
<TABLE>
<CAPTION>
Arrangement Adjusted
Ultra Pendaries Adjustments Balance
--------- ------------ ----------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
REVENUE
Oil and natural gas revenue $ 8,930 $ - $ - $ 8,930
--------- ------------ ----------- --------
TOTAL REVENUE 8,930 - - 8,930
EXPENSES
Oil and natural gas operating expenses 2,132 - - 2,132
Depletion and depreciation 1,733 30 - 1,763
General and administrative expenses 1,777 1,783 - 3,560
--------- ------------ ----------- --------
TOTAL EXPENSES 5,642 1,813 - 7,455
OTHER INCOME (EXPENSE)
Interest income 15 162 - 177
Interest expense (517) - - (517)
--------- ------------ ----------- --------
TOTAL OTHER INCOME (EXPENSE) (502) 162 - (340)
--------- ------------ ----------- --------
NET INCOME (LOSS) $ 2,786 $ (1,651) $ $ 1,135
========= ============ =========== ========
EARNINGS (LOSS) PER SHARE
Basic shares outstanding 56,782 9,226 - 71,777
Diluted shares outstanding 58,908 9,226 - 73,903
Basic earnings (loss) per share $ .05 $ (.18) - $ .02
Diluted earnings (loss) per share $ .05 $ (.18) - $ .02
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
42
<PAGE>
Ultra Petroleum and Pendaries Petroleum
Unaudited Pro Forma Condensed Combined Balance Sheet
at September 30, 2000
<TABLE>
<CAPTION>
Arrangement Adjusted
Ultra Pendaries Adjustments Balance
--------- --------- ------------ --------
Unaudited
---------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,112 $ 898 $ - $ 2,010
Restricted cash 198 - - 198
Accounts receivable 4,091 - - 4,091
Prepaid expenses and other assets 700 96 - 796
-------- ------- -------- --------
Total current assets 6,101 994 - 7,095
PROPERTY AND EQUIPMENT
Oil and natural gas properties
recorded under the full cost method 50,389 25,451 (25,451) (B)
47,999 (C) 98,388
Furniture, fixtures and office equipment 533 234 (234) (B)
127 (C) 660
Accumulated depreciation, depletion
and amortization (5,853) (107) 107 (B) (5,853)
-------- ------- -------- --------
Total property and equipment 45,069 25,578 22,548 93,195
-------- ------- -------- --------
TOTAL ASSETS $ 51,170 $26,572 $ 22,548 $100,290
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 5,836 109 - 5,945
Accrued liabilities - 33 600 (D) 633
-------- ------- -------- --------
Total current liabilities 5,836 142 600 6,578
LONG TERM LIABILITIES
Long-term debt 16,517 - - 16,517
Deferred income taxes - - 5,942 (C) 5,942
Deferred revenue 225 - - 225
-------- ------- -------- --------
Total liabilities 16,742 - 5,942 22,684
SHAREHOLDERS' EQUITY
Share capital 50,840 33,057 9,379 (E) 93,276
Accumulated deficit (22,248) (6,627) 6,627 (E) (22,248)
-------- ------- -------- --------
Total Shareholders' Equity 28,592 26,430 16,006 71,028
-------- ------- -------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 51,170 $26,572 $ 22,548 $100,290
======== ======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
43
<PAGE>
Notes to Unaudited Pro Forma Condensed
Combined Financial Statements
(A) The statement of operations for the six-months ended June 30, 1999 and
December 31, 1999 reflects Ultra's 1999 change in fiscal year from June 30
to December 31 and to present the twelve-months ended December 31, 1999.
(B) To reverse Pendaries historical oil and natural gas properties and
furniture, fixtures and office equipment balances and the related
accumulated depreciation, depletion and amortization.
(C) To record the preliminary pro forma allocation of the purchase price of
the acquisition of Pendaries, including estimated arrangement costs, to
property, plant and equipment using the purchase method of accounting. The
following is a calculation and allocation of the purchase price to the
acquired assets and liabilities based on their relative fair values.
<TABLE>
<S> <C>
Calculation of Purchase Price (in Thousands Except per Share Data):
Common shares to be issued........................................ 14,995
Price per Ultra common share (using $4.29 Canadian and an
exchange rate of .66 as of October 16, 2000).................... $ 2.83
-------
Fair value of stock issued........................................ $42,436
Add: Estimated arrangement costs.................................. 600
Add: Deferred tax liability....................................... 5,942
-------
Purchase price.................................................... $48,978
=======
Allocation of Purchase Price (In Thousands):
Purchase Price.................................................... $48,978
Less: Working capital and other liabilities assumed.............. (852)
Less: Furniture, fixtures and office equipment................... (127)
-------
Oil and natural gas properties using the full cost method of
accounting...................................................... $47,999
=======
</TABLE>
(D) To record the liabilities associated with estimated arrangement costs of
approximately $600,000.
(E) To record the pro forma adjustments to shareholders' equity using the
purchase method of accounting. the adjustment amount is calculated as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of stock issued (calculated in Note (C) above).............. $ 42,436
Less: Pendaries historical shareholders' equity........................ (26,430)
--------
Adjustments to shareholders' equity.................................... $ 16,006
========
</TABLE>
(F) Reconciliation Note
These unaudited pro forma condensed Combined 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 years presented, except as outlined below.
Oil and Natural Gas Properties
In Canada, if the net capitalized costs of oil and natural gas properties
in a cost center exceed an amount equal to the sum of the estimated future
net revenues from proved oil and natural 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, providing for site
development and restoration, future general, administrative and financing
costs. This is not consistent with U.S. GAAP.
For U.S. GAAP, if the net capitalized costs of oil and natural gas
properties in a cost center exceed an amount equal to the sum of the
estimated discounted present value of 10% of future net revenues from
proved oil and natural 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.
44
<PAGE>
Purchase Price Adjustments and Historical Differences
The retained (deficit) under U.S. GAAP would be $169,000 greater due to
the manner in which escrowed shares were accounted for in fiscal 1995, and
Share Capital would be $2,850,000 less due to U.S. GAAP using an
acquisition price of $4.00 Canadian versus the pro forma acquisition price
for Canadian GAAP of $4.29 Canadian. Under U.S. GAAP the amount allocated
to deferred income taxes and oil and natural gas properties would be
$1,857,000 less.
45
<PAGE>
COMPARATIVE MARKET DATA
In the table below, we present the range of the reported high and low
sales prices, as shown on AMEX and the TSE, of the Pendaries common shares, and,
with respect to the shares of Ultra common stock, as shown on the TSE. The
Pendaries common shares are listed on AMEX under the ticker symbol "PDR" and on
the TSE under the ticker symbol "PDQ." The shares of Ultra common stock are
listed on the TSE under the ticker symbol "UP."
<TABLE>
<CAPTION>
Pendaries Ultra
-------------------------------------------------- ---------------------------
American Stock Toronto Stock Toronto Stock
Exchange/(1)(2)/ Exchange/(3)/ Exchange/(3)/
----------------------- ------------------------- ---------------------------
High Low High Low High Low
(US$) (US$) (Cdn$) (Cdn$) (Cdn$) (Cdn$)
---------- ----------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1998
First Quarter N/A N/A $12.500 $7.500 $7.300 $4.060
Second Quarter $3.875 $3.500 $ 8.750 $5.250 $5.650 $3.550
Third Quarter $3.625 $1.125 $ 5.200 $1.510 $3.850 $1.680
Fourth Quarter $1.063 $0.313 $ 1.500 $0.570 $2.020 $1.140
1999
First Quarter $0.938 $0.438 $ 1.400 $0.660 $1.540 $1.060
Second Quarter $1.875 $0.500 $ 2.650 $0.800 $1.370 $0.960
Third Quarter $1.313 $0.625 $ 1.700 $1.100 $2.000 $1.070
Fourth Quarter $3.438 $0.938 $ 5.040 $1.500 $1.490 $0.930
2000
First Quarter $4.500 $2.250 $ 6.600 $2.840 $1.100 $0.750
Second Quarter $3.380 $2.000 $ 5.250 $3.000 $2.800 $0.780
Third Quarter $3.500 $2.875 $ 5.000 $4.000 $3.900 $1.950
Fourth Quarter
(through October 25, 2000) $4.062 $3.062 $ 6.000 $4.110 $4.500 $3.810
</TABLE>
________________________
(1) Our common shares were listed on AMEX on June 24, 1998.
(2) Pricing information provided by AMEX.
(3) Pricing information provided by the TSE.
On October 13, 2000, the last full trading day prior to our signing and
announcing the arrangement agreement, the closing price of the Pendaries common
shares was US $3.50 per share as reported on AMEX, and Cdn $4.11 per share as
reported on the TSE. The closing price of the Ultra common shares on the same
day was Cdn $3.85 per share as reported on the TSE. Based on the 1.58 exchange
ratio provided in the arrangement agreement and the closing price of the Ultra
common shares on October 13, 2000, the value of the Ultra common shares to be
received for each Pendaries common share is US $4.01, using the average exchange
rate on October 13, 2000 of $0.6623. On [ ], 2000, the most recent date prior to
the mailing of this document to you, the closing sale prices of the Pendaries
common shares was US $[ ] per share as reported on AMEX, and Cdn $[ ] per share
as reported on the TSE. We encourage you to obtain current market quotations for
Ultra common shares and Pendaries common shares.
Ultra has filed an application with AMEX to list its common shares,
including the common shares to be issued to shareholders of Pendaries in the
arrangement. We cannot assure you that the Ultra common shares will be approved
for listing on AMEX. The listing of the Ultra common shares on AMEX is not a
condition to the consummation of the arrangement.
In the arrangement agreement, Ultra agreed that, until the arrangement is
completed or the arrangement agreement is terminated, Ultra will not pay any
dividends on any of Ultra common shares. In the arrangement agreement, we agreed
that, until the arrangement is completed or the arrangement agreement is
terminated, will not pay any dividends on any of the common shares. We have
never declared nor paid cash dividends to the holders of common shares, and do
not intend to do so. Ultra also has never declared nor paid cash dividends to
the holders of Ultra common shares, and does not intend to do so in the
foreseeable future.
46
<PAGE>
SELECTED COMPARATIVE PER SHARE DATA
The following table sets forth selected combined historical per share data
for Ultra and Pendaries, selected unaudited pro forma per share data for Ultra
giving effect to the arrangement using the purchase method of accounting and the
equivalent unaudited pro forma combined per share amounts for Pendaries. The pro
forma combined data are not necessarily indicative of actual financial position
or future operating results or that which would have occurred or will occur upon
consummation of the arrangement.
The information shown below should be read in conjunction with the historical
consolidated financial statements and notes thereto and the selected pro forma
financial data for the combined company included elsewhere in this proxy
statement.
<TABLE>
<CAPTION>
For the Nine-Months Ended September 30, 2000
----------------------------------------------------------------
Pendaries
Ultra Pendaries Ultra Pro Forma
Historical Historical Pro Forma /(1)/ Equivalent /(2)/
------------ ----------- -------------- ----------------
<S> <C> <C> <C> <C>
Net Income (loss) per common share from............. $0.05 $(0.18) $0.02 $0.03
continuing operations
Book value per common share /(3)/..................... $0.50 $ 2.86 $0.99 $1.56
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
----------------------------------------------------------------
Pendaries
Ultra Pendaries Ultra Pro Forma
Historical Historical Pro Forma /(1)/ Equivalent /(2)/
------------ ----------- -------------- ----------------
<S> <C> <C> <C> <C>
Net Income (loss) per common share from............. $(0.07) $(0.13) $(0.07) $(0.11)
continuing operations
Book value per common share /(3)/..................... $ 0.46 $ 2.99 $ 0.96 $ 1.52
</TABLE>
------------------------------
(1) The pro forma net income (loss) per share data for Ultra is presented as if
the arrangement and certain other recent transactions as described in the
"Unaudited Pro Forma Combined Financial Statements" had occurred as of the
beginning of the respective periods.
(2) The equivalent per share amounts of Pendaries are calculated by multiplying
Ultra pro forma per share amounts for net income (loss) per share and book
value per share (post-arrangement) by the exchange ratio of 1.58.
(3) Book value per common share was calculated using shareholders' equity as
reflected in the historical and pro forma financial statements divided by
the number of Ultra or Pendaries common shares outstanding.
47
<PAGE>
PENDARIES PETROLEUM LTD.
The Company
We are a Houston-based independent oil and natural gas company with interests
in two shallow water concession blocks in the Bohai Bay, China.
Block 04/36 covers 454,000 acres. We own an 18.2% foreign contractor's
interest in the block. Our partner and the operator is Kerr-McGee China
Petroleum Ltd. which owns the remaining 81.8%. China National Offshore Oil
Company, or CNOOC, has the right to participate for up to 51% by paying 51% of
development and operating costs. This block contains our discovery field, the
CFD 2-1, on which Kerr McGee drilled one exploration and three successful
appraisal wells in 1996 and 1997. In addition, Kerr-McGee drilled a successful
discovery well on the CFD 11-1 field in late 1999 followed by two successful
appraisal wells in early 2000.
Block 05/36 covers 312,000 acres and is adjacent to Block 04/36. We own a 15%
foreign contractor's interest in this block. Our partners in this block are
Kerr-McGee which owns a 50% interest and is the operator, and Newfield
Exploration which owns a 35% interest. CNOOC has the right to participate for up
to 51% by paying its proportionate share of development and operating costs. One
field, the CFD 12-1, has been discovered to date. Kerr-McGee drilled the
successful discovery well in mid-2000 followed by a successful appraisal well in
the third quarter of 2000.
3-D seismic has been shot over the CFD 2-1 field and is currently being shot
over an area which covers both the CFD 11-1 and the CFD 12-1 fields, as well as
nine other prospects in the area. After the 3-D seismic data is analyzed, we and
our partners plan to drill 8 to 15 exploration and appraisal wells in 2001.
Description of Share Capital
Our authorized capital consists of an unlimited number of common shares.
Each common share entitles the holder of record to one vote at shareholder
meetings and to receive dividends as may be declared by our board of directors,
paid in equal amounts per common share. Holders of common shares are entitled to
participate, on an equal basis per share, in any distribution of the net assets
upon our liquidation, dissolution or winding-up. There are no preemptive,
redemption, purchase or conversion rights attached to the common shares.
The shareholders elect our directors by cumulative voting. Each shareholder
has the right to cast a number of votes equal to the number of shares held
multiplied by the number of directors to be elected. A shareholder may cast all
such votes in favor of one candidate or distribute them among the candidates in
any manner.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PENDARIES
General
You should read this discussion together with our consolidated financial
statements, including the accompanying notes. Because the majority of Pendaries'
business activity is conducted in U.S. dollars, it uses the U.S. dollar as its
reporting currency. Pendaries prepared consolidated financial statements in
accordance with Canadian generally accepted accounting principles for all
periods presented. You should also read Note 12 to our December 31, 1999 audited
consolidated financial statements regarding reconciliation to U.S. generally
accepted accounting principles.
Results of Operations
Nine-Month Period Ended September 30, 2000 Compared to the Nine-Month Period
Ended September 30, 1999
Pendaries incurred a net loss of $1,651,124 ($.18) and $826,696 ($.09) for
the nine months ended September 30, 2000 and 1999, respectively. The $824,428
increase in net loss was due to the following:
48
<PAGE>
Oil and natural gas revenue from our properties located in Alberta, Canada of
$321,796 for the nine months ended September 30, 1999 was zero for the same
period in 2000 due to the sale of these Canadian properties in November of 1999.
For the same reason, oil and natural gas operating expenses of $213,031 for the
nine months ended September 30, 1999 were zero for the same period in 2000.
General and administrative expense increased from $1,075,000 in the first
nine months of 1999 to $1,197,541 for the comparable period of 2000. The
$122,441 increase was due to increased costs of attempted capital raising.
Depreciation, depletion and amortization decreased by $110,175 from $140,374
in 1999 to $30,199 in 2000 due to the sale of the Canadian oil and natural gas
properties in November 1999.
During the course of the nine months ended September 30, 2000, we incurred
$550,632 in costs associated with our financing efforts, the share exchange
agreement and line of credit agreement with Ultra. Our financing efforts
included an extensive effort to raise capital through a private placement of
equity as well as the preparation of the documents for a shareholders' rights
offering. When the decision was made to enter into an arrangement agreement with
Ultra, all such costs were expensed. There were no such costs in 1999.
We incurred an exchange loss of $35,018 for the nine months ended September
30, 2000 as compared to an exchange gain of $38,721 in the same period of 1999
as a result of the strengthening of the U.S. dollar against the Canadian dollar
in the 2000 period.
Interest income decreased by $79,026 from $241,292 in the nine month period
of 1999 to $162,266 in the same period of 2000. The decrease was due to the
reduction of cash available for investment in the 2000 period.
Liquidity and Capital Resources
From inception, July 5, 1994, our equity transactions by year are shown
below. Of the total, $31,504,198 represents cash raised by issuance of common
equity, $1,325,000 represents oil and natural gas properties paid for by
issuance of common equity, and $227,290 represents services paid for by issuance
of common equity.
<TABLE>
<CAPTION>
Common Share Exercise of Exercise of
Period Equity Warrants Options Total
----------------------------------- -------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
1995 $ 3,287,500 - - $ 3,287,500
1996 22,812,658 - $ 20,000 22,832,658
1997 68,000 $ 944,488 5,196,115 6,208,603
1998 131,081 - 42,000 173,081
1999 28,209 - 50,000 78,209
2000 (through September 30) 30,000 - 446,437 476,437
-------------------- ------------------ ------------------ --------------------
Totals $ 26,357,448 $ 944,488 $ 5,754,552 $ 33,056,488
==================== ================== ================== ====================
</TABLE>
49
<PAGE>
During the same periods, Pendaries' capital expenditures were as follows:
<TABLE>
<CAPTION>
Oil and Natural Oil and Natural Furniture,
Gas Properties Gas Properties Fixtures and
Period canada China Equipment Total
---------------------------- ----------------- ------------------ ---------------- -----------
<S> <C> <C> <C> <C>
1995 - $ 3,597,631 $ 59,758 $ 3,657,389
1996 $ 1,966,088 2,981,853 62,613 5,010,554
1997 - 7,739,641 105,286 7,844,927
1998 - 4,843,827 (57,719) 4,786,108
1999 (1,966,088)/(1)/ 1,163,869 (2,579) (804,798)
2000 (through September 30) - 5,123,708 66,301 5,190,009
----------------- ----------------- ---------- ------------
Totals $ - $25,450,529 $233,660 $25,684,189
================= ================= =========== ============
</TABLE>
_____________________
/(1)/ We received proceeds from the sale of our Canadian properties of
$1,200,000. The difference of $766,088 is due to accumulated depletion on
the properties.
Our current projections of total cash requirements attributable to our China
interests through the end of 2003 are shown below. After 2003, we believe that
all capital costs in the Bohai Bay and general and administrative expenses can
be funded from internal cash flow of these properties.
Estimated Capital Costs/ 2000 - 2003
US$000's
<TABLE>
<CAPTION>
Exploration Development Less Cash
All Fields All Fields and and Net Cumulative
and Potential Potential Pendaries Production Cash Out
Year Prospects Prospects G&A Income Total Flows
-------------------------- --------------- --------------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Last Three Months of 2000 $ 1,770 $ - $ 350 $ (900) $ 1,220 $ 1,220
2001 8,967 1,068 1,500 - 11,535 12,755
2002 4,717 23,273 1,500 (6,701) 22,789 35,544
2003 6,316 55,380 1,500 (53,616) 9,580 45,124
---------- ---------- ---------- ---------- ---------- ----------
TOTALS $21,770 $79,721 $4,850 $(61,217) $45,124
========== ========== ========== ========== ==========
</TABLE>
After capital expenditures and funds used in operations, we had cash of
approximately $900,000 at September 30, 2000. In conjunction with the
arrangement agreement, Ultra has provided a US $5.0 million line of credit to
our subsidiary, Sino-American. The line of credit bears interest at the prime
rate of Bank One, Texas N.A. The credit facility is fully guaranteed by
Pendaries and secured by all of the stock of Sino-American. Under the terms of
the credit facility, any amounts borrowed by Sino-American must be repaid by
December 31, 2001 unless extinguished by an earlier closing of the arrangement
with Ultra.
As of October 27, 2000, we have borrowed $500,000 from Ultra. We believe that
Ultra's cash flow and its bank line of credit will be sufficient to cover both
our capital requirements and those of Ultra's in the future.
We anticipate that we will have access to the full $5.0 million provided under
the line of credit from Ultra. This amount should be enough to meet all of our
commitments for capital expenditures and general and administrative expenses
through the end of the first quarter 2001, and possibly into the middle of the
second quarter of 2001. If the arrangement with Ultra were not to close, then
we may be unable to find another source of capital to continue operations. If
we find any new capital source, that party would have to provide sufficient
funds to fully pay off the Ultra line of credit. While we expect to close the
transaction
50
<PAGE>
with Ultra in early 2001, we have been informed by Arthur Andersen LLP, our
independent public accountants, that if the transaction does not close before
filing its December 31, 2000 financial statements and we are unable to secure
additional financing, their report on those statements will include an
explanatory fourth paragraph expressing uncertainty regarding our ability to
continue as a going concern.
51
<PAGE>
PRINCIPAL SHAREHOLDERS OF PENDARIES
The following sets forth information, as of September 30, 2000, concerning
beneficial ownership of our shares by any shareholders known to us to
beneficially own more than 5% of our issued and outstanding common shares, and
all current executive officers and directors individually and as a group.
Except as otherwise indicated and except for those shares that are listed as
being beneficially owned by more than one shareholder, each shareholder
identified in the table has sole voting and investment power with respect to
their shares. As of September 30, 2000, there were 9,113,370 shares
outstanding.
Unless otherwise indicated, information on beneficial owners of more than 5%
of shares is based on Schedule 13G reports filed with the SEC and as to Filland
International Ltd., is based on our corporate records.
<TABLE>
<CAPTION>
Common Shares
Beneficially Owned at
September 30, 2000/(1)/
------------------------------------------
Name and Address of Percent of Class
-------------------
Person or Group* Position Shares Outstanding
--------------- --------------------------- --------------- ---------------------
<S> <C> <C> <C>
Robert E. Rigney Chairman of the Board 669,539 7.3%
Chief Executive Officer
Fred A. Tietz President 73,579 0.8%
Bobby J. Fogle Vice-President Finance, Director 117,566 1.3%
Philip R. Henry Vice-President 91,132 1.0%
Paul H. Farrar Director 93,901 1.0%
Shingyi Ho Vice-President, Director 231,219 2.5%
Ben F. Barnes Director 174,498 1.9%
James C. Roe Director 134,031 1.5%
All of the executive officers and
directors as a group (8 persons) 1,583,461 17.4%
State Street Research & Management
Company
One Financial Center, 30/th/ Fl.
Boston, MA 02111-2690 479,400/(2)/ 5.3%
Filland International Ltd.
38 Gloucester Road
Wanchai, Hong Kong 600,000/(3)/ 6.6%
</TABLE>
------------------
* Except as noted, the address of our officers and directors is 8 Greenway
Plaza, Suite 910, Houston, Texas 77046.
(1) Unless otherwise indicated in the footnotes below, the number of shares held
and the percent outstanding are as of September 30, 2000 and the persons
named have sole voting and investment power over the number of shares
beneficially owned by them. The table includes the following shares that
were acquirable within 60 days following September 30, 2000 by exercise of
options granted under our stock option plans: Mr. Robert E. Rigney -
102,500; Mr. Frederic A. Tietz - 60,000; Mr. Bobby J. Fogle - 97,500; Mr.
Philip R. Henry - 50,000; Mr. Paul H. Farrar -73,400; Mr. Shingyi Ho -
68,500; Mr. Ben F. Barnes - 29,200; and Mr. James C. Roe - 73,400.
(2) Based on a Schedule 13G dated February 11, 1999 filed with the SEC, State
Street Research & Management Company, an investment adviser registered under
Section 203 of the Investment Advisors Act of 1940, is deemed to be the
beneficial owner of 479,400 shares as a result of acting as an investment
advisor to several clients.
(3) Based on our records only, as Filland is a foreign corporation not subject
to SEC filing requirements.
52
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF PENDARIES
Our directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position
------------------ ---- -------------------------------------------------
<S> <C> <C>
Robert E. Rigney 68 Chairman and Chief Executive Officer, Director
Frederic A. Tietz 69 President
Bobby J. Fogle 54 Vice President, Finance, Chief Financial Officer,
Director
Shingyi Ho 54 Vice President, Director
Philip R. Henry 47 Vice President, Investor Relations
Ben F. Barnes 62 Director
Paul H. Farrar 65 Director
James C. Roe 71 Director
</TABLE>
Robert E. Rigney is our Chairman and Chief Executive Officer and has been a
member of our board of directors since our founding. Mr. Rigney has been a
diplomat, oil company executive and consultant in Asia for over 21 years. Mr.
Rigney has been responsible for obtaining oil concessions in China, Indonesia
and other Asian countries. He has also assisted various Chinese oil and natural
gas enterprises to train their employees in the use of Western oil and natural
gas technology and applications.
Frederic A Tietz has served as our President since 1996. From 1991 to 1996,
Mr. Tietz worked as an independent consultant to McDermott International and
Axem Resources. Mr. Tietz is a certified petroleum geologist and has over 35
years of oil and natural gas exploration and production experience including
serving as President of Monsanto Oil Company and as President of BHP Petroleum
(Americas) Inc.
Bobby J. Fogle is our Vice President, Finance, and serves on our board of
directors. Before joining us in 1996, Mr. Fogle was employed by The Keplinger
Companies, Inc. from 1976 to 1996 in various capacities, including controller,
vice president, treasurer, executive vice president and director.
Shingyi Ho is our Vice President and a member of our board of directors and
has held these same positions with Sino-American since 1996. Before 1996, Mr.
Ho worked for our predecessor company for two years. Mr. Ho is the senior
executive in our Beijing office and is the principal liaison with the Chinese
ministries, governmental authorities and agencies. He has worked for more than
16 years in the energy business in China, representing a variety of western
companies such as Input-Output, Kerr-McGee, Valero Energy and Landmark Graphics.
Philip R. Henry has served as Vice-President, Operations of Pendaries and
Vice-President of Sino-American since 1996. Mr. Henry was a partner with Klenda
Financial Services, Inc., a financial services company based in Denver,
Colorado, from 1988 until 1996.
Ben F. Barnes has been a member of our board of directors since 1999 and has
been a director of Sino-American since 1996. Mr. Barnes has been active in
politics in Texas for more than thirty years. Since 1973, Mr. Barnes has been
employed as a business consultant working with organizations such as MARTA
Technologies and Ranger Insurance. He served as Lieutenant Governor of Texas
from 1969 to 1973.
Paul H. Farrar has been a member of our board of directors since 1996. Since
1994 he has served as Chairman of Adelaide Capital Corporation, a finance
services corporation, and currently serves as a director of AFC Enterprises and
Anchor Glass Container Corp in the U.S. and serves as director and Chairman of
Canadian Airlines Corporation, as well as a director of Consumers Packaging Inc.
in Canada. Mr. Farrar was a Senior Vice-President of a Canadian chartered bank
prior to 1994.
James C. Roe has been a member of both our board of directors and Sino-
American's board of directors since 1996. Mr. Roe was Vice-President/Owner of
Delta-X Corporation from 1973 until the sale of that corporation in February
1997. Delta-X is engaged in the design, manufacture, and sale of high technology
automation systems used in oil producing operations. Mr. Roe has spent his
entire career in various sales and management positions in the oil services
industry before joining Delta-X Corporation in 1973.
53
<PAGE>
ULTRA PETROLEUM CORP.
The Company
Ultra was incorporated on November 14, 1979, under the laws of the Province of
British Columbia, Canada. Ultra continued into the Yukon Territory, Canada,
under Section 190 of the Business Corporations Act (Yukon Territory) on March 1,
2000. Ultra explores for and develops oil and natural gas, primarily in the
Green River Basin of southwest Wyoming, where it leases approximately 271,966
gross (200,088 net) acres covering approximately 425 square miles. Ultra also
operates a well in Texas that is a marginal producer. Ultra currently derives
approximately 90% of its revenue from the sale of natural gas and approximately
10% from the sale of condensate. As of July 1, 2000, Ultra estimates that it
had 128.745 Bcfe of proved reserves with a discounted before-tax cash flow of
$140.7 million.
Ultra has two wholly-owned subsidiaries through which it conducts its
operations in the United States, Ultra Petroleum (USA) Inc., a Colorado
corporation, and Ultra Resources, Inc., a Wyoming corporation.
Recent Developments
Pinedale Anticline EIS. In 1998, the U.S. Bureau of Land Management initiated
an Environmental Impact Study, or EIS, for Ultra's Pinedale Anticline area in
the Green River Basin of Wyoming. An EIS evaluates the effects an industry's
activities will have on the environment in which the activity is proposed, and
will play an important role in determining Ultra's ability to develop its
natural gas resources in the region. From January 2000 to July 2000, Ultra did
not participate in the drilling of any new wells within the Pinedale Anticline
area due to restrictions placed on the area by the BLM while the EIS was
conducted over the area as well as due to winter lease stipulations.
The EIS encompasses approximately 200,000 gross acres north of the Jonah
Field, and where most of Ultra's exploration and development is taking place.
The EIS includes an analysis of the geological and reservoir characteristics of
the area plus environmental studies related to wildlife, surface use, and socio-
economic and air quality issues.
The BLM issued a preliminary draft of the EIS in mid-September and a final
draft in mid-November 1999. The final EIS was issued by the Bureau in late July
2000, and allows for the drilling of 700 producing surface locations within the
EIS areas. The EIS does not authorize the drilling of particular wells. Ultra
must submit applications to the Bureau's Pinedale field manager for permits to
drill and for other required authorizations, such as rights-of-ways for
pipelines, for each specific well or pipeline location.
Since the final EIS was issued, Ultra has embarked on a ten-well drilling
program in the northern end of the Pinedale Anticline. As of October 20, 2000,
Ultra had drilled two (.85 net) successful exploratory wells and two (0.4 net)
successful development wells, all of which were in the process of being
completed. Production from these wells is expected to commence by the end of
November 2000. The remaining six (1.55 net) development wells were drilling at
October 20, 2000. Questar Exploration and Production Company is the operator of
these wells. In addition, as of October 20, 2000, Ultra, as operator, was
drilling one gross (.38 net) development well on the southern end of the
Pinedale Anticline.
In addition to locations on federal lands, Ultra owns leases on significant
areas of state and privately owned lands in the vicinity of the Pinedale
Anticline area that do not fall under the jurisdiction of the BLM and are not
subject to the EIS process.
Jonah Field Environmental Assessment. In August 1999, the BLM required an
environmental assessment, or "EA," for the Jonah Field where Ultra had drilled
21 wells. An EA is a more limited environmental study than an EIS. The BLM
required an EA to evaluate the proposed downspacing of the Jonah Field from 80
acres, which had been permitted as a result of an EIS completed on the Jonah
Field in 1998, to 40 acres. The final EA was issued in mid-June 2000 and
approves infield drilling on 40 acre spacing. As a result, Ultra has identified
22 additional drilling locations on its acreage in the Stud Horse Butte area of
the field which it estimates has added as of July 1, 2000 proved reserves of
49.766 Bcfe with a discounted before tax cash flow of $51.82 million.
In the third quarter of 2000, Ultra commenced a program to drill and complete
18 wells out of the 22 new locations in the Jonah Field. As of October 20, 2000,
Ultra has drilled 10 gross (6.4 net) development wells, of which 7 gross (4.5
net) wells are currently producing at an average rate of 8.4 MMcf per day. Two
additional gross (1.3 net) development wells are being drilled while three
additional
54
<PAGE>
gross (1.9 net) development wells are in the process of completion. The
remaining wells in the program are scheduled to be drilled and completed by the
second quarter of 2001. Ultra is the operator of these wells.
Acquisition of 3-D Seismic. In June 2000, Ultra acquired 182 square miles of
3-D seismic data from Veritas DGC covering a portion of the Pinedale Anticline.
Ultra is currently reprocessing this data to integrate it with existing 3-D
data over the northern Mesa area of the Pinedale Anticline area prior to
interpretation. Ultra now has 3-D seismic data over the entirety of its
Pinedale Anticline acreage.
Description of Property
As of December 31, 1999, Ultra owned developed oil and natural gas leases
totaling 4,750 gross, or 1,621 net, acres of which 87.5% is located in the Green
River Basin of Sublette County, Wyoming and the remaining 12.5% is located in
Texas, plus associated production equipment. Ultra owned undeveloped oil and
natural gas leases totaling 267,216 gross, or 198,467 net, acres of which 98% is
located in the Green River Basin of Sublette County, Wyoming and the remaining
2% is located in Texas. Ultra's acreage in the Green River Basin is primarily
covering the Pinedale Anticline and a large undeveloped block west of the
Anticline. Ultra also owns three sections in the Jonah Field. The acreage and
other additional information concerning Ultra's oil and natural gas operations
are presented in the following tables. Holding costs of leases not held by
production are approximately $280,000 for the fiscal year ended December 31,
2000.
Net Oil and Natural Gas Production, Average Price and Average Production Cost
The net quantities of natural gas and condensate produced and sold by Ultra
for each of the last three fiscal years, the average sales price per unit sold
and the average production cost per unit are presented below:
<TABLE>
<CAPTION>
Natural Gas and Condensate
---------------------------
Net
Net Condensate Natural Gas Sales Price Natural Gas Cost per
Fiscal Year Ended Production Production Per Bbl Sales Equivalent
June 30, (Bbls) (MCF) Price Per MCF MCF**
------------------ ---------------- ------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
1997 8,000 300,000 $21.68 $2.02 $0.25
1998 14,000 1,800,000 $13.26 $1.81 $0.33
1999 42,000 4,129,000 $15.95 $1.54 $0.32
Six months ended
December 31, 1999 20,000 1,908,000 $21.69 $2.29 $0.38
</TABLE>
_____________
* Equivalent barrels have been calculated on the basis of six thousand cubic
feet (6 MCF) of natural gas equals one barrel of oil.
** Average production cost includes lifting costs, remedial workover expenses
and production taxes.
55
<PAGE>
Gross and Net Productive Wells
As of the dates set forth below, Ultra's total gross and net wells were as
follows:
Productive Wells*
-----------------
Natural Gas and Condensate
--------------------------
Gross Wells Net Wells
----------- ---------
June 30, 1999 48 14.86
December 31, 1999 52 16.56
_______________
* A gross well is a well in which a working interest is owned. The number of
net wells represents the sum of fractional working interests Ultra owns in
gross wells. Productive wells are producing wells plus shut-in wells Ultra
deems capable of production.
Gross and Net Developed and Undeveloped Acres
As of the following dates, Ultra had total gross and net developed and
undeveloped oil and natural gas leasehold acres as set forth below. The
developed acreage is stated on the basis of spacing units designated by the
state regulatory authorities.
<TABLE>
<CAPTION>
Leasehold Acreage*
------------------
June 30, 1999 December 31, 1999
--------------------------------------- ---------------------------------------
Developed Undeveloped Developed Undeveloped
--------------------------------------- ---------------------------------------
Gross Net Gross Net Gross Net Gross Net
------- ------ --------- ---------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Louisiana 430 13 - -- 430 13 -- --
Texas 160 40 3,684 747 160 40 3,684 747
Wyoming 4,160 1,568 263,532 197,720 4,160 1,568 263,532 197,720
--------------------------------------- ---------------------------------------
All States 4,750 1,621 267,216 198,467 4,750 1,621 267,216 198,467
</TABLE>
___________________
* Gross acres are those acres in which a working interest is owned. The
number of net acres represents the sum of fractional working interests
Ultra owns in gross acres.
56
<PAGE>
Exploratory Wells and Developed Wells
For the time periods indicated below, the number of net wells drilled by
Ultra was as follows:
<TABLE>
<CAPTION>
Net Exploratory Net Development Total Net
Fiscal Year Wells Wells Wells
Ended June 30, Drilled Drilled Drilled
-------------------- ------------------- -------------------- -------------
Productive Dry Productive Dry
------------ ------- ------------- -----
<S> <C> <C> <C> <C> <C>
1999 0.68 0.50 3.73 0 4.91
1998 2.93 1.60 3.44 0 7.97
1997 0.43 0 0.95 0 1.38
Six Months Ended
December 31, 1999 0 1.00 1.70 0.43 3.125
</TABLE>
As of October 20, 2000, Ultra had seven gross (2.33 net) wells drilling.
57
<PAGE>
Estimated Net Quantities of Proved Reserves and Present Value of Estimated
Future Net Reserves
The following information regarding Ultra's proved producing reserves and
total proved reserves sets forth the quantities of oil, natural gas, and natural
gas equivalents. Additional information is presented on the estimated
undiscounted future cash flows from such proved producing and total proved
reserves, along with their present value, discounted at 10% per annum. These
undiscounted future net cash flows and present value of such cash flows are
presented before tax. This should be contrasted with the supplemental
information regarding oil and natural gas producing activities appended to
Ultra's audited financial statements for the period ended December 31, 1999,
which information is provided on an after-tax basis.
<TABLE>
<CAPTION>
JULY 1, 2000 JULY 1, 1999 JULY 1, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Proved Developed Reserves/(1)/
Oil, Mbbls.......................................... 289 350 224
Natural gas, MMcf................................... 35,690 34,400 22,300
Natural gas equivalents, MMcfe (6:1)................ 37,424 36,500 23,644
As a percentage of total proved..................... 29% 83% 39%
Total Proved Reserves
Oil, Mbbls.......................................... 987 420 579
Natural gas, MMcf................................... 122,826 41,436 57,100
Natural gas equivalents, MMcfe (6:1)................ 128,748 43,956 60,574
Before tax cash flow, undiscounted.................. $297,158 $64,482 $47,821
Before tax cash flow, discounted.................... $140,741 $30,671 $17,399
</TABLE>
/(1)/ Reserve numbers at July 1, 2000 are based on reports prepared by Ultra
and audited by Netherland, Sewell & Associates, Inc. Reserve numbers at
July 1, 1999 and 1998 are based on reports prepared by Gilbert Laustsen
Jung Associates Ltd.
In general, estimates of reserves and the future net cash flows
attributable to the reserves are based upon a number of variable factors and
assumptions, such as historical production from the properties, the assumed
effects of regulation by governmental agencies, and assumptions concerning
future oil and natural gas prices and future operating costs, all of which may
vary considerably from actual results. All such estimates are to some degree
speculative, and classifications of reserves are
58
<PAGE>
only attempts to define the degree of speculation involved. For these reasons,
estimates of the economically recoverable oil and natural gas reserves
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net cash flows
expected therefrom, prepared by different engineers or by the same engineers at
different times, may vary substantially. The actual production, revenues,
severance and excise taxes, development and operating expenditures with respect
to its reserves will vary from estimates and such variances could be material.
Information set forth herein regarding the quantities of and cash flows
attributable to Ultra's oil and natural gas reserves are forward looking
statements. See "Forward-Looking Statements."
Legal Proceedings
Ultra is currently involved in various routine disputes and allegations
incidental to its business operations. While it is not possible to determine
the ultimate disposition of these matters, Ultra, after consultation with legal
counsel, believes that the final resolution of all such currently pending or
threatened litigation is not likely to have a material adverse effect on the
consolidated financial position, results of operations or cash flows of Ultra.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF ULTRA
General
The following discussion of the financial condition and operating results
of Ultra should be read in conjunction with consolidated financial statements
and related notes of Ultra. Except as otherwise indicated all amounts are
expressed in U.S. dollars. In 1999, Ultra changed its fiscal year end from June
30 to December 31. Ultra therefore prepared, in addition to financial statements
for the 12-month period ended June 30, 1999, financial statements for the
transition period from July 1, 1999 through December 31, 1999. Ultra's financial
statements are prepared in accordance with Canadian GAAP. You should read Note
10 to Ultra's audited consolidated financial statements regarding reconciliation
to U.S. GAAP.
Since its entry into the oil and natural gas industry in 1993, Ultra has
continued to raise capital for its exploration and development programs, all of
which are based in the United States. Substantially all of the oil and natural
gas activities are conducted jointly with others and, accordingly, the amounts
reflect only Ultra's proportionate interest in such activities.
From January 2000 to July 2000, Ultra did not participate in the drilling
of any new wells within the Pinedale Anticline area due to restrictions placed
on the area by the BLM while an Environmental Impact Assessment was conducted
over the area as well as for winter lease stipulations. The final EIS was issued
by the Bureau in late July 2000, and as a result, in the third quarter of 2000,
Ultra commenced a ten well drilling program.
In mid-June 2000, the BLM issued a final Environmental Assessment regarding
Ultra's Jonah Field that approves infield drilling on 40 acre spacing. As a
result, in the third quarter of 2000, Ultra commenced a program to drill and
complete 18 wells out of the 22 new locations in the Jonah Field. As of October
20, 2000, Ultra has drilled ten gross (6.4 net) wells, of which seven gross (4.5
net) wells are currently producing at an average rate of 8.4 MMcf per day.
Inflation has not had a material impact on Ultra's results of operations
and is not expected to have a material impact on Ultra's results of operations
in the future.
59
<PAGE>
Nine-Month Period Ended September 30, 2000 Compared to the Nine-Month Period
Ended September 30, 1999
Revenues
Oil and natural gas revenues for the nine-month period increased 49% to
$8.9 million from $6.0 million during the same period in 1999. For the nine-
month period ended September 30, 2000, Ultra had net income of $2.8 million
compared to a net loss of $2.0 million for the same period in 1999. The increase
in revenue and net income were attributable to increases in product prices
received. During the nine-month period ended September 30, 2000, natural gas
production decreased 18% to 2.9 Bcf from 3.5 Bcf in 1999 due to lack of drilling
during the first half of 2000. For the same reason, condensate production
decreased to 27,749 barrels during the nine-month period ended September 30,
2000 from 34,942 barrels in 1999. Production rates have increased following the
commencement of drilling upon issuance of the Jonah down-spacing order in June
2000, and the Pinedale EIS Record of Decision in July 2000. During the nine-
month period ended September 30, 2000 the average product prices received were
$2.80 per Mcf and $30.94 per barrel, compared to $1.49 per Mcf and $22.07 per
barrel during the same period in 1999. Natural gas prices reported for the nine
months ended September 30, 2000 included the effects of volumes hedged at levels
below realized prices. No production is currently hedged.
Expenses
Production expenses and taxes for the nine-month period ended September 30,
2000 increased to $2.1 million from $2.0 million during the same period in 1999.
Direct operating expenses decreased to $0.5 million for the period from $0.6
million for the same period in 1999.
Production taxes increased to $0.8 million from $0.5 million in 1999.
Production taxes increased to $0.292 per mcfe, from $0.14 during the same period
in 1999. As production taxes are calculated as percentage of production revenue,
these increases were directly attributable to higher product prices received.
Gathering costs decreased to $0.8 million from $0.9 million in 1999. On a unit
basis, gathering fees were flat for the period.
Depletion and depreciation expense for the nine-month period increased to
$1.7 million from $1.0 million during the same period in 1999. The increase in
depletion and depreciation expense was attributable to a higher DD&A rate for
the nine-month period ended September 30, 2000.
General and administrative expenses for the nine-month period ended
September 30, 2000 decreased 33% to $1.8 million from $2.6 million during the
same period in 1999. This decrease in total general and administrative expense
was attributable to the restructuring program implemented mid-1999, which
reduced staffing and costs throughout the course of the year, and into early
2000. On a unit basis, general and administrative expenses for the nine months
decreased by 18% to $0.58 per mcfe as compared to the same period in 1999.
Six-Month Period Ended December 31, 1999 Compared to Six-Month Period Year Ended
December 31, 1998
Revenues
Oil and natural gas revenues increased to $4.8 million for the six-month
period ended December 31, 1999 from $3.1 million for the same period in 1998.
Ultra incurred a net loss of $1.6 million for the six-month period ended
December 31, 1999 compared to a net loss of $6.7 million for the same period in
1998. The increase in gross revenues was attributable to an increase in both
Ultra's production and the increase in prices received for that production.
During this period, Ultra's cumulative production increased to 1.91 Bcf of
natural gas, and 20.0 thousand barrels of condensate, up from 1.76 Bcf of
natural gas, and 9.43 thousand barrels of condensate for the same period in
1998. During the six-month period ended December 31, 1999, the average product
prices were $2.26 per Mcf and $20.67 per barrel, compared to $1.72 per Mcf and
$11.77 per barrel for the same period in 1998.
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<PAGE>
Results of Operations
Expenses
During the six-month period ended December 31, 1999 production expenses and
taxes increased to $1.3 million from $1.2 million in 1998. Direct lease
operating expenses decreased to $0.3 million in 1999 from $0.4 million in 1998
and on a unit of production basis, to $0.136 per Mcfe in 1999, from $0.225 per
Mcfe in 1998. This reduction was primarily attributable to the effects of
restructuring operations and reductions in operating field staff. Production
taxes for this period in 1999 were $0.4 million compared to $0.25 million in
1998 or $0.238 per Mcfe in 1999, from $0.143 per Mcfe in 1998. Production taxes
are calculated based on a percentage of revenue from production. Therefore,
higher production and higher prices contributed to the increases. Gathering fees
for the period increased in 1999 to $0.6 million from $0.5 million in 1998 due
to higher production volumes.
Depletion and depreciation expenses remained relatively constant from the
six-month period ended December 31, 1999 to the same period in 1998. On a unit
basis, such expenses decreased to $0.578 per Mcf, from $0.648 in 1998 primarily
as a result of increases in proved reserves.
General and administrative expenses decreased 58% to $1.7 million during
the six-month period ended December 31, 1999 from $4.0 million for the same
period in 1998. The decrease was attributable to the restructuring implemented
during 1999. Net interest expense for the period increased to $0.3 million in
1999 from $0.1 million in 1998. This increase was attributable to both the
increase in borrowings under the senior credit facility and reduction in cash
balances earning interest. In November 1999, Ultra settled litigation relating
to the plugging and abandonment of the White Estate No. 1 well. The settlement
and legal costs relating to this litigation totaled $1.9 million.
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Revenues
Ultra incurred a net loss of $8.9 million for the year ended June 30, 1999
compared to a net loss of $10.6 million for the year ended June 30, 1998. Oil
and natural gas revenues increased to $7.0 million in fiscal 1999 from $3.6
million in 1998. This was directly attributable to Ultra's drilling and
completion activities in the Green River Basin of Wyoming. Ultra's annual
production increased to 4.1 Bcf of natural gas and 42.0 thousand barrels of
condensate during 1999, up from 1.8 Bcf of natural gas and 14.0 thousand barrels
of condensate during 1998. During 1999 the average product prices received were
$1.54 per Mcf and $15.95 per barrel, compared to an average of $1.81 per Mcf
and $13.26 per barrel in 1998.
Expenses
Production expenses and taxes increased to $2.6 million in 1999 from $1.0
million in 1998. Direct lease operating expenses increased to $0.8 million in
1999 from $0.3 million in 1998. Production taxes and gathering fees increased to
$1.8 million in 1999 from $0.7 million in 1998. Both increases were directly
attributable to increases in production in the Green River Basin of Wyoming.
Depletion and depreciation expense increased to $1.8 million in 1999 from
$1.4 million in 1998. The increase in depletion and depreciation expense was
attributable to increased production. The per mcf equivalent oil and natural gas
depletion and depreciation rate fell to $0.41 in 1999. The decline in the per
mcfe depletion and depreciation rate was attributable to the effects of the
ceiling test write-down of $3.4 million incurred in December, 1998, additions to
reserves and reduced finding and development costs. The book value of oil and
natural gas properties was $33.3 million at June 30, 1999, compared to $37.4
million at June 30, 1998. The causes of this decrease were the sale and write-
downs of oil and natural gas properties and the costs of drilling of additional
wells.
During 1999, Ultra recognized a property impairment charge of $3.4 million,
as a result of the capitalized cost of oil and natural gas properties exceeding
a "ceiling" on such costs computed in accordance in GAAP. This impairment was
caused by the lower commodity prices at December 31, 1998. The ceiling test
impairment is a direct line item on the income statement. In June 1999, Ultra
sold a working interest in certain undeveloped leaseholds for $5.0 million in
cash, which has been split between proven and unproven properties and $8.2
million in carried work commitments which reduced the carrying value of
unproven properties. The $8.2 million in carried work commitments will not be
reflected on the books until they are incurred which will be in December 1999.
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<PAGE>
General and administrative expenses increased to $5.9 million in 1999 from
$3.4 million in 1998. This increase in total general and administrative expenses
was primarily attributable to increases in staffing and activity during the
first and second quarters of fiscal 1999. During the third and fourth quarters,
Ultra implemented a restructuring plan to reduce general and administrative
expenses. During fiscal 1999, Ultra wrote off $2.0 million of bad debt that had
been on the books in excess of two years. These debts were owed primarily by
junior joint venture partners for amounts expended by Ultra in drilling farm-out
prospects on these partners' behalf for which Ultra was never reimbursed. Ultra
evaluated the ability of the joint venture partners to repay the debts and
determined that repayment was unlikely.
Included in unproven properties is $2.5 million of prepaid environmental
costs, which relate to Ultra's agreement to purchase specified nitrogen oxide
emission off-sets. These off-sets are to be utilized by Ultra in the future
development of its oil and natural gas properties in the Pinedale Anticline as
the asset that will generate the off-sets is under construction. Of the total
payment, $2.0 million was in the form of a note that bears interest at 10%
payable in installments of $.75 million and $1.25 million on July 15, 1999 and
2000, respectively. The $0.2 million of interest on this note at June 30, 1999
has been capitalized as part of the prepaid environmental cost.
Liquidity and Capital Resources
In the nine-month period ended September 30, 2000, Ultra relied on its cash
flow and senior credit facility to finance its capital expenditures. Cash flow
from operations before changes in non-cash working capital for the first three
quarters of 2000 totaled $4.5 million as compared to cash flow from operations
of ($0.9) million for the first three quarters of 1999. As of September 30,
2000, Ultra had $9.7 million of outstanding indebtedness under its credit
facility. Ultra reported a cash position at September 30, 2000 of $1.1 million
as compared to $0.4 million cash on hand at December 31, 1999. The increased
cash position is primarily attributable to an increase in principal outstanding
under the senior credit facility. Working capital increased to $0.3 million at
September 30, 2000 from $0.2 million at December 31, 1999.
Bank credit facility. In March 2000, Ultra secured a senior credit facility
with Bank One, Texas, N.A. The senior credit facility provides for a $40 million
revolving credit line with an initial borrowing base of $18 million bearing
interest at either the bank's prime rate or LIBOR plus two and one half percent.
Borrowings under the senior credit facility are secured by mortgages covering
substantially all of Ultra's producing oil and natural gas properties. The
borrowing base is adjusted periodically on the basis of the discounted present
value attributable to Ultra's proved producing oil and natural gas reserves, as
determined by the bank. As of October 20, 2000 the bank was redetermining the
borrowing base to account for an increase in Ultra's reserve base. Ultra may
borrow, pay, reborrow and repay under the credit facility until March 1, 2003,
on which date Ultra must repay in full all amounts then outstanding.
Capital Expenditures
For the nine-month period ended September 30, 2000, Ultra's capital
expenditures were $12.8 million. Ultra spent approximately $8.8 million to drill
ten gross (6.4 net) wells and complete seven gross (4.46 net) wells on its
acreage in the Jonah Field and spent approximately $2.3 million to drill an
additional five gross (1.9 net) wells and complete three gross (0.9 net) wells
on its acreage in the Pinedale Anticline area of the Green River Basin of
southwestern Wyoming.
For the remainder of 2000 and the first quarter of 2001, Ultra has budgeted
$10.4 million to drill nine gross (4.46 net) development wells in the Jonah
Field and three gross (.73 net ) exploratory wells in the Pinedale Anticline.
Ultra estimates that this budget along with the capital expenditures associated
with the consummation of this arrangement can be financed with available cash,
projected cash flow from operations and the senior credit facility. However,
future cash flows and continued availability of financing are subject to a
number of uncertainties beyond Ultra's control, such as production rates, the
price of oil and natural gas, continued results of Ultra's drilling program and
the general condition of the capital markets for oil and natural gas companies.
There can be no assurances that adequate funding will be available to execute
Ultra's planned future capital program.
DESCRIPTION OF ULTRA CAPITAL STOCK
Ultra is a Yukon Territory corporation governed by its articles of
incorporation, by-laws and the Business Corporations Act (Yukon Territory).
Ultra's authorized capital stock of Ultra consists of an unlimited number of
common shares without par value and 10 million preferred shares.
Common Shares
As of September 30, 2000, Ultra had approximately 470 holders of record and
approximately 9,883 beneficial holders of its common shares. The holders of
outstanding common shares may receive dividends out of assets legally available
at the times and in the amounts as the Ultra board of directors may, from time
to time, determine. These dividends are subject to any preferences which may be
granted to the holders of preferred shares. Holders of common shares do not
have cumulative voting rights and are entitled to one vote per share on all
matters on which the holders of common shares may vote. The common shares do not
have preemptive rights and are not subject to redemption or conversion. Upon
liquidation, dissolution, or winding-up of Ultra, the assets available for
distribution to shareholders are distributable ratably among the holders of the
common shares after payment of all debt and liabilities of Ultra and the
liquidation preference of any outstanding class or series of preferred stock.
All outstanding common shares are, and the common shares to be issued in
exchange for Pendaries common shares will be, when issued and delivered, validly
issued, fully paid, and nonassessable. The rights of holders of common shares
are subject to the preferential rights of any preferred stock that is
outstanding or that Ultra may issue in the future.
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<PAGE>
Preferred Stock
Ultra's board of directors may, without further action of Ultra
shareholders, establish and issue preferred shares in one or more series and fix
the rights, preferences and restrictions of the series of preferred shares. The
rights of holders of common shares are subject to, and may be adversely affected
by, the rights of holders of preferred shares. The issuance of additional
preferred shares could adversely affect the voting power of holders of common
shares and could have the effect of delaying or preventing a change in control
of Ultra or other corporate action. The board has not yet established any three
series of preferred shares.
As of September 30, 2000, Ultra had 4,595,000 options outstanding with
exercise prices ranging from Cdn $0.81 to Cdn $5.00 per share with a weighted
average exercise price of Cdn $1.54.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF ULTRA
The following sets forth information, as of September 30, 2000, concerning
beneficial ownership of Ultra common shares by any shareholders known to Ultra
to beneficially own more than 5% of Ultra's issued and outstanding common
shares, and all current executive officers and directors individually and as a
group. As of September 30, 2000, there were 56,939,762 shares outstanding.
<TABLE>
<CAPTION>
Common Shares Beneficially
Owned at September 30, 2000
----------------------------------
Name and Address of Percent of Class
Person or Group* Position Shares Outstanding
------------------------------- ----------------- ----------- ------------------
<S> <C> <C> <C>
Michael D. Watford Chairman of the 144,403 *
16801 Greenspoint Park Drive Board and Chief
Houston, Texas 77060 Executive Officer
Dr. William C. Helton Director 363,329 *
1015 Marlow Road
Raleigh, North Carolina 27609
John Hislop/(1)/ Director 220,134 *
609 West Hastings Street
Suite 1100
Vancouver, British Columbia
Canada V6 B 4 W4
Ultra Holdings, Inc. /(1)/ 13,000,000 22.9%
609 West Hastings Street
Suite 1100
Vancouver, British Columbia
Canada V6 B W4
All of the executive officers and 743,401 1.31%
directors as a group (6 persons)
</TABLE>
_________________
* Less than 1%.
(1) Mr. John Hislop is the President and a director of Ultra Holdings, Inc.
Combined, Mr. Hislop and Ultra Holdings, Inc. hold 13,220,134 Ultra common
shares.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF ULTRA
Our directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position
------------------ ---- ------------------------------------------------
<S> <C> <C>
Michael D. Watford 46 Chairman, President and Chief Executive Officer
Stephen R. Kneller 46 Vice-President - Exploration
Charlotte H. Kauffman 42 General Counsel, Corporate Secretary
John Hislop 47 Director
William Charles Helton 58 Director
</TABLE>
Mr. Michael D. Watford, Chairman, President and Chief Executive Officer
Joined Ultra Petroleum on January 29, 1999. Mr. Watford was previously the
chief executive officer of Nuevo Energy Company of Houston, Texas where he
presided over the rapid growth of that company between 1994 and 1997. During
that period the company tripled its asset size and quadrupled market
capitalization to $1.0 billion. During his 25 years in the oil and natural gas
business, Mr. Watford has become familiar with virtually every aspect of the
industry, holding senior management positions in natural gas sales, marketing,
exploration & production and corporate finance.
Stephen R. Kneller, Vice-President - Exploration
Joined Ultra in 1997. Mr. Kneller is a registered professional geologist and
certified petroleum geologist with over 22 years of experience in the oil and
natural gas industry. Mr. Kneller has experience in the Rocky Mountain region,
Appalachian Basin, Texas Gulf Coast and Anadarko Basin. Prior to joining Ultra,
Mr. Kneller spent 17 years with CNG Producing Co. and CNG Development Co.
working in various roles within exploration. Mr. Kneller has worked the Green
River Basin of Wyoming actively since 1990.
Charlotte H. Kauffman, General Counsel, Corporate Secretary
Joined Ultra in May, 1996. Ms. Kauffman is a licensed attorney in the State of
Texas and a petroleum landman with 20 years experience in the oil and natural
gas industry. Prior to joining Ultra, Ms. Kauffman spent ten years as petroleum
landman and 2 years as an international negotiator with Amoco Production Company
working primarily in the Gulf of Mexico and various Gulf Coast areas in the US
and various countries as an international negotiator. Ms Kauffman worked as a
land and legal consultant for various independents until joining Ultra.
John Hislop, Director
Joined Ultra in March of 1993 as a Director and President. Mr. Hislop served as
President of Ultra until May of 1996 and became the Chief Financial Officer
until September, 1998. Mr. Hislop is President of Ultra Holdings, Inc., an
investment holding company, as well as President of Cubix Investments, Inc., an
investment holding company. Mr. Hislop is a director of Gemini Energy Corp., a
public resource company.
William Charles Helton, Director
Joined the board of directors of Ultra in August of 1994. Dr. Helton is a
cardiologist in Raleigh, North Carolina and is the President of Enterprise
Exploration and Production, Inc., a private oil and natural gas exploration and
development company.
Certain Relationships and Related Transactions
Mr. John Hislop is a Director of Gemini Energy Corp. Gemini and Ultra are
partners with varying working interests in three prospects in the Green River
Basin, Sublette County, Wyoming. Mr. Hislop is engaged and will continue to be
engaged in the search for oil and natural gas and oil and natural gas properties
on behalf of entities outside of Ultra, and situations may arise where he will
be in direct competition with Ultra and, on a post-arrangement basis, the
combined companies. It is Ultra's policy that conflicts will be dealt with in
accordance with the relevant provisions of the Business Corporations Act (Yukon
Territory).
65
<PAGE>
COMPARISON OF SHAREHOLDERS' RIGHTS
Pendaries was incorporated under the Business Corporations Act (Ontario) and
continued under the New Brunswick Act, and is now governed by the laws of New
Brunswick, its articles of incorporation and its by-laws. Ultra was
incorporated under the Business Corporations Act (British Columbia), continued
under the Business Corporations Act (Yukon), referred to in this proxy statement
as the "Yukon Act," and is now governed by the laws of the Yukon Territory, its
articles of incorporation and its by-laws. If the arrangement is consummated,
holders of Pendaries common shares will have their shares exchanged for Ultra
common shares.
While the rights and privileges of shareholders of a Yukon corporation are
comparable to those of shareholders of the New Brunswick corporation, there are
certain differences. Following is a summary of the most significant differences
in shareholders' rights. These differences result from differences between:
. New Brunswick and Yukon law;
. New Brunswick Act and the Yukon Act; and
. Pendaries' articles and by-laws and Ultra's articles and by-laws.
This summary is not intended to be complete and is qualified in its entirety by
reference to the New Brunswick Act, the Yukon Act and the governing corporate
instruments of Pendaries and Ultra.
Place of Meetings and Shareholders
Under the New Brunswick Act, shareholders' meetings are held within New
Brunswick unless otherwise specified in the articles of incorporation.
Pendaries' articles provide that shareholder meetings may be held outside of New
Brunswick in the following places: Houston, Texas; Toronto, Canada; Beijing,
China; and such other place or places outside of New Brunswick as the
shareholders may resolve to meet.
Under the Yukon Act, shareholders' meetings are held in the Yukon Territory
unless all of the shareholders entitled to vote at that meeting agree, or unless
otherwise specified in the articles of incorporation. Ultra's articles provide
that meetings of shareholders may be held, at the directors' discretion, at any
location in North America and Europe specified by the directors in the notice of
such meeting.
Dissent Rights of Shareholders
The New Brunswick Act and the Yukon Act each provide that shareholders of a
corporation who are entitled to vote on certain matters are also entitled to
exercise dissent rights and to be paid the fair value of their shares. The New
Brunswick Act and Yukon Act do not distinguish between listed and unlisted
shares. Such matters include:
. any amalgamation with another corporation, other than with certain
affiliated corporations;
. an amendment to the corporation's article to add, change or remove any
provisions restricting the issue, transfer or ownership of shares;
. an amendment to the corporation's articles to add, change or remove any
restriction upon the business or businesses that the corporation may
carry on;
. a continuance under the laws of another jurisdiction;
. a sale, lease or exchange of all or substantially all the property of
the corporation other than in the ordinary course of business;
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<PAGE>
. a court order permitting a shareholder to dissent in connection with an
application to The Court of Queen's Bench for an order approving an
arrangement proposed by the corporation if the arrangement is adopted;
or
. certain amendments to the articles of a corporation which require a
separate class or series vote, provided that a shareholder is not
entitled to dissent if an amendment to the articles is effected by a
court order approving a reorganization or by a court order made in
connection with an action for an oppression remedy.
The New Brunswick Act does differ from the Yukon Act in that under the New
Brunswick Act, a corporation which proposes to take any action which might
otherwise give rise to dissent rights in favor of a shareholder may apply to The
Court of Queen's Bench for an order declaring that the proposed action is not,
in all the circumstances, one which should give rise to the dissent rights to
which the shareholders would otherwise be entitled. Under the Yukon Act, there
is no similar provision, unless the action is taken pursuant to the oppression
remedy provision set out in section 243 of the Yukon Act.
Vote Required for Extraordinary Transactions
Under the New Brunswick Act and the Yukon Act, certain corporate actions
require approval by a special resolution:
. certain amalgamations, other than with a direct or indirect wholly-
owned subsidiary;
. continuances;
. sales, leases or exchange of all or substantially all of a
corporation's property, other than in the ordinary course of business;
. liquidations;
. dissolutions; and
. arrangements ordered by a court.
A two-thirds vote of the shareholders voting at the meeting is needed to pass a
special resolution.
Under the Yukon Act and New Brunswick Act, class or series votes may be
required with certain fundamental changes. Under both statutes the vote must be
by a majority of not less than two-thirds of the votes cast by shareholders of
the class or series, as applicable, who vote for that resolution.
Calling a Shareholders' Meeting
The New Brunswick Act provides that a holder of not less than 10% of the
issued and outstanding voting shares of a corporation may require the directors
to hold a shareholders' meeting. The Yukon Act provides that holders of not
less than 5% of the issued and outstanding voting shares of a corporation may
require the directors to hold a shareholders' meeting.
Oppression Remedy
Both the New Brunswick Act and the Yukon Act provide an oppression remedy that
permits a court to make any order, both interim and final, to rectify the
matters complained of, if the Director appointed thereunder is satisfied upon
application by a complainant, as defined below, that:
. any act or omission of the corporation or an affiliate effects a
result;
. the business or affairs of the corporation or an affiliate are or have
been carried on or conducted in a manner; or
. the powers of the directors of the corporation or an affiliate are or
have been exercised in a manner;
that is oppressive or unfairly prejudicial to, or that unfairly disregards the
interest of any security holder, creditor, director or officer of the
corporation. A complainant includes:
. a present or former registered holder or beneficial owner of securities
of a corporation or any of its affiliates;
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<PAGE>
. a present or former officer or director of the corporation or any of
its affiliates;
. a director; and
. any other person who in the discretion of the applicable court is a
proper person to make such application. The New Brunswick Act also
specifically includes a creditor of the corporation as a complainant.
Because of the breadth of the conduct which can be complained of and the scope
of the court's remedial powers, the oppression remedy is very flexible and is
frequently relied upon to safeguard the interest of shareholders and other
complainants who have a substantial interest in the corporation. Under both the
New Brunswick Act and the Yukon Act, it is not necessary to prove that the
directors of a corporation acted in bad faith in order to seek an oppression
remedy.
Derivative Action
Both the New Brunswick Act and the Yukon Act provide a right of derivative
action. This right is extended to officers, former shareholders, former
directors and former officers of a corporation or its affiliates, and any person
who, in the court's discretion, is a proper person to make an application to
court to bring a derivative action. The New Brunswick Act also extends a right
of derivative action to present creditors of a corporation or its subsidiary.
Both the New Brunswick Act and the Yukon Act permit derivative actions to be
brought in the name and on behalf of a corporation or any of its subsidiaries.
Under both the New Brunswick Act and the Yukon Act, the court in a derivative
action may make any order that it thinks fit including, without limitation:
. an order authorizing the complainant or any other person to control the
conduct of the action;
. an order giving directions for the conduct of the action;
. an order directing that any amount adjudged payable by a defendant in
the action shall be paid, in whole or in part, directly to former and
present security holders, or, in the case of the New Brunswick Act, to
a present creditor of the corporation or its subsidiary, instead of to
the corporation or its subsidiary, and
. an order requiring the corporation or its subsidiary to pay reasonable
legal fees and any other costs reasonably incurred by the complainant
in connection with the action.
Director Qualifications
The New Brunswick Act provides that a corporation must be managed by one or
more directors subject to that corporation's articles, by-laws or unanimous
shareholder agreement. Pendaries' articles provide that Pendaries must have no
less than three and no more than ten directors. Under the New Brunswick Act
there is no requirement that directors be Canadian citizens or residents.
The Yukon Act provides that the board of directors of a corporation that is a
distributing corporation must consist of at lease three individuals, at least
two of whom are not officers or employees of the corporation. Ultra's articles
provide that Ultra must have at least one and no more than seven directors.
There is no requirement under the Yukon Act that directors be Canadian citizens
or residents.
Fiduciary Duties of Directors
The New Brunswick Act and the Yukon Act both provide that every director and
officer of a corporation governed by these Acts, in exercising his or her powers
and discharging his or her duties shall act honestly and in good faith with a
view to the best interests of the corporation and exercise the care, diligence
and skill that a reasonably prudent person would exercise in comparable
circumstances. Every director and officer of a corporation governed by either
the New Brunswick Act or the Yukon Act must comply with the provisions of that
Act, its regulations, the articles and by-laws and any unanimous shareholder
agreement of such corporation. No contract provision, articles, by-laws or any
resolution relieves a director or officer from the
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duty to act in accordance with either the New Brunswick Act or the Yukon Act or
their regulations or relieves him or her of liability for a breach of either,
except with respect to an unanimous shareholder agreement made in accordance
with such Act.
Shareholder Voting Rights
Under both the New Brunswick Act and the Yukon Act, unless the applicable
articles of incorporation otherwise provide, shareholders are entitled to one
vote per share, either in person or by proxy, on each matter to be voted on at
shareholders' meetings. Unless the by-laws otherwise provide, voting at a
shareholders' meeting shall be by a show of hands except where a ballot is
demanded, either before or on the declaration of the result of any vote by show
of hands, after the vote, by a shareholder or proxy holder entitled to vote at
the meeting. Both Pendaries' and Ultra's by-laws provide for voting by a show of
hands except where a ballot is demanded.
Under both the New Brunswick Act and the Yukon Act, unless the by-laws
otherwise provide, a quorum consists of a majority of the shares entitled to
vote at that shareholders' meeting, either present in person or by proxy.
Pendaries' by-laws provide that a quorum consists of at least 25% of the shares
entitled to vote at the shareholders' meeting be present, either in person or by
proxy. The quorum requirement in the Ultra by-laws provide that a quorum
consists of at least 5% of the shares entitled to vote at the shareholders'
meeting be present, either in person or by proxy. Under the New Brunswick Act,
shareholders have cumulative rights in the election of directors, that permit
each shareholder entitled to vote at a meeting of shareholders to cast a number
of votes equal to the number of shares held by the shareholder multiplied by the
number of directors to be elected. Under the Yukon Act, cumulative voting is
only permitted in the election of directors if the articles of a corporation
provide for it. Ultra's articles do not provide for such cumulative voting.
Consent of Shareholders in Lieu of Meeting
Under both the New Brunswick Act and the Yukon Act, a written resolution
signed by all the shareholders entitled to vote on that resolution is as valid
as if it had been passed at a physical meeting of the shareholders.
Inspection Rights
Under both the New Brunswick Act and the Yukon Act, the security holders of a
corporation, in the case of the New Brunswick Act, holders of not less than 10%
of the issued shares of any class of a corporation, may apply to a court for an
order requiring that an investigation be made of a corporation or of any
affiliated corporation. Under both the New Brunswick Act and the Yukon Act, a
shareholder of a corporation has the right to inspect copies of:
. the articles and by-laws of the corporation, including any amendments;
. minutes of meetings and resolutions of shareholders;
. notices of changes or directors or registered office;
. the share register;
. copies of the financial statements and reports of the corporation's
auditors and other financial information required by the Act; and
. the list of all current and former directors.
However, under the Yukon Act, a shareholder of a corporation also has the
right to inspect copies of a register of disclosures made by directors and
officers of their interests in material contracts or proposed material contracts
with the corporation.
Pre-emptive Rights
Under the New Brunswick Act, unless otherwise provided in the articles of a
corporation, shareholders have pre-emptive rights in regarding the issuance of
certain securities of the corporation. However, the New Brunswick Act further
provides that a corporation which has its shares listed on a prescribed stock
exchange is not subject to the otherwise applicable pre-emptive
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rights provisions in the New Brunswick Act. Pendaries articles provide that
where the corporation proposes to issues equity shares of any class or
securities convertible into or carrying rights or options to purchase equity
shares of any class, the holders of equity shares of any class of the
corporation shall not have the pre-emptive right provided by the New Brunswick
Act, even if the issuance of the equity shares proposed to be issued or issuable
upon exercise of such rights or options or upon conversion of such other
securities would adversely affect the unlimited dividend rights of such holders.
Pendaries' articles further provide that where the corporation proposes to
issue voting shares of any class or rights or options to purchase voting shares
of any class, the holders of voting shares of any class of the corporation shall
not have the pre-emptive right provided by the New Brunswick Act, even if the
issuance of the voting shares proposed to be issued or issuable upon exercise of
such rights or options or upon conversion of such other securities would
adversely affect the voting rights of such holders.
The Yukon Act provides that there is no pre-emptive right to acquire shares
unless provided for in the articles of corporation. Ultra's articles do not
provide for any such pre-emptive rights.
Dividends and Repurchases of Shares
Under both the New Brunswick Act and the Yukon Act, subject to a corporation's
articles, the directors may declare and the corporation may pay a dividend by
issuing fully paid shares of the corporation and, subject to the solvency test
described in the following sentence, a corporation may pay a dividend in money
or property. The directors are prohibited from declaring and the corporation is
prohibited from paying a dividend if there are reasonable grounds for believing
that the corporation is, or after the payment would be, unable to pay its
liabilities as they become due, or the realizable value of the corporation's
assets would, after such payment, be less than the aggregate of its liabilities
and its stated capital of all classes. Both the New Brunswick Act and the Yukon
Act also permit a corporation, subject to its articles, to purchase or otherwise
acquire any of its issued shares or warrants, provided that no payment to
purchase or otherwise acquire its shares may be made unless, subject to certain
specified exceptions, the solvency test described above is satisfied at the time
of, and after, such payment.
Furthermore, both the New Brunswick Act and the Yukon Act provide that a
corporation may, subject to its articles and to the solvency test mentioned
below, redeem or purchase any redeemable shares issued by it at prices not
exceeding the redemption price stated in its articles or calculated according to
a formula stated in its articles. However, a corporation may not make any
payment to purchase or redeem any redeemable shares issued by it if there are
reasonable grounds for believing that the corporation is, or after the payment
would be, unable to pay its liabilities as they become due, or after the
payment, the realizable value of the corporation's assets would be less than the
aggregate of its liabilities and the amount that would be required to pay the
shareholders who have a right to be paid, on a redemption or in a liquidation,
rateably with or before the holders of the shares to be purchased or redeemed.
Amendments to Governing Instruments
Under both the New Brunswick Act and the Yukon Act, any change to the articles
of a corporation must be approved by special resolution, other than a change in
the corporation's name from a number name to a non-number name. Subject to
certain restrictions, under both the New Brunswick Act and the Yukon Act, if a
proposed amendment requires approval by special resolution, the holders of
shares of a class (or of a series of a class, if the proposed amendment would
affect such series differently from the other series of shares of such class)
are entitled to vote separately on such proposed amendment as a class or series
otherwise carries the right to vote.
In addition, under both the New Brunswick Act and the Yukon Act, a
corporation's board of directors may make and amend by-laws provided that any
such by-law or amendment must be confirmed at the next shareholders' meeting by
the affirmative vote of a majority of the shareholders entitled to vote. Any
by-law or amendment is effective when made by the board of directors but ceases
to be effective if not confirmed by the shareholders.
Indemnification of Directors, Officers and Others
Both the New Brunswick Act and the Yukon Act permit indemnification of:
. a director or officer;
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. a former director or officer;
. a person who acts or acted at the corporation's request as a director
or officer of a body corporate of which the corporation is or was a
shareholder or creditor; and
. his or her heirs and legal representatives.
The persons are known as "indemnifiable persons" and reindemnified against all
costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by him or her in respect of any civil,
criminal or administrative action or proceeding to which he or she is made a
party by reason of being or having been a director or officer of the corporation
or body corporate. Such indemnification is permitted if the following
indemnification conditions are met:
. he or she acted honestly and in good faith with a view to the best
interests of the corporation; and
. in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he or she had reasonable grounds for
believing that his or her conduct was lawful.
Both the Pendaries by-laws and the Ultra by-laws provide for such
indemnification of directors, officers and others.
In addition, under both the New Brunswick Act and the Yukon Act, a corporation
may also, with the approval of the court, indemnify an indemnifiable person by
or on behalf of the corporation or body corporate to procure a judgment in its
favor, to which the person is made a party by reason of being or having been a
director or an officer of the corporation or body corporate, against all costs,
charges and expenses reasonably incurred by the person in connection with such
action if he or she fulfills the indemnification conditions in the preceding
paragraph. In any event, an indemnifiable person is entitled to indemnity from
the corporation for all costs, charges and expenses reasonably incurred by him
or her in connection with the defense of any civil, criminal or administrative
action or proceeding to which he or she is made a party by reason of being or
having been a director or officer of the corporation of the body corporate, if
the indemnifiable person was substantially successful on the merits in his or
her defense of the action or proceeding, fulfills the indemnification conditions
in the preceding paragraph, and is fairly and reasonably entitled to indemnity.
Director Liability
Under both the New Brunswick Act and the Yukon Act, directors who vote for or
consent to a resolution authorizing the issue of a share of the corporation for
consideration other than money are jointly and severally liable to the
corporation to make good any amount by which the consideration received by the
corporation is less than the fair equivalent of the money that the corporation
would have received if the share had been issued for money, provided that a
director is not liable to the foregoing if he or she proves he did not know and
could not reasonably have known that the share was issued for consideration less
than the fair equivalent of the money that the corporation would have received
had the share been issued for money. Both the New Brunswick Act and the Yukon
Act provide that directors who vote or consent to certain resolutions involving
payments or distributions by the corporation contrary to the New Brunswick Act
or the Yukon Act, as applicable, are jointly and severally liable to restore to
the corporation any amounts so paid and the value of any property so distributed
and not otherwise recovered by the corporation. However, in the case of the
Yukon Act only, where a director's liability results from financial assistance
by the corporation in contravention of the Yukon Act, the director will not be
liable if he or she proves that they did not know and could not reasonably have
known that the financial assistance given was contrary to the Yukon Act.
Neither the New Brunswick Act nor the Yukon Act otherwise permit the limitation
of a director's liability for breach of fiduciary obligations to the
corporation, whether through the articles or otherwise.
Proposal of Shareholders
Under both the New Brunswick Act and the Yukon Act, shareholders entitled to
vote at an annual meeting of shareholders may submit to the corporation notice
of any proposal to be raised at the meeting. The corporation shall set out the
proposal in the notice of meeting provided that, among other things:
. it is submitted at least 90 days before the anniversary of the date of
the previous annual meeting;
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. if it has been submitted in the last two years, it has not been
defeated; and
. the right to submit a proposal is not being abused to secure publicity.
A proposal may include nominations for the election of directors if it is
signed by holders of not less than:
. in the case of the New Brunswick Act, 10% of the shares or 10% of the
shares of a class of shares of the corporation entitled to vote at the
meeting to which the proposal is to be presented and
. in the case of the Yukon Act, 5% of the shares of a class of shares of
the corporation entitled to vote at the meeting to which the proposal
is to be presented.
Mandatory Solicitation of Proxies
The New Brunswick Act contains no provisions relating to the mandatory
solicitation of proxies. However, the Yukon Act provides that, subject to
certain exceptions, the management of a corporation shall, concurrently with
giving notice of a meeting of shareholders, send a form of proxy in the
prescribed form to each shareholder who is entitled to receive notice of the
meeting. This difference between New Brunswick and Yukon law will have no impact
so long as Pendaries remains subject to securities legislation which provides
for mandatory proxy solicitation.
Financial Assistance
Under the New Brunswick Act, financial assistance may be given to certain
persons and related corporations notwithstanding that the corporation may not
meet solvency tests otherwise prescribed by the New Brunswick Act, if the
articles of the corporation so provide. The Pendaries articles do contain such
a provision. The Yukon Act subjects financial assistance to prescribed solvency
tests which cannot be removed or avoided by provision in the articles of the
corporation.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary as at the date hereof of the principal Canadian
federal income tax considerations generally applicable to a holder of Pendaries
common shares who, for the purposes of the Income Tax Act (Canada) (the "Tax
Act"), holds Pendaries common shares as capital property, deals at arm's length
with, and is not affiliated with, Pendaries, and deals at arm's length with
Ultra.
Pendaries common shares will generally be considered to be held as capital
property by a holder of Pendaries common shares provided that such holder does
not hold such shares in the course of carrying on a business and has not
acquired them in one or more transactions considered to be an adventure in the
nature of trade. Certain holders of Pendaries common shares resident in Canada
whose Pendaries common shares might not otherwise be considered capital property
may make an irrevocable election in accordance with subsection 39(4) of the Tax
Act to have such shares and every "Canadian security" (as defined in the Tax
Act) owned by such holder in the taxation year of the election and all
subsequent taxation years deemed to be capital property. Pendaries common
shares held by certain "financial institutions" (as defined in section 142.2 of
the Tax Act) will generally not be held as capital property and will be subject
to special "mark-to-market rules". This summary does not otherwise take into
account the mark-to-market rules and holders of Pendaries common shares that are
"financial institutions" for the purposes of these rules should consult their
own tax advisors.
This summary is based upon the provisions of the Tax Act in force on the date
hereof, the regulations enacted pursuant thereto, all specific proposals to
amend the Tax Act and the regulations publicly announced by or on behalf of the
Minister of Finance (Canada) prior to the date hereof (the "Proposed
Amendments") and legal counsel's understanding of the current published
administrative policies and practices of the Canada Customs and Revenue Agency
(the "CCRA"). This summary assumes that the Proposed Amendments will be enacted
in their present form, although there is no certainty that such proposals will
be enacted in the form proposed, if at all. This summary does not otherwise
take into account or anticipate any changes in law, whether by legislative,
governmental or judicial decision or actions, or changes in the administrative
practices of the CCRA, nor does it take into account or consider any provincial,
territorial or foreign income tax considerations.
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THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT EXHAUSTIVE OF ALL POSSIBLE
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS. THIS SUMMARY IS NOT INTENDED TO BE,
NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER
OF PENDARIES COMMON SHARES. ACCORDINGLY, HOLDERS OF PENDARIES COMMON SHARES
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR
CIRCUMSTANCES.
Holders of Pendaries Common Shares Resident in Canada
The following summary is generally applicable to a holder of Pendaries common
shares who, at all relevant times, for the purposes of the Tax Act and any
applicable income tax treaty, is or is deemed to be resident in Canada (a
"Canadian Resident Shareholder").
Exchange of Pendaries Common Shares under the Arrangement. A Canadian
Resident Shareholder who exchanges Pendaries common shares for Ultra common
shares under the arrangement will be deemed to have disposed of such Pendaries
common shares for proceeds of disposition equal to the aggregate adjusted cost
base of such Pendaries common shares to the particular holder immediately before
the exchange. A Canadian Resident Shareholder will also be deemed to have
acquired the Ultra common shares received on the exchange at an aggregate cost
equal to the aggregate adjusted cost base of the Pendaries common shares to the
particular holder immediately before the exchange. This tax deferred rollover
will automatically occur unless the Canadian Resident Shareholder chooses to
report any portion of the capital gain or capital loss otherwise determined on
the disposition of the Pendaries common shares in computing such holder's income
for the year of disposition.
A Canadian Resident Shareholder who exchanges Pendaries common shares for
Ultra common shares under the arrangement and who, in computing its income for
the year in which the exchange occurs, includes any portion of the capital gain
or capital loss otherwise determined from the exchange, will be considered to
have disposed of all Pendaries common shares so exchanged for proceeds of
disposition equal to the fair market value of the Ultra common shares received
on the exchange, and to have acquired those Ultra common shares at a cost equal
to that same fair market value. Such a Canadian Resident Shareholder will
realize a capital gain (or capital loss) equal to the amount by which those
proceeds, net of any costs of the disposition, exceed (or are exceeded by) the
adjusted cost base of the Pendaries common shares so exchanged. Generally, two-
thirds of any capital gain (the "taxable capital gain") realized by a Canadian
Resident Shareholder must be included in the Canadian Resident Shareholder's
income for the year of disposition, and two-thirds of any capital loss (the
"allowable capital loss") so realized may be deducted by the Canadian Resident
Shareholder against taxable capital gains for the year of disposition. Any
excess of allowable capital losses over taxable capital gains of the Canadian
Resident Shareholder for the year of disposition may be carried back up to three
taxation years or forward indefinitely and deducted against net taxable capital
gains in those other years to the extent and in the circumstances prescribed in
the Tax Act and the Proposed Amendments.
The cost of the Ultra common shares acquired by a Canadian Resident
Shareholder will be averaged with the adjusted cost base of all other Ultra
common shares held by the Canadian Resident Shareholder (if any) immediately
prior to the exchange for the purpose of determining thereafter the adjusted
cost base of each Ultra common share held by such Canadian Resident Shareholder.
Dissenting Canadian Resident Shareholders. A Canadian Resident Shareholder
who exercises its dissenter's rights, as outlined above under the heading "The
Arrangement -- Dissenters' Rights", and who becomes entitled to receive a
payment equal to the fair value of the Canadian Resident Shareholder's Pendaries
common shares, will be deemed to have received a dividend equal to the amount,
if any, by which that payment exceeds the paid-up capital of those Pendaries
common shares determined in accordance with the Tax Act.
In the case of a dissenting Canadian Resident Shareholder who is an
individual, any such deemed dividend will be subject to the normal gross-up and
dividend tax credit rules applicable to taxable dividends received on shares of
Canadian corporations.
In the case of a dissenting Canadian Resident Shareholder that is a
corporation, any such deemed dividend will be included in the Canadian Resident
Shareholder's income and will generally be deductible in computing such Canadian
Resident Shareholder's taxable income. Certain corporations may be subject to a
33 1/3% refundable tax under Part IV of the Tax Act in respect of such deemed
dividends. Under subsection 55(2) of the Tax Act, a dissenting Canadian
Resident Shareholder that is a corporation may be required to recognize all or a
portion of such deemed dividend as proceeds of disposition in computing any
capital gain or capital loss from the disposition of the Pendaries common
shares.
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A dissenting Canadian Resident Shareholder will also be considered to have
disposed of the Pendaries common shares for proceeds of disposition equal to the
amount of the payment to which that dissenting Canadian Resident Shareholder
becomes entitled, less the portion thereof, if any, that is deemed to be a
dividend, and will realize a capital gain (or capital loss) equal to the amount
by which those proceeds, net of any costs of disposition, exceed (or are
exceeded by) the adjusted cost base to such a holder of Pendaries common shares.
The tax treatment of any such capital gain or capital loss will be as outlined
above under the heading "- Exchange of Pendaries Common Shares under the
Arrangement".
Holders of Pendaries Common Shares Not Resident in Canada
The following summary is generally applicable to a holder of Pendaries common
shares who, at all relevant times, for the purposes of the Tax Act and any
applicable tax treaty, is neither resident nor deemed to be resident in Canada
and does not use or hold and is not deemed to use or hold, Pendaries common
shares in connection with carrying on a business in Canada (a "Non-Resident
Pendaries Shareholder"). Special rules which are not discussed in this summary
may apply to a Non-Resident Pendaries Shareholder that is an insurer for whom
Pendaries common shares are "designated insurance property" under the Tax Act.
Such holders are urged to consult their own tax advisors.
Exchange of Pendaries Common Shares under the Arrangement. A Non-Resident
Pendaries Shareholder will not be subject to tax under the Tax Act on any
capital gain realized on a disposition of Pendaries common shares under the
arrangement unless those Pendaries common shares constitute "taxable Canadian
property" to the Non-Resident Pendaries Shareholder.
A Pendaries common share generally will not be taxable Canadian property to a
Non-Resident Pendaries Shareholder unless at any time during the five-year
period immediately preceding the exchange of such Pendaries common share for
Ultra common shares, the Non-Resident Pendaries Shareholder, persons with whom
the Non-Resident Pendaries Shareholder does not deal at arm's length, or the
Non-Resident Pendaries Shareholder together with all such persons, owned 25% or
more of the shares of any class or series of Pendaries. For this purpose, a
person is considered to own any share in respect of which such person has an
interest or option or other right to acquire.
A Non-Resident Pendaries Shareholder whose Pendaries common shares are taxable
Canadian property and who exchanges Pendaries common shares for Ultra common
shares under the arrangement will realize neither a capital gain nor a capital
loss by virtue of that exchange, unless the Non-Resident Pendaries Common
Shareholder includes in computing its income (for Canadian tax purposes) for the
taxation year in which the exchange occurs any portion of the capital gain or
capital loss otherwise determined. The Non-Resident Pendaries Shareholder will
be deemed to have disposed of those Pendaries common shares for proceeds of
disposition equal to their adjusted cost base and to have acquired the Ultra
common shares at a cost equal to that same adjusted cost base, unless that Non-
Resident Pendaries Shareholder includes in computing its income (for Canadian
tax purposes) any portion of the capital gain or capital loss otherwise
determined. The Ultra common shares received on such an exchange will be deemed
to be taxable Canadian property.
A Non-Resident Pendaries Shareholder whose Pendaries common shares are taxable
Canadian property, who exchanges the Pendaries common shares for Ultra common
shares under the arrangement and who, in its Canadian income tax return for the
taxation year in which the exchange occurs, includes in computing its income any
portion of the capital gain or capital loss otherwise determined from the
exchange, will be considered to have disposed of all the Pendaries common shares
so exchanged for proceeds of disposition equal to the fair market value of the
Ultra common shares received on the exchange, and to have acquired the Ultra
common shares at a cost equal to that same fair market value. Such a Non-
Resident Pendaries Shareholder will realize a capital gain (or capital loss)
equal to the amount by which those proceeds, net of any costs of disposition,
exceed (or are exceeded by) the adjusted cost base to such a holder of the
Pendaries common shares. However, such a capital gain (or capital loss) may be
exempt from Canadian tax under an applicable income tax treaty.
Dissenting Non-Resident Pendaries Shareholders. A Non-Resident Pendaries
Shareholder who exercises its dissenter's rights as outlined above under the
heading "The Arrangement -- Dissenters' Rights", and who becomes entitled to
receive a payment equal to the fair value of that Non-Resident Pendaries
Shareholder's Pendaries common shares, will be deemed to receive a dividend
equal to the amount, if any, by which that payment exceeds the paid-up capital
of those Pendaries common shares determined in accordance with the Tax Act. Any
such deemed dividend will be subject to Canadian withholding tax at a rate of
25%, subject to reduction under an applicable income tax treaty. In the case of
a dissenting Non-Resident Pendaries Shareholder who is a resident of the United
States for the purposes of the Canada-U.S. Income Tax Convention, the rate of
such withholding tax will generally be reduced to 15%. If the dissenting Non-
Resident Pendaries Shareholder's Pendaries common
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shares constitute taxable Canadian property, the Non-Resident Pendaries
Shareholder will also realize a capital gain (or capital loss) equal to the
amount by which the payment (including any tax withheld in respect thereof),
less the amount of any deemed dividend and any costs of the disposition, exceeds
(or is exceeded by) the adjusted cost base of the Pendaries common shares.
However, any such capital gain may be exempt from Canadian tax under an
applicable income tax treaty.
U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The following is a summary of certain material U.S. federal income tax
considerations arising from and relating to the exchange of Pendaries shares for
Ultra shares under the arrangement that is generally applicable to you if you
are a U.S. holder. A U.S. holder means a beneficial owner of shares held as a
capital asset for U.S. federal income tax purposes who is:
. a citizen or individual resident of the U.S.;
. a corporation created or organized in or under the laws of the U.S. or
any political subdivision thereof;
. a domestic partnership within the meaning of the United States Internal
Revenue Code of 1986, as amended, the "Code", and the regulations
thereunder;
. an estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
. a trust, if both a U.S. court is able to exercise primary supervision
over the administration of the trust and one or more U.S. persons have
the authority to control all substantial decisions of the trust.
This summary does not apply to you if you are a member of a class of U.S.
holders subject to special treatment under certain U.S. federal income tax laws,
such as:
. dealers in securities, tax-exempt entities, financial institutions,
qualified retirement plans, real estate investment trusts, insurance
companies;
. persons who own or have owned directly or indirectly 10% or more of the
total combined voting power of Pendaries' shares at any time in the 5-
year period ended immediately prior to the exchange under the
arrangement;
. persons that hold Pendaries' stock as part of a straddle or a hedging,
integrated, constructive sale or conversion transaction for tax
purposes;
. persons whose functional currency for tax purposes is not the U.S.
dollar;
. persons who are liable for the alternative minimum tax;
. persons who are traders in securities that elect to use a mark-to-
market method of accounting for their securities holdings;
. persons holding stock who received such stock as compensation; and
. persons who are residents of a country other than the U.S. for purposes
of an income tax treaty to which the U.S. is a party or that hold
shares in connection with a permanent establishment or fixed base
through which business is carried on or services are performed in a
country that is a party to an income tax treaty with the U.S.
This summary assumes that no U.S. holder will own or be deemed to own 5% or
more of Ultra's shares immediately after the share exchange under the
arrangement, and that Ultra will not be a Passive Foreign Investment Company
after the arrangement.
All U.S. holders are urged to consult with their own tax advisor as to the
particular tax consequences to them of the exchange under the arrangement,
including the applicability and effect of U.S. federal income tax law, state,
provincial and local
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tax laws and any pending or proposed legislation. The state, provincial, local
and foreign tax consequences of the exchange under the arrangement are not
discussed below.
This summary of U.S. federal income tax considerations and the conclusions
regarding certain issues of U.S. federal income tax law that are reflected in
this summary are based upon the Code, existing and proposed Treasury
regulations, administrative and judicial interpretations thereof, and treaties
and regulatory interpretations, all as of the date hereof, and which are subject
to change, and upon certain representations made by officers of Pendaries, some
of which relate to anticipated future factual matters and circumstances. No
assurance can be given that changes in existing laws or regulations or their
interpretation will not occur, or that such changes will not be retroactive, or
that anticipated future factual matters and circumstances will in fact occur. No
advance ruling from the IRS with respect to these matters has been requested.
It is possible that the U.S. federal income tax consequences may differ from
those described below.
Passive Foreign Investment Company Status. Under current U.S. tax law,
Pendaries will be a Passive Foreign Investment Company, known as a "PFIC", for
U.S. federal income tax purposes if either 75% or more of its gross income in a
tax year is passive income or the average percentage of its assets (by value)
held by Pendaries during the taxable year which produce or are held for the
production of passive income is more than 50%.
For the purposes of the PFIC tests, if a foreign corporation owns directly or
indirectly at least 25% by value of the stock of another corporation, the
foreign corporation is treated as owning its proportionate share of the assets
of the other corporation, and as if it had received directly its proportionate
share of the income of such other corporation. Because Pendaries wholly owns
Sino-American, for purposes of the PFIC tests, Pendaries will be treated as
owning all of the assets of Sino-American and its wholly-owned subsidiaries,
Sino-American Overseas and Pendaries Production, and receiving directly all of
the income of Sino-American and its wholly-owned subsidiaries, Sino-American
Overseas and Pendaries Production.
At present, Pendaries and its subsidiaries' revenue is limited to the interest
income earned on their cash reserves. Consequently, it is anticipated by the
officers of Pendaries that Pendaries will be classified as a PFIC for its
current taxable year beginning on January 1, 2000, assuming that Pendaries and
its subsidiaries will only earn interest income for the remainder of the year.
The officers of Pendaries believe that Pendaries was not a PFIC in any of
Pendaries' taxable years preceding the current taxable year.
If Pendaries is a PFIC for any taxable year during which a U.S. holder owns
shares, certain "excess" distributions and gains would generally be allocated
ratably to all days in the U.S. holder's holding period for the shares. Any
amount allocated to the current tax year of the U.S. holder and any period in
the U.S. holder's holding period before the first day of the first tax year of
Pendaries for which it was a PFIC is includible in the U.S. holder's gross
income as ordinary income in the current tax year. Any amount allocated to each
other period is includible in the U.S. holder's current tax year gross income as
ordinary income, subject to tax at the highest marginal tax rate applicable to
the U.S. holder in the year such income was so attributed, and subject to an
interest charge on taxes deemed deferred by the U.S. holder.
A U.S. holder could avoid the interest charge and ordinary income
characterization if Pendaries agrees to comply with certain reporting
requirements and the U.S. holder were to make a "qualified election" for its
taxable year which includes December 31, 2000 (i.e., the date the taxable year
of Pendaries ends), to be currently taxable on such U.S. holder's pro rata share
of Pendaries' ordinary earnings, excluding net capital gain, and net capital
gain for each year, at ordinary and long-term capital gain rates, respectively,
included wholly or partially in the U.S. holder's holding period in Pendaries
and during which Pendaries was a PFIC, even if no distributions were received.
U.S. holders who make a qualified election may be eligible to make an additional
election, a "deferral election," to defer payment of the tax liability on such
current income inclusion until the receipt of distributions from Pendaries of
the amounts deemed included in the U.S. holder's income pursuant to the
qualified election or until the time other events occur which cause the deferral
election to terminate including any transfer of the U.S. holder's shares under
the arrangement. However, a U.S. holder who makes a deferral election must pay
interest on the deferred tax liability.
Alternatively, to avoid an interest charge and ordinary income
characterization, a U.S. holder may elect to mark his shares to market for each
period included wholly or partially in the U.S. holder's holding period in
Pendaries and during which Pendaries was a PFIC. However, the interest charge
and ordinary income characterization generally will not be avoided for "excess"
distributions and gains in the U.S. holder's first taxable year of the mark to
market election. Under this election, the excess of the fair market value of
the U.S. holder's Pendaries shares at the end of the tax year over the U.S.
holder's adjusted basis, as increased to reflect net previous inclusions of mark
to market gains over previous mark to market losses, is included in the U.S.
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holder's gross income as ordinary income in the current year. Gain on the sale
or disposition of Pendaries shares is also treated as ordinary income. If the
adjusted basis of Pendaries shares at the end of the tax year over the U.S.
holder's adjusted basis, as increased to reflect net previous inclusions of mark
to market gains over previous mark to market recognized losses, exceeds the fair
market value of Pendaries shares at the end of the tax year, this excess is
deductible as ordinary loss, but only to the extent of net previous inclusions
of mark to market gains over previous mark to market losses. Losses on the sale
of Pendaries shares are also treated as ordinary losses, and not capital losses,
but likewise only to the extent of net previous inclusions of mark to market
gains over previous mark to market losses.
EACH U.S. HOLDER IS URGED TO CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR
REGARDING WHETHER PENDARIES WILL BE TREATED AS A PFIC UNDER U.S. TAX LAW.
The Exchange Under the Arrangement.
Qualified Election is Made. A U.S. holder generally will not recognize gain
or loss on the exchange of Pendaries shares solely for Ultra shares under the
arrangement if the U.S. holder timely makes a qualified election to be currently
taxable on such U.S. holder's pro rata share of Pendaries' ordinary earnings,
excluding net capital gain, and net capital gain for each year at ordinary and
long-term capital gain rates, respectively. See "Passive Foreign Investment
Company Status" in this section for additional information regarding the
qualified election.
The officers of Pendaries believe that there is a substantial likelihood that
Pendaries will not have any ordinary earnings or net capital gain in 2000. If
Pendaries does not have any ordinary earnings or net capital gain in 2000, a
U.S. holder making a qualified election for its taxable year which includes
December 31, 2000 (i.e., the date the taxable year of Pendaries ends) should not
be required to include any additional amount in their gross income for such
taxable year as a result of making the qualified election. If Pendaries does
have ordinary earnings and/or net capital gain in 2000, unless a deferral
election is made, a U.S. holder will be required to include its pro rata portion
of such amounts in their gross income which amounts will be taxable at ordinary
and long-term capital gain rates, respectively, even if no distribution is
received from Pendaries.
The qualified election is not applicable to a U.S. holder's Ultra shares
unless the U.S. holder makes a specific election regarding its Ultra shares. A
qualified election with respect to a U.S. holder's Ultra shares is not required
for the exchange under the arrangement to qualify for tax-free treatment.
Qualified elections are made on a shareholder-by-shareholder basis. A U.S.
holder may make a qualified election for any taxable year at any time on or
before the due date for filing its U.S. federal income tax return for the
taxable year for which the election is made. A U.S. holder makes the qualified
election by attaching a completed IRS Form 8621, that includes information
contained in a PFIC annual information statement or a combined statement
provided by Pendaries, to such U.S. holder's timely filed U.S. federal income
tax return. Once made, the qualified election applies to that U.S. holder's
subsequent taxable years regarding Pendaries for which the U.S. holder is a
direct or indirect shareholder of Pendaries, unless invalidated, terminated or
revoked by the U.S. holder with the consent of the IRS. A U.S. holder of
Pendaries shares should not be a direct or indirect shareholder of Pendaries
immediately after the exchange under the arrangement for U.S. federal income tax
purposes. Pendaries will supply an individual or combined PFIC annual
information statements to any U.S. holder or former U.S. holder who requests it
and to all U.S. holders of record immediately prior to the exchange under the
arrangement.
A U.S. holder's basis in the Ultra shares received in the exchange under the
arrangement will be the same as the basis of the U.S. holder's Pendaries shares
surrendered in exchange therefor. The holding period for the shares of Ultra
received in the exchange under the arrangement will include the holding period
of the shares of Pendaries surrendered in exchange therefor.
Qualified Election is Not Made. A U.S. holder generally will recognize gain,
but not loss, on the exchange of Pendaries shares solely for Ultra shares under
the arrangement equal to the difference between the fair market value of the
U.S. holder's Ultra shares immediately after the exchange and the U.S. holder's
basis in its Pendaries shares exchanged therefor, if the U.S. holder does not
timely make a qualified election. Any gain recognized will generally be
allocated ratably to all days in the U.S. holder's holding period for the
shares. Any amount allocated to the current tax year of the U.S. holder and any
period in the U.S. holder's holding period before the first day of the first tax
year of Pendaries for which it was a PFIC is includible in the U.S. holder's
gross income as ordinary income in the current tax year. Any amount allocated
to each other period is includible in the U.S. holder's current tax year gross
income as ordinary income, subject to tax at the highest marginal tax rate
applicable to the U.S. holder in the year such income was so attributed, and
subject to an interest charge on taxes deemed deferred by such U.S. holder.
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A U.S. holder's basis in the Ultra shares received in the exchange under the
arrangement will be the same as the basis of the U.S. holder's Pendaries shares
surrendered in exchange therefor for U.S. federal income tax purposes plus any
gain recognized on the exchange. The U.S. holder's holding period for the
shares of Ultra received in the exchange should generally include the holding
period of the shares of Pendaries surrendered in exchange therefor.
EACH U.S. HOLDER SHOULD CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR TO DECIDE
WHETHER AND HOW TO MAKE A QUALIFIED ELECTION.
Dissenting U.S. Holders. Qualified Election is Made. If a U.S. holder
exercises dissenter's rights as outlined under the heading "The Arrangement --
Dissenters' Rights" and becomes entitled to receive a payment equal to the fair
value of its Pendaries shares and timely makes a qualified election, the U.S.
holder will realize taxable capital gain or loss equal to the difference between
the fair value of its Pendaries shares and its basis in its Pendaries shares
immediately prior to the payment. Any amount of Canadian tax withheld on a
payment to a U.S. holder may generally be credited against the U.S. holder's
U.S. federal income tax liability arising from the payment. The implications of
making and the procedure to make a qualified election are more fully discussed
in this section "U.S. Federal Income Tax Considerations for U.S. Holders" above.
Qualified Election is Not Made--Loss Realized. If a U.S. holder exercises
dissenter's rights as outlined under the heading "The Arrangement -- Dissenters'
Rights" and becomes entitled to receive a payment equal to the fair value of its
Pendaries shares and does not timely make a qualified election, and the U.S.
holder's basis in its Pendaries shares exceeds the fair value of its Pendaries
-------
shares immediately prior to the payment, the U.S. holder will realize a taxable
capital loss equal to the difference between the U.S. holder's basis in its
Pendaries shares immediately prior to the payment and the fair value of its
Pendaries shares. Any amount of Canadian tax withheld on a payment to a U.S.
holder may generally be credited against the U.S. holder's U.S. federal income
tax liability arising from the payment.
Qualified Election is Not Made-Gain Realized. If a U.S. holder exercises
dissenter's rights as outlined above under the heading "The Arrangement
Proposal-Dissenters' Rights" and becomes entitled to receive a payment equal to
the fair value of its Pendaries shares and does not timely make a qualified
election, and the fair value of its Pendaries shares exceeds the U.S. holder's
-------
basis in its Pendaries shares immediately prior to the payment, the U.S. holder
will realize a taxable gain equal to the difference between the fair value of
its Pendaries shares and the U.S. holder's basis in its Pendaries shares
immediately prior to the payment. Any gain recognized will generally be
allocated ratably to all days in the U.S. holder's holding period for the
shares. Any amount allocated to the current tax year of the U.S. holder and any
period in the U.S. holder's holding period before the first day of the first tax
year of Pendaries for which it was a PFIC is includible in the U.S. holder's
gross income as ordinary income in the current tax year. Any amount allocated
to each other period is includible in the U.S. holder's current tax year gross
income as ordinary income, subject to tax at the highest marginal tax rate
applicable to the U.S. holder in the year such income was so attributed, and
subject to an interest charge on taxes deemed deferred by such U.S. holder. Any
amount of Canadian tax withheld on a payment to a U.S. holder may generally be
credited against the U.S. holder's U.S. federal income tax liability arising
from the payment.
Disposition of Ultra Shares. A U.S. holder will generally recognize gain or
loss on the sale or other disposition of Ultra shares in an amount equal to the
difference between the amount received and the U.S. holder's basis in the Ultra
shares, determined as described above. Gain or loss from the sale of the shares
will be long-term capital gain or loss if the shares are held for more than one
year. Long-term capital gain recognized by an individual U.S. holder is
generally subject to taxation at a maximum rate of 20%.
Capital loss recognized by an individual U.S. holder is generally allowable as
an offset against capital gain and up to $3,000, or $1,500 in the case of a
married individual filing a separate return, of ordinary income. Capital loss
recognized by a corporate U.S. holder is generally allowable as an offset only
against capital gain. Capital loss not utilized in any taxable year by an
individual U.S. holder may be carried forward indefinitely and used to offset
capital gain and up to $3,000 of ordinary income in any future taxable year.
Capital loss not utilized by a corporate U.S. holder must first be carried back
and applied against capital gain in the three years preceding the year of the
sale giving rise to the loss, and then may be carried forward to the five
taxable years subsequent to the year of such sale.
THIS DISCUSSION REGARDING THE DISPOSITION OF ULTRA SHARES IS SUBJECT TO THE
DETERMINATION THAT ULTRA IS NOT AND/OR HAS NOT BEEN A PFIC, FOREIGN PERSONAL
HOLDING COMPANY, FOREIGN INVESTMENT COMPANY OR CONTROLLED FOREIGN CORPORATION AS
THOSE TERMS
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ARE SPECIFICALLY DEFINED IN THE CODE. EACH U.S. HOLDER SHOULD CONSULT WITH SUCH
HOLDER'S OWN TAX ADVISOR TO DETERMINE WHETHER ANY OF THESE SPECIAL U.S. FEDERAL
INCOME TAX RULES SPECIFICALLY APPLY ON THE DISPOSITION DATE.
Dividends. Ultra does not contemplate paying dividends to its shareholders at
any time within the foreseeable future. Ultra intends to retain earnings, if
any, for use in the operation and expansion of its business. If at any time a
dividend is paid by Ultra, U.S. holders are urged to consult with their tax
advisors regarding the tax consequences thereof.
Information Reporting and Backup Withholding. Dividends on shares and payments
of the proceeds of a sale of shares paid within the U.S. or through certain
U.S.-related financial intermediaries, are subject to information reporting and
may be subject to backup withholding at a 31% rate unless the U.S. holder:
. is a corporation or comes within certain other exempt categories and, when
required, demonstrates that fact; or
. provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with
applicable requirements.
Any amount of backup withholding may be credited against the U.S. holder's U.S.
federal income tax liability and may entitle such holder to a refund provided
that the required information is furnished to the IRS.
LEGAL MATTERS
The validity of the issuance of the common shares offered in this offering
will be passed upon for us by Stewart, McKelvey, Stirling & Scales. Jenkens &
Gilchrist, a Professional Corporation, will render an opinion with respect to
certain U.S. tax matters and Stikeman Elliott will render an opinion with
respect to certain Canadian tax matters.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting issuer or the equivalent in the Provinces of British
Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and
Newfoundland. As a result, we file annual and other information with the
securities commissions in each of these jurisdictions. The Canadian securities
commissions maintain a website named "SEDAR" that contains reports, proxy and
information statements and other information regarding registrants that file
with the commissions. Our Canadian filings can be found on the SEDAR website at
http://www.sedar.com. In addition, we file annual, quarterly and other
information with the SEC. You may read and copy any reports, statements and
other information we file at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call (800) SEC-0330 for
further information on the public reference rooms. Our filings will also be
available to the public from commercial document retrieval services and at the
website maintained by the SEC at http://www.sec.gov. Our securities are listed
-------------------
on the TSE under the symbol "PDQ" and on AMEX under the symbol "PDR". Materials
filed by us may be inspected at the offices of The Toronto Stock Exchange at 2
First Canadian Place, The Exchange Tower, Toronto, Ontario M5X 1J2 or at the
office of AMEX at 86 Trinity Place, New York, New York 10006.
Ultra is a reporting issuer that files annual and other information with the
SEC, the British Columbia Securities Commission, the Ontario Securities
Commission and the Yukon Securities Commission. As Ultra is not required to
file electronically with the SEC, Ultra's filings are not available at the SEC's
website. However, you may read and copy any reports, statements and other
information Ultra files in the U.S. at the SEC's public reference rooms as
described in the preceding paragraph. Ultra's securities are listed on the TSE
under the symbol "UP." Materials filed by Ultra may be inspected at the offices
of the TSE at 2 First Canadian Place, The Exchange Tower, Toronto, Ontario M5X
1J2. Ultra's Canadian filings can be found on the SEDAR, at
http://www.sedar.com.
---------------------
Other Information about Pendaries - Documents Incorporated by Reference
The following documents of Pendaries are incorporated herein by reference and
form part of this proxy statement:
. Annual report on Form 10-K of Pendaries for the fiscal year ended December
31, 1999;
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. Quarterly reports on Form 10-Q of Pendaries for the quarterly periods
ended March 31, 2000, June 30, 2000 and September 30, 2000; and
. Proxy Statement of Pendaries dated March 10, 2000.
Any documents of the type referred to in the preceding paragraph (excluding
confidential material change reports) filed by Pendaries after the date of this
proxy statement and prior to the effective time of the arrangement shall be
deemed to be incorporated by reference in this proxy statement.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this proxy statement to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute part of this proxy statement. The making of a
modifying or superseding statement shall not be deemed an admission for any
purposes that the modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an omission to
state a material fact that is required to be stated or that is necessary to make
a statement not misleading in light of the circumstances in which it was made.
Documents Available Without Charge from the Companies
Pendaries and Ultra will provide, without charge, copies of any report
incorporated by reference into this document, excluding exhibits other than
those that are specifically incorporated by reference in this document. You may
obtain a copy of any document incorporated by reference by writing or calling
Ultra or Pendaries as follows: Philip R. Henry, Eight Greenway Plaza, Suite 910,
Houston, Texas 77046, (713) 355-2900.
TO ENSURE DELIVERY OF THE COPIES IN TIME FOR THE SPECIAL MEETING, YOUR REQUEST
MUST BE RECEIVED BY [ ].
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OTHER MATTERS
Our board of directors does not plan to bring or know of any other matter that
will be brought before the special shareholders' meeting other than as
specifically set forth in this proxy statement. If any other matters properly
come before the special shareholders' meeting, the persons named in the
accompanying proxy intend to vote the proxy in accordance with the judgment of
the board of directors.
No persons have been authorized to give any information or to make any
representation other than those contained in this proxy statement in connection
with the solicitation of proxies or the offering of securities made hereby and,
if given or made, such information or representation must not be relied upon as
having been authorized by Pendaries. This proxy statement does not constitute
an offer to sell, or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom it is
not lawful to make any such offer or solicitation in such jurisdiction.
The information contained in this proxy statement relating to Pendaries has
been provided by Pendaries. This proxy statement and the sending, communication
and delivery thereof to the Pendaries shareholders have been authorized and
approved by the board of directors.
DATED at Houston, Texas this ____ day of __________, 2000.
By Order of the Board of Directors
________________________
PHILIP R. HENRY
Secretary
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APPENDIX A
PENDARIES ARRANGEMENT RESOLUTION
BE IT RESOLVED THAT:
1. The arrangement (the "Arrangement") under Section 128 of the Business
Corporations Act (New Brunswick) (the "NBBCA") involving Pendaries Petroleum
Ltd. ("Pendaries"), as more particularly described and set forth in the
Management Proxy Circular (the "Circular") of Pendaries accompanying the
notice of meeting (as the Arrangement may be or may have been modified or
amended) is hereby authorized, approved and adopted.
2. The plan of arrangement (the "Plan of Arrangement") involving Pendaries, the
full text of which is set out as Schedule . to the Circular and Exhibit 1
to the arrangement agreement (the "Arrangement Agreement") made between
Ultra Petroleum Corp. and Pendaries (as the Plan of Arrangement may be or
may have been modified or amended) is hereby authorized, approved and
adopted.
3. Notwithstanding that this resolution has been passed (and the Arrangement
adopted) by the shareholders of Pendaries or that the Arrangement has been
approved by The Court of Queen's Bench of New Brunswick, the directors of
Pendaries are hereby authorized and empowered without further notice to or
approval of the shareholders of Pendaries (i) to amend the Arrangement
Agreement, or the Plan of Arrangement to the extent permitted by the
Arrangement Agreement, and (ii) subject to the terms of the Arrangement
Agreement, not to proceed with the Arrangement.
4. Any one officer or director of Pendaries is hereby authorized and directed
for and on behalf of Pendaries to execute, under the seal of Pendaries or
otherwise, and to deliver articles of arrangement and such other documents
as are necessary or desirable to the Director under the NBBCA in accordance
with the Arrangement Agreement for filing.
5. Any one officer or director of Pendaries is hereby authorized and directed
for and on behalf of Pendaries to execute or cause to be executed, under the
seal of Pendaries or otherwise, and deliver or cause to be delivered, all
such other documents and instruments and to perform or cause to be performed
all such other acts and things as may be necessary or desirable to give full
effect to the foregoing resolution and the matters authorized hereby.
<PAGE>
APPENDIX B
IN THE COURT OF QUEEN'S BENCH OF NEW BRUNSWICK
TRIAL DIVISION
JUDICIAL DISTRICT OF SAINT JOHN
IN THE MATTER OF A PROPOSED ARRANGEMENT CONCERNING PENDARIES PETROLEUM LTD. AND
ITS SHAREHOLDERS PURSUANT TO THE BUSINESS CORPORATIONS ACT, R.S.N.B. 1973,
c.B-9.1 AS AMENDED
B E T W E E N:
PENDARIES PETROLEUM LTD.
Applicant
- and -
ULTRA PETROLEUM CORP.
Respondent
INTERIM ORDER
UPON READING:
--the affidavit of Bobby J. Fogle sworn to the . day of . , 2000;
--the Notice of Application dated the . day of . , 2000, and the
affidavit of Bobby J. Fogle sworn to in support thereof on the . day of
. , 2000; and
--the consent of the Respondent, Ultra Petroleum Corp. ("Ultra");
AND UPON BEING SATISFIED that the Director appointed pursuant to s.184 of
the Business Corporations Act R.S.N.B. 1973, c. B-9.1 (the "NBBCA") has been
given timely notice of the Applicant's motion for this Interim Order and, based
upon the contents of a letter transmitted to the said Kenneth B. McCullogh,
Q.C. by telecopier on . , 2000 from Charles McAllister, Director, Corporations
Branch, that the Director does not wish to appear or be heard on the
Applicant's motion for this Interim Order;
AND UPON HEARING Kenneth B. McCullogh, Q.C., of counsel for the Applicant;
AND UNDER THE AUTHORITY of s. 128(4) of the NBBCA;
AND IN CONNECTION WITH AN APPLICATION made by Pendaries Petroleum Ltd. by
Notice of Application herein dated the . day of . , 2000, FOR A FINAL ORDER
TO BE HEARD before the Court at 110 Charlotte Street, Saint John, New
Brunswick, on the . day of . , 2001;
IT IS HEREBY ORDERED THAT:
SPECIAL MEETING
1. Pendaries shall call, hold and conduct a special meeting on January . ,
2001 (the "Meeting") of the holders (the "Pendaries Shareholders") of its
common shares (the "Pendaries Common Shares") to, among other things,
consider and, if deemed advisable, to pass, with or without variation, the
special resolution (the "Pendaries Arrangement Resolution") to approve the
arrangement (the "Arrangement") substantially in the form set forth in the
Plan of Arrangement, which is attached as Appendix " . " to the draft
Management Information Circular of Pendaries (the "Circular") which is
Schedule . to the Affidavit of Bobby J. Fogle sworn to . , 2000 in
support of the Notice of Application.
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2. The Meeting shall be called, held and conducted in accordance with the
notice of Meeting (the "Notice") forming part of the Circular, the NBBCA,
the articles and by-laws of Pendaries, the terms of this Interim Order, and
any further Order of this Honourable Court.
AMENDMENTS
3. Pendaries is authorized to make, in the manner contemplated by the
Arrangement Agreement, such amendments, revisions or supplements to the
Arrangement as it may determine without any additional notice of such
changes to Pendaries Shareholders and the Arrangement as so amended, revised
or supplemented, shall be the Arrangement to be submitted to the Meeting and
the subject of the Pendaries Arrangement Resolution.
ADJOURNMENTS, POSTPONEMENTS
4. Pendaries, if it deems advisable, is specifically authorized to adjourn or
postpone the Meeting on one or more occasions, without the necessity of
first convening the Meeting or first obtaining any vote of Pendaries
Shareholders respecting the adjournment or postponement.
RECORD DATE
5. Pursuant to section 86 of the NBBCA, the record date for determining
registered Pendaries Shareholders entitled to receive the Notice, the Notice
of Application, the Circular, the form of proxy and the Letter of
Transmittal (collectively, the "Meeting Materials") shall be the close of
business on [December] . , 2000 (the "Record Date").
NOTICE OF MEETING
6. The Meeting Materials with such amendments, additional communications or
documents as counsel for Pendaries may advise are necessary or desirable,
provided such amendments, communications or documents are not inconsistent
with this Interim Order, shall be disseminated, distributed, sent and given
to Pendaries Shareholders, the directors of Pendaries, the auditors of
Pendaries, and Ultra by one or more of the following methods not later than
21 days prior to the date of the Meeting:
(1) to Pendaries Shareholders:
(a) by prepaid ordinary mail, addressed to each Pendaries Shareholder
at his, her or its address, as shown on the security registers of
Pendaries as at the Record Date;
(b) by delivery, in person or by courier service, to the addresses
specified in paragraph 6(1)(a) above;
(c) by facsimile transmission to any registered Pendaries Shareholders
who request such facsimile transmission, and if required by
Pendaries, is prepared to pay the charges for such facsimile
transmission;
(d) in the case of non-registered Pendaries Shareholders, by providing
multiple copies of the Meeting Materials to intermediaries and
registered nominees to facilitate the broad distribution of the
Meeting Materials to non-registered Pendaries Shareholders;
(2) by courier or delivery in person to the directors and auditors of
Pendaries; and
(3) by prepaid ordinary mail, or by courier, or delivery in person, to the
solicitors for Ultra,
and that compliance with this paragraph shall constitute good and
sufficient notice of the Meeting. The accidental omission to give notice of
the Meeting, or the non-receipt of such notice, shall not invalidate any
resolution passed or proceedings taken at the Meeting.
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DEEMED RECEIPT OF NOTICE
7. The Meeting Materials shall be deemed, for the purposes of this Interim
Order and the Application, to have been received:
(a) in the case of mailing, three (3) days after delivery thereof to the
post office;
(b) in the case of delivery in person, upon receipt thereof by the intended
addressee or, in the case of delivery by courier, one (1) Business Day
after receipt by the courier; and
(c) in the case of facsimile transmission, upon the transmission thereof.
QUORUM AND VOTING
8. The Meeting shall be a meeting of Pendaries Shareholders and that votes
shall be taken at the Meeting on the basis of one (1) vote per Pendaries
Common Share and that, subject to further Order of this Court, the vote
required to pass the Pendaries Arrangement Resolution shall be the
affirmative vote of not less than 66 2/3% of the votes cast on the Pendaries
Arrangement Resolution (for this purpose any spoiled votes, illegible votes,
defective votes and abstentions shall be deemed not to be votes cast) by the
Pendaries Shareholders present in person or represented by proxy at the
Meeting.
9. Pendaries Shareholders holding 25% of the Pendaries Common Shares entitled
to vote at the Meeting, whether present in person or by proxy, shall
constitute a quorum for the Meeting and any adjournments or postponements
thereof.
10. The only persons entitled to vote at the Meeting shall be the registered
Pendaries Shareholders as at the close of business on the Record Date,
subject to the provisions of the NBBCA with respect to persons who become
registered Pendaries Shareholders after that date.
DISSENT RIGHTS
11. Pendaries Shareholders shall be accorded rights of dissent and appraisal
with respect to the Pendaries Arrangement Resolution pursuant to section
131 of the NBBCA (except as that section is varied by this paragraph 11),
and to seek fair value for their Pendaries Common Shares, provided that
holders of any Pendaries Common Shares who wish to dissent shall provide
Pendaries with their written objection to the Pendaries Arrangement
Resolution and such written objection is received by Pendaries, c/o
Montreal Trust Company of Canada, 100 University Avenue, Toronto, Ontario
M5V 2Y1, Attention: Proxy Department, facsimile: (416) 981-9803, prior to
5:00 p.m. (Saint John time) on the Business Day immediately preceding the
Meeting (or any adjournment or postponement thereof) and otherwise strictly
comply with the requirements of section 131 of the NBBCA (except as that
section is varied by this paragraph 11). Except as varied by this section
11, the procedure to be followed in connection with any exercise of dissent
rights by Pendaries Shareholders shall be as set forth in section 131 of
the NBBCA. Pendaries Shareholders who duly exercise their dissent rights
and who:
(a) are ultimately determined to be entitled to be paid fair value for
their Pendaries Common Shares shall be deemed to have transferred such
Pendaries Common Shares as of the Effective Time, without any further
act or formality and free and clear of all liens, claims and
encumbrances, to Ultra in consideration for a payment of cash from
Pendaries equal to such fair value and such shares shall be cancelled
as of the Effective Time; or
(b) are ultimately determined not to be entitled, for any reason, to be
paid fair value for their Pendaries Common Shares shall be deemed to
have participated in the Arrangement on the same basis as a non-
dissenting holder of Pendaries Common Shares and shall receive Ultra
common shares on the basis determined in accordance with the Plan of
Arrangement.
3
<PAGE>
For the purpose of any proceedings involving any dissenting registered
holders of Pendaries Common Shares who seek fair value for their Pendaries
Common Shares:
(a) the "court" referred to in section 131 of the NBBCA means this Court;
(b) the dissenting registered holders of Pendaries Common Shares shall
provide Pendaries with written notice demanding payment of the fair
value of the Pendaries Common Shares, which notice is required by
section 131(7) of the NBBCA; and
(c) the dissenting registered holders of Pendaries Common Shares shall send
the certificates for their Pendaries Common Shares to Pendaries, which
certificates must be delivered as required by section 131(8) of the
NBBCA.
SANCTION HEARING AND SERVICE OF COURT MATERIALS
12. Upon approval by the Pendaries Shareholders of the Arrangement in the
manner set forth in this Interim Order, Pendaries may apply to this Court
for approval of the Arrangement and that service of the Meeting Materials,
in accordance with paragraph 6 of this Interim Order, shall constitute good
and sufficient service of such Notice of Application and no other form of
service need be made and no other material need be served on such persons
in respect of these proceedings except as required under paragraph 6 of
this Interim Order.
13. Any holder of Pendaries Shares desiring to appear and make submissions in
the within application at the hearing for a final order is required to
appear at the said hearing in person or by a New Brunswick lawyer and may
present affidavit or other documentary evidence provided a copy of such
evidence is served upon Pendaries or its lawyer, Kenneth B. McCullogh,
Q.C., Stewart McKelvey Stirling Scales, 44 Chipman Hill, 10th Floor, P.O.
Box 7289 Station "A", Saint John, New Brunswick E2L 4S6, at least four days
prior to the date set for the hearing of the final order and proof of such
service is filed with the Clerk of The Court of Queen's Bench, judicial
district of Saint John, 110 Charlotte Street, Saint John, New Brunswick
prior to the hearing.
14. In the event that the hearing of the application for final approval of the
Arrangement is postponed, only those persons who have appeared at the
initial application for the final order or have filed notice with the Court
pursuant to this Interim Order will be entitled to notice of the adjourned
date.
PRECEDENCE
15. To the extent of any inconsistency or discrepancy with respect to the
matters provided for in this Interim Order, between this Interim Order and
the terms of any instrument creating, governing or collateral to the
Pendaries Common Shares or the articles or by-laws of Pendaries, this
Interim Order shall govern.
EXTRA-TERRITORIAL ASSISTANCE
16. THIS COURT seeks and requests the aid and recognition of any court or any
judicial, regulatory or administrative body in any province of Canada and
any judicial, regulatory or administrative tribunal or other court
constituted pursuant to the Parliament of Canada or the legislature of any
province and any court or any judicial, regulatory or administrative body
of the United States or the United Kingdom to act in aid of and to assist
this Court in carrying out the terms of this Interim Order.
VARIANCE
17. Pendaries shall be entitled, at any time, to seek leave to vary this
Interim Order.
DATED at Saint John, New Brunswick, this day of , 2000.
-------------------------------------
J.C.Q.B.
4
<PAGE>
APPENDIX C
Cause No: S/M/
Numero de Cause:
IN THE COURT OF QUEEN'S BENCH
OF NEW BRUNSWICK
TRIAL DIVISION
JUDICIAL DISTRICT OF SAINT JOHN
In the matter of a proposed arrangement concerning Pendaries Petroleum Ltd. and
its shareholders pursuant to the Business Corporations Act, RSNB 1973 c.B-9.1
BETWEEN:
PENDARIES PETROLEUM LTD.
Applicant
- and -
ULTRA PETROLEUM CORP.
Respondents
NOTICE OF APPLICATION
(FORM 16D)
TO: Ultra Petroleum Corp.
AND TO: The Director Appointed Pursuant to s.184 of the Business Corporations
Act
LEGAL PROCEEDINGS HAVE BEEN COMMENCED BY FILING THIS NOTICE OF APPLICATION.
The applicant will make an application before the Court at 110 Charlotte
Street, Saint John, New Brunswick on the day of , 2000 at for an
order as set out hereunder. If you wish to oppose this application you must
appear at the hearing of the application at the place, date and time stated,
either in person or by a New Brunswick lawyer acting on your behalf.
If you intend to appear on the hearing of the application and wish to
present to the Court at that time affidavit or other documentary evidence to
support your position, you must serve a copy of such evidence on the applicant
or his lawyer and, with proof of such service, file it in this Court Office
prior to the hearing of the application.
COUR DU BANC DE LA REINE DU
NOUVEAU-BRUNSWICK
DIVISION DE PREMIERE INSTANCE
CIRCONSCRIPTION JUDICIAIRE DE
E N T R E:
requerant(s)
- et -
intime(s)
AVIS DE REQUETE
(FORMULE 16D)
DESTINATAIRE:
PAR LE DEPOT DU PRESENT AVIS DE REQUETE, UNE POURSUITE JUDICIAIRE A ETE
ENGAGEE.
Le requerant presentera une requete a la Cour a , le 19 a h en
vue d'obtenir l'ordonnance decrite ci-dessous.
Si vous desirez contester cette requete, vous devrez comparaitre a
l'audition de la requete aux lieu, date et heure indiques, soit en personne ou
par l'intermediaire d'un avocat du Nouveau-Brunswick charge de vous
representer.
Si vous prevoyez comparaitre a l'audition de la requete et desirez presenter
a la Cour un affidavit ou une autre preuve litterale en votre faveur, vous
devrez signifier copie de cette preuve au requerant ou a son avocat et la
deposer, avec une preuve de sa signification, au greffe de cette Cour avant
l'audition de la requete.
<PAGE>
If you fail to appear on the hearing of the application AN ORDER WHICH MAY
AFFECT YOU MAY BE MADE IN YOUR ABSENCE.
You are advised that:
(a) you are entitled to issue documents and present evidence in the
proceeding in English or French or both;
(b) the applicant intends to proceed in the English language; and
(c) if you require the services of an interpreter at the hearing you must
advise the clerk at least 7 days before the hearing.
THIS NOTICE is signed and sealed for the Court of Queen's Bench by G.S.
Theriault, Clerk of the Court at Saint John, on the day of , 2000.
C L E R K
110 Charlotte Street
Saint John, New Brunswick
Si vous ne comparaissez pas a l'audition de la requete, UNE ORDONNANCE
POUVANT VOUS CONCERNER POURRA ETRE RENDUE EN VOTRE ABSENCE.
Sachez que:
(a) vous avez le droit dans la presente instance, d'emettre des documents et
de presenter votre preuve en francais, en anglais ou dans les deux langues;
(b) le requerant a l'intention d'utiliser la langue; et
(c) si vous avez besoin des services d'un interprete a l'audience, vous
devez en aviser le greffier au moins 7 jours avant l'audience.
CET AVIS est signe et scelle au nom de la Cour du Banc de la Reine par ,
greffier de la Cour a Saint John, ce , 2000.
G R E F F I E R
110 Charlotte Street
Saint John, New Brunswick
2
<PAGE>
APPLICATION
On the hearing of this application, the Applicant intends to apply for an
order pursuant to the provisions of the Business Corporations Act RSNB, 1973
c.B-9.1 as amended (the "BCA"), approving an arrangement whereby the shares of
the Applicant will be exchanged for shares of the Respondent (the
"Arrangement").
1. The Applicant is a body corporate incorporated under the laws of Canada
and continued under the laws of the Province of New Brunswick on
September 19, 1996 and is a corporation to which the provisions of the
BCA apply.
2. The Respondent is a body corporate incorporated under the laws of the
Province of British Columbia and continued under the laws of the Yukon
Territory.
3. The Applicant has its registered office at 44 Chipman Hill, Suite 1000,
Saint John, New Brunswick, E2L 4S6.
4. The grounds to be argued in respect of the application are that the
Arrangement is fair and reasonable and is in the best interests of the
shareholders of the Applicant and that it is not practicable to effect
the fundamental change desired by the Applicant under any other
provision of the BCA. The Applicant intends to rely upon:
(a) Section 128 of the BCA; and
(b) Section 3(a)(10) of the United States Securities Act of 1933.
5. The documentary evidence to be used at the hearing of the application
is:
1. The affidavit of Bobby J. Fogle, sworn to herein the day of
, 2000.
2. Proof of compliance with the terms of any interim order which may be
made by this Honourable Court pursuant to the provisions of the BCA
and /or Rule 38.09 of the Rules of Court.
3. Proof of satisfaction of any preconditions to the Arrangement
becoming effective which may be stipulated in any management
information circular distributed to the shareholders of the
Applicant.
DATED at Saint John, New Brunswick, this day of , 2000.
STEWART McKELVEY STIRLING SCALES
Solicitors for the Applicants
Per:_________________________________
Kenneth B. McCullogh, Q.C.
Stewart McKelvey Stirling Scales
Barristers & Solicitors
P. O. Box 7289, Station "A"
44 Chipman Hill, Suite 1000
Saint John, NB E2L 4S6
Telephone: 506-632-1970
Facsimile: 506-634-3579
3
<PAGE>
APPENDIX D
THIS ARRANGEMENT AGREEMENT made as of the 13th day of October, 2000.
BETWEEN:
ULTRA PETROLEUM CORP., a corporation subsisting under the laws of the Yukon
Territory (hereinafter called "UPC")
OF THE FIRST PART
- and -
PENDARIES PETROLEUM LTD., a corporation subsisting under the laws of the
Province of New Brunswick (hereinafter called "PPL")
OF THE SECOND PART
WHEREAS the parties hereto intend to carry out the transactions contemplated
herein pursuant to an arrangement under the NBBCA;
NOW THEREFORE IN CONSIDERATION of the covenants and agreements herein
contained and other good and valuable consideration (the receipt and
sufficiency of which is hereby acknowledged), the parties hereto covenant and
agree as follows:
ARTICLE 1
Definitions
1.1 In this Agreement, unless the context otherwise requires:
(a) "Agreement" means this agreement, including the recitals and all
Schedules to this agreement, as amended or supplemented from time to time,
and "hereby", "hereof", "herein", "hereunder", "herewith" and similar terms
refer to this Agreement and not to any particular provision of this
Agreement;
(b) "Arrangement" means the arrangement under the provisions of Section
128 of the NBBCA set out in the Plan of Arrangement;
(c) "Articles of Arrangement" means the articles of arrangement in
respect of the Arrangement required by the NBBCA to be sent to the Director
after the Final Order has been made;
(d) "AMEX" means the American Stock Exchange;
(e) "Business Day" means a day, other than a Saturday, Sunday or
statutory holiday, when banks are generally open for the transaction of
bank business in the location in which an action is to be taken hereunder;
(f) "Canadian Securities Laws" means the applicable securities laws,
regulations, rules and policies of each province or territory of Canada in
which Ultra Common Shares are to be distributed pursuant to the
Arrangement;
(g) "Closing" means the completion of the transactions contemplated
herein;
(h) "Competing Transaction" means any agreement, understanding, proposal
or offer (including without limitation a proposal or offer to PPL's
shareholders) which is, or if accepted would be, inconsistent with or
detrimental to the completion of the transactions contemplated herein;
1
<PAGE>
(i) "control" means, with respect to control of a body corporate by a
person, the holding (other than by way of security) by or on behalf of that
person of securities of the body corporate carrying voting rights
sufficient to elect a majority of the directors of the body corporate;
(j) "Court" means The Court of Queen's Bench of New Brunswick;
(k) "Director" means the Director appointed pursuant to section 184 of
the NBBCA;
(l) "Effective Date" means the date the Arrangement becomes effective
under the NBBCA as determined by the certificate of arrangement issued by
the Director pursuant to section 125(2) of the NBBCA;
(m) "Effective Time" means 12:01 a.m. (Fredericton time) on the
Effective Date;
(n) "Encumbrance" includes, without limitation, any mortgage, pledge,
assignment, charge, lien, security interest, claim, trust, royalty or
carried, participation, net profits or other third party interest and any
agreement, option, right or privilege (whether by law, contract or
otherwise) capable of becoming any of the foregoing;
(o) "Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended;
(p) "Expiry Date" means January 31, 2001, provided that in the event
that the SEC has not completed its review of the Pendaries Proxy Statement
within 60 days of the date on which the Pendaries Proxy Statement is first
filed with the SEC, the Expiry Date shall be extended for a period of days
beyond January 31, 2001 equal to the number of days (to a maximum of 60
days) in excess of 60 days that elapse between the date the Pendaries Proxy
Statement is first filed with the SEC and the date on which the SEC shall
have completed their review of the Pendaries Proxy Statement, or such later
date as PPL and UPC shall agree upon in writing;
(q) "Final Order" means the order of the Court approving the
Arrangement, as such order may be affirmed, amended or modified;
(r) "Governmental Authority" includes any federal, provincial, municipal
or other political subdivision government, department, commission, board,
bureau, agency or instrumentality, domestic or foreign;
(s) "GST" means any and all taxes payable under Part IX of the Excise
Tax Act (Canada) as amended from time to time;
(t) "Income Tax Act" means the Income Tax Act (Canada);
(u) "Interim Order" means an order of the Court containing declarations
and directions with respect to the Arrangement, as such order may be
affirmed, amended or modified;
(v) "Letter of Intent" means the letter of intent between UPC and PPL
dated August 28, 2000, providing for the entering into of this Agreement;
(w) "Material Adverse Change" means any adverse change in the financial
condition, assets, business, operations or prospects of either Pendaries or
Ultra, as applicable, which is material to PPL and the Pendaries
Subsidiaries taken as a whole or to UPC and the Ultra Subsidiaries taken as
a whole; provided, however, that the occurrence of any event that affects
the oil and gas industry in general, including, but not limited to, changes
in product prices, shall not be a Material Adverse Change;
(x) "Material Adverse Effect" when used in connection with Pendaries or
Ultra, means any effect of Material Adverse Change relating to such party;
2
<PAGE>
(y) "Misrepresentation" includes any untrue statement of a material
fact, any omission to state a material fact that is required to be made and
any omission to state a material fact that is necessary to be made in order
for a statement not to be misleading;
(z) "NBBCA" means the Business Corporations Act (New Brunswick);
(aa) "NSA" means Netherland, Sewell & Associates, Inc., an independent
petroleum engineering firm;
(ab) "Ontario Securities Laws" means the applicable securities laws,
regulations, rules and policies of the Province of Ontario;
(ac) "Pendaries" means collectively PPL and the Pendaries Subsidiaries;
(ad) "Pendaries Assets" means all of the assets and properties of
Pendaries described in the Pendaries Reports;
(ae) "Pendaries Common Shares" means the common shares in the capital of
PPL;
(af) "Pendaries Counsel" means collectively Stewart McKelvey Stirling
Scales, and Jenkens & Gilchrist, or such other legal counsel as may be
designated by Pendaries;
(ag) "Pendaries Disclosure Statement" means the disclosure schedule
delivered by PPL to UPC prior to the execution of this Agreement;
(ah) "Pendaries Financial Statements" means collectively the audited
consolidated financial statements of Pendaries for the twelve months ended
December 31, 1999 and the unaudited consolidated financial statements of
Pendaries for the six months ended June 30, 2000, comprised of consolidated
balance sheets, consolidated statements of operations and retained deficit,
and consolidated statements of cash flow and the notes thereto;
(ai) "Pendaries Meeting" means the special meeting of the holders of
Pendaries Common Shares, including any adjournment or postponement thereof,
to be called in accordance with the Interim Order to consider and, if
thought fit, approve and adopt the Arrangement;
(aj) "Pendaries Options" means the options granted under agreements or
otherwise to purchase or acquire shares in Pendaries which if exercised
would result in the issuance of up to 575,500 Pendaries Common Shares, as
set out in the Pendaries Disclosure Statement;
(ak) "Pendaries Permitted Encumbrances" means the encumbrances and
burdens disclosed or reflected in the Pendaries Reports, and those
Encumbrances of a general nature generally affecting companies carrying on
in the ordinary course of business of exploration and development of oil
and gas or generally affecting title to oil and gas properties, or
disclosed in the Pendaries Financial Statements;
(al) "Pendaries Proxy Statement" means collectively the letter to
shareholders, notice of meeting, proxy statement and form of proxy to be
filed by PPL with the SEC and distributed to holders of Pendaries Common
Shares in connection with the holding of the Pendaries Meeting;
(am) "Pendaries SEC Documents" has the meaning ascribed thereto in
subsection 4.1(u) hereof;
(an) "Pendaries Reports" means the report of RSC evaluating the reserves
of Pendaries and the estimated future cash flow from such reserves
effective January 1, 2000;
(ao) "Pendaries Subsidiaries" means collectively Sino-American, Sino-
American Overseas Energy Corporation, a Cayman Islands corporation, and
Pendaries Production, Inc., a Delaware corporation;
3
<PAGE>
(ap) "person" includes any individual, partnership, firm, trust, body
corporate, government, governmental body, agency or instrumentality,
unincorporated body of persons or association;
(aq) "Plan of Arrangement" means the plan of arrangement substantially
in the form and content of Exhibit 1 hereto, as amended or supplemented
from time to time in accordance with Article 3 hereof or at the direction
of the Court;
(ar) "RSC" means Ryder Scott Company, an independent petroleum
consulting firm;
(as) "SEC" means the United States Securities and Exchange Commission;
(at) "Sino-American" means Sino-American Energy Corporation, a Texas
corporation;
(au) "Sino-American Loan Documents" means collectively the promissory
notes, loan agreements, guarantees, security agreements and other
instruments which have been, or may in the future be, delivered by one or
more of PPL and the Pendaries Subsidiaries in connection with the loan
arrangement contemplated by paragraph 13 of, and the term sheet attached
to, the Letter of Intent;
(av) "Sino-American Property Agreements" means collectively (i) the
Petroleum Contract dated August 17, 1994 by and between China National
Offshore Oil Corporation, Kerr-McGee China Petroleum Ltd. and Murphy
Pacific Rim, Ltd. covering Block 04/36 in the Gulf of Bohai People's
Republic of China, (ii) the Joint Operating Agreement dated effective
October 1, 1994 by and between Kerr-McGee China Petroleum Ltd. and Murphy
Pacific Rim, Ltd., (iii) the Novation of Joint Operating Agreement dated
March 16, 1995 by and between Kerr-McGee China Petroleum Ltd., Murphy
Pacific Rim, Ltd. and Setsco Resources Inc., (iv) the Petroleum Contract
dated January 23, 1996 by and between China National Offshore Oil
Corporation, Kerr-McGee China Petroleum Ltd. and Huffco China, LDC covering
Block 05/36 in the Gulf of Bohai People's Republic of China, and (v) the
Joint Operating Agreement dated June 26, 1997 by and between Kerr-McGee
China Petroleum Ltd., Huffco China, LDC and Setsco Resources, Inc.;
(aw) "Subsidiary" means, when used to indicate a relationship with
another body corporate;
(i) a body corporate which is controlled by (A) that other, or (B)
that other and one or more bodies corporate, each of which is
controlled by that other, or (C) two or more bodies corporate each of
which is controlled by that other; or
(ii) a subsidiary of a body corporate that is the other's
subsidiary; and
(ax) "Tax" or "Taxes" means taxes, fees, levies, duties, tariffs,
imposts, premiums and governmental impositions or charges of any kind in
the nature of (or similar to) taxes, payable to any federal, provincial,
state, local or foreign taxing authority, including, without limitation,
(i) income, capital, business, franchise, profits, gross receipts, ad
valorem, goods and services, customs, net worth, value added, sales, use,
service, real or personal property, special assessments, capital stock,
license, payroll, withholding, employment, social security, workers'
compensation, unemployment insurance or compensation, utility, severance,
production, excise, stamp, occupation, premiums, environmental, recapture,
windfall profits, transfer and gains taxes, fees, levies, duties, tariffs,
imposts, premiums and governmental impositions and (ii) interest,
penalties, additional taxes and additions to tax imposed with respect
thereto;
(ay) "Tax Return" means returns, reports, declarations, information
statements, or any other document with respect to Taxes required to be
filed with any taxing authority, whether domestic or foreign;
(az) "Title Documents" means all contracts, leases, deeds, mortgages,
letter of credit, licenses, concessions, permits and other instruments
through which title to the Pendaries Assets or Ultra Assets, as the case
may be, is derived or which relate or affect title to, or operation of, the
Pendaries Assets or the Ultra Assets, as the case may be, and without
limiting the generality of the foregoing, in respect of PPL shall include
the Sino-American Property Agreements;
4
<PAGE>
(ba) "TSE" means The Toronto Stock Exchange;
(bb) "Ultra" means collectively UPC and the Ultra Subsidiaries;
(bc) "Ultra Assets" means all of the assets and properties of Ultra
described in the Ultra Reports;
(bd) "Ultra Common Shares" means common shares in the capital of UPC as
constituted on the date hereof;
(be) "Ultra Counsel" means collectively Preston Lackowicz & Shier, and
Haynes and Boone, LLP, or such other legal counsel as may be designated by
Ultra;
(bf) "Ultra Disclosure Statement" means the disclosure schedule
delivered by UPC to PPL prior to the execution of this Agreement;
(bg) "Ultra Financial Statements" means collectively the audited
consolidated financial statements of Ultra for the twelve months ended June
30, 1999 and for the six months ended December 31, 1999, and the unaudited
consolidated financial statements of Ultra for the six months ended June
30, 2000, comprised of consolidated balance sheets, consolidated statements
of operations and deficit, consolidated statements of changes in financial
position and the notes thereto;
(bh) "Ultra Meeting" means the special meeting of the holders of Ultra
Common Shares, including any adjournment or postponement thereof, to be
called to consider and, if thought fit, approve and adopt the Arrangement;
(bi) "Ultra Options" means the options granted and outstanding as of the
date hereof under agreements or otherwise to purchase or acquire shares in
UPC which if exercised would result in the issuance of 4,595,000 Common
Shares;
(bj) "Ultra OSC Documents" has the meaning ascribed thereto in
subsection 4.2(u) hereof;
(bk) "Ultra Permitted Encumbrances" means the encumbrances or burdens
disclosed or reflected in the Ultra Reports and those Encumbrances of a
general nature generally affecting companies carrying on in the ordinary
course of business of exploration for development of oil and gas or
generally affecting title to oil and gas properties or disclosed in the
Ultra Financial Statements;
(bl) "Ultra Proxy Solicitation Material" means collectively the letter
to shareholders, notice of meeting, management information circular and
form of proxy to be filed by UPC with the Ontario Securities Commission and
the SEC and distributed to holders of Ultra Common Shares in connection
with the holding of the Ultra Meeting;
(bm) "Ultra Reports" means the report of NSA effective January 1, 2000
evaluating certain reserves of Ultra and the estimated future cash flows
from such reserves;
(bn) "Ultra Shareholder Approval" means the affirmative vote, at the
Ultra Shareholders Meeting, of more than 50% of the votes cast in respect
of approval of the Arrangement;
(bo) "Ultra Subsidiaries" means collectively Ultra Petroleum (USA) Inc.,
a Colorado corporation, and Ultra Resources, Inc., a Wyoming corporation;
(bp) "U.S. Securities Laws" means the United States Securities Act of
1933, as amended, the Exchange Act, and the rules and regulations of the
SEC thereunder.
1.2 The following Exhibit forms part of this Agreement:
Exhibit 1 Plan of Arrangement
5
<PAGE>
ARTICLE 2
Interpretation
2.1 The division of this Agreement into Articles, Sections, subsections and
paragraphs and the insertion of headings are for convenience of reference only
and shall not affect in any way the meaning or interpretation of this
Agreement.
2.2 Unless the contrary intention appears, references in this Agreement to
an Article, Section, subsection, paragraph, clause, subclause or schedule by
number or letter or both refer to the Article, Section, subsection, paragraph,
clause, subclause or schedule, respectively, bearing that designation in this
Agreement.
2.3 In this Agreement, unless the contrary intention appears, words
importing the singular include the plural and vice versa and words importing
gender shall include all genders.
2.4 In the event that the date on which any action is required to be taken
hereunder by any of the parties is not a Business Day in the place where the
action is required to be taken, such action shall be required to be taken on
the next succeeding day which is a Business Day in such place.
2.5 References in this Agreement to any statute or sections thereof shall
include such statute as amended or substituted and any regulations promulgated
thereunder in effect as of the date hereof.
2.6 Unless otherwise stated, all references in this Agreement to sums of
money are expressed in lawful money of Canada.
2.7 All representations, warranties, covenants and opinions in or
contemplated by this Agreement as to the enforceability of any covenant,
agreement or document are subject to enforceability being limited by applicable
bankruptcy, insolvency, reorganization and other laws affecting creditors'
rights generally and the discretionary nature of certain remedies (including
specific performance and injunctive relief).
2.8 Each reference herein to the knowledge of a party means, unless
otherwise specified, the knowledge of such party's senior officers following
due inquiry.
ARTICLE 3
Arrangement
3.1 Subject to the terms and conditions hereof, as soon as reasonably
practicable, PPL shall apply to the Court pursuant to Section 128 of the NBBCA
for an order approving the Arrangement and in connection with such application
shall:
(a) forthwith file, proceed and diligently process an application for an
Interim Order under Section 128(4) of the Act providing for, among other
things the calling and holding of the Pendaries Meeting; and
(b) subject to obtaining the approvals as may be directed by the Court
in the Interim Order, take the steps necessary to submit the Arrangement to
the Court and apply for the Final Order.
3.2 The Arrangement shall become effective on the Effective Date.
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ARTICLE 4
Representations and Warranties
4.1 PPL represents and warrants to UPC that:
(a) each of PPL and the Pendaries Subsidiaries is duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own or lease
its property and assets and to carry on its business as now conducted by it
and is duly qualified to carry on business in each jurisdiction in which
the nature of its business or the property or assets owned or leased by it
makes such qualification necessary;
(b) PPL has all requisite power and authority to enter into this
Agreement and all documents to be delivered pursuant hereto and, subject to
the terms hereof, to perform its obligations hereunder and thereunder;
(c) the execution and delivery of this Agreement and all documents to be
delivered pursuant hereto, the performance of the terms hereof and thereof
and the consummation of the transactions contemplated herein and therein do
not and will not, subject to fulfillment of the conditions hereof:
(i) result in the breach of or violate any term or provision of the
articles, by-laws or governing documents of PPL or any of the Pendaries
Subsidiaries, or
(ii) conflict with, result in a breach of, constitute a default
under, or accelerate or permit the acceleration of the performance
required by, any agreement, instrument, licence, permit or authority to
which PPL or any of the Pendaries Subsidiaries is a party or by which
they are bound or to which any of their property is subject; or
(iii) result in the creation of any material Encumbrance upon the
Pendaries Assets other than Pendaries Permitted Encumbrances; or
(iv) give to any person any material interest or right, including
right of purchase, termination, cancellation or acceleration under any
such agreement, instrument, license, permit or authority, provided that
PPL makes no representation or warranty with respect to the rights, if
any, which may arise in favour of third parties pursuant to the Sino-
American Property Agreements as a result of the execution and delivery
of this Agreement or the performance of the terms hereof or the
consummation of the transactions contemplated hereby;
(v) violate any provision of law or administrative regulation or any
judicial or administrative order, award, judgment or decree applicable
to any of PPL, the Pendaries Subsidiaries, the Pendaries Common Shares
or the Pendaries Assets; or
(vi) require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Authority or any
parties to the Title Documents relating to the Pendaries Assets, except
(A) pursuant to U.S. Securities Laws, (B) the Interim Order and the
Final Order, or (C) where the failure to obtain such consent, approval,
authorization or permit, or to make such filing or notification, would
not in the aggregate have a Material Adverse Effect on Pendaries or
prevent, materially hinder, or materially make more burdensome the
consummation of the transactions contemplated by this Agreement, or (D)
such filings and approvals as may be required under the "blue sky",
takeover or securities laws of various states.
(d) this Agreement has been duly authorized, executed and delivered by
PPL and this Agreement does constitute valid, legal and binding obligations
of PPL enforceable in accordance with its terms;
(e) PPL has not taken any action, directly or indirectly, with the
intention of adversely affecting the approval of the Arrangement or the
completion of the transactions contemplated hereby;
(f) other than as disclosed in writing to UPC at or prior to the date
hereof or as disclosed in the Pendaries Financial Statements, there are no
actions, claims, suits, other legal, administrative or arbitration
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<PAGE>
proceedings or government investigations commenced, or to the knowledge of
Pendaries contemplated, at law or in equity or before or by any court or
other Governmental Authority and which involve or affect Pendaries,
including, without limitation, the title to, or ownership of, the Pendaries
Assets, and none of PPL or any of the Pendaries Subsidiaries is subject to
any outstanding order, writ, injunction or decree having, or which could
reasonably be foreseen to have, a Material Adverse Effect on Pendaries;
(g) the authorized capital of PPL consists of an unlimited number of
Pendaries Common Shares, of which 9,225,970 Pendaries Common Shares are
issued and outstanding as of the date hereof and all such issued and
outstanding Pendaries Common Shares are fully paid and non-assessable as of
the date hereof;
(h) the Pendaries Disclosure Statement sets forth the name, the number
of shares of authorized capital stock and the number of issued and
outstanding shares of capital stock of each direct or indirect Subsidiary
of PPL. Except as set forth in the Pendaries Disclosure Statement, all of
the outstanding shares of capital stock of each such Subsidiary are owned,
directly or indirectly, by PPL, beneficially and of record. Except as
disclosed in the Pendaries Disclosure Schedule, all of such shares of
capital stock of the Pendaries Subsidiaries are owned free and clear of any
Encumbrances, and are not subject to any agreements or understandings among
any persons with respect to the voting or transfer of such shares. There
are no outstanding subscriptions, options, convertible securities, warrants
or claims of any kind issued or granted by or binding on Pendaries to
purchase or otherwise acquire any security of or equity interest in any of
such Pendaries Subsidiaries. All of the outstanding shares of capital stock
of each Pendaries Subsidiary have been duly authorized and validly issued
and are fully paid and non-assessable, and none has been issued in
violation of the preemptive rights of any stockholder;
(i) PPL has no agreements of any nature to acquire any Subsidiary other
than the Pendaries Subsidiaries, or to acquire or lease any other business
operations out of the ordinary course and is not a party to or bound by any
agreement of guarantee, indemnification, assumption endorsement or similar
commitment in respect of the obligations, liabilities (contingent or
otherwise) or indebtedness of any other person, firm or corporation other
than pursuant to agreements which are standard or customary in the oil and
gas industry;
(j) other than the Pendaries Options, no person has any agreement,
option, right or privilege (including, without limitation, whether by law,
preemptive right, contract or otherwise) to purchase, subscribe for,
convert into, exchange for or otherwise require the issuance of any of the
unissued shares of PPL or of any of the Pendaries Subsidiaries;
(k) since December 31, 1999, PPL has:
(i) not amended its articles, by-laws or other governing documents
and there are no resolutions, special resolutions or other proceedings
pending for any amendment thereto except as may be desirable in respect
of the transactions contemplated by this Agreement;
(ii) not declared, paid or set aside for payment any dividends
whether by cash, shares or otherwise or made or authorized or proposed
other distributions of any kind and no repayments of capital have been
made by PPL (other than repayments of indebtedness at or below the
amount at which such indebtedness is shown on the Pendaries Financial
Statements) since December 31, 1999 nor reduced its stated capital in
any manner or purchased, acquired, cancelled or redeemed or agreed to
purchase, acquire, cancel or redeem any of its outstanding shares other
than as contemplated by this Agreement;
(l) since December 31, 1999, other than as has been publicly disclosed
by PPL or set out in the Pendaries Disclosure Statement, Pendaries has:
(i) conducted its business in all material respects in the ordinary
course;
(ii) not suffered any Material Adverse Change;
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<PAGE>
(iii) not made any change in its accounting principles and practices
as theretofore applied including, without limitation, the basis upon
which its assets and liabilities are recorded on its books and its
earnings and profits and losses are ascertained; and
(iv) maintained in effect salary and other compensation levels in
accordance with its then existing salary administration programme and
has not authorized or paid or agreed to pay any bonus or similar
payment to any officer or director or person providing to Pendaries
services similar in nature to employment services or made any material
change in respect of employment or contract terms, as the case may be,
of any such officer, director or person and Pendaries is not presently
indebted to any of its present or former shareholders, directors or
officers in any material respect except as set forth in the Pendaries
Financial Statements or as disclosed in writing to UPC at or prior to
the date hereof;
(m) the Pendaries Financial Statements have been prepared in accordance
with generally accepted accounting principles applicable in Canada applied
on a basis consistent with that of prior periods (except as stated therein)
and present fairly the financial position of Pendaries as of the date
provided therein and the results of its operations and the changes in
financial position for the periods then ended and in all material respects
all accounts receivable included in the Pendaries Financial Statements, as
except to the extent collected since the date hereof, are bona fide,
collectible and not subject to set-off or counterclaim;
(n) Pendaries has duly and timely filed, in proper form, correct and
complete Tax Returns in respect of Taxes under all applicable federal,
provincial, state or local Tax legislation of Canada or any foreign country
having jurisdiction over Pendaries, for all prior periods in respect of
which such filings have heretofore been required, and all Taxes shown
thereon and all Taxes owing with respect to the current period and any
previous period have been paid or accrued on the books of Pendaries and
there are no outstanding agreements or waivers extending the statutory
period of limitations applicable to any Tax Return for any period, and all
payments by Pendaries to any non-resident of Canada have been made in
accordance with all applicable legislation in respect of withholding tax;
Pendaries is not aware of any contingent Tax liabilities or any grounds for
reassessment; there are no assessments or reassessments respecting
Pendaries pursuant to which there are amounts owing or discussions in
respect thereof with any taxing authority other than as disclosed in
writing to UPC at or prior to the date hereof; Pendaries has not acquired
property from, or disposed of property to, any Person with whom it does not
deal at arm's length (as that term is construed under the Income Tax Act)
for proceeds less than the fair market value thereof; Pendaries has no
outstanding loans or indebtedness incurred by directors, former directors,
officers, shareholders and/or employees or by any Person not dealing at
arm's length (as that term is construed under the Income Tax Act) with any
of the foregoing; there are no circumstances existing which could result in
the application of section 78, section 79, or sections 80 to 80.04 of the
Income Tax Act or any equivalent provincial provision, to Pendaries;
Pendaries has not claimed nor will claim any reserve under any provision of
the Income Tax Act or any equivalent provincial provision, if any such
amount could be included in the income of Pendaries for any period ending
after the date hereof; Pendaries has withheld from each payment made to any
of its officers, directors, former directors, former employees and
employees the amount of all Taxes and other deductions required to be
withheld therefrom and has paid the same to the proper tax or other
authority within the time required under any applicable Tax legislation;
Pendaries has remitted to the appropriate tax authority when required by
law to do so all amounts collected by it on account of the GST; and
Pendaries is a "taxable Canadian Corporation" for the purposes of the
Income Tax Act;
(o) all filings made by Pendaries under which Pendaries has received or
is entitled to government incentives, have been made in accordance, in all
material respects, with all applicable legislation and contain no
misrepresentations of material fact or omit to state any material fact
which could cause any amount previously paid to Pendaries or previously
accrued on the accounts of Pendaries to be recovered or disallowed;
(p) other than as disclosed in writing to UPC at or prior to the date
hereof, Pendaries is not a party to any written contracts of any nature,
including but not limited to, employment or material consulting
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<PAGE>
agreements or collective bargaining agreements and there are no currently
existing employment benefit plans, arrangements or agreements of a material
nature, service contracts, leases and rental agreements that are in excess
of $20,000 remaining on the term of the said contract and to which
Pendaries is a party or by which it is bound;
(q) PPL does not make any representations or warranties, express or
implied, as to Pendaries' title to the Pendaries Assets, but does represent
and warrant that:
(i) the Pendaries Assets are free and clear of Encumbrances created
by, through or under Pendaries, excepting only the Pendaries Permitted
Encumbrances;
(ii) the concessions, petroleum contracts, deeds of assignments,
permits, licenses and other contracts necessary or appropriate to
operate the Pendaries Assets are, to the best of PPL's knowledge,
currently being operated, or anticipated to be operated, in full
compliance with all applicable laws, rules, regulations and orders of
all federal, state and local governmental bodies, authorities and
agencies and in conformity in all material respects for the provisions
of the concessions, petroleum contracts and other contracts; and
(iii) the concessions, petroleum contracts and other contracts are
in force and effect, except for such failures as would not,
individually or in the aggregate, have a Material Adverse Effect on the
value or operation of the Pendaries Assets, taken as a whole;
(iv) Pendaries is not in default, nor has Pendaries been informed of
any alleged default or received any notice of default, affecting or
capable of affecting the Pendaries Assets, or any of them, in an
adverse manner;
(v) except as disclosed or reflected in the Pendaries Reports,
Pendaries' interests in the Pendaries Assets are not subject to
reduction by rights of conversion or other alteration or election in
favor of a third party, created by, through or under Pendaries;
(vi) all rentals, royalties, taxes and other payments due under each
of the concessions, petroleum contracts and other contracts have been
timely and fully paid, except for such amounts that are being held in
suspense as a result of title issues and that do not provide any third
party with a right to cancel such contracts and such amounts as would
not, individually or in aggregate, have a Material Adverse Effect on
Pendaries; and
(vii) the estimates of Pendaries' oil and gas reserves set out in
the Pendaries Reports were prepared in accordance with standard
geological and engineering methods generally accepted in the oil and
gas industry. The working interest, net revenue interest and historical
factual information supplied by Pendaries to RSC in connection with the
preparation of the Pendaries Reports did not contain a
Misrepresentation. The oil and gas prices utilized in the Pendaries
Reports are not intended to be representative of historical or
prevailing prices existing as of the effective date or actual date of
the Pendaries Reports;
(r) other than as disclosed in writing to UPC at or prior to the date
hereof, to the best of the knowledge of Pendaries, Pendaries is not in
material violation of any applicable federal, provincial, municipal or
local laws, regulations, orders, government decrees or ordinances with
respect to environmental, health or safety matters (collectively
"Environmental Laws") and, for greater certainty and without limiting the
generality of the foregoing, but subject to the foregoing qualifications:
(i) Pendaries has operated its business at all times and has
received, handled, used, stored, treated, shipped and disposed of all
contaminants in strict compliance with all Environmental Laws;
(ii) there have been no unrectified spills, releases, deposits or
discharges of hazardous or toxic substances, contaminants or wastes on
any of the real property owned or leased by Pendaries or under its
respective control, nor to the best of PPL's knowledge has any such
real property been used at any time by any person as a landfill or
waste disposal site;
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(iii) there have been no releases, deposits or discharges, in
violation of Environmental Laws, of any hazardous or toxic substances,
contaminants or wastes into the earth, air or into any body of water or
any municipal or other sewer or drain water systems by Pendaries;
(iv) no orders, directions or notices have been issued and remain
outstanding pursuant to any Environmental Laws relating to the business
or assets of Pendaries;
(v) Pendaries has not failed to report to the proper Governmental
Authority the occurrence of any event which is required to be so
reported by any Environmental Laws; and
(vi) Pendaries holds all licences, permits and approvals required
under any Environmental Laws in connection with the operation of its
business and the ownership and use of its assets, all such licences,
permits and approvals are in full force and effect, and Pendaries has
not received any notification pursuant to any Environmental Laws that
any work, repairs, construction or capital expenditures are required to
be made by it as a condition of continued compliance with any
Environmental Laws, or any licence, permit or approval issued pursuant
thereto, or that any licence, permit or approval referred to above is
about to be reviewed, made subject to limitation or conditions,
revoked, withdrawn or terminated;
(s) PPL is a reporting issuer or the equivalent in the Provinces of
British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova
Scotia and Newfoundland, and has not been notified of any default of any
requirement of any applicable securities legislation, regulations, orders,
notices or policies;
(t) PPL is current with respect to all filings required by the TSE and
the AMEX and the Pendaries Common Shares which are issued and outstanding
as of the date hereof are listed and posted for trading on the TSE and the
AMEX and are not subject to any cease trading or trading suspension order;
(u) PPL has furnished UPC with a true and complete copy of each report,
schedule, registration statement and definitive proxy statement (including
exhibits) filed by PPL with the SEC since December 31, 1998 (the "Pendaries
SEC Documents"), which are all the documents (other than preliminary
material) that PPL was required to file with the SEC since such date,
except where the failure to file any such documents would not cause PPL to
be in material noncompliance with U.S. Securities Laws. As of their
respective dates, (i) the Pendaries SEC Documents complied in all material
respects with the requirements of the U.S. Securities Laws applicable to
such Pendaries SEC Documents and (ii) none of the Pendaries SEC Documents
contained any Misrepresentation. Except to the extent information contained
in any Pendaries SEC Document has been revised or superseded by a later-
filed Pendaries SEC Document, none of the Pendaries SEC Documents currently
contains any Misrepresentation;
(v) as of the respective dates of the Pendaries SEC Documents, (i) the
financial statements of PPL included in the SEC Documents complied as to
form in all material respects with applicable accounting requirements and
the published results and regulations of the SEC with respect thereto, (ii)
were prepared in all material respects in accordance with Canadian
generally accepted accounting principles applied on a consistent basis
during the periods involved (except as noted therein or as may be permitted
by the rules of the SEC) and (iii) fairly presented in all material
respects the consolidated financial position of PPL and the Pendaries
Subsidiaries as of the dates thereof and the consolidated results of their
operations and changes in financial position for the periods then ended
(subject, in the case of any unaudited interim financial statements, to
normal year-end adjustments, none of which are or were material);
(w) the Pendaries Proxy Statement will be distributed in accordance with
and will comply as to form in all material respects with U.S. Securities
Laws and, if applicable, will include the information required by Rule 13e-
3 of the Exchange Act, and PPL will otherwise comply with Rule 13e-3. None
of the information relating to PPL and the Pendaries Subsidiaries included
in the Pendaries Proxy Statement shall, at the time the Pendaries Proxy
Statement is mailed or at the time of the Pendaries Meeting, contain any
Misrepresentation, except that no representation is being made by PPL with
respect to information supplied or approved in writing by UPC or any
affiliate of UPC specifically for inclusion in the Pendaries Proxy
Statement;
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(x) as of the date hereof, no "person" as defined in Section 801.1(a)(1)
of the Rules, Regulations, Statements and Interpretations (in this
paragraph the "HSR Rules") under the Hart-Scott-Rodino Anti-Trust
Improvements Act of 1976 (16 CFR 801 et.seq.) in which PPL is included has
annual net sales of $100,000,000 or more or total assets of $100,000,000 or
more, as determined in accordance with Section 801.11 of the HSR Rules;
(y) all information furnished by PPL for inclusion in the Ultra Proxy
Solicitation Material is or will be, as of the earlier of the date it
purports to be given at and the date of the Ultra Proxy Solicitation
Material, true and complete in all material respects and contains no
Misrepresentations; and
(z) the board of directors of PPL has (A) determined unanimously that as
of the date hereof that the Arrangement is fair to the holders of Pendaries
Common Shares and is in the best interests of PPL; and (B) determined as of
the date hereof to unanimously recommend that the holders of Pendaries
Common Shares vote in favour of the Arrangement.
4.1.1 PPL makes no representations or warranties to UPC in addition to those
expressly enumerated in subsection 4.1. Except and to the extent provided in
subsection 4.1, PPL does not warrant title to the Pendaries Assets or make
representations or warranties with respect to: (i) the quantity, quality or
recoverability of petroleum substances respecting the Pendaries Assets; (ii)
any estimates of the value of the Pendaries Assets or the revenues applicable
to future production from the Pendaries Assets; (iii) any engineering,
geological or other interpretations or economic evaluations respecting the
Pendaries Assets; (iv) the rates of production of petroleum substances from the
Pendaries Assets; (v) the quality, condition or serviceability of the Pendaries
Assets; or (vi) the suitability of their use for any purpose. Without
restricting the generality of the foregoing, but subject always to the
provisions herein, UPC acknowledges that it has made its own independent
investigation, analysis, evaluation and inspection of the interests of PPL in
the Pendaries Assets and the state and condition thereof and that it has relied
solely on such investigation, analysis, evaluation and inspection as to its
assessment of the condition, quantum and value of the Pendaries Assets.
4.1.2 Except with respect to the representations and warranties in
subsection 4.1 or in the event of fraud, UPC forever releases and discharges
PPL and its directors, officers, servants, agents and employees from any claims
and all liability to UPC or UPC's assigns and successors, as a result of the
use or reliance upon advice, information or materials pertaining to the
Pendaries Assets which was delivered or made available to UPC by Pendaries or
its directors, officers, servants, agents or employees prior to or pursuant to
this Agreement, including, without limitation, any evaluations, projections,
reports and interpretive or non-factual materials prepared by or for Pendaries,
or otherwise in Pendaries' possession.
4.2 UPC represents and warrants to PPL that:
(a) each of UPC and the Ultra Subsidiaries is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own or lease its
property and assets and to carry on its business as now conducted by it and
is duly qualified to carry on business in each jurisdiction in which the
nature of its business or property or assets owned or leased by it makes
such qualification necessary;
(b) UPC has all requisite power and authority to enter into this
Agreement and all documents to be delivered pursuant hereto and, subject to
the terms hereof, to perform its obligations hereunder and thereunder;
(c) the execution and delivery of this Agreement and all documents to be
delivered pursuant hereto, the performance of the terms hereof and thereof
and the consummation of the transactions contemplated herein and therein do
not and will not subject to fulfillment of the conditions hereof:
(i) result in the breach of or violate any term or provision of the
articles, by-laws or governing documents of UPC or any of the Ultra
Subsidiaries; or
(ii) conflict with, result in a breach of, constitute a default
under, or accelerate or permit the acceleration of the performance
required by, any agreement, instrument, licence, permit or authority
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<PAGE>
to which UPC or any of the Ultra Subsidiaries is a party or by which
any of them is bound or to which their property is subject; or
(iii) result in the creation of any material Encumbrance upon the
Ultra Assets other than Ultra Permitted Encumbrances; or
(iv) give to any person any material interest or right, including
right of purchase, termination, cancellation or acceleration under any
such agreement, instrument, license, permit or authority;
(v) violate any provision of law or administrative regulation or any
judicial or administrative order, award, judgment or decree applicable
to any of UPC, the Ultra Subsidiaries, the Ultra Common Shares or the
Ultra Assets; or
(vi) require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Authority or any
parties to the Title Documents relating to the Ultra Assets, except (A)
pursuant to Canadian Securities Laws and U.S. Securities Laws, (B) the
Interim Order and the Final Order, (C) the approval of the TSE, (D)
where the failure to obtain such consent, approval, authorization or
permit, or to make such filing or notification, would not in the
aggregate have a Material Adverse Effect on Pendaries or prevent,
materially hinder, or materially make more burdensome the consummation
of the transactions contemplated by this Agreement, or (E) such filings
and approvals as may be required under the "blue sky", takeover or
securities laws of various states.
(d) this Agreement has been duly authorized, executed and delivered by
UPC and this Agreement does constitute valid, legal and binding obligations
of UPC enforceable in accordance with its terms; the execution and delivery
of this Agreement by UPC and the performance by UPC of the transactions
contemplated by this Agreement have been duly authorized by its Board of
Directors and, subject to receipt of Ultra Shareholder Approval, no other
corporate proceedings on its part are necessary to authorize this Agreement
or the transactions contemplated hereby;
(e) UPC has not taken any action, directly or indirectly, with the
intention of adversely affecting the approval of the Arrangement or the
completion of the transactions contemplated hereby;
(f) other than as disclosed in writing to PPL at or prior to the date
hereof or as disclosed in the Ultra Financial Statements, there are no
actions, claims, suits, other legal, administrative or arbitration
proceedings or government investigations commenced, or to the knowledge of
UPC contemplated, at law or in equity or before or by any court or other
Governmental Authority and which involve or affect UPC, including, without
limitation, the title to, or ownership of, the Ultra Assets, and none of
UPC or any of the Ultra Subsidiaries is subject to any outstanding order,
writ, injunction or decree having, or which could reasonably be foreseen to
have, a Material Adverse Effect on Ultra;
(g) the authorized share capital of UPC consists of an unlimited number
of Ultra Common Shares, of which 56,944,762 Ultra Common Shares are issued
and outstanding as of the date hereof and all such issued and outstanding
Ultra Common Shares are fully paid and non-assessable as of the date
hereof;
(h) the Ultra Disclosure Statement sets forth the name, the number of
shares of authorized capital stock and the number of issued and outstanding
shares of capital stock of each direct or indirect Subsidiary of UPC.
Except as set forth in the Ultra Disclosure Statement, all of the
outstanding shares of capital stock of each such Subsidiary are owned,
directly or indirectly, by UPC, beneficially and of record. Except as
disclosed in the Ultra Disclosure Schedule, all of such shares of capital
stock of the Ultra Subsidiaries are owned free and clear of any
Encumbrances, and are not subject to any agreements or understandings among
any persons with respect to the voting or transfer of such shares. There
are no outstanding subscriptions, options, convertible securities, warrants
or claims of any kind issued or granted by or binding on Ultra to purchase
or otherwise acquire any security of or equity interest in any of such
Ultra Subsidiaries. All of the outstanding shares of capital stock of each
Ultra Subsidiary have been duly authorized and validly issued and are fully
paid and non-assessable, and none has been issued in violation of the
preemptive rights of any stockholder;
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(i) as of the date hereof, UPC has no agreements of any nature to
acquire any Subsidiary other than the Ultra Subsidiaries, or to acquire or
lease any other business operations out of the ordinary course and is not a
party to or bound by any agreement of guarantee, indemnification,
assumption endorsement or similar commitment in respect of the obligations,
liabilities (contingent or otherwise) or indebtedness of any other person,
firm or corporation other than pursuant to agreements which are standard or
customary in the oil and gas industry;
(j) the Ultra Common Shares to be issued pursuant to the Arrangement
will, upon issuance, be duly and validly issued as fully paid and non-
assessable shares of UPC;
(k) other than the Ultra Options and rights to acquire Ultra Common
Shares which may be granted after the date hereof pursuant to the 2000
Share Incentive Plan of UPC, no person has any agreement, option, right or
privilege (including, without limitation, whether by law, preemptive right,
contract or otherwise) to purchase, subscribe for, convert into, exchange
for or otherwise require the issuance of any of the unissued shares of UPC
or any of the Ultra Subsidiaries;
(l) since December 31, 1999:
(i) except as disclosed to PPL, UPC has not amended its articles,
by-laws or other governing documents, and there are no resolutions,
special resolutions or other proceedings pending for any amendment
except as may be desirable in respect of the transactions contemplated
by this Agreement;
(ii) except as disclosed to PPL, UPC has not declared, paid or set
aside for payment any dividends whether by cash, shares or otherwise or
made, authorized or proposed other distributions of any kind, and no
repayments of capital have been made by UPC (other than repayment of
indebtedness at or below the amount at which such indebtedness is shown
on the Ultra Financial Statements) since December 31, 1999, nor reduced
its stated capital in any manner or purchased, acquired, cancelled or
redeemed or agreed to purchase, acquire, cancel or redeem any of its
outstanding shares;
(m) since December 31, 1999, other than as has been publicly disclosed
by UPC or set out in the Ultra Disclosure Statement, Ultra has:
(i) conducted its business in all material respects in the ordinary
course;
(ii) not suffered any Material Adverse Change; and
(iii) not made any change in its accounting principles and practices
as theretofore applied including, without limitation, the basis upon
which its assets and liabilities are recorded on its books and its
earnings and profits and losses are ascertained;
(n) the Ultra Financial Statements have been prepared in accordance with
generally accepted accounting principles applicable in Canada applied on a
basis consistent with that of prior periods (except as stated therein) and
present fairly the financial position of UPC as of the date provided
therein and the results of its operations and the changes in financial
position for the periods then ended and in all material respects all
accounts receivable included in the Ultra Financial Statements, except to
the extent collected since the date thereof; are bona fide, collectible and
not subject to set-off or counterclaim;
(o) Ultra has duly and timely filed, in proper form, correct and
complete Tax Returns in respect of Taxes under all applicable federal,
provincial, state or local Tax legislation of Canada or any foreign country
having jurisdiction over Ultra, for all prior periods in respect of which
such filings have heretofore been required, and all Taxes shown thereon and
all Taxes owing with respect to the current period and any previous period
have been paid or accrued on the books of Ultra and there are no
outstanding agreements or waivers extending the statutory period of
limitations applicable to any Tax Return for any period, and all payments
by Ultra to any non-resident of Canada have been made in accordance with
all applicable legislation in respect of withholding tax; Ultra is not
aware of any contingent Tax liabilities or any grounds for reassessment;
there are no assessments or reassessments respecting Ultra pursuant to
which there are amounts owing or discussions in respect thereof with any
taxing authority other than as disclosed
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in writing to UPC at or prior to the date hereof; Ultra has not acquired
property from, or disposed of property to, any Person with whom it does not
deal at arm's length (as that term is construed under the Income Tax Act)
for proceeds less than the fair market value thereof; Ultra has no
outstanding loans or indebtedness incurred by directors, former directors,
officers, shareholders and/or employees or by any Person not dealing at
arm's length (as that term is construed under the Income Tax Act) with any
of the foregoing; there are no circumstances existing which could result in
the application of section 78, section 79, or sections 80 to 80.04 of the
Income Tax Act or any equivalent provincial provision, to Ultra; Ultra has
not claimed nor will claim any reserve under any provision of the Income
Tax Act or any equivalent provincial provision, if any such amount could be
included in the income of Ultra for any period ending after the date
hereof; Ultra has withheld from each payment made to any of its officers,
directors, former directors, former employees and employees the amount of
all Taxes and other deductions required to be withheld therefrom and has
paid the same to the proper tax or other authority within the time required
under any applicable Tax legislation; Ultra has remitted to the appropriate
tax authority when required by law to do so all amounts collected by it on
account of the GST; and Ultra is a "taxable Canadian Corporation" for the
purposes of the Income Tax Act;
(p) all filings made by Ultra under which it has received or is entitled
to government incentives, have been made in accordance, in all material
respects, with all applicable legislation and contain no misrepresentations
of material fact or omit to state any material fact which could cause any
amount previously paid to Ultra or previously accrued on the accounts of
Ultra to be recovered or disallowed;
(q) UPC does not make any representations or warranties, express or
implied, as to Ultra's title to the Ultra Assets, but does represent and
warrant that:
(i) the Ultra Assets are free and clear of Encumbrances created by,
through or under Ultra, excepting only the Ultra Permitted
Encumbrances;
(ii) the leases, rights-of-ways, surface agreements, easements,
servitudes, permits, licenses and other contracts necessary or
appropriate to operate the Ultra Assets (in this subsection the "Ultra
Leases") are, to the best of UPC's knowledge, currently being operated,
or anticipated to be operated, in full compliance with all applicable
laws, rules, regulations and orders of all federal, state and local
governmental bodies, authorities and agencies and in conformity in all
material respects for the provisions of the leases; and
(iii) the Ultra Leases are in force and effect, except for such
failures as would not, individually or in the aggregate, have a
Material Adverse Effect on the value or operation of the Ultra Assets,
taken as a whole;
(iv) Ultra is not in default, nor has Ultra been informed of any
alleged default or received any notice of default, affecting or capable
of affecting the Ultra Assets, or any of them, in an adverse manner;
(v) except as disclosed or reflected in the Ultra Reports, Ultra's
interests in the Ultra Assets are not subject to reduction by rights of
conversion or other alteration or election in favor of a third party,
created by, through or under Ultra;
(vi) all rentals, royalties, taxes and other payments due under each
of the Ultra Leases have been timely and fully paid, except for such
amounts that are being held in suspense as a result of title issues and
that do not provide any third party with a right to cancel such Ultra
Leases and such amounts as would not, individually or in aggregate,
have a Material Adverse Effect on Ultra; and
(vii) the estimates of Ultra's oil and gas reserves set out in the
Ultra Reports were prepared in accordance with standard geological and
engineering methods generally accepted in the oil and gas industry. The
working interest, net revenue interest and historical factual
information supplied by Ultra to NSA in connection with the preparation
of the Ultra Reports did not contain a Misrepresentation. The oil and
gas prices utilized in the Ultra Reports are not intended to be
representative of historical or prevailing prices existing as of the
effective date or actual date of the Ultra Reports;
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(r) other than as disclosed in writing to PPL at or prior to the date
hereof, to the best of the knowledge of Ultra, Ultra is not in material
violation of any applicable Environmental Laws and, for greater certainty
and without limiting the generality of the foregoing, but subject to the
foregoing qualifications:
(i) Ultra has operated its business at all times and has received,
handled, used, stored, treated, shipped and disposed of all
contaminants in strict compliance with all Environmental Laws;
(ii) there have been no unrectified spills, releases, deposits or
discharges of hazardous or toxic substances, contaminants or wastes on
any of the real property owned or leased by Ultra or under its
respective control, nor to the best of UPC's knowledge has any such
real property been used at any time by any person as a landfill or
waste disposal site;
(iii) there have been no releases, deposits or discharges, in
violation of Environmental Laws, of any hazardous or toxic substances,
contaminants or wastes into the earth, air or into any body of water or
any municipal or other sewer or drain water systems by Ultra;
(iv) no orders, directions or notices have been issued and remain
outstanding pursuant to any Environmental Laws relating to the business
or assets of Ultra;
(v) Ultra has not failed to report to the proper Governmental
Authority the occurrence of any event which is required to be so
reported by any Environmental Laws; and
(vi) Ultra holds all licences, permits and approvals required under
any Environmental Laws in connection with the operation of its business
and the ownership and use of its assets, all such licences, permits and
approvals are in full force and effect, and Ultra has not received any
notification pursuant to any Environmental Laws that any work, repairs,
construction or capital expenditures are required to be made by it as a
condition of continued compliance with any Environmental Laws, or any
licence, permit or approval issued pursuant thereto, or that any
licence, permit or approval referred to above is about to be reviewed,
made subject to limitation or conditions, revoked, withdrawn or
terminated;
(s) Ultra has made available to NSA, prior to the issuance of the Ultra
Reports, all information material to an adequate determination of its oil
and gas reserves and non-reserve lands, none of such information contained
a Misrepresentation and UPC has no knowledge of any material adverse change
to the oil and gas reserves or non-reserve lands of Ultra since the
effective date of the Ultra Reports; and
(t) UPC is current with respect to all filings required by the TSE, and
the Ultra Common Shares which are issued and outstanding as of the date
hereof are listed and posted for trading on the TSE and are not subject to
any cease trading or trading suspension order;
(u) UPC has furnished PPL with a true and complete copy of each report
(including exhibits) filed by UPC with the Ontario Securities Commission
since June 30, 1998 (the "Ultra OSC Documents"), which are all the
documents (other than preliminary material) that UPC was required to file
with the Ontario Securities Commission since such date, except where the
failure to file any such documents would not cause UPC to be in material
noncompliance with Ontario Securities Laws. As of their respective dates,
(i) the Ultra OSC Documents complied in all material respects with the
requirements of the Ontario Securities Laws applicable to such Ultra OSC
Documents and (ii) none of the Ultra OSC Documents contained any
Misrepresentation. Except to the extent information contained in any Ultra
OSC Document has been revised or superseded by a later-filed Ultra OSC
Document, none of the Ultra OSC Documents currently contains any
Misrepresentation;
(v) as of the respective dates of the Ultra OSC Documents, (i) the
financial statements of UPC included in the Ultra OSC Documents complied as
to form in all material respects with applicable accounting requirements
and the published results and regulations of the Ontario Securities
Commission with respect thereto, (ii) were prepared in all material
respects in accordance with Canadian generally accepted accounting
principles applied on a consistent basis during the periods involved
(except as noted
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therein or as may be permitted by the rules of the Ontario Securities
Commission) and (iii) fairly presented in all material respects the
consolidated financial position of UPC and the Ultra Subsidiaries as of the
dates thereof and the consolidated results of their operations and changes
in financial position for the periods then ended (subject, in the case of
any unaudited interim financial statements, to normal year-end adjustments,
none of which are or were material);
(w) UPC is and has for at least the previous 12 months been, a
"reporting issuer" in the Provinces of British Columbia and Ontario, and
has not been notified of any default of any requirement of any applicable
securities legislation, regulations, orders, notices or policies;
(x) the Ultra Proxy Solicitation Material will be distributed in
accordance with and will comply as to form in all material respects with
Ontario Securities Laws. None of the information relating to UPC and the
Ultra Subsidiaries included in the Ultra Proxy Solicitation Material shall,
at the time the Ultra Proxy Solicitation Material is mailed or at the time
of the Ultra Meeting, contain any Misrepresentation, except that no
representation is being made by UPC with respect to information supplied or
approved in writing by PPL or any affiliate of PPL specifically for
inclusion in the Ultra Proxy Solicitation Material;
(y) all information furnished by UPC for inclusion in the Pendaries
Proxy Statement is or will be, as of the earlier of the date it purports to
be given at and the date of the Pendaries Proxy Statement, true and
complete in all material respects and contains no Misrepresentations;
(z) the board of directors of UPC determined as of October 6, 2000,
which determination has not been withdrawn, amended or modified up to the
date hereof, to unanimously recommend that the holders of Pendaries Common
Shares vote in favour of the Arrangement.
4.2.1 UPC makes no representations or warranties to PPL in addition to those
expressly enumerated in subsection 4.2. Except and to the extent provided in
subsection 4.2, UPC does not warrant title to the Ultra Assets or make
representations or warranties with respect to: (i) the quantity, quality or
recoverability of petroleum substances respecting the Ultra Assets; (ii) any
estimates of the value of the Ultra Assets or the revenues applicable to future
production from the Ultra Assets; (iii) any engineering, geological or other
interpretations or economic evaluations respecting the Ultra Assets; (iv) the
rates of production of petroleum substances from the Ultra Assets; (v) the
quality, condition or serviceability of the Ultra Assets; or (vi) the
suitability of their use for any purpose. Without restricting the generality of
the foregoing, but subject always to the provisions herein, PPL acknowledges
that it has made its own independent investigation, analysis, evaluation and
inspection of the interests of UPC in the Ultra Assets and the state and
condition thereof and that it has relied solely on such investigation,
analysis, evaluation and inspection as to its assessment of the condition,
quantum and value of the Ultra Assets.
4.2.2 Except with respect to the representations and warranties in
subsection 4.2 or in the event of fraud, PPL forever releases and discharges
UPC and the Ultra Subsidiaries and their directors, officers, servants, agents
and employees from any claims and all liability to PPL or PPL's assigns and
successors, as a result of the use or reliance upon advice, information or
materials pertaining to the Ultra Assets which was delivered or made available
to PPL by Ultra or their directors, officers, servants, agents or employees
prior to or pursuant to this Agreement, including, without limitation, any
evaluations, projections, reports and interpretive or non-factual materials
prepared by or for UPC, or otherwise in UPC's possession.
ARTICLE 5
Covenants
5.1 PPL covenants and agrees that, until the transactions contemplated
herein have closed or this Agreement has been terminated, whichever is the
earlier, PPL and each of the Pendaries Subsidiaries:
(a) will conduct its operations according to its ordinary and usual
course of business and consistent with past practices, and will use its
reasonable commercial efforts to fulfil the conditions set forth herein to
the extent the fulfillment of the same is within the control of PPL and/or
the Pendaries Subsidiaries;
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(b) will not without the prior written consent of UPC:
(i) make any capital expenditures other than pursuant to existing
capital expenditure programs that are disclosed in the Pendaries
Disclosure Statement, or pursuant to cash calls made on Pendaries
pursuant to the Sino-American Property Agreements;
(ii) sell, transfer or otherwise dispose of or create any
Encumbrance on, or allow the sale, transfer or other disposition of or
creation of any Encumbrance on any of the Pendaries Assets other than
chattel property or other non-real property that is replaced by
equivalent property or consumed in the operation of the Pendaries
Assets and other than any Encumbrances arising in the ordinary course
of business as a result of operations under agreements affecting the
Pendaries Assets;
(iii) grant any option, warrant, right or subscription privilege or
enter into any agreement to grant any such option, warrant, right or
subscription privilege to purchase or otherwise acquire any securities
of PPL or issue any securities of PPL except pursuant to the exercise
of Pendaries Options; or
(iv) directly or indirectly, through officers, directors, employees,
representatives, advisors, agents or otherwise, take any action to
continue, solicit, initiate or encourage any Competing Transaction, and
will notify UPC forthwith immediately if any inquiries or proposals
with respect to a possible Competing Transaction are received by PPL,
and shall provide details of any such inquiries or proposals as such
information becomes available to PPL; provided, however, that in the
event that PPL receives an unsolicited inquiry or proposal with respect
to a possible Competing Transaction, the directors and officers of PPL
shall be entitled to take such actions which PPL's Board of Directors,
based upon the advice of PPL's counsel, determine in good faith to be
required in order for such directors and officers to fulfil their
fiduciary obligations to PPL, provided that prior to furnishing any
information or engaging in any negotiations with the third party
initiating such inquiry or proposal, PPL shall have provided written
notice to UPC to the effect that it is doing so;
(c) will maintain insurance on and in respect of all the Pendaries
Assets in like kind to, and in an amount not less than the amount of,
insurance in respect of the Pendaries Assets in effect on the date hereof;
(d) will make available and cause to be made available to UPC, its
agents and advisors, as soon as possible, all documents and agreements
(including without limitation, any correspondence between Pendaries and or
any governmental body and its minute book) in any way relating to or
affecting the Pendaries Assets or the financial status of Pendaries and
such other documents or agreements as may be necessary to enable Ultra to
effect a thorough investigation of Pendaries, its business, properties and
financial status, except where Pendaries is contractually precluded from
making such document or agreement available, and Pendaries shall cooperate
with Ultra in securing access for Ultra to any such documentation not in
the possession or under the control of Pendaries;
(e) will not enter into any transaction not in the ordinary course of
business or pay any dividends or make any other distribution to its
shareholders or repay, other than in the ordinary course of business, any
outstanding indebtedness;
(f) will not disclose to any person, other than officers, directors, key
employees and professional advisors of PPL any confidential information
relating to Ultra except information disclosed in the Pendaries Proxy
Statement, required to be disclosed by law or otherwise known to the public
or PPL;
(g) will provide to UPC, in a timely and expeditious manner, all
information as may be reasonably requested by UPC or is required by
applicable law, with respect to PPL for inclusion in the Ultra Proxy
Solicitation Material or any amendments or supplements to the Ultra Proxy
Solicitation Material so that UPC can comply in all material respects with
all applicable legal and reporting requirements on the date of issue
thereof;
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(h) will:
(i) forthwith carry out the terms of the Interim Order and the Final
Order provided that nothing shall require PPL to consent to any
modification of this Agreement, the Arrangement or PPL's obligations
thereunder or hereunder,
(ii) convene the Pendaries Meeting as ordered by the Interim Order;
(iii) provide notice to UPC of the Pendaries Meeting and allow UPC
representatives to attend the Pendaries Meeting unless such attendance
is prohibited by rules governing such Pendaries Meeting; and
(iv) conduct the Pendaries Meeting in accordance with the Interim
Order, the bylaws of PPL and any instrument governing such meeting, as
applicable, and as otherwise required by law;
(i) will prepare (in consultation with UPC), file and distribute to the
holders of Pendaries Common Shares in a timely and expeditious manner, the
Pendaries Proxy Statement and any amendments or supplements to the
Pendaries Proxy Statement as required by the Interim Order or by applicable
law or regulation of regulatory authorities, in all jurisdictions where the
same is required complying in all material respects with all applicable
legal and reporting requirements on the date of issue thereof;
(j) subject to the applicable fiduciary obligations to shareholders of
PPL as advised by counsel, the Board of Directors of PPL shall not
withdraw, modify or change in a manner adverse to UPC its recommendation
that the holders of Pendaries Common Shares vote to approve the Arrangement
and this Agreement, and shall use its reasonable efforts to solicit from
holders of Pendaries Common Shares proxies in favour of the Arrangement;
(k) will, subject to obtaining such approvals as are required by the
Interim Order and the terms and conditions hereof, forthwith prepare, file,
proceed with and diligently pursue an application for the Final Order;
(l) subject to the terms and conditions hereof, will file Articles of
Arrangement, and the Final Order with the Director, in order for the
Arrangement to become effective;
(m) will make other necessary filings and applications under applicable
U.S. and Canadian, federal and provincial and laws and regulations
(including without limitation U.S. Securities Laws) required on the part of
PPL in connection with the transactions contemplated herein and take all
reasonable action necessary to be in compliance with such laws and
regulations;
(n) will use its reasonable efforts to diligently pursue and obtain all
consents, approvals and authorizations (including without limitation all
regulatory and third party approvals and consents) required or necessary in
connection with the transactions contemplated herein;
(o) will not issue, authorize or propose the issuance of, or purchase or
propose the purchase of, any shares of its capital stock of any class or
securities convertible into, rights, warrants or options to acquire, any
such shares or other exchangeable or convertible securities, other than
pursuant to the exercise of the Pendaries Options or as otherwise disclosed
to UPC;
(p) will not authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into an agreement in principle or
an agreement with respect to, any merger, consolidation or business
combination (other than the Arrangement), any acquisition of a material
amount of assets or securities, any disposition of a material amount of
assets or securities or any material change in its capitalization, or any
entry into a material contract or any release or relinquishment of any
material contract rights, not in the ordinary course of business, other
than pursuant to commitments existing on the date hereof and set out in the
Pendaries Disclosure Statement, or commitments entered into after the date
hereof with the written consent of UPC;
(q) except as contemplated in the term sheet attached to the Letter of
Intent, will not guarantee the payment of indebtedness or incur
indebtedness for money borrowed or issue any debt securities;
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(r) will not subdivide the Pendaries Common Shares or issue any rights,
options, warrants, shares or Pendaries Common Shares to all or
substantially all holders of Pendaries Shares or make any change in its
share capital or make any similar distribution that would materially and
adversely affect the value of the Pendaries Common Shares or the ability of
UPC to acquire all of the issued and outstanding Pendaries Common Shares on
the terms contemplated by the Arrangement;
(s) will not purchase or otherwise acquire, or propose to purchase or
otherwise acquire, any securities of any third party issuer;
(t) will not propose or adopt any amendments to its charter or by-laws;
(u) will not enter into, assign or terminate, or amend in any material
respect, any Title Document; and
(v) will not waive, compromise or settle any right or claim that would
adversely affect the ownership, operation or value of any of the Pendaries
Assets;
(w) will mail on or before October 16, 2000, notice of the proposed
Arrangement in form and substance satisfactory to PPL and UPC to the China
National Offshore Oil Corporation, a company organized and existing under
the laws of the People's Republic of China, Kerr-McGee China Petroleum
Ltd., a company incorporated in the Bahamas, and Newfield Exploration
Company;
(x) if the Ultra Common Shares are not approved for listing on AMEX, PPL
will comply in all respects with Rule 13e-3 of the Exchange Act;
(y) will promptly advise UPC orally and, if then requested, in writing:
(i) of any event occurring subsequent to the date of this Agreement
that would render any representation or warranty of PPL contained in
this Agreement (except any such representation or warranty which speaks
solely as of a date prior to the occurrence of such event), if made on
or as of the date of such event or the Effective Date, untrue or
inaccurate in any material respect;
(ii) of any Material Adverse Change in respect of Pendaries; and
(iii) of any material breach by PPL of any covenant or agreement
contained in this Agreement.
5.2 UPC covenants and agrees that, until the transactions contemplated
herein have closed or this Agreement has been terminated, whichever is the
earlier, UPC and each of the Ultra Subsidiaries:
(a) will conduct its operations according to its ordinary and usual
course of business and consistent with past practices, and will use its
reasonable commercial efforts to fulfil the conditions set forth herein to
the extent the fulfillment of the same is within the control of UPC and/or
the Ultra Subsidiaries;
(b) will maintain insurance on and in respect of all the Ultra Assets in
like kind to, and in an amount not less than the amount of, insurance in
respect of the Ultra Assets in effect on the date hereof,
(c) will make available and cause to be made available to PPL, its
agents and advisors, as soon as possible, all documents and agreements
(including, without limitation, any correspondence between Ultra and any
governmental body and its minute books) in any way relating to or affecting
the Ultra Assets or the financial status of Ultra and such other documents
or agreements as may be necessary to enable PPL to effect a thorough
investigation of Ultra, its business, properties and financial status,
except where Ultra is contractually precluded from making such document or
agreement available, and Ultra shall cooperate with PPL in securing access
for PPL to any such documentation not in the possession or under the
control of Ultra;
(d) will not disclose to any person, other than officers, directors, key
employees and professional advisors of UPC any confidential information
relating to Pendaries except information disclosed in the Pendaries Proxy
Statement, required to be disclosed by law or otherwise known to the public
or UPC;
(e) will make application to obtain all necessary approvals and make all
filings required with the securities commissions or similar authorities in
all jurisdictions of Canada in which registered holders of
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Pendaries Common Shares are resident as shown on the books of PPL to
validly authorize and enable the distribution by Ultra pursuant to
exemptions from the prospectus and registration requirements of applicable
Canadian Securities Laws of the Ultra Common Shares to be issued pursuant
to the Arrangement, and, without limiting the generality of the foregoing,
will make application for, and diligently pursue, such discretionary orders
of Canadian securities regulators as may be necessary to enable Ultra
Counsel to provide the opinion contemplated by subsection 7.1(c)(iv)
hereof;
(f) prepare jointly with PPL the Pendaries Proxy Statement and provide
to PPL, in a timely and expeditious manner, all information as may be
reasonably requested by PPL or is required by the Interim Order or
applicable law, with respect to UPC for inclusion in the Pendaries Proxy
Statement or any amendments or supplements to the Pendaries Proxy Statement
so that PPL can comply in all material respects with all applicable legal
and reporting requirements on the date of issue thereof;
(g) will forthwith carry out the terms of the Interim Order and the
Final Order provided that nothing shall require Ultra to consent to any
modification of this Agreement, the Arrangement or UPC's obligations
hereunder or thereunder;
(h) will:
(i) convene the Ultra Meeting on or before December 15, 2000;
(ii) provide notice to PPL of the Ultra Meeting and allow PPL
representatives to attend the Ultra Meeting unless such attendance is
prohibited by rules governing such Ultra Meeting; and
(iii) conduct the Ultra Meeting in accordance with the by-laws of
UPC and any instrument governing such meeting, as applicable, and as
otherwise required by law;
(i) will prepare (in consultation with PPL), file and distribute to the
holders of Ultra Common Shares in a timely and expeditious manner, the
Ultra Proxy Solicitation Material and any amendments or supplements to the
Ultra Proxy Solicitation Material as required by applicable law or
regulation of regulatory authorities, in all jurisdictions where the same
is required complying in all material respects with all applicable legal
and reporting requirements on the date of issue thereof;
(j) subject to the applicable fiduciary obligations to shareholders of
UPC as advised by counsel, the Board of Directors of UPC shall not
withdraw, modify or change in a manner adverse to PPL its recommendation
that the holders of Ultra Common Shares vote to approve the Arrangement and
this Agreement, and shall use its reasonable efforts to solicit from
holders of Ultra Common Shares proxies in favour of the Arrangement;
(k) will make all other necessary filings and applications under
applicable federal and provincial laws and regulations required on the part
of Ultra in connection with the transactions contemplated herein and take
all reasonable action necessary to be in compliance with such laws and
regulations;
(l) on the Effective Date, issue Ultra Common Shares to those persons
entitled thereto pursuant to the Arrangement in accordance with their
entitlement under the Arrangement;
(m) will use its reasonable efforts to diligently pursue and obtain all
consents, approvals and authorizations (including without limitation all
regulatory and third party approvals and consents) required or necessary in
connection with the transactions contemplated herein;
(n) except in the ordinary course of business, or except as contemplated
by the term sheet attached to the Letter of Intent, will not guarantee the
payment of indebtedness or incur indebtedness for money borrowed or issue
any debt securities;
(o) will take all necessary corporate action to issue the Ultra Common
Shares to be issued in connection with the Arrangement and shall issue such
Ultra Common Shares on the basis contemplated herein and shall apply for
and diligently pursue the listing of such Ultra Common Shares on the TSE;
(p) will not subdivide the Ultra Common Shares or issue any rights,
options, warrants, shares or Ultra Common Shares to all or substantially
all holders of Ultra Shares or make any change in its share capital
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or make any similar distribution that would materially and adversely affect
the value of the Ultra Common Shares to be issued to PPL's Shareholders in
connection with the Arrangement;
(q) will not reorganize, amalgamate or merge UPC with any other person,
nor acquire by amalgamating, merging or consolidating with, purchasing a
majority of the voting securities or substantially all of the assets of or
otherwise, any business or person which acquisition or other transaction
would reasonably be expected to prevent or materially delay the
transactions contemplated hereby beyond the Expiry Date;
(r) will use reasonable commercial efforts to cause the Ultra Common
Shares, including the Ultra Common Shares issuable pursuant to the
Arrangement, to be listed on AMEX;
(s) will maintain and continue all rights to indemnification or
exculpation now existing in favour of the directors or officers of PPL or
any Subsidiary as provided in its articles or by-laws thereof full force
and effect for a period of not less than six years from the Effective Time;
and
(t) will maintain in effect, for not less than six years from the
Effective Time, coverage substantially equivalent to that in effect under
the current policies of the directors' and officers' liability insurance
maintained in effect by Pendaries (provided that the coverage limit need
not be greater than US$10,000,000) which is no less advantageous, and with
no gaps or lapses in coverages with respect to matters occurring prior to
the Effective Time;
(u) subject to their applicable fiduciary obligations, the Board of
Directors of UPC will convene a directors' meeting on or before November
10, 2000 for the purpose of considering adding to the matters to be dealt
with at the Ultra Meeting an increase in the number of directors of UPC and
the election of additional directors to fill the vacancies created by such
increase; and
(v) will promptly advise PPL orally and, if then requested, in writing:
(i) of any event occurring subsequent to the date of this Agreement
that would render any representation or warranty of UPC contained in
this Agreement (except any such representation or warranty which speaks
solely as of a date prior to the occurrence of such event), if made on
or as of the date of such event or the Effective Date, untrue or
inaccurate in any material respect;
(ii) of any Material Adverse Change in respect of Ultra; and
(iii) of any material breach by UPC of any covenant or agreement
contained in this Agreement.
ARTICLE 6
Employment
6.1 Prior to the Effective Date, UPC shall use its reasonable best efforts
to enter into employment agreements with each of Bobby J. Fogle, Urich Ho,
Philip R. Henry, Michael D. Watford and Fox Benton III, and consulting
agreements with each of Robert E. Rigney and Fred Tietz, which employment
agreements and consulting agreements shall be conditional upon completion of
the Arrangement and shall be effective as of the Effective Date. The
employment agreements shall provide for the employment of each such individual
at a salary which is not less than the salary currently being paid to such
individual by Ultra or Pendaries, as the case may be. The consulting agreement
with Robert E. Rigney shall provide for Mr. Rigney to devote 50% of his time
to the affairs of Ultra and its Subsidiaries (which for greater certainty
shall then include Pendaries). The employment agreement with Bobby J. Fogle
shall provide for Mr. Fogle to devote 75% of his time to the affairs of Ultra
and its Subsidiaries (which for greater certainty shall then include
Pendaries). The consulting agreement with Fred Tietz shall provide for Mr.
Tietz to be engaged as a consultant to Ultra and its Subsidiaries at a
consulting fee which is not less than the consulting fee currently being paid
to Mr. Tietz by Pendaries.
6.2 Subject to the fiduciary obligations of the Board of Directors of UPC
to act in the best interests of UPC and its shareholders, at the next annual
or special meeting of shareholders of UPC following the Effective
22
<PAGE>
Date management of UPC shall recommend that the number of directors of UPC be
increased by at least one director and shall nominate one person designated by
Robert E. Rigney, who is a director of PPL on the date hereof, for election as
a director of UPC.
ARTICLE 7
Closing Conditions
7.1 The obligation of PPL to complete the transactions contemplated herein
is subject to the fulfillment of the following conditions precedent on or
before the Effective Date or such other time as is specified below:
(a) all representations and warranties of UPC under this Agreement shall
have been true and correct on the date hereof;
(b) the representations and warranties of UPC shall be true and correct
in all material respects (except where already qualified as to materiality
or the absence of Material Adverse Effect) as of the Effective Date as if
made on and as of such date (except to the extent such representations and
warranties speak solely as of an earlier date, in which event such
representations and warranties shall be true and correct to such extent as
of such earlier date, or except as affected by transactions contemplated or
permitted by this Agreement), and PPL shall have received a certificate of
UPC addressed to PPL and dated the Effective Date, signed on behalf of UPC
by two senior executive officers of UPC (on UPC's behalf and without
personal liability) confirming the same as of the Effective Date;
(c) UPC shall have provided PPL with opinions of Ultra Counsel
reasonably satisfactory to PPL dated the Effective Date (or such other date
as UPC and PPL may agree) and addressed to PPL and Pendaries Counsel to the
effect that:
(i) UPC and each Subsidiary is duly incorporated, organized and
validly existing under the law of the jurisdiction of its
incorporation, and is duly qualified to carry on business in such
jurisdictions in which the nature of its business or the property or
assets owned or leased by it makes such qualification necessary and UPC
has full power and authority to enter into this Agreement and perform
its obligations hereunder,
(ii) all necessary proceedings, corporate, regulatory or otherwise,
of UPC have been taken to fully, validly and effectively authorize this
Agreement, the Arrangement, the performance by UPC of its obligations
hereunder, and the execution and delivery by UPC of this Agreement,
(iii) this Agreement has been duly executed and delivered by UPC;
(iv) the execution and delivery of this Agreement by UPC, the
performance of the terms hereof by UPC and the consummation of the
transactions contemplated herein do not and will not require any
consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, except (A) pursuant to
Canadian Securities Laws and U.S. Securities Laws, (B) the Interim
Order and the Final Order, (C) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a Material Adverse Effect
on Ultra or prevent, materially hinder, or materially make more
burdensome the consummation of the transactions contemplated by this
Agreement, (D) such filings and approvals as may be required under the
"blue sky", takeover or securities laws of various states, or (E) such
consents, approvals, authorizations, permits, filings or notifications
that have been previously made;
(v) the first trade by any person, other than a control person
distribution, of Ultra Common Shares issued pursuant to the Arrangement
will not be subject to the prospectus requirements of, or any hold
period under, applicable Canadian Securities Laws;
(vi) the Ultra Common Shares issued pursuant to the Arrangement are
duly and validly issued as fully paid and non-assessable Ultra Common
Shares and such Ultra Common Shares have been conditionally approved
for listing on the TSE subject to satisfaction of the conditions
prescribed by the TSE;
23
<PAGE>
(vii) the limited offer and sale of Ultra Common Shares in accordance
with the provisions of the Arrangement Agreement and the Plan of
Arrangement does not require registration under the U.S. Securities Act
of 1933 and, subject to certain exceptions and qualifications to be
specifically set out in the opinion letter of Ultra Counsel, upon
issuance, such shares will be freely tradeable under such law by the
holders thereof.
in giving such opinion, Ultra Counsel may rely, in respect of matters
governed by the laws of any jurisdiction other than the Yukon Territory or
the laws of Canada applicable therein, upon the opinion of local counsel in
such jurisdiction provided that Ultra Counsel is of the opinion that the
opinion of such local counsel is one upon which Ultra Counsel may properly
rely; and, in respect of matters of fact, upon certificates of UPC or any
other appropriate persons;
(d) UPC shall have complied with its covenants herein in all material
respects and shall have provided to PPL a certificate of UPC certifying
that UPC has complied with its covenants herein in all material respects
and Pendaries shall have no knowledge to the contrary;
(e) between the date hereof and the Effective Date, there shall have
been no Material Adverse Change in respect of Ultra;
(f) on the Effective Date, the number of directors of UPC shall be
increased from three to four, and an individual designated by PPL shall be
appointed as a director to fill the vacancy created by such increase;
(g) on the Effective Date, the Board of Directors of UPC shall have
appointed the following officers:
<TABLE>
<S> <C>
Chairman, CEO and
President Michael D. Watford
Vice-President,
Accounting Bobby J. Fogle
Vice-President, Finance Fox Benton, III
</TABLE>
The foregoing conditions precedent are for the benefit of PPL and may be
waived, in whole or in part, by PPL in writing at any time. If any of the said
conditions precedent shall not be complied with or waived by PPL on or before
the date required for the performance thereof, PPL may, in addition to the
other remedies it may have at law or equity, rescind and terminate this
Agreement by written notice to UPC; provided, however, that PPL may not rely
on the failure to satisfy any of the foregoing conditions if the condition
would have been satisfied but for a material default by PPL in complying with
its obligations hereunder.
7.2 The obligation of UPC to complete the transactions contemplated herein
is subject to fulfillment of the following conditions precedent on or before
the Effective Date or such other time as is specified below:
(a) all representations and warranties of PPL under this Agreement shall
have been true and correct on the date hereof;
(b) the representations and warranties of PPL shall be true and correct
in all material respects (except where already qualified as to materiality
or the absence of Material Adverse Effect) as of the Effective Date as if
made on and as of such date (except to the extent such representations and
warranties speak solely as of an earlier date, in which event such
representations and warranties shall be true and correct to such extent as
of such earlier date, or except as affected by transactions contemplated or
permitted by this Agreement), and UPC shall have received a certificate of
PPL addressed to UPC and dated the Effective Date, signed on behalf of PPL
by two senior executive officers of PPL (on PPL's behalf and without
personal liability) confirming the same as of the Effective Date;
(c) PPL shall have provided UPC with opinions of Pendaries Counsel
reasonably satisfactory to UPC dated the Effective Date (or such other date
as UPC and PPL may agree) and addressed to UPC and Ultra Counsel, to the
effect that:
(i) each of PPL and the Pendaries Subsidiaries is duly incorporated,
organized and validly existing under the law of the jurisdiction of its
incorporation, and is duly qualified to carry on business in such
jurisdictions in which the nature of its business or the property or
assets owned or
24
<PAGE>
leased by it makes such qualification necessary and PPL has full power
and authority to enter into this Agreement and perform its obligations
hereunder;
(ii) all necessary proceedings, corporate, regulatory or otherwise,
of PPL have been taken to fully, validly and effectively authorize this
Agreement, the Arrangement, the performance by PPL of its obligations
hereunder, and the execution and delivery by PPL of this Agreement; and
(iii) this Agreement has been duly executed and delivered by PPL,
(iv) the execution and delivery of this Agreement by PPL, the
performance of the terms hereof by PPL and the consummation of the
transactions contemplated herein do not and will not require any
consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority or any parties to the Title
Documents relating to the Pendaries Assets, except (A) pursuant to
Canadian Securities Laws or U.S. Securities Laws, (B) the Interim Order
and the Final Order, (C) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a Material Adverse Effect
on Pendaries or prevent, materially hinder, or materially make more
burdensome the consummation of the transactions contemplated by this
Agreement, (D) such filings and approvals as may be required under the
"blue sky", takeover or securities laws of various states, or (E) such
consents, approvals, authorizations, permits, filings or notifications
that have been previously made; and
(v) the Pendaries Proxy Statement complies as to form with Schedule
14A of the Exchange Act and, if applicable, contains all information
required by Rule 13e-3 of the Exchange Act, and does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
in giving such opinion, Pendaries Counsel may rely, in respect of matters
governed by the laws of any jurisdiction other than the Province of New
Brunswick or the laws of Canada applicable therein, upon the opinion of
local counsel in such jurisdiction provided that Pendaries Counsel is of
the opinion that the opinion of such local counsel is one upon which
Pendaries Counsel may properly rely; and, in respect of matters of fact,
upon certificates of Pendaries or any other appropriate persons;
(d) PPL shall have complied with its covenants herein in all material
respects and shall have provided to UPC a certificate of PPL certifying
that PPL has complied with its covenants herein in all material respects,
and UPC shall have no knowledge to the contrary;
(e) between the date hereof and the Effective Date there shall have been
no Material Adverse Change in respect of Pendaries;
(f) there shall have been no material breach by PPL or any of the
Pendaries Subsidiaries of any of their respective covenants,
representations or warranties contained in the Sino-American Loan
Documents;
(g) China National Offshore Oil Company shall not have asserted any
rights with respect to or arising from the Arrangement, which rights, if
upheld, could be expected to have a Material Adverse Effect on Pendaries or
Ultra;
(h) nothing shall have come to the attention of UPC that would cause UPC
to be unable to rely on the exemption provided in section 3(a)(10) of the
Exchange Act; and
(i) the number of Ultra Common Shares to be issued by UPC in exchange
for Pendaries Common Shares pursuant to the Arrangement shall not be
greater than 15,000,000.
The foregoing conditions precedent are for the benefit of UPC and may be
waived, in whole or in part, by UPC in writing at any time. If any of the said
conditions precedent shall not be complied with or waived by UPC on or before
the date required for the performance thereof, UPC may, in addition to the
other remedies it may have at law or equity, rescind and terminate this
Agreement by written notice to PPL; provided, however, that UPC may not rely on
the failure to satisfy any of the foregoing conditions if the condition would
have been satisfied but for a material default by UPC in complying with its
obligations hereunder.
25
<PAGE>
7.3 The obligations of UPC and PPL to complete the transactions contemplated
herein are subject to fulfillment of the following conditions precedent on or
before the Effective Date or such other time as is specified below:
(a) a resolution shall have been passed at the Pendaries Meeting, duly
approving the Arrangement in accordance with the Interim Order;
(b) on or before the Expiry Date, the Final Order shall have been
granted in form and substance satisfactory to UPC and PPL, acting
reasonably, and such Final Order shall not have been set aside or modified,
on appeal or otherwise, in a manner unacceptable to such parties, acting
reasonably;
(c) there shall be no action taken under any existing applicable law or
regulation, nor any statute, rule, regulation or order which is, enacted,
enforced, promulgated or issued by any court, department, commission,
board, regulatory body, government or governmental authority or similar
agency, domestic or foreign, that:
(i) makes it illegal or otherwise directly or indirectly restrains,
enjoins or prohibits the Arrangement or any other transactions
contemplated herein;
(ii) results in a judgment or assessment of material damages
directly or indirectly relating to the transactions contemplated
herein;
(iii) prohibits Ultra's or Pendaries' ownership or operation of all
or any material portion of the business or assets of Ultra or
Pendaries, respectively, or compels Ultra or Pendaries to dispose of or
hold separately all or any portion of the business or assets of Ultra
or Pendaries or the Ultra Common Shares or the Pendaries Common Shares;
or
(iv) imposes or confirms material limitations on the ability of UPC
effectively to exercise and fulfill rights of ownership of the
Pendaries Common Shares or the holders of Pendaries Common Shares to
hold or receive Ultra Common Shares under the Arrangement or otherwise,
including, without limitation, the right to vote any such securities;
(d) Pendaries and Ultra shall have obtained all consents, approvals and
authorizations (including without limitation all regulatory and third party
approvals and consents) required or necessary in connection with the
transactions contemplated herein, the failure of which to obtain would have
a Material Adverse Effect on Pendaries or Ultra, as the case may be, on
terms and conditions that will not have a Material Adverse Effect on
Pendaries and/or Ultra;
(e) holders of not more than 5% of number of Pendaries Common Shares
outstanding as of the date hereof shall have exercised any rights of
dissent granted under the Interim Order in relation to the Plan of
Arrangement proposed at the Pendaries Meeting and PPL shall have provided
to UPC a certificate of PPL certifying on the Effective Date the number of
Pendaries Common Shares in respect of which the holders have exercised
rights of dissent;
(f) the TSE shall have accepted notice of the Arrangement and the
transactions contemplated hereby and the Ultra Common Shares to be issued
to holders of Pendaries Common Shares under this Agreement shall have been
conditionally approved for listing on the TSE; and
(g) the Pendaries Proxy Statement shall have included opinions of
counsel to PPL with respect to the Canadian and U.S. tax consequence of the
Arrangement, substantially in the form of the draft opinions provided by
PPL to UPC prior to the execution hereof.
The foregoing conditions are for the mutual benefit of UPC and PPL and may
be waived, in whole or in part, by both UPC and PPL at any time. If any of the
said conditions precedent shall not be complied with or waived as aforesaid on
or before the date required for the performance thereof, UPC or PPL may rescind
and terminate this Agreement by written notice to the other party; provided,
however, that no party may not rely on the failure to satisfy any of the
foregoing conditions if the condition would have been satisfied but for a
material default by such party in complying with its obligations hereunder.
26
<PAGE>
7.4 Each of PPL and UPC shall give prompt notice to the other of the
occurrence or failure to cure at any time from the date hereof to the Effective
Date of any event or state of facts which occurrence or failure to cure would,
or would be likely to (a) cause any of the representations or warranties of any
party contained herein to be untrue or inaccurate in any material respect, or
(b) result in the failure to comply with or satisfy any covenant, condition or
agreement to comply with or be satisfied by any party hereunder, provided
however, that no such representation shall affect the representations or
warranties of the parties or the conditions or obligations of the parties
hereunder.
7.5 The conditions set forth in this Article 7 shall be conclusively deemed
to be satisfied, waived or released when with the agreement of the parties the
Articles of Arrangement are filed under the Act to effect the Arrangement.
ARTICLE 8
Termination
8.1 If any condition contained in Sections 7.2 or 7.3 is not satisfied at or
before the Expiry Date, then UPC may by notice to PPL terminate this Agreement
and the obligations of the parties hereunder (except as otherwise herein
provided), but without detracting from the rights of UPC arising from any
breach by PPL but for which the condition would have been satisfied.
8.2 If any condition contained in Sections 7.1 or 7.3 is not satisfied at or
before the Expiry Date, then PPL may by notice to UPC terminate this Agreement
and the obligations of the parties hereunder (except as otherwise herein
provided), but without detracting from the rights of PPL arising from any
breach by UPC but for which the condition would have been satisfied.
8.3 This Agreement may be terminated:
(a) by the mutual agreement of PPL and UPC (for greater certainty,
without further action on the part of PPL shareholders if terminated after
the holding of the Pendaries Meeting);
(b) by either UPC or PPL by notice to the other party at any time prior
to the Effective Time if there shall be passed any law that makes
consummation of the transactions contemplated by this Agreement illegal or
otherwise prohibited;
(c) by UPC if the Board of Directors of PPL shall have withdrawn,
modified or changed in a manner adverse to UPC its approval or
recommendation of the Arrangement (unless the holders of Pendaries Common
Shares shall have approved the Arrangement prior to such termination or UPC
has suffered a Material Adverse Change or UPC shall have made a
misrepresentation at the date hereof or breached a covenant under this
Agreement in such a manner that, taking into account the last paragraph of
Section 7.1 hereof, PPL would be entitled to rely on the failure of a
condition set forth in Sections 7.1(a), (d) or (e) as a reason not to
complete the Arrangement);
(d) by PPL if the Board of Directors of PPL shall have withdrawn,
modified or changed in a manner adverse to UPC its approval or
recommendation of the Arrangement (unless the holders of Pendaries Common
Shares shall have approved the Arrangement prior to such termination);
(e) by PPL if the Board of Directors of UPC shall have withdrawn,
modified or changed in a manner adverse to PPL its approval or
recommendation of the Arrangement (unless the holders of Ultra Common
Shares shall have approved the Arrangement prior to such termination or PPL
has suffered a Material Adverse Change or PPL shall have made a
misrepresentation at the date hereof or breached a covenant under this
Agreement in such a manner that, taking into account the last paragraph of
Section 7.2 hereof, UPC would be entitled to rely on the failure of a
condition set forth in Sections 7.2(a), (d) or (e) as a reason not to
complete the Arrangement);
27
<PAGE>
(f) by UPC if the Board of Directors of UPC shall have withdrawn,
modified or changed in a manner adverse to PPL its approval or
recommendation of the Arrangement (unless the holders of Ultra Common
Shares shall have approved the Arrangement prior to such termination);
(g) by either UPC or PPL by notice to the other party if the PPL
shareholder approval shall not have been obtained by reason of the failure
to obtain the required vote at the PPL Meeting; or
(h) by either UPC or PPL by notice to the other party if the Ultra
Shareholder Approval shall not have been obtained by reason of the failure
to obtain the required vote at the Ultra Meeting.
8.4 If the Effective Date does not occur on or prior to the Expiry Date,
then, unless otherwise agreed in writing by the parties, this Agreement shall
terminate.
8.5 The exercise by either party of any right of termination hereunder shall
be without prejudice to any other remedy available to such party.
8.6 If this Agreement is validly terminated pursuant to any provision of
this Agreement, the parties shall return all materials and copies of all
materials delivered to PPL or UPC, as the case may be, or their agents and,
except for the obligations set forth in subsection 10.6 hereof (which shall
survive any termination of this Agreement and continue in full force and
effect), no party shall have any further obligations to any other party
hereunder with respect to this Agreement. The covenants contained in this
Section shall survive any termination of this Agreement and continue in full
force and effect.
8.7 After the Effective Date, the respective representations, warranties and
covenants of UPC and PPL contained herein shall expire and be terminated and
extinguished at and from the Effective Date and no party shall have any
liability or further obligation to any party hereunder in respect of such
representations, warranties or covenants thereafter.
ARTICLE 9
Amendment
9.1 This Agreement may, at any time and from time to time before or after
the holding of the Pendaries Meeting be amended by written agreement of the
parties hereto without further notice to or authorization on the part of their
respective shareholders, and any such amendment may, without limitation:
(a) change the time for performance of any of the obligations or acts of
the parties hereto;
(b) waive any inaccuracies or modify any representation or warranty
contained herein or in any document delivered pursuant hereto; and
(c) waive compliance with or modify any of the covenants herein
contained and waive or modify performance of any of the obligations of the
parties hereto,
provided that, notwithstanding the foregoing, the number of Ultra Common Shares
which the holders of Pendaries Common Shares shall have the right to receive on
the Arrangement may not be reduced without the approval of the shareholders of
PPL given in the same manner as required for the approval of the Arrangement or
as may be ordered by the Court.
ARTICLE 10
General
10.1 Each party agrees to bear all costs and expenses incurred by it in
connection with the transactions contemplated hereby.
28
<PAGE>
10.2 No party hereto shall disclose, by press release, any aspect of the
transactions contemplated hereby, without prior written consent of the other
party. Notwithstanding the foregoing if either party is required by law or
administrative regulation to make any disclosure relating to the transactions
contemplated herein, that party will inform the other party as to the wording
of such disclosure prior to its being made.
10.3 Any notice, consent, waiver, direction or other communication required
or permitted to be given under this Agreement by a party to any other party
shall be in writing and may be given by delivering same or sending same by
facsimile transmission or by hand delivery addressed to the party to whom the
notice is to be given at its address for service herein. Any notice, consent,
waiver, direction or other communication aforesaid shall, if delivered, be
deemed to have been given and received on the date on which it was delivered to
the address provided herein (if a Business Day and, if not, the next succeeding
Business Day) and if sent by facsimile transmission on a Business Day be deemed
to have been given and received at the time of receipt unless actually received
at the point of delivery after 4:00 p.m. on a Business Day or anytime on a day
which is not a Business day, in which case it shall be deemed to have been
given and received on the next Business Day.
10.4 The address for service of each of the parties hereto shall be as
follows:
if to UPC:
Ultra Petroleum Corp.
16801 Greenspoint Park Drive
Suite 370
Houston, Texas
U.S.A. 77060
Attention: Michael D. Watford
Facsimile: (281) 876-2831
with a copy to:
Charlotte H. Kauffman
Ultra Petroleum Corp.
1200 Summit Avenue
Suite 700
Fort Worth, Texas
U.S.A. 76102
Facsimile: (817) 335-2434
if to PPL:
Pendaries Petroleum Ltd.
8 Greenway Plaza
Suite 910
Houston, Texas
U.S.A. 77046
Attention: Robert E. Rigney / Bobby J. Fogle
Facsimile: (713) 355-3511
with a copy to:
Stikeman Elliott
5300 Commerce Court West
199 Bay Street
Toronto, Ontario M5L 1B9
Attention: Brian M. Pukier
Facsimile: (416) 947-0866
29
<PAGE>
and to:
Jenkens & Gilchrist
1100 Louisiana
Suite 1800
Houston, Texas 77002
Attention: Judy G. Gechman
Facsimile: (713) 951-3314
10.5 Time shall be of the essence in this Agreement
10.6 UPC and PPL each represent and warrant to the other that it has not
done any act which would give rise to a valid claim against the other party for
any obligation or liability contingent or otherwise for brokerage fees,
finders' fees, agents' commissions or other similar forms of compensation with
respect to the transactions contemplated herein.
10.7 This Agreement constitutes the entire agreement between the parties
hereto and cancels and supersedes all prior agreements and understandings
between the parties with respect to the terms of the Arrangement.
10.8 If any one or more of the provisions or parts thereof contained in this
Agreement should be or become invalid, illegal or unenforceable in any respect
in any jurisdiction, the remaining provisions or parts thereof contained herein
shall be and shall be conclusively deemed to be, as to such jurisdiction,
severable therefrom and:
(a) the validity, legality or enforceability of such remaining
provisions or parts thereof shall not in any way be affected or impaired by
the severance of the provisions or parts thereof severed; and
(b) the invalidity, illegality or unenforceability of any provision or
part thereof contained in this Agreement in any jurisdiction shall not
affect or impair such provision or part thereof or any other provisions of
this Agreement in any other jurisdiction.
10.9 Each party hereto shall, from time to time, and at all times hereafter,
at the request of the other party hereto, but without further consideration, do
all such further acts and execute and deliver all such further documents and
instruments as shall be reasonably required in order to fully perform and carry
out the terms and intent hereof.
10.10 This Agreement may only be amended by a written instrument signed by
the parties hereto.
10.11 This Agreement shall be governed by, and be construed in accordance
with, the laws of the Province of New Brunswick and applicable laws of Canada
but the reference to such laws shall not, by conflict of laws rules or
otherwise, require the application of the law of any jurisdiction other than
the Province of New Brunswick. Each party hereto hereby irrevocably attorns to
the jurisdiction of the Courts of the Province of New Brunswick in respect of
all matters arising under or in relation to this Agreement.
10.12 This Agreement may be executed in identical counterparts, each of
which is and is hereby conclusively deemed to be an original and all
counterparts collectively are to be conclusively deemed one instrument.
10.13 No waiver by any party hereto shall be effective unless in writing and
any waiver shall affect only the matter and the occurrence thereof specifically
identified and shall not extend to any other matter or occurrence.
10.14 This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns. This Agreement may
not be assigned by any party hereto without the prior consent of the other
party hereto.
30
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement.
ULTRA PETROLEUM CORP.
Per:_________________________________
Per:_________________________________
PENDARIES PETROLEUM LTD.
Per:_________________________________
Per:_________________________________
31
<PAGE>
APPENDIX E
Exhibit 1 to that Arrangement Agreement made the 13th day of October, 2000
between Ultra Petroleum Corp. and Pendaries Petroleum Ltd.
PLAN OF ARRANGEMENT
dated .
and made pursuant to
Section 128 of the Business Corporations Act (New Brunswick)
ARTICLE 1
Definitions
1.1 In this Plan, unless the context otherwise requires:
(a) "Arrangement" means the arrangement contemplated by this Plan pursuant
to Section 128 of the NBBCA;
(b) "Arrangement Agreement" means the arrangement agreement dated as of
October 13, 2000 between UPC and PPL, as amended, supplemented and/or restated
in accordance therewith prior to the Effective Date, providing for, among other
things, the Arrangement;
(c) "Arrangement Resolution" means the special resolution of the Pendaries
Shareholders considered at the Pendaries Meeting;
(d) "Articles of Arrangement" means the articles of arrangement in respect
of the Arrangement required by the NBBCA to be sent to the Director after the
Final Order is made;
(e) "Business Day" means a day, other than a Saturday, Sunday or statutory
holiday, when banks are generally open for the transactions of banking
business;
(f) "Court" means The Court of Queen's Bench of New Brunswick
(g) "Depositary" means Montreal Trust Company of Canada, as the registrar
and transfer agent of the Ultra Common Shares;
(h) "Director" means the director registrar appointed pursuant to Section
184 of the NBBCA.
(i) "Effective Date" means the date the Arrangement becomes effective under
the NBBCA as determined by the certificate of arrangement issued by the
Director pursuant to section 129(2) of the NBBCA;
(j) "Effective Time" means 12:01 am. (Fredericton time) on the Effective
Date;
(k) "Final Order" means the order of the Court approving the Arrangement, as
such order may be affirmed, amended or modified;
(l) "Interim Order" means an order of the Court containing declarations and
directions under the NBBCA with respect to the Arrangement;
(m) "NBBCA" means the Business Corporations Act (New Brunswick);
(n) "Pendaries Common Shares" means the common shares in the capital of PPL
as constituted on the date hereof;
1
<PAGE>
(o) "Pendaries Dissenting Shares" means all Pendaries Common Shares which
are deemed to have been cancelled on the Effective Date in accordance with the
provisions of Section 5.1(a);
(p) "Pendaries Meeting" means the special meeting of the holders of
Pendaries Common Shares, including any adjournment or postponement thereof, to
be called in accordance with the Interim Order to consider and, if thought fit,
approve and adopt the Arrangement;
(q) "Pendaries Options" means the options granted under agreements or
otherwise to purchase or otherwise acquire shares in the capital of Pendaries
(including without limitation Pendaries Common Shares);
(r) "Pendaries Shareholders" means the holders of Pendaries Common Shares;
(s) "Plan" means this plan as amended or supplemented from time to time, and
"hereby", "hereof", "herein", "hereunder", "herewith" and similar terms refer
to this Plan and not to any particular provision of this Plan; and
(t) "PPL" means Pendaries Petroleum Ltd., a corporation incorporated under
the NBBCA;
(u) "Ultra Common Shares" means the common shares in the capital of UPC as
constituted on the date hereof; and
(v) "UPC" means Ultra Petroleum Corp., a corporation subsisting under the
Business Corporations Act (Yukon Territory).
1.2 The headings contained in this Plan are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Plan.
1.3 Unless the contrary intention appears, references in this Plan to an
Article, Section or subsection by number or letter or both refer to the
Article, Section or subsection bearing that designation in this Plan.
1.4 In this Plan, unless the contrary intention appears, words importing the
singular include the plural and vice versa, words importing gender shall
include all genders; and "person" includes any individual, partnership, firm,
trust, body corporate, government, governmental body, agency or
instrumentality, unincorporated body of persons or association.
1.5 In the event that the date on which any action is required to be taken
hereunder by any of the parties is not a Business Day in the place where the
action is required to be taken, such action shall be required to be taken on
the next succeeding day which is a Business Day in such place.
1.6 References in this Plan to any statute or sections thereof shall include
such statute as amended or substituted and any regulations promulgated
thereunder from time to time in effect.
ARTICLE 2
Effect of the Plan
2.1 At the Effective Time, the Plan shall be binding upon PPL, the Pendaries
Shareholders, the holders of Pendaries Options and UPC.
ARTICLE 3
Arrangement
3.1 At the Effective Time, each of the events set out below shall occur and
be deemed to occur in the sequence set out therein without further act or
formality:
(a) all Pendaries Common Shares (other than the Pendaries Dissenting Shares
and Pendaries Common Shares held by UPC and its affiliates) shall be
and shall be deemed to be transferred to UPC in
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exchange for Ultra Common Shares on the basis of one and fifty-eight one
hundredths of one (1.58) fully paid and non-assessable Ultra Common
Shares for each one (1.00) Pendaries Common Share; and
(b) with respect to each Pendaries Common Share to which subsection 3.1 (a)
applies (other than those Pendaries Common Shares to which section 3.3
applies):
(i) the holder thereof shall (A) cease to be a holder of such share, (B)
such holder's name shall be removed from the register of Pendaries
Common Shares with respect to such shares, (C) be allotted and
issued, as fully paid and non-assessable shares, the number of Ultra
Common Shares calculated in the basis set forth in subsection 3.1(a)
(subject to section 3.2), and (D) such holder's name shall be added
to the register of Ultra Common Shares with respect to such Ultra
Common Shares; and
(ii) UPC shall be and be deemed to be the transferee and shall be
entered in the register of Pendaries Common Shares as the holder
thereof; and
(c) all Pendaries Options shall be cancelled.
3.2 No certificates representing fractional Ultra Common Shares will be
issued. In the event that the exchange ratios referred to herein would in any
case otherwise result in a holder of a Pendaries Common Share being entitled to
a fractional Ultra Common Share, an adjustment shall be made to the next
highest whole number of Ultra Common Shares and a certificate for the resulting
whole number of Ultra Common Shares will be issued. In calculating such
fractional interests, all Pendaries Common Shares held by a beneficial holder
of Pendaries Common Shares shall be aggregated.
ARTICLE 4
Outstanding Certificates
4.1 After the Effective Time, certificates formerly representing Pendaries
Common Shares to which subsection 3.1(a) applies shall represent only the right
to receive certificates representing the Ultra Common Shares, if any, which the
former holder of such Pendaries Common Shares is entitled to receive pursuant
to Article 3 subject to compliance with the requirements set forth in this
Article 4.
4.2 Either prior to or as soon as practicable after the Effective Date, UPC
shall forward to each holder of Pendaries Common Shares to which subsection
3.1(a) applies at the address of such holder as it appeared in the relevant
share register of PPL a letter of transmittal containing, among other things,
instructions for obtaining delivery of certificates representing the Ultra
Common Shares pursuant to this Plan. Such holder of Pendaries Common Shares
shall be entitled to receive certificates representing the Ultra Common Shares
which such holder is entitled to receive pursuant to Article 3 upon delivering
the certificate formerly representing such holder's Pendaries Common Shares to
the Depositary, or as the Depositary may otherwise direct, in accordance with
the instructions contained in the letter of transmittal. Such certificate
formerly representing such holder's Pendaries Common Shares shall be
accompanied by the letter of transmittal, duly completed, and such other
documents as the Depositary may reasonably require. The Depositary shall
register the Ultra Common Shares in such name, and shall deliver by first class
mail, postage prepaid, or, in the case of postal disruption, by such other
means as the Depositary deems prudent certificates representing such Common
Shares to such address as such holder may direct in such letter of transmittal,
as soon as practicable after receipt by the Depositary of such documents.
4.3 The holders of Pendaries Common Shares shall not be entitled to any
interest, dividend, premium or other payment on or with respect to the
Pendaries Common Shares other than the Ultra Common Shares, if any, which they
are entitled to receive for the Pendaries Common Shares pursuant to this Plan.
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4.4 No dividends or other distributions declared or made with respect to
Ultra Common Shares with a record date after the Effective Time, shall be paid
to the holder of any unsurrendered certificate which immediately prior to the
Effective Time represented outstanding Pendaries Common Shares, unless and
until the holder of such certificate shall surrender such certificate in
accordance with Section 4.2. Subject to applicable law, at the time of such
surrender of any such certificate (or, in the case of clause (z) below, at the
appropriate payment date), there shall be paid to the holder of the
certificates representing Pendaries Common Shares, without interest, (y) the
amount of any cash dividends or other distributions with a record date after
the Effective Time theretofore paid with respect to which such holder is
entitled pursuant hereto, and (z) on the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable with
respect to such Ultra Common Shares.
4.5 In the event any certificate which immediately prior to the Effective
Time represented one or more outstanding Pendaries Common Shares that were
exchanged pursuant to Article 3 shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such certificate
to be lost, stolen or destroyed, together with such holder's letter of
transmittal, UPC will issue in exchange for such lost, stolen or destroyed
certificate, certificates representing the UPC Common Shares issuable under
this Plan in accordance with Article 3. When authorizing such issuance of
certificate(s) representing UPC Common Shares issuable in exchange for any
lost, stolen or destroyed certificate, the person to whom such certificate(s)
are to be issued shall, as a condition precedent to the issuance of such
certificate(s), give a bond satisfactory to PPL and UPC and their respective
transfer agents in such sum as PPL and UPC may direct or otherwise indemnify
PPL and UPC in a manner satisfactory to PPL and UPC against any claim that may
be made against PPL and UPC with respect to the certificate alleged to have
been lost, stolen or destroyed.
4.6 Any certificate which immediately prior to the Effective Time
represented outstanding Pendaries Common Shares that were exchanged pursuant to
Article 3, which is not deposited with all other instruments required by
Section 4.2 on or prior to December 31, 2008 shall cease to represent a claim
or interest of any kind or nature as a securityholder of PPL or UPC. On such
date, Ultra Common Shares to which the former holder of the certificate
referred to in the preceding sentence was ultimately entitled shall be deemed
to have been surrendered for no consideration to UPC, together with all
entitlements to dividends and distributions in respect thereof held for such
former holder. Neither of PPL or UPC shall be liable to any person in respect
of Ultra Common Shares, if any, (or dividends or distributions in respect
thereof) delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
ARTICLE 5
Shareholder Dissent Rights
5.1 Holders of Pendaries Common Shares may exercise rights of dissent with
respect to such shares pursuant to and in the manner set forth in Section 131
of the NBBCA, as such rights may be modified by the Interim Order and this
Section 5.1 (the "Dissent Rights"), in connection with the Arrangement provided
that, notwithstanding Section 131(5) of the NBBCA, the written objection to the
Arrangement Resolution referred to in Section 131(5) of the NBBCA must be
received by PPL not later than 5:00 p.m. (Toronto time) on the Business Day
preceding the Pendaries Meeting. Holders of Pendaries Common Shares who duly
exercise such rights of dissent and who:
(a) are ultimately determined to be entitled to be paid fair value for
their Pendaries Common Shares, shall be deemed to have transferred such
Pendaries Common Shares as of the Effective Time, without any further
act or formality and free and clear of all liens, claims and
encumbrances, to UPC in consideration for a payment of cash from PPL
equal to such fair value; or
(b) are ultimately determined not to be entitled, for any reason, to be
paid fair value for their Pendaries Common Shares, shall be deemed to
have participated in the Arrangement on the same basis as a
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<PAGE>
non-dissenting holder of Pendaries Common Shares and shall receive Ultra
Common Shares on the basis determined in accordance with Article 3;
but in no case shall UPC or any other person be required to recognize such
holders of Pendaries Dissenting Shares as holders of Pendaries Common Shares
after the Effective Time, and the names of such holders of Pendaries Dissenting
Shares shall be deleted from the register of holders of Pendaries Common Shares
at the Effective Time.
ARTICLE 6
Amendments to Plan of Arrangement
6.1 PPL reserves the right to amend, modify and/or supplement this Plan at
any time and from time to time prior to the Effective Date, provided that each
such amendment, modification and/or supplement must be (i) set out in writing,
(ii) approved by UPC, (iii) filed with the Court and, if made following the
Pendaries Meeting, approved by the Court and (iv) communicated to the Pendaries
Shareholders if and as required by the Court.
6.2 Any amendment, modification or supplement to this Plan may be proposed
by PPL at any time prior to the Pendaries Meeting (provided that UPC shall have
consented thereto) with or without any other prior notice or communication, and
if so proposed and accepted by the persons voting at the Pendaries Meeting
(other than as may be required under the Interim Order), shall become part of
this Plan for all purposes.
6.3 Any amendment, modification or supplement to this Plan that is approved
by the Court following the Pendaries Meeting shall be effective only if (i) it
is consented to by each of PPL and UPC and (ii) if required by the Court, it is
consented to by the Pendaries Shareholders voting in the manner directed by the
Court.
6.4 Any amendment, modification or supplement to this Plan may be made
following the Effective Date unilaterally by UPC, provided that it concerns a
matter which, in the reasonable opinion of UPC, is of an administrative nature
required to better give effect to the implementation of this Plan.
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<PAGE>
APPENDIX F
October 13, 2000
The Board of Directors of
Pendaries Petroleum Ltd.
8 Greenway Plaza
Suite 910
Houston, TX 77046
Dear Sirs:
You have requested the opinion (the "Opinion") of Loewen, Ondaatje,
McCutcheon Limited ("LOM") with respect to the terms of the Arrangement
Agreement (the "Arrangement Agreement") entered into by Pendaries Petroleum
Ltd. ("Pendaries", the "Company") and Ultra Petroleum Corporation ("Ultra")
which provides for a Plan of Arrangement (the "Arrangement"). Under the terms
of the Arrangement Agreement, each Pendaries shareholder will receive 1.58
common shares of Ultra for each Pendaries share held at the completion of the
transaction. The terms and conditions of the Arrangement Agreement will be
fully described in the Notices of Special Meetings and Management Proxy
Circulars (the "Circulars") to be sent to the shareholders of Pendaries and
Ultra in connection with the meetings of shareholders to approve the
Arrangement Agreement.
This Opinion is provided pursuant to our engagement by the Special Committee
of Board of Directors of Pendaries (the "Special Committee") to provide
financial advice to the Board including our Opinion as to the fairness of the
Arrangement from a financial point of view to the shareholders of Pendaries.
We understand that the Arrangement is not subject to the formal valuation
requirements under Ontario Securities Commission Rule 61-501, Quebec Securities
Commission Policy Q-27 and applicable policies of certain other securities
regulatory authorities. Accordingly, we have not been engaged to provide a
formal valuation of Pendaries or its principal assets or of the common shares
of Pendaries, and this Opinion should not be construed as such. We have,
however, conducted such analyses, investigations, research and testing of
assumptions as were considered by us to be necessary in the circumstances. We
have had access to the senior management group of Pendaries, and were not, to
the best of our knowledge, denied any type of information or access which we
requested.
Credentials of Loewen, Ondaatje, McCutcheon Limited
LOM is an independent investment banking firm with operations in corporate
finance, equity sales and trading, and investment research. LOM is owned by its
employees and its head office is located in Toronto, Canada with additional
Canadian offices in Montreal and Calgary, and offices in Paris and Geneva. LOM
provides services to companies in the natural resource industry directly
through investment banking professionals based in its Toronto office and
through its research analysts. LOM has participated in a significant number of
transactions involving resource companies and its investment banking
professionals have extensive experience in preparing valuations and fairness
opinions.
Scope of Review
In connection with rendering our Opinion, we have reviewed and relied upon,
or carried out, among other things, the following:
(i) the Arrangement Agreement dated October 13, 2000;
(ii) Annual Reports to shareholders of Pendaries for the fiscal years
ended December 31, 1999, 1998 and 1997;
<PAGE>
(iii) Annual Reports to shareholders of Ultra for the fiscal years ended
December 31, 1999 and June 30, 1999, 1998 and 1997;
(iv) the Management Proxy Circular/Information Circular of Pendaries
dated April 14, 2000;
(v) the Management Proxy Circular/Information Circular of Ultra dated
April 17, 2000;
(vi) report titled "Estimated Reserves and Future Net Revenue
Attributable to the CFD 2-1 and CFD 11-1 Fields Bohai Bay, China"
by Ryder Scott Company dated January 1, 2000 and prepared for Sino-
American Energy Corporation (a wholly owned subsidiary of
Pendaries);
(vii) report titled "Estimate of Reserves and Future Revenue to the Ultra
Petroleum Corporation Interest in Certain Oil and Gas Properties
located in Jonah and Pinedale Fields, Sublette County, Wyoming as
of January 1, 2000" by Netherland, Sewell & Associates, Inc.;
(viii) various internal information of Pendaries including geological
information, budgets for 2000 and 2001;
(ix) estimates of reserves updated to July 1, 2000 prepared by Pendaries
and its consultants, EBS & Associates Inc., and provided to us by
Pendaries;
(x) various internal information of Ultra including geological
information, budgets for 2000 and 2001;
(xi) estimates of reserves updated to July 1, 2000 prepared by Ultra and
reviewed by Pendaries consultants, EBS & Associates Inc.;
(xii) discussions with senior management of Pendaries and Ultra with
respect to planned production and exploration operations, financial
condition and future prospects of Pendaries and Ultra;
(xiii) publicly available information relating to the business,
operations, financial performance and stock trading history of
Pendaries, Ultra, and other selected public companies;
(xiv) information with respect to other transactions of a comparable
nature considered by LOM to be relevant in the circumstances;
(xv) representations contained in certificates addressed to us dated the
date hereof from a senior officer of Pendaries on behalf of
Pendaries and from a senior officer of Ultra on behalf of Ultra as
to the completeness and accuracy of the information upon which this
Opinion is based; and
(xvi) such other information, investigations and analyses as we
considered necessary or appropriate in the circumstance.
Assumptions and Limitations
We have relied upon, and have assumed the completeness, accuracy and fair
presentation of, all information, data, advice, opinions and representations
obtained by us from public sources or provided to us by Pendaries and Ultra or
otherwise pursuant to our engagement. We have not attempted to verify
independently the accuracy or completeness of any such information, data,
advice, opinions and representations. Senior management of Pendaries and Ultra
have represented to us, in certificates delivered on behalf of Pendaries and
Ultra as at the date hereof, amongst other things, that the information, data,
advice, opinions and other materials (the "Information") provided to us by or
on behalf of Pendaries and Ultra, respectively, is accurate, complete and
correct at the date the Information was provided to us and that since the date
of the Information there has been no material change, financial or otherwise,
in the financial condition of Pendaries and Ultra, respectively, or in its
assets, liabilities (contingent or otherwise), business operations or prospects
and there has been no change in any material fact which is of a nature as to
render the Information untrue or misleading in any material respect.
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This Opinion is rendered as at the date hereof and on the basis of
securities markets and economic and general business and financial conditions
prevailing as at the date hereof. In our analysis and in connection with the
preparation of the Opinion, we have made assumptions with respect to industry
performance, general business, market and economic conditions and other
matters, many of which are beyond the control of any party involved in the
Arrangement. The Opinion contained herein is only given as of the date hereof
and we undertake no responsibility for advising of a change in our opinion for
any changes in fact which may occur after the date hereof.
In preparing the Opinion, LOM has made several assumptions, including that
all of the conditions required to implement the Arrangement will be met and
that the disclosure provided in the management proxy circular to be sent to the
shareholders of Pendaries will be accurate in all material respects.
We considered the Arrangement from the perspective of Pendaries'
shareholders generally and did not consider the specific circumstances,
particularly with respect to income tax consequences, of any particular
Pendaries shareholder.
Opinion
This opinion is for the benefit and use by members of the Board of Directors
of Pendaries in connection with their consideration of the Arrangement and does
not constitute a recommendation to any holder of common shares of Pendaries as
to whether such shareholder should vote in favour of the Arrangement. This
opinion may not be published or otherwise used without our prior written
consent, other than as provided for in the engagement agreement, dated
September 13, 2000, between the Special Committee of the Board of Directors of
Pendaries and LOM.
Based upon and subject to the foregoing, LOM is of the opinion that, as of
the date hereof, the consideration offered by Ultra for the acquisition of the
common shares of Pendaries pursuant to the Arrangement is fair, from a
financial point of view, to the holders of common shares of Pendaries.
Very truly yours,
Loewen, Ondaatje, McCutcheon Limited
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APPENDIX G
SECTION 131 OF THE BUSINESS CORPORATIONS ACT (NEW BRUNSWICK)
131(1) Subject to sections 132 and 166, a holder of shares of any class of a
corporation may dissent if the corporation is subject to an order under
paragraph 128(4)(d) that affects the holder or if the corporation resolves to
(a) amend its articles under section 113 to add, change or remove
restrictions on the transfer of shares of a class or series of the
shares of the corporation;
(b) amend its articles under section 113 to add, change or remove any
restriction upon the business or businesses that the corporation may
carry on;
(c) amend its articles under section 113 to provide that meetings of the
shareholders may be held outside New Brunswick at one or more specified
places;
(d) amalgamate with another corporation, otherwise than under section 123;
(e) be continued under the laws of another jurisdiction under section 127;
or
(f) sell, lease or exchange all or substantially all its property under
subsection 130(1).
131(2) A holder of shares of any class or series of shares entitled to vote
under section 115 may dissent if the corporation resolves to amend its articles
in a manner described in that section.
131(3) In addition to any other rights he may have, but subject to subsection
(26), a shareholder who complies with this section is entitled, when the action
approved by the resolution from which he dissents becomes effective, or an
order is made under subsection 128(5), 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 day before the resolution is adopted or an
order is made, but in determining the fair value of the shares any change in
value reasonably attributable to the anticipated adoption of the resolution
shall be excluded.
131(4) A dissenting shareholder may only claim under this section with respect
to all the shares of a class held by him on behalf of any one beneficial owner
and registered in the name of the dissenting shareholder.
131(5) A dissenting shareholder shall send to the registered office of the
corporation, at or before any meeting of shareholders at which a resolution
referred to in subsection (1) or (2) is to be voted on, a written objection to
the resolution, unless the corporation did not give notice to the shareholder
of the purpose of the meeting or of his right to dissent.
131(6) The corporation shall, within ten days after the shareholders adopt the
resolution, send to each shareholder who has sent the objection referred to in
subsection (5) notice that the resolution has been adopted, but such notice is
not required to be sent to any shareholder who voted for the resolution or who
has withdrawn his objection.
131(7) A dissenting shareholder shall, within twenty days after he receives a
notice under subsection (6), or, if he does not receive such notice, within
twenty days after he learns that the resolution has been adopted, send to the
corporation a written notice containing
(a) his name and address;
(b) the number and class of shares in respect of which he dissents; and
(c) a demand for payment of the fair value of such shares.
131(8) Not later than the thirtieth day after the sending of a notice under
subsection (7), a dissenting shareholder shall send the certificates
representing the shares in respect of which he dissents to the corporation or
its transfer agent.
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131(9) A dissenting shareholder who fails to comply with subsection (8) has no
right to make a claim under this section.
131(10) A corporation or its transfer agent shall endorse on any share
certificate received under subsection (8) a notice that the holder is a
dissenting shareholder under this section and shall return forthwith the share
certificates to the dissenting shareholder.
131(11) On sending a notice under subsection (7), a dissenting shareholder
ceases to have any rights as a shareholder other than the right to be paid the
fair value of his shares as determined under this section except where
(a) the dissenting shareholder withdraws his notice before the corporation
makes an offer under subsection (12),
(b) the corporation fails to make an offer in accordance with subsection
(12) and the dissenting shareholder withdraws his notice, or
(c) the directors revoke a resolution to amend the articles under
subsection 113(2), terminate an amalgamation agreement under subsection
122(6), abandon an application for continuance under subsection 127(5),
or abandon a sale, lease or exchange under subsection 130(7),
in which case his rights as the holder of the shares in respect of which he had
dissented are reinstated as of the date he sent the notice referred to in
subsection (7), and he is entitled, upon presentation and surrender to the
corporation or its transfer agent of any certificate representing the shares
that have been endorsed in accordance with subsection (10), to be issued a new
certificate representing the same number of shares as the certificate so
presented, without payment of any fee.
131(12) A corporation shall, not later than fourteen days after the later of
the day on which the action approved by the resolution is effective or the day
the corporation received the notice referred to in subsection (7), send to each
dissenting shareholder who has sent such notice
(a) a written offer to pay for his shares in an amount considered by the
directors of the corporation to be the fair value thereof, accompanied
by a statement showing how the fair value was determined; or
(b) if subsection (26) applies, a notification that it is unable lawfully
to pay dissenting shareholders for their shares.
131(13) Every offer made under subsection (12) for shares of the same class or
series shall be on the same terms.
131(14) Subject to subsection (26), a corporation shall pay for the shares of a
dissenting shareholder within ten days after an offer made under subsection
(12) has been accepted, but any such offer lapses if the corporation does not
receive an acceptance thereof within thirty days after the offer has been made.
131(15) Where a corporation fails to make an offer under subsection (12) or if
a dissenting shareholder fails to accept an offer, the corporation may, within
fifty days after the action approved by the resolution is effective or within
such further period as the Court may allow, apply to the Court to fix a fair
value for the shares of any dissenting shareholder.
131(16) If a corporation fails to apply to the Court under subsection (15), a
dissenting shareholder may apply to the Court for the same purpose within a
further period of twenty days or within such further period as the Court may
allow.
131(17) If a corporation fails to comply with subsection (12), then the costs
of a shareholder application under subsection (16) are to be borne by the
corporation unless the Court otherwise orders.
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131(18) Before making application to the Court under subsection (15) or not
later than seven days after receiving notice of an application to the Court
under subsection (16), as the case may be, a corporation shall give notice to
each dissenting shareholder who, at the date upon which the notice is given,
(a) has sent to the corporation the notice referred to in subsection (7),
and
(b) has not accepted an offer made by the corporation under subsection
(12), if such offer was made,
of the date, place and consequences of the application and of his right to
appear and be heard in person or by counsel, and a similar notice shall be
given to each dissenting shareholder who, after the date of such first
mentioned notice and before termination of the proceedings commenced by the
application, satisfies the conditions set out in paragraph (a) and (b), within
three days after he satisfies such conditions.
131(19) All dissenting shareholders who satisfy the conditions set out in
paragraphs (18)(a) and (b) shall be deemed to be joined as parties to an
application under subsection (15) or (16) on the later of the date upon which
the application is brought and the date upon which they satisfy the conditions,
and shall be bound by the decision rendered by the Court in the proceedings
commenced by the application.
131(20) Upon an application to the Court under subsection (15) or (16), the
Court may determine whether any other person is a dissenting shareholder who
should be joined as a party, and the Court shall then fix a fair value for the
shares of all dissenting shareholders.
131(21) The Court may in its discretion appoint one or more appraisers to
assist the Court to fix a fair value for the shares of the dissenting
shareholders.
131(22) The final order of the Court in the proceedings commenced by an
application under subsection (15) or (16) shall be rendered against the
corporation and in favour of each dissenting shareholder who, whether before or
after the date of the order, complies with the conditions set out in paragraphs
(18)(a) and (b).
131(23) The Court may in its discretion allow a reasonable rate of interest on
the amount payable to each dissenting shareholder from the date the action
approved by the resolution is effective until the date of payment.
131(24) Where subsection (26) applies, the corporation shall, within ten days
after the pronouncement of an order under subsection (22), notify each
dissenting shareholder that it is unable lawfully to pay dissenting
shareholders for their shares.
131(25) Where subsection (26) applies, a dissenting shareholder, by written
notice delivered to the registered office of the corporation within thirty days
after receiving a notice under subsection (24), may
(a) withdraw his notice of dissent, in which case the corporation shall be
deemed to consent to the withdrawal and the shareholder is reinstated
to his full rights as a shareholder, or
(b) retain 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.
131(26) 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.
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131(27) Upon application by a corporation that proposes to take any of the
actions referred to in subsection (1), the Court may, if satisfied that the
proposed action is not in all the circumstances one that should give rise to
the rights arising under subsection (3), by order declare that those rights
will not arise upon the taking of the proposed action, and the order may be
subject to compliance with such terms and conditions as the Court thinks fit
and notice of any such application and a copy of any order made by the Court
upon such application shall be served upon the Director.
131(28) The Director may appoint counsel to assist the Court upon the hearing
of an application under subsection (27).
1991, c.27, s.5.
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APPENDIX H
ULTRA PETROLEUM CORP.
MANAGEMENT PROXY CIRCULAR
FOR THE 2000 ANNUAL MEETING
This information is given as of April 17, 2000
GENERAL INFORMATION
SOLICITATION OF PROXIES
This Management Proxy Circular is furnished in connection with the
solicitation of proxies by the management of ULTRA PETROLEUM CORPORATION (the
"Corporation") for use at the Annual and Special Meeting (the "Meeting") of the
shareholders of the Corporation, to be held at the time and place and for the
purposes set forth in the accompanying Notice of Meeting and at any adjournment
thereof.
The contents and the sending of this Management Proxy Circular have been
approved by the Directors of the Corporation.
Persons or Companies Making The Solicitation
The enclosed instrument of proxy is solicited by management. Solicitations
will be made by mail and possibly supplemented by telephone or other personal
contact to be made without special compensation by regular officers and
employees of the Corporation. The Corporation may reimburse shareholders'
nominees or agents (including brokers holding shares on behalf of clients) for
the cost incurred in obtaining authorization from their principals to execute
the instrument of proxy. No solicitation will be made by specifically engaged
employees or soliciting agents. The cost of solicitation of proxies by
management will be borne by the Corporation. None of the directors of the
Corporation have advised management in writing that they intend to oppose any
action intended to be taken by management as set forth in this Management Proxy
Circular.
Appointment and Revocation of Proxies
The persons named in the accompanying instrument of proxy are directors or
officers of the Corporation. A shareholder has the right to appoint a person to
attend and act for him on his behalf at the Meeting other than the persons
named in the enclosed instrument of proxy. To exercise this right, a
shareholder shall strike out the names of the persons named in the instrument
of proxy and insert the name of his nominee in the blank space provided, or
complete another instrument of proxy.
The completed instrument of proxy must be dated and signed and the duly
completed instrument of proxy must be deposited at the Corporation's transfer
agent, Montreal Trust Company of Canada, 4th Floor, 510 Burrard Street,
Vancouver, British Columbia, V6C 3B9, at least 48 hours before the time of the
Meeting or any adjournment thereof, excluding Saturdays, Sundays and holidays.
The instrument of proxy must be signed by the shareholder or by his duly
authorized attorney. If signed by a duly authorized attorney, the instrument of
proxy must be accompanied by the original power of attorney or a notarially
certified copy thereof. If the shareholder is a corporation, the instrument of
proxy must be signed by a duly authorized attorney, officer, or corporate
representative, and must be accompanied by the original power of attorney or
document whereby the duly authorized officer or corporate representative
derives his power, as the case may be, or a notarially certified copy thereof.
The exercise of a proxy does not constitute a written objection for the
purposes of subsection 193(5) of the Business Corporations Act (Yukon). See
"Shareholders' Rights of Dissent".
1
<PAGE>
The articles of the Corporation confer discretionary authority upon the
Chairman of the Meeting to accept proxies which do not strictly conform to the
foregoing requirements and certain other requirements set forth in the
articles.
In addition to revocation in any other manner permitted by law, a
shareholder may revoke a proxy either by (a) signing a proxy bearing a later
date and depositing it at the place and within the time aforesaid, or (b)
signing and dating a written notice of revocation (in the same manner as the
instrument of proxy is required to be executed as set out in the notes to the
instrument of proxy) and either depositing it at the place and within the time
aforesaid or with the Chairman of the Meeting on the day of the Meeting or on
the day of any adjournment thereof, or (c) registering with the scrutineer at
the Meeting as a shareholder present in person, whereupon such proxy shall be
deemed to be have been revoked.
Voting of Shares and Exercise of Discretion of Proxies
On any poll, the persons named in the enclosed instrument of proxy will vote
the shares in respect of which they are appointed and, where directions are
given by the shareholder in respect of voting for or against any resolution,
will do so in accordance with such direction.
In the absence of any direction in the instrument of proxy, it is intended
that such shares will be voted in favour of each of the proposals referred to
in the instrument of proxy. The instrument of proxy enclosed, when properly
signed, confers discretionary authority with respect to amendments or
variations to any matters which may properly be brought before the Meeting. At
the date of this Management Proxy Circular, management of the Corporation is
not aware of any such amendments, variations or other matters to be presented
for action at the Meeting. However, if any other matters which are not now
known to the management should properly come before the Meeting, the proxies
hereby solicited will be voted on such matters in accordance with the best
judgement of the nominee.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
On April 17, 2000, 56,751,125 Common Shares without par value were issued
and outstanding, each share carrying the right to one vote. At a general
meeting of the Corporation, on a show of hands, every shareholder present in
person shall have one vote and, on a poll, every shareholder shall have one
vote for each share of which he is the holder.
Only shareholders of record at the close of business on the 17th day of
April, 2000, who either personally attend the Meeting or who complete and
deliver an instrument of proxy in the manner and subject to the provisions set
out under the heading "Appointment and Revocation of Proxies" will be entitled
to have his or her shares voted at the Meeting or any adjournment thereof.
To the knowledge of the directors and senior officers of the Corporation,
only the following own, directly or indirectly, or exercise control or
direction over, shares carrying more than 10% of the voting rights attached to
all outstanding shares of the Corporation:
<TABLE>
<CAPTION>
Percentage of
Issued and
Number of Outstanding
Name of Shareholder Shares Voting Securities
------------------- ---------- -----------------
<S> <C> <C>
Ultra Holdings, Inc............................. 12,861,245 22.66%
</TABLE>
2
<PAGE>
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Other than as disclosed elsewhere in this Management Proxy Circular, none of
the directors or senior officers of the Corporation, no proposed nominee for
election as a director of the Corporation, none of the persons who have been
directors or senior officers of the Corporation since the commencement of the
Corporation's last completed financial year and no associate or affiliate of
any of the foregoing persons has any material interest, direct or indirect, by
way of beneficial ownership of securities or otherwise, in any matter to be
acted upon at the Meeting.
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
Other than as previously disclosed in this Management Proxy Circular or as
set out in the following, no insider of the Corporation, no proposed nominee
for election as a director of the Corporation and no associate or affiliate of
any such insider or proposed nominee, has any material interest, direct or
indirect, in any material transaction since the commencement of the
Corporation's last completed financial year or in any proposed transaction,
which, in either case, has materially affected or will materially affect the
Corporation. The Corporation's former President, who is also a director of the
Corporation, is a director of Gemini Energy Corp. and a director and officer of
Ultra Holdings, Inc. The Corporation and Gemini both own working interests in a
number of the same oil and gas properties. The Corporation's largest
shareholder is Ultra Holdings, Inc.
STATEMENT OF EXECUTIVE COMPENSATION
Executive Officers of the Corporation
For the purposes of this Management Proxy Circular:
"CEO" of the Corporation means an individual who served as Chief Executive
Officer of the Corporation or acted in a similar capacity during the most
recently completed financial year;
"executive officer" of the Corporation means an individual who at any time
during the most recently completed financial year was the Chairman or Vice-
Chairman of the Board, where that person performed the function of such office
on a full-time basis, the President, a Vice-President in charge of a principal
business unit such as sales, finance or production, and any officer of the
Corporation or any of its subsidiaries who performed a policy-making function
in respect of the Corporation whether or not the individual was also a director
of the Corporation or any of its subsidiaries; and
"Named Executive Officers" means:
(a) each CEO regardless of the amount of his compensation;
(b) each of the Corporation's four most highly compensated executive
officers, other than the CEO, who were serving as executive officers at
the end of the most recently completed financial year and had total
salary and bonuses of at least Cdn$100,000; and
(c) any person who would be included under paragraph (b) but for the fact
that he was not serving as an executive officer at the end of the most
recently completed financial year.
3
<PAGE>
Summary Compensation Table
The following table, presented in accordance with Form 40 of the Regulation
made under the Securities Act (Ontario) (the "Regulation"), sets forth all
annual and long-term compensation for services rendered in all capacities to
the Corporation (on a consolidated basis) for the six month fiscal period ended
December 31, 1999, and for the fiscal years ended June 30, 1999 and June 30,
1998. The Corporation had no other executive officers whose total salary and
bonuses (on an annualized basis) exceeded Cdn$100,000 during the fiscal period
ended December 31, 1999 and the fiscal years end June 30, 1999 and June 30,
1998.
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation
--------------------- -------------------------
Awards
-------------------------
Securities Restricted
Under Shares or
Options/ Restricted All Other
Name and Principal Salary Bonus SARs Share Compensation
Position Period Ending ($) USD ($) USD Granted (#) Units ($) USD ($) USD
------------------ ------------- --------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Watford...... Dec. 31, 1999 $ 240,000(3) $120,000 Nil $80,000
Chairman of the Board, June 30, 1999 $ 240,000 Nil 1,650,000 Nil Nil
CEO & President(1) June 30, 1998 N/A N/A N/A N/A N/A
Charlotte Kauffman...... Dec. 31, 1999 $ 100,000(3) $ 20,000 150,000 Nil Nil
Corporate Secretary June 30, 1999 $ 100,000 Nil Nil Nil Nil
and General Counsel June 30, 1998 $ 100,000 Nil 50,000 Nil Nil
Stephen Kneller......... Dec. 31, 1999 $ 99,000(3) $ 9,900 150,000 Nil Nil
VP Exploration June 30, 1999 $ 99,000 Nil Nil Nil Nil
June 30, 1998 $ 90,000 Nil 15,000 Nil Nil
R. G. "Jerry" Albertus.. Dec. 31, 1999 $ 110,000(3) Nil Nil Nil $55,000(2)
President(2) June 30, 1999 $ 110,000 Nil Nil Nil Nil
June 30, 1998 $ 113,538 Nil 175,000 Nil Nil
</TABLE>
--------
(1) Michael D. Watford has served as President of the Corporation since
December 4, 1999.
(2) R. G. "Jerry" Albertus has served as President of the Corporation from May
14, 1996 to December 3, 1999 and received a six months severance package in
December, 1999.
(3) This represents an annual salary, even though the reporting period is six
months.
Compensation of Directors
Directors who are not officers of the Corporation are not currently paid any
fees for their services as directors other than expenses for travel to the
board meetings. During the year ended December 31, 1999, Michael Schoen was
paid $3,000 for serving as an interim director from the period of September,
1999 to December 3, 1999. Other than Mr. Schoen, no compensation was paid or
payable to directors or entities controlled by directors except for
compensation paid to the Named Executive Officers as described above. Directors
are also entitled to participate in the existing stock option plan of the
Corporation and, if the 2000 Stock Incentive Plan is ratified and approved,
will be entitled to automatic awards of options thereunder. See "2000 Stock
Incentive Plan" below. As of December 31, 1999, options in respect of an
aggregate of 600,000 Common Shares were outstanding in favour of current
directors who are not officers of the Corporation.
Long-term Incentive Plan ("LTIP") Awards
No LTIP awards were made to a Named Executive Officer during the most
recently completed financial year.
4
<PAGE>
Options and Stock Appreciation Rights ("SARs")
OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
<TABLE>
<CAPTION>
Market Value of
% of Total Securities
Options/SARs Underlying
Securities Granted to Options/SARs on
Under Employees in Exercise or the Date of
Options/SARs Financial Base Price Grant Expiration
Name Granted (#) Year (Cdn$/Security) (Cdn$/Security) Date
---- ------------ ------------ --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Charlotte Kauffman...... 150,000 11% $1.20 $1.20 30 Nov 09
Stephen Kneller......... 150,000 11% $1.20 $1.20 30 Nov 09
</TABLE>
--------
(1) Exercise price is based on the previous day's closing price on the Toronto
Stock Exchange.
AGGREGATED OPTION/SAR EXERCISES DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Unexercised
in-the-Money
Securities Unexercised Options/SARs
Acquired Aggregate Options/SARs at at Dec 31,
on Value Dec 31, 1999 1999(1)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) USD Unexercisable Unexercisable
---- ---------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Michael D. Watford...... Nil N/A 825,000/825,000 Nil/Nil
Charlotte Kauffman...... Nil N/A 345,000/Nil Nil/Nil
Stephen Kneller......... Nil N/A 215,000/Nil Nil/Nil
R.G. "Jerry" Albertus
(2).................... 300,000 $198,000 375,000/Nil Nil/Nil
</TABLE>
--------
(1) The closing price of the Corporation's Common Shares on December 31, 1999
was Cdn$0.98.
(2) R. G. Albertus ceased to be an officer and employee of the Corporation
effective December 3, 1999.
Change in Responsibilities and Employment Contracts
The Corporation has an employment contract with Michael D. Watford, the
Chairman, Chief Executive Officer and President. The contract provides for an
initial term of three years that will be automatically extended for successive
one-year periods with a ninety day written notice for early termination. The
Corporation's Compensation Committee will annually review Mr. Watford's
compensation and will recommend to the Board of Directors for approval the
appropriate adjustments, if any. Such adjustments shall be based on performance
and then current market conditions for comparable positions. An annual
incentive award is recommended by the Compensation Committee and approved by
the Board. Mr. Watford received stock options for common stock of the
Corporation, with an expiration period of ten years. The options will be vested
over two years from January 29, 1999. The vesting will occur in four equal
parts at six month intervals. The contract also provides for a retention bonus
of $250,000 US for continued employment of two years. In the event Mr. Watford
is terminated prior to the end of his contract other than for just cause, a
severance package comprising 50% of Mr. Watford's salary would be paid. Should
Mr. Watford be terminated due to sale or merger of the Corporation, 100% of his
salary would be paid. The stock options at termination would vest according to
the following schedule: (a) prior to six months of employment, he would receive
one-fourth of the options; (b) for six months to a year of employment, he would
receive the proportionate number of options equivalent to the number of months
employed divided by 24 months; and (c) after one year, he would receive all the
options.
Compensation Committee
There is a Compensation Committee for the Corporation. The Corporation's
executive compensation program is administered by the Compensation Committee.
During the time period of July 1, 1999 to
5
<PAGE>
December 3, 1999, the Compensation Committee consisted of Dr. William C.
Helton, Mr. John Hislop, and Dr. G. Harold Laycraft, who were each directors of
the Corporation. During the time period of December 4, 1999 to December 31,
1999, the compensation committee consisted of Dr. William C. Helton, Mr. John
Hislop and Mr. Michael D. Watford. No member of the Compensation Committee had
or has any relationship with the Corporation or its subsidiaries which requires
disclosure under the "Indebtedness of Directors, Executive Officers, and Senior
Officers" or "Interest of Insiders in Material Transactions", unless described
in the relative sections herein.
Report on Executive Compensation
The compensation policy of the Corporation for determining executive
compensation is performance based and focuses on management's fundamental
objective of maximizing long term shareholder value. The compensation practices
are comprised of several components such as base salary and incentives which
relate to specific accomplishments during the year which may be paid in cash
and/or long term equity-based incentives in the form of stock options. To date,
no specific formulae have been developed to assign specific weighting to each
of these components. The Corporation's compensation philosophy is to foster
entrepreneurship at all levels of the organization by generating long term
equity-based incentives, through the granting of stock options, which is a
significant component of executive compensation assuming the Corporation's
Common Share price achieves good long term performance. The Compensation
Committee uses third party compensation data to assist with salary
determinations and to assist in assessing competitiveness. The Compensation
Committee considers the amount and terms of outstanding options when
determining whether and how many new option grants are to be made.
Base Salary
The Compensation Committee reviews and approves the salary ranges for the
Corporation's employees. Comparative data is accumulated from a number of
external sources including independent consultants. The policy for determining
salary for executive officers is consistent with the administration of salaries
for all other employees. Base salaries for executives are determined by
assessment of sustained performances and consideration of competitive
compensation levels for the markets in which the Corporation operates.
Long Term Compensation
The Corporation has a broad-based employee stock option plan. The plan is
designed to encourage stock ownership and entreprenueurship on the part of all
employees and, in particular, all executive officers. The plan aligns the
interests of executive officers with shareholders by linking a significant
component of executive compensation to the long term performance of the
Corporation's Common Shares. Individual grants are determined by an assessment
of an individual's current and expected future performance, level of
responsibilities and the importance of his/her position with, and contribution
to, the Corporation. The executive officers who are most involved in the
evolution of the Corporation, be it through property acquisition, promotion or
compliance, are the officers who are prioritized in terms of compensation. As
such, Michael D. Watford is the officer who receives the greatest amount of
compensation in terms of salary and option packages. These individuals have
been primarily responsible to date for advancing the business of the
Corporation.
6
<PAGE>
Performance Graph
The following graph compares the yearly percentage change in the
Corporation's cumulative total shareholder return on its Common Shares with the
cumulative total return of the Toronto Stock Exchange 300 Composite Index. For
this purpose, the yearly percentage change in the Corporation's cumulative
total shareholder return is calculated by dividing the difference between the
price for the Corporation's shares at the end and the beginning of the
"measurement period" by the price for the Corporation's Common Shares at the
beginning of the measurement period. "Measurement period" means the period
beginning at the market close on the last trading day before the beginning of
the Corporation's fifth preceding financial year, through and including the end
of the Corporation's most recently completed financial year.
[PERFORMANCE GRAPH APPEARS HERE]
TSE-300 Composite Index Ultra Petroleum Corp.
1994 100
1995 112 20
1996 141 147
1997 159 308
1998 154 64
1999 200 63
7
<PAGE>
STATEMENT OF CORPORATE GOVERNANCE
General
"Corporate Governance" refers to the process and structure used to direct
and manage the business and affairs of a corporation. The objective is to
enhance shareholder value, including ensuring the financial viability of the
business. Corporate governance processes and structures define the division of
power among the shareholders, the board of directors and management and
establish ways to ensure accountability. They also take into account how the
direction and management of the business will affect other stakeholders such as
employees, customers, suppliers and communities.
The TSE Committee on Corporate Governance in Canada issued a series of
proposed guidelines for effective corporate governance (the "TSE Report"). The
guidelines address matters such as the constitution and independence of
corporate boards, the functions to be performed by boards and their committees
and the effectiveness and education of board members. The TSE has adopted as a
listing requirement the disclosure by each listed Corporation, on an annual
basis, of its approach to corporate governance with reference to the guidelines
contained in the TSE Report. The following describes the Corporation's approach
to corporate governance in relation to the guidelines contained in the TSE
Report.
The Corporation is not in compliance with all of the proposed corporate
governance guidelines as in the past it did not believe, because of its size
and nature of business, all of the guidelines were applicable. The Corporation
in the future will attempt to more fully address all of the guidelines.
Stewardship of the Corporation
The Board of Directors has implicitly and explicitly acknowledged its
responsibility for the stewardship of the Corporation in the following ways.
Strategic Planning and Identification of Risks
Strategic planning is done on an ad hoc basis. Management of the Corporation
provides an operational review of the Corporation to the Board of Directors
quarterly. In connection therewith, the Board of Directors discusses various
strategic matters and identifies business risks associated with the activities
of the Corporation, as it considers appropriate.
Senior Management
In accordance with its legal responsibilities, the Board of Directors takes
responsibility for appointing those members of senior management who become
officers of the Corporation. Currently, the senior officers of the Corporation
are Michael D. Watford, the Chairman, Chief Executive Officer and the President
of the Corporation; Stephen Kneller, Vice-President of Exploration; Charlotte
H. Kauffman, Secretary and General Counsel; and Kristen Miller, Assistant
Corporate Secretary. The Corporation has no formal succession plan.
Communications Policy
The Board of Directors has procedures in place to ensure effective
communication between the Corporation, its shareholders, prospective investors
and the public, including the dissemination of information on a regular and
timely basis. Each of the Chief Executive Officer and President, Vice-
President, and Business Development Manager dedicates a portion of his time to
communicating with shareholders and prospective investors,as well as an
Investor Relations and Corporate Affairs Representative who communicates with
shareholders and prospective investors.
Internal Control and Management Information Systems
The Board of Directors is responsible for the Corporation's internal control
and management information systems. Management has developed and maintains a
system of internal controls and reporting to obtain
8
<PAGE>
reasonable assurance that the Corporation's assets are safeguarded,
transactions are authorized and financial information available is reliable.
Market Regulation
The Board of Directors has adopted Disclosure, Confidentiality and Employee
Trading Guidelines as recommended by the TSE. A copy of those Guidelines is
available from the Corporation on request.
Board Composition
Pursuant to the TSE Report, an "unrelated" director is a director who is
independent of management and is free from any interest and any business or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director's ability to act in the best interests of the
Corporation, other than interests and relationships arising from shareholding.
Two of the three individuals proposed for election to the Board by the
shareholders at the 2000 annual meeting are "unrelated" directors. These
"unrelated" directors are Dr.William C. Helton and John Hislop. Michael D.
Watford is considered to be a "related" director. The Corporation considers
John Hislop an unrelated director since it has been over two years since he was
the President and CFO. The TSE Report also made a distinction between inside
and outside directors. The TSE Report considers an "inside" director to be a
director who is an officer or employee of the Corporation or any of its
affiliates. Each of the named "unrelated" directors is also considered to be an
"outside" director of the Corporation by virtue of the fact that none of them
have worked for the Corporation, received remuneration from the Corporation in
excess of director's fees and/or stock options nor have any of them entered
into material contracts with the Corporation. The outside directors meet
independently as necessary and at least twice a year. The Corporation does not
have a "significant" shareholder as defined by the TSE Corporate Governance
Guidelines as a shareholder with the ability to exercise a majority of votes
for the election of directors.
Independence from Management
Mr. Watford serves as Chairman of the Board of Directors. The TSE Report
states that the independence of a board is most simply assured by appointing a
Chair who is not a member of management. The Board has considered the issue of
an independent chair of the Board. In light of Mr. Watford's guidance in the
successful development of the business of the Corporation, the Board considers
him uniquely suited to fulfil the role of Chair at the meetings of the Board of
Directors.
Nominating and Corporate Governance Committee
The Board of Directors does not have a Corporate Governance Committee
currently in place. At present, in addition to those matters which must by law
be approved by the Board, management seeks Board approval for any transaction
which is out of ordinary course of business or could be considered to be
material to the business of the Corporation.
The Nominating Committee of the Corporation is comprised of Dr. William C.
Helton and Mr. John Hislop, directors; and Mr. Michael D. Watford (Chair). This
committee determines nominees to the Board of Directors.
Assessment of Board and Committees
The Board of Directors does not formally review individual board members or
committee members and their contributions.
Orientation and Education Programs
The Corporation does not have a formal process of orientation or education
program for new members of the Board.
9
<PAGE>
Size of Board
The Board considers its size each year when it passes a resolution
determining the number of directors to be appointed at each annual general
meeting of shareholders. The Board has determined for the upcoming year that
three directors is the appropriate number of directors, taking into account the
number required to carry out duties effectively while maintaining a diversity
of views and experience.
Compensation Committee
The Compensation Committee of the Corporation is comprised of three
directors: Dr. William C. Helton (Chair), Mr. John Hislop and Mr. Michael D.
Watford. This committee makes recommendations to the Board in respect of the
compensation of senior executives as described above.
Mandates
The Corporation does not have specific mandates for its Board members as any
matters which have not been delegated specifically to senior management or a
committee are the responsibility of the full Board of Directors. The
Corporation does not have specific mandates for the Chief Executive Officer and
President given the size and scope of operations of the Corporation. The senior
officers are responsible for the operations of the Corporation.
Independence of Board
The Board of Directors functions independently because a majority of the
members of the Board are not involved in the management of the Corporation.
Audit Committee
The Audit Committee is comprised of three directors: Mr. John Hislop
(Chair), Dr. William C. Helton and Mr. Michael D. Watford. The Audit Committee
is responsible for review of both interim and annual financial statements for
the Corporation. For the purposes of performing their duties, the members of
the Audit Committee have the right, at all times, to inspect all of the books
and financial records of the Corporation and its subsidiaries and to discuss
with management and the external auditors of the Corporation any accounts,
records and matters relating to the financial statements of the Corporation.
The Audit Committee members meet periodically with management and annually with
the external auditors.
Engagement of Outside Advisors
Individual directors may engage outside advisors with the authorization of
the Board.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
No person who is or at any time during the most recently completed financial
year was a director, executive officer or senior officer of the Corporation, no
proposed nominee for election as a director of the Corporation, and no
associate of any of the foregoing persons has been indebted to the Corporation
or any of its subsidiaries, at any time since the commencement of the
Corporation's last completed financial year. No guarantee, support agreement,
letter of credit or other similar arrangement or understanding has been
provided by the Corporation at any time since the beginning of the most
recently completed financial year with respect to any indebtedness of any such
person.
10
<PAGE>
PARTICULARS OF MATTERS TO BE ACTED UPON
ELECTION OF DIRECTORS
Each director of the Corporation is elected annually and holds office until
the next Annual General Meeting of the shareholders unless that person ceases
to be a director before then. In the absence of instructions to the contrary,
the shares represented by proxy will, on a poll, be voted for the nominees
herein listed. Management does not contemplate that any of the nominees set out
below will be unable to serve as a director.
The following table sets out the names of the persons to be nominated for
election as directors, the positions and offices which they presently hold with
the Corporation, their respective principal occupations and the number of
shares of the Corporation which each beneficially owns, directly or indirectly,
or over which control or direction is exercised as of the date of this
Management Proxy Circular:
<TABLE>
<CAPTION>
Common
Shares
Beneficially
Owned or
Name and Position Principal Occupation Director Since Controlled
----------------- ------------------------ ---------------- ------------
<C> <S> <C> <C>
JOHN HISLOP........................... President of Ultra March 24, 1993 345,134
Director Holdings, Inc. an
investment holding
company; President of
Cubix Investments, Inc.,
an investment holding
company; Director of
Gemini Energy Corp., a
public resource company.
DR. WILLIAM C. HELTON................. Medical Doctor; August 12, 1994 378,329
Director President of Enterprise
Exploration & Production
Inc., a private oil and
gas exploration and
development company.
MICHAEL D. WATFORD.................... Former President, CEO January 29, 1999 25,000
Chairman of the Board, CEO & Director and Director of Nuevo
Energy Co., a public
resource company;
Consultant in private
business until Feb.
1999; Chairman of the
Board, Chief Executive
Officer and President of
the Corporation.
</TABLE>
The information as to shares beneficially owned or over which the above-
named officers and directors exercise control or direction not being within the
knowledge of the Corporation has been furnished by the respective officers and
directors individually.
APPOINTMENT OF AUDITOR
The Board of Directors of the Corporation is recommending the re-appointment
of KPMG Peat Marwick LLP, Chartered Accountants, to act as the Corporation's
auditors in respect of the year ending December 31, 2000. KPMG Peat Marwick LLP
is the successor firm to KPMG Peat Marwick Thorne, Lybrand, Chartered
Accountants, which firm was first appointed as the Corporation's auditors at
the meeting of the shareholders held on December 19, 1996. At the meeting,
shareholders will be asked to consider and, if thought fit, approve the re-
appointment of KPMG Peat Marwick LLP as auditors of the Corporation for the
ensuing year. Unless such authority is withheld, the persons named in the
accompanying proxy intend to vote for the appointment of KPMG Peat Marwick LLP,
Chartered Accountants, as auditors of the Corporation, and to authorize the
directors to fix their remuneration.
11
<PAGE>
APPENDIX I
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 20-F
----------------
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from June 30, 1999 to December 31, 1999
Commission File Number: 0-29370
ULTRA PETROLEUM CORP.
(Exact Name of Registrant as specified in its charter)
ULTRA PETROLEUM CORP.
(Translation of Registrant's Name into English)
Yukon Territory, Canada
(Jurisdiction of incorporation or organization)
16801 Greenspoint Park Drive, Suite 370
Houston, Texas 77060
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares without par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the Company's classes
of capital or common stock as of December 31, 1999: 56,751,125 common shares
without par value.
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
Indicate by check mark which financial statement item the registrant has
elected to follow.
ITEM 17 [X] ITEM 18
Currency: All dollar amounts set forth in this report are in United States
dollars, except where otherwise indicated.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I.................................................................... 1
Item 1. Description of Business......................................... 1
Item 2. Description of Property......................................... 7
Item 3. Legal Proceedings............................................... 9
Item 4. Control of Registrant........................................... 9
Item 5. Nature of Trading Market........................................ 10
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders......................................................... 10
Item 7. Taxation........................................................ 11
Item 8. Selected Financial Data......................................... 15
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 16
Item 9A. Quantitative and Qualitative Disclosures About Market Risk..... 19
Item 10. Directors and Officers of Registrant........................... 19
Item 11. Compensation of Directors and Officers......................... 20
Item 12. Options to Purchase Securities From Registrant or
Subsidiaries................................................... 20
Item 13. Interest of Management In Certain Transactions................. 20
PART II................................................................... 21
Item 14. Description of Securities to be Registered..................... 21
PART III.................................................................. 21
Item 15. Defaults Upon Senior Securities................................ 21
Item 16. Changes in Securities and Changes in Security for Registered
Securities..................................................... 21
PART IV................................................................... 22
Item 17. Financial Statements........................................... 22
Item 18. Financial Statements........................................... 22
Item 19. Financial Statements and Exhibits.............................. 22
</TABLE>
ii
<PAGE>
PART I
Item 1. Description of Business.
General
Ultra Petroleum Corp. (the "Company") was incorporated on November 14, 1979,
under the laws of the Province of British Columbia, Canada. The Company
continued into the Yukon Territory, Canada under Section 190 of the Business
Corporations Act (Yukon Territory) on March 1, 2000. The Company explores for
and develops oil and gas, primarily in the Green River Basin of southwest
Wyoming, where it leases approximately 271,966 gross (200,088 net) acres
covering approximately 410 square miles. The Company operates a well in Texas
that is a marginal producer. The Company currently derives approximately 90% of
its revenue from the sale of natural gas and approximately 10% from the sale of
condensate.
During the six months ended December 31, 1999, the Company drilled, caused
to be drilled or purchased a total of 6 gross exploratory (3.125 net) wells.
Four of these exploratory wells were considered productive and 2 wells were
plugged and abandoned. Since December 31, 1999, the Company has not
participated in the drilling of any new wells due to governmental restrictions
on the Company's area of activity. (see Environmental Impact Statement) "Item
2--Description of Property."
The Company plans to continue to obtain financing to enable field
development, to use advanced technology to improve the Company's drilling
success ratio, and to continue to search for ways to reduce finding and
development costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Plan of Operations."
In June, 1999, the Company sold an undivided fifty percent (50%) of its
working interest in 15,760 net acres on the northern end of the Pinedale
Anticline ("Mesa" or "Mesa Area") to Anschutz Wyoming Corporation ("Anschutz")
and Questar Exploration and Production Company ("Questar"), the holder of a
preferential right to purchase. Under the terms of the agreement with Questar,
Questar was obligated to fund exploratory costs on behalf of the Company up to
the amount of $7.6 million net to the Company's interest prior to December 31,
1999 (the "Carried Amount").
During the six-month period ending December 31, 1999, Anschutz drilled 4
gross exploratory wells on their portion of the purchased acreage, of which 3
were successful and 1 was a dry hole. Total net cost to the Company was $2.8
million. During the same time period, Questar drilled 1 exploratory well but
was not able to complete the well before winter lease stipulations were
imposed. Questar paid to the Company $4.6 million of the unspent Carried Amount
as of December 31, 1999. The Company is currently interpreting the results of a
77 square mile 3-D seismic survey across the Mesa Area of the Pinedale
Anticline. The Company received the processed survey in February 2000. Subject
to the Company's review of the seismic survey and the final results of the
Environmental Impact Statement described below, the Company through its partner
Questar plans to drill potentially as many as 8 gross exploratory wells in the
Mesa Area.
The Company has two wholly-owned subsidiaries through which it conducts its
operations in the United States, Ultra Petroleum (USA) Inc., a Colorado
corporation, and Ultra Resources, Inc., a Wyoming corporation.
Environmental Impact Statement
In 1998, the U.S. Bureau of Land Management ("BLM") initiated a requirement
for an Environmental Impact Statement ("EIS") for the Pinedale Anticline area
in the Green River Basin. An EIS evaluates the effects an industry's activities
will have on the environment in which the activity is proposed. This EIS
encompasses approximately 200,000 gross acres under lease by the Company north
of the Jonah Field, and where most of the Company's exploration and development
is taking place. This environmental study includes an analysis of the
geological and reservoir characteristics of the area plus the necessary
environmental studies related to wildlife, surface use, socio-economic and air
quality issues. It will play an important role in
1
<PAGE>
determining the Company's ability to develop its natural gas resources in the
region. The preliminary draft of the EIS was issued in mid-September, and the
draft EIS was issued mid-November, 1999. The final EIS is to be issued in late
July, 2000. The draft provides for a great deal of flexibility for the
operators, but will require continued up front planning before a company
submits its application for a permit to drill on each well. The Record of
Decision ("ROD") on the EIS is expected in August of 2000. Until the EIS is
completed, the Company's development of its land position subject to the EIS
will be limited to no additional surface locations, because all the locations
allowed by the BLM during the EIS have been drilled. In addition to locations
on federal lands, the Company co-owns leases on a significant area of state and
privately owned lands in the vicinity of the Mesa that do not fall under the
jurisdiction of the BLM and are not subject to the EIS process. Since the ROD
is expected to be issued in August 2000, the Company anticipates sufficient
locations for its drilling activities for the remainder of 2000.
Further, in August, 1999 the BLM required an Environmental Assessment ("EA")
for the Jonah Field where the Company owns three sections and has drilled 19
wells to date. An EA is a more limited environmental study than is conducted
under an EIS. The BLM required an EA for the Jonah Field to evaluate allowing
industry to drill wells on a smaller density than had been previously studied
in the Jonah EIS which was completed in 1998. The Company will be allowed to
infield drill on 40 acre spacing in the Jonah Field. The EA was completed in
mid-June, 2000. The result of the EA is that the Company will be allowed to
infield drill on 40 acre spacing in the Jonah Field. The Company plans to begin
drilling development wells on the three sections within the Jonah Field area
with approximately 11 gross wells planned for the remainder of the year.
Factors That May Affect Future Results
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes,
projects, intends or anticipates will or may occur, including such matters as:
future availability of capital; development and exploration expenditures
(including the amount and nature thereof); drilling of wells; timing and amount
of future production of oil and gas; business strategies; operating costs and
other expenses; cash flow and anticipated liquidity; prospect development and
property acquisitions; and marketing of oil and gas. Factors that could cause
actual results to differ materially ("Cautionary Disclosures") are described
below in "Risk Factors," and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Cautionary Disclosures include,
but are not limited to: general economic conditions; the market prices of oil
and gas; the risks associated with exploration; the Company's ability to find,
acquire, market, develop and produce new properties; operating hazards
attendant to the oil and gas business; downhole drilling and completion risks
that are generally not recoverable from third parties or insurance; the outcome
of the Bureau of Land Management's EIS relating to the Company's core
properties in the Green River Basin of southwest Wyoming; uncertainties in the
estimation of proved reserves and in the projection of future rates of
production and timing of exploration and development expenditures; potential
mechanical failure or under performance of individually significant productive
wells; the strength and financial resources of the Company's competitors; the
Company's ability to find and retain skilled personnel; climatic conditions;
labor relations; availability and cost of material and equipment; delays in
anticipated start-up dates; environmental risks; the results of financing
efforts; actions or inactions of third-party operators of the Company's
properties; and regulatory developments. All statements attributable to the
Company or persons acting on its behalf are expressly qualified in their entity
by these Cautionary Disclosures. The Company disclaims any obligation to update
or revise any forward-looking statement to reflect events or circumstances
occurring hereafter or to reflect the occurrence of anticipated or
unanticipated events.
Risk Factors
In addition to the risks set forth above and elsewhere in this report, the
Company is subject to the following risks.
2
<PAGE>
Environmental Impact Statement. The BLM is preparing an Environmental Impact
Statement ("EIS") relating to the area north of the Jonah Field in the Green
River Basin of Wyoming where most of the Company's exploration and development
is taking place. Many factors will be taken into account in the EIS, including
factors that may limit the Company's ability to pursue development of its
affected land position. Management believes that the EIS will define the
development of the Pinedale Anticline and surrounding area. At this time it is
not possible to predict the outcome of the EIS with reasonable certainty. Any
adverse impact to the Company from the EIS could be particularly detrimental to
the Company because its operations are concentrated in the Green River Basin.
Until the EIS is completed, the Company's drilling and completion activities
are curtailed as no additional drilling activity in this area is allowed until
the ROD is issued. Production activities, however, have continued. The timing
of future drilling will be impacted by the completion of the EIS and the timing
of obtaining drilling permits after meeting various governmental regulations
and requirements. In addition to locations on federal lands, the Company owns
leases on a significant area of state and privately owned lands in the vicinity
of the Mesa that do not fall under the jurisdiction of the BLM and are not
subject to the EIS process. The Company intends to pursue all permitable
activity on its leasehold interests. The Company anticipates that the EIS will
be completed by August 2000 in time for a portion of the third quarter drilling
period, but there is no assurance that this will be the case. The Company
cannot guarantee the ultimate completion date of the EIS or that, when
completed, the EIS will permit the Company to drill and develop wells according
to its current plans.
Ability to Replace Reserves. The Company's future success depends upon its
ability to find, develop and acquire oil and gas reserves that are economically
recoverable. As a result, the Company must locate and develop or acquire new
oil and gas reserves to replace those being depleted by production. The Company
must do this even during periods of low oil and gas prices when it is difficult
to raise the capital necessary to finance these activities. Without successful
exploration or acquisition activities, the Company's reserves, production and
revenues will decline rapidly. No assurances can be made that the Company will
be able to find and develop or acquire additional reserves at an acceptable
cost.
Marketability of Production. The ability to market oil and gas depends on
numerous factors beyond the Company's control. These factors include: the
extent of domestic production and imports of oil and gas; the proximity of gas
production to gas pipelines; the availability of pipeline capacity; the demand
for oil and gas by utilities and other end users; the availability of
alternative fuel sources; the effects of inclement weather; state and federal
regulation of oil and gas marketing; and federal regulation of gas sold or
transported in interstate commerce. Because of these factors, the Company may
be unable to market all of the oil and gas it produces. In addition, it may be
unable to obtain favorable prices of the oil and gas it produces.
Volatility of Oil and Gas Prices and Markets. The Company's revenues are
determined, to a large degree, by prevailing prices for oil and gas.
Historically, oil and gas prices and markets have been volatile and are likely
to continue to be volatile. Prices for oil and gas are subject to wide
fluctuations in response to relatively minor changes in supply of and demand
for oil and gas, market uncertainty and numerous additional factors that are
beyond the control of the Company. The Company derives its revenue principally
from the sale of natural gas. The Company sells the majority of its gas in the
open market at prevailing market prices, or pursuant to market-price contracts.
The market price for gas is dictated by supply and demand, and the Company
cannot predict or control the price it receives for its gas. Moreover, market
prices for gas vary significantly by region. For example, natural gas in the
Rocky Mountain region, where the Company produced approximately 99 percent of
its gas during the six-month period ended December 31, 1999, historically sells
for less than gas in the Midwest and Northeast. Accordingly, the Company's
income and cash flows will be greatly affected by changes in gas prices and by
regional pricing differentials. The Company will experience reduced cash flows
and may experience operating losses when gas prices are low. Under extreme
circumstances, the Company's gas sales may not generate sufficient revenue to
meet the Company's financial obligations and fund its planned capital
expenditures. Moreover, significant price decreases could negatively affect the
Company's reserves by reducing the quantities of reserves that are recoverable
on an economic basis, necessitating write downs to reflect the realizable value
of the reserves in the low price environment.
3
<PAGE>
Concentration of Oil and Gas Operations. The Company's core assets, and the
focus of its oil and gas operations, are in the Green River Basin of southwest
Wyoming. During the two past fiscal years ended June 30, and continuing through
fiscal 2000, nearly all of the Company's drilling activity has occurred or will
occur in the Green River Basin, on its land position of 271,966 gross acres
covering an area of approximately 410 square miles. The Company's concentration
in this area, while considered a competitive advantage by the Company, entails
risks as well. These risks include non-diversification of the Company's
resources, exploration risks that are inherent in deep, tight gas resources
(such as highly complex drilling and completion procedures that must be
carefully executed), as well as significant environmental regulations and
oversight by regulatory authorities in the Green River Basin. See
"Environmental Impact Statement."
Limited Financial Resources. The Company's ability to continue exploration
and development of its properties and to replace reserves will be dependent
upon its ability to continue to raise significant additional financing or
obtain some other arrangements with industry partners in lieu of raising
financing. Any arrangements that may be entered into could be expensive to the
Company. There can be no assurance that the Company will be able to raise
additional capital in light of factors such as the market demand for its
securities, the state of financial markets for independent oil companies
(including the markets for debt), oil and gas prices and general market
conditions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations and Liquidity and Capital Resources" for a discussion
of the Company's capital budget.
The Company expects to continue using its bank credit facility to borrow
funds to supplement its available cash. The amount the Company may borrow under
the credit facility may not exceed a borrowing base determined by the lenders
based on their projections of the Company's future production, future
production costs and taxes, commodity prices and other factors. The Company
cannot control the assumptions the lenders use to calculate the borrowing base.
The lenders may, without the Company's consent, adjust the borrowing base at
any time. If the Company's borrowings under the credit facility exceed the
borrowing base, the lenders may require that the Company repay the excess. If
this were to occur, the Company may have to sell assets or seek financing from
other sources. The Company can make no assurances that it would be successful
in selling assets or arranging substitute financing. For a description of the
bank credit facility and its principal terms and conditions, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Environmental and Other Governmental Regulation. Oil and gas operations are
subject to various federal, state and local governmental regulations. The
production, handling, transportation and disposal of oil and gas and their by-
products are subject to regulation under federal, state and local environmental
laws. To date, the Company has been required to expend significant resources in
order to satisfy applicable environmental laws and regulations, and it may be
assumed that the Company's costs of complying with these regulations will
continue to be substantial. Compliance costs under existing legal requirements
and under any new requirements that might be enacted could become material.
Additional matters subject to governmental regulation include discharge permits
for drilling operations, performance bonds, reports concerning operations, the
spacing of wells, unitization and pooling of properties and taxation. From time
to time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below actual
production capacity in order to conserve supplies of oil and gas. Any move to
curtail production or control prices could be materially detrimental to the
Company.
A significant percentage of the Company's operations are conducted on public
lands. These operations are subject to a variety of on-site security
regulations and other permits and authorizations issued by the Bureau of Land
Management, the Wyoming Department of Environmental Quality and other agencies,
and are subject to a number of other regulatory restrictions, such as winter
lease stipulations and drilling limitations imposed by resource management
plans. In order to drill wells in Wyoming on federal, state or privately-owned
land, the Company is required to file an Application for Permit to Drill with
the Wyoming Oil and Gas Commission. Drilling on acreage controlled by the
federal government requires the filing of a similar application with the BLM.
While the Company has been able to obtain required drilling permits to date,
the Company cannot
4
<PAGE>
guarantee that permitting requirements will not adversely affect its ability to
complete its drilling program at the cost and in the time period currently
anticipated. On large-scale projects, lessees may be required to perform
environmental impact statements to assess the environmental impact of potential
development, which can delay project implementation and/or result in the
imposition of environmental restrictions that could have a material impact on
cost or scope. The BLM has currently imposed an EIS covering the area where a
significant portion of the Company's prospects are located. See "--
Environmental Impact Statement."
Likewise, the Company's compliance with environmental impact assessment
regulations on federal leases can significantly delay the commencement of
operations in the area and can limit the extent to which the leases may be
developed.
Interruption From Severe Weather. The Company's operations are conducted
principally in the Rocky Mountain region. The weather in this area can be
extreme and can cause interruption in the Company's exploration and production
operations. Moreover, especially severe weather can result in damage to
facilities entailing longer operational interruptions and significant capital
investment. Likewise, the Company's Rocky Mountain operations are subject to
disruption from winter storms and severe cold which can limit operations
involving fluids and impair access to the Company's facilities. A portion of
the Company's acreage is affected by winter lease stipulations that restrict
the period of time during which operations may be conducted on the leases. The
Company's leases that are affected by the winter stipulations prohibit drilling
and completing activities from late November to mid-May, but do allow
production activities all year round.
The Company Invests Heavily in Exploration. The Company has historically
invested a significant portion of its capital budget in drilling exploratory
wells in search of unproved oil and gas reserves. The Company cannot be certain
that the exploratory wells it drills will be productive or that it will recover
all or any portion of its investments. In order to increase the chances for
exploratory success, the Company often invests in seismic or other geoscience
data to assist it in identifying potential drilling objectives. Additionally,
the cost of drilling, completing and testing exploratory wells is often
uncertain at the time of the Company's initial investment. Depending on
complications encountered while drilling, the final cost of the well may
significantly exceed that which the Company originally estimated. The Company
expenses all direct costs of drilling an unsuccessful exploratory well in the
period in which the well is determined not to be producible in commercial
quantities.
Operating Hazards and Uninsured Risks. The oil and gas business involves a
variety of operating risks, including fire, explosion, pipe failure, casing
collapse, abnormally pressured formations, and environmental hazards such as
oil spills, gas leaks, and discharges of toxic gases. The occurrence of any of
these events with respect to any property operated or owned (in whole or in
part) by the Company could have a material adverse impact on the Company. The
Company and the operators of its properties maintain insurance in accordance
with customary industry practices and in amounts that management believes to be
reasonable. However, insurance coverage is not always economically feasible and
is not obtained to cover all types of operational risks. The occurrence of a
significant event that is not fully insured could have a material adverse
effect on the Company's financial condition.
Drilling and Operating Risks. The Company's oil and gas operations are
subject to all of the risks and hazards typically associated with drilling for,
and production and transportation of, oil and gas. These risks include the
necessity of spending large amounts of money for identification and acquisition
of properties and for drilling and completion of wells. In the drilling of
exploratory or development wells, failures and losses may occur before any
deposits of oil or gas are found. The presence of unanticipated pressure or
irregularities in formations, blow-outs or accidents may cause such activity to
be unsuccessful, resulting in a loss of the Company's investment in such
activity. If oil or gas is encountered, there can be no assurance that it can
be produced in economic quantities sufficient to justify the cost of continuing
such operations or that it can be marketed satisfactorily.
5
<PAGE>
Drilling Plans Subject to Change. This report includes descriptions of the
Company's future drilling plans with respect to its prospects. A prospect is a
property on which the Company's geoscientists have identified what they
believe, based on available seismic and geological information, to be
indications of hydrocarbons. The Company's prospects are in various stages of
review. Whether or not we ultimately drill a prospect may depend on the
following factors: receipt of additional seismic data or reprocessing of
existing data; material changes in oil or gas prices; the costs and
availability of drilling equipment; success or failure of wells drilled in
similar formations or which would use the same production facilities;
availability and cost of capital; changes in the estimates of costs to drill or
complete wells; the Company's ability to attract other industry partners to
acquire a portion of the working interest to reduce exposure to costs and
drilling risks; decisions of the Company's joint working interest owners; and
the results of the BLM's EIS. The Company will continue to gather data about
its prospects, and it is possible that additional information may cause the
Company to alter its drilling schedule or determine that a prospect should not
be pursued at all.
Conflicts of Interest. There is a conflict of interest to which one director
of the Company is subject in connection with the operations of the Company.
This director is engaged and will continue to be engaged in the search for oil
and gas and oil and gas properties on behalf of entities outside of the
Company, and situations may arise where this director will be in direct
competition with the Company. One of the Company's directors and his associated
company holds interests in certain properties in which the Company also has an
interest. It is the Company's policy that conflicts will be dealt with in
accordance with the relevant provisions of the Business Corporations Act (Yukon
Territory). See "Item 13--Interest of Management in Certain Transactions."
Uncertainty of Estimates of Reserves and Future Net Revenues. The financial
statements included in this report contain estimates of the Company's oil and
gas reserves and the discounted future net revenues from those reserves, as
prepared by independent petroleum engineers and/or the Company. There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves, including many factors beyond the control of the Company. Those
estimates are based on several assumptions that the United States Securities
and Exchange Commission (the "SEC") requires oil and gas companies to use, for
example, constant oil and gas prices. Such estimates are inherently imprecise
indications of future net revenues. Actual future production, revenues, taxes,
operating expenses, development expenditures and quantities of recoverable oil
and gas reserves might vary substantially from those assumed in the estimates.
Any significant variance in these assumptions could materially affect the
estimated quantity and value of reserves. In addition, the Company's reserves
might be subject to revisions based upon future production, results of future
exploration and development, prevailing oil and gas prices and other factors.
Moreover, estimates of the economically recoverable oil and gas reserves,
classifications of such reserves, and estimates of future net cash flows,
prepared by different engineers or by the same engineers at different times,
may vary substantially. Information about reserves constitutes forward-looking
information. See "Factors That May Affect Future Results."
Financial Reporting Impact of Full Cost Method of Accounting. The Company
follows the full cost method of accounting for its oil and gas properties. A
separate cost center is maintained for expenditures applicable to each country
in which the Company conducts exploration and/or production activities. Under
such method, the net book value of properties on a country by country basis,
less related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after tax future net revenues from proved oil and gas
properties, discounted at 10% per year. In calculating discounted future net
revenues, oil and gas prices in effect at the time of the calculation are held
constant, except for changes which are fixed and determinable by existing
contracts. The net book value is compared to the ceiling on a quarterly basis.
The excess, if any, of the net book value above the ceiling is required to be
written off as an expense. Under SEC full cost accounting rules, any write-off
recorded may not be reversed even if higher oil and gas prices increase the
ceiling applicable to future periods. Future price decreases could result in
reductions in the carrying value of such assets and an equivalent charge to
earnings.
Competition. The oil and gas industry is highly competitive. The Company
competes in the areas of property acquisitions and the development and
production of oil and gas with major oil companies and other
6
<PAGE>
independent oil and gas concerns, as well as with individual producers and
operators. Many of these competitors have substantially greater financial and
other resources than the Company.
Item 2. Description of Property.
As of December 31, 1999, the Company owned developed oil and gas leases
totaling 4,750 gross (1,621 net) acres of which 87.5% is located in the Green
River Basin of Sublette County, Wyoming and the remaining 12.5% is located in
Texas and Louisiana, plus associated production equipment. The Company owned
undeveloped oil and gas leases totaling 267,216 gross (198,467 net) acres of
which 98% is located in the Green River Basin of Sublette County, Wyoming and
the remaining 2% is located in Texas. The Company's acreage in the Green River
Basin is primarily covering the Pinedale Anticline and a large undeveloped
block west of the Anticline. The Company also owns three sections in the Jonah
Field. The acreage and other additional information concerning the Company's
oil and gas operations are presented in the following tables. Holding costs of
leases not held by production are approximately $280,000 for the fiscal year
ending December 31, 2000.
Estimated Net Quantities of Oil and Gas and Standardized Measure of Future Net
Cash Flows
All of the Company's oil and gas reserves are located in the United States.
Information concerning the estimated net quantities of all the Company's proved
reserves, changes therein and the standardized measure of future net cash flows
from such reserves as of December 31, 1999, is presented as unaudited
supplementary information included in the consolidated financial statements
included in this report. The estimates are based upon the reports of Netherland
Sewell & Associates, an independent petroleum engineering firm, for the six-
month period ending December 31, 1999. Gilbert Lausten Jung & Associates , an
independent petroleum engineering firm provided the reports for each of the
three fiscal years ended June 30, 1997 , 1998 and 1999. The Company elected to
retain Netherland Sewell & Associates for review of its US asset base, because
they are a US engineering firm with prior and ongoing experience in the Green
River Basin of Sublette County, Wyoming where the Company's core assets are
located. The Company has no long-term supply or similar agreements with foreign
governments or authorities, and the Company does not own an interest in any
reserves accounted for by the equity method.
Net Oil and Gas Production, Average Price and Average Production Cost
The net quantities of gas and condensate produced and sold by the Company
for each of the last three fiscal years, the average sales price per unit sold
and the average production cost per unit are presented below.
<TABLE>
<CAPTION>
Gas and Condensate*
---------------------------------------------------
Average
Net Production Gas
Condensate Net Gas Sales Sales Cost Per
Fiscal Year Ended June Production Production Price Per Price Equivalent
30, (Bbls) (MCF) Bbl Per MCF MCF**
---------------------- ---------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
1997.................... 8,000 300,000 $21.68 $2.02 $0.25
1998.................... 14,000 1,800,000 $13.26 $1.81 $0.33
1999.................... 42,000 4,129,000 $15.95 $1.54 $0.32
<CAPTION>
Six Months Ended
December 31,
----------------
<S> <C> <C> <C> <C> <C>
1999.................... 20,000 1,908,000 $21.69 $2.29 $0.38
</TABLE>
--------
* Equivalent barrels have been calculated on the basis of six thousand cubic
feet (6 MCF) of natural gas equals one barrel of oil.
** Average production cost includes lifting costs, remedial workover expenses
and production taxes.
7
<PAGE>
Gross and Net Productive Wells
As of December 31, 1999, the Company's total gross and net wells were as
follows:
<TABLE>
<CAPTION>
Productive Wells*
-------------------------------------------------------------------
Gas and Condensate
-------------------------------------------------------------------
Gross Wells Net Wells
----------- ---------
<S> <C>
52 16.56
</TABLE>
--------
* A gross well is a well in which a working interest is owned. The number of
net wells represents the sum of fractional working interests the Company owns
in gross wells. Productive wells are producing wells plus shut-in wells the
Company deems capable of production.
Gross and Net Developed and Undeveloped Acres
As of December 31, 1999, the Company had total gross and net developed and
undeveloped oil and gas leasehold acres as set forth below. The developed
acreage is stated on the basis of spacing units designated by state regulatory
authorities.
<TABLE>
<CAPTION>
Leasehold Acreage*
---------------------------
Developed Undeveloped
----------- ---------------
Gross Net Gross Net
----- ----- ------- -------
<S> <C> <C> <C> <C>
Louisiana........................................ 430 13 -- --
Texas............................................ 160 40 3,684 747
Wyoming.......................................... 4,160 1,568 263,532 197,720
----- ----- ------- -------
All States....................................... 4,750 1,621 267,216 198,467
</TABLE>
--------
* Gross acres are those acres in which a working interest is owned. The number
of net acres represents the sum of fractional working interests the Company
owns in gross acres.
Exploratory Wells and Developed Wells
For each of the three fiscal years ended June 30, 1999 and the six-month
period ended December 31, 1999, the number of net wells drilled by the Company
was as follows:
<TABLE>
<CAPTION>
Net Exploratory Net Development Total
Wells Drilled Wells Drilled Net
--------------- ---------------- Wells
Six Months Ended December 31, Productive Dry Productive Wells Drilled
----------------------------- ---------- ---- ---------- ----- -------
<S> <C> <C> <C> <C> <C>
1999.............................. 0 1.00 1.70 .425 3.125
<CAPTION>
Year Ended June 30,
-------------------
<S> <C> <C> <C> <C> <C>
1999.............................. 0.68 0.50 3.73 0 4.91
1998.............................. 2.93 1.60 3.44 0 7.97
1997.............................. 0.43 0 0.95 0 1.38
</TABLE>
Recent Activities
From January 1, 2000 through June 1, 2000, the Company did not participate
in the drilling of any new wells within the Pinedale Anticline area due to
restrictions placed on the area by the BLM for winter lease stipulations which
prohibit drilling and completion activities from mid-November until mid-May as
well as further restrictions imposed while the BLM conducts the Pinedale EIS.
The BLM conducted and has completed the Jonah EA as of mid-June, 2000 and
issued a Finding of No Significant Impact (FONSI) on June 15, 2000. The Jonah
EA evaluated down-spacing the field to allow for a greater density of wells to
be drilled within the area. The BLM's issuance of the FONSI allows operations
to begin as soon as permits are granted by the BLM and the Wyoming Oil and Gas
Commission.
8
<PAGE>
Supply Contracts or Agreements
The Company is not obligated to provide a fixed or determinable quantity of
oil and gas in the future under any existing contract or agreement, beyond the
short-term contracts customary in division orders and off lease marketing
arrangements within the industry and the Company's agreement with Questar
discussed above that provides for funding arrangements in return for production
payments and gas deductions.
Reserve Estimates Filed with Agencies
No estimates of total proved net oil and gas reserves for the fiscal year
ended December 31, 1999 have been filed with any federal authority or agency.
Other than the estimates of reserves at June 30, 1999, filed with the SEC, the
Company did not file reserve reports with any other United States federal
agencies within the past 12 months.
Item 3. Legal Proceedings.
The Company is currently involved in various routine disputes and
allegations incidental to its business operations. While it is not possible to
determine the ultimate disposition of these matters, the Company, after
consultation with legal counsel, believes that the final resolution of all such
currently pending or threatened litigation is not likely to have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
Item 4. Control of Registrant.
To the knowledge of the Company, (i) the Company is not owned or controlled,
directly or indirectly, by another corporation or by any foreign government and
(ii) there are no arrangements that may, at a subsequent date, result in a
change of control of the Company.
The following table sets forth each individual or entity which owns, of
record and beneficially, directly or indirectly, or is known by the Company to
own beneficially, directly or indirectly, more than 10% of any class of the
Company's voting securities as of June 1, 2000.
<TABLE>
<CAPTION>
Number of
Type of Common
Name and Address Ownership Shares Percentage
---------------- --------- ---------- ----------
<S> <C> <C> <C>
Ultra Holdings, Inc......................... Direct 13,000,000 22.90%
609 West Hastings Street
Suite 1100
Vancouver, BC Canada
V6B 4W4
</TABLE>
The following table sets forth the total amount of the Company's voting
securities owned by the Company's executive officers and directors, as a group,
as of June 1, 2000.
<TABLE>
<CAPTION>
Amount Percentage
Title of Class Identity of Group Owned of Class
-------------- -------------------- ------- ----------
<S> <C> <C> <C>
Common............................... Officers & Directors 743,401 1.31%
(six individuals)
</TABLE>
9
<PAGE>
Item 5. Nature of Trading Market.
The common shares of the Company are listed and posted for trading on the
Toronto Stock Exchange ("TSE"). The common shares were listed on the Vancouver
Stock Exchange ("VSE") until December 31, 1998. The following table sets forth
the high and low closing bid prices on the VSE through September 30, 1998 and
on the TSE thereafter through December 31, 1999 and the volume of shares traded
for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ending High Low Volume
-------------- ----- ----- ----------
($CDN)
<S> <C> <C> <C>
March 31, 1998........................................ $7.30 $4.06 12,366,978
June 30, 1998......................................... $5.65 $3.55 10,514,001
September 30, 1998.................................... $3.85 $1.68 7,074,696
December 31, 1998..................................... $2.02 $1.14 6,073,344
March 31, 1999........................................ $1.54 $1.06 5,897,735
June 30, 1999......................................... $1.37 $0.96 5,934,003
September 30, 1999.................................... $2.00 $1.07 7,408,400
December 31, 1999..................................... $1.49 $0.93 5,009,300
</TABLE>
On June 1, 2000 the closing bid price of the Company's common shares on the
TSE was CDN $1.75 per share.
To the best of the Company's knowledge, as of June 1, 2000, 21,995,454 of
its common shares representing 38.79% of the common shares outstanding were
held by 436 registered holders in the United States. The Company is not listed
for trading on any securities exchange in the United States. The Company's
common shares are not registered to trade in the United States in the form of
American Depository Receipts or similar certificates.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
There are no governmental laws, decrees or regulations in Canada relating to
restrictions on the import/export of capital affecting the remittance of
interest, dividends or other payments to non-residential holders of the
Company's shares. Any such remittances to United States residents, however, may
be subject to a 15% withholding tax pursuant to Article X of the reciprocal tax
treaty between Canada and the United States. See Item 7--Taxation.
Except as provided in the Investment Canada Act (the "Act"), there are no
limitations under the laws of Canada or in the charter or any other constituent
documents of the Company on the right of foreigners to hold and/or vote the
shares of the Company. The Act requires a non-Canadian making an investment to
acquire control of a Canadian business, the gross assets of which exceed
certain defined threshold levels, to file an application for review with
Investment Canada, the federal agency created by the Act. As a result of the
Canada-U.S. Free Trade Agreement, the Act was amended in January 1989 to
provide distinct threshold levels for Americans who acquire control of a
Canadian business. A Canadian business is defined in the Act as a business
carried on in Canada that has a place of business in Canada, an individual or
individuals in Canada who are employed or self-employed in connection with the
business, and assets in Canada used in carrying on the business.
An American, as defined in the Act, includes: an individual who is an
American national or a lawful permanent resident of the United States; a
government or government agency of the United States; and American-controlled
entity, corporation or limited partnership; and a corporation, limited
partnership or trust which is not controlled in fact through ownership of its
voting interests of which two-thirds of its board of directors, general
partners or trustees, as the case may be, are any combination of Canadians and
Americans.
10
<PAGE>
The following investments by a non-Canadian are subject to review by
Investment Canada:
(a) all direct acquisitions of control of Canadian businesses with
assets of $5 million or more;
(b) all indirect acquisitions of control of Canadian businesses with
assets of $50 million or more if such assets represent less than 50% of the
value of the assets of the entities, the control of which is being
acquired; and
(c) all indirect acquisitions of control of Canadian businesses with
assets of $5 million or more if such assets represent more than 50% of the
value of the assets of the entities, the control of which is being
acquired.
Review is required when investments by Americans exceeds $150 million for
direct acquisitions of control. For purposes of the Act, direct acquisition of
control means, a purchase of the voting interest in a corporation, partnership,
joint venture or trust carrying on a Canadian business, or any purchase of all
or substantially all of the assets used in carrying on a Canadian business;
indirect acquisition of control means, a purchase of the voting interest of a
corporation, partnership, joint review or trust, whether a Canadian or foreign
entity, which controls a corporation, partnership, joint venture or trust
company carrying on a Canadian business in Canada.
The acquisition of certain Canadian businesses is excluded from the higher
thresholds set out for Americans. These excluded businesses include oil, gas,
uranium, financial services (except insurance); transportation services and
cultural services (i.e., the publication, distribution or sale of books,
magazines, periodicals (other than printing or typesetting businesses), music
in print or machine readable form, radio, television, cable and satellite
services; the publication, distribution, sale of exhibitions of film or video
recordings or audio or video music recordings). Direct or indirect acquisitions
of control of these excluded business are reviewable at the $5 and $50 million
thresholds.
A non-Canadian shall not implement an investment reviewable under the Act
unless the investment has been reviewed and the Minister responsible for
Investment Canada is satisfied or is deemed to be satisfied that the investment
is likely to be of net benefit to Canada. The factors to be taken into account
include:
1. The effect of the investment on the legal and economic activities in
Canada, including the effect on employment and resource processing, on the
utilization of particular components and services produced in Canada, and
on exports from Canada;
2. The degree and significance of participation by Canadians in the
Canadian business;
3. The effect of the investment on productivity, industrial efficiency,
technological development, product innovation and product variety in
Canada;
4. The effect of the investment on competition within an industry or
industries in Canada; and
5. The compatibility of the investment with national industrial economic
or cultural policies enunciated by the federal government or legislation or
the legislature or government of any Province likely to be significantly
affected by the investment.
A non-Canadian or American making the following investments: (i) an
investment to establish a new Canadian business; and (ii) an investment to
acquire control of a Canadian business which investment is not subject to
review under the Act, must notify Investment Canada, within prescribed time
limits, of such investments.
Item 7. Taxation.
The following is a summary of the principal Canadian federal income tax
considerations generally applicable in respect of the common shares. The tax
consequences to any particular holder of common shares will vary according to
the status of that holder as an individual, trust, corporation, or member of a
partnership,
11
<PAGE>
the jurisdiction in which that holder is subject to taxation, the place where
the holder is resident and, generally, according to that holder's particular
circumstances. This summary is applicable only to holders who are resident in
the United States, have never been resident in Canada, hold their common shares
as capital property and will not use or hold the common shares in carrying on
business in Canada.
The following general discussion respecting taxation is based upon the
Company's advice from its auditors and lawyers. No opinion was requested by the
Company or provided by such auditors and lawyers.
Generally, dividends paid by Canadian corporations to non-resident
shareholders are subject to a withholding tax of 25% of the gross amount of
such dividends. However, Article X of the reciprocal tax treaty between Canada
and the United States reduced to 15% the withholding tax on the gross amount of
dividends paid to residents of the United States. The treaty provides a further
reduction in the withholding tax rate on the gross amount of dividends to 6%
for dividends paid in 1996 and 5% for dividends paid thereafter where a U.S.
corporation owns at least 10% of the voting stock of the Canadian corporation
paying the dividends.
A non-resident who holds shares of the Company as capital property will not
be subject to tax on capital gains realized on the disposition of such shares
unless such shares are "taxable Canadian property" within the meaning of the
Income Tax Act (Canada) and no relief is afforded under any applicable tax
treaty. The shares of the Company would be taxable Canadian property of a non-
resident if at any time during the five year period immediately preceding a
disposition by the non-resident of such shares not less than 25% of the issued
shares of any class of the Company belonged to the non-resident, any person
with whom the non-resident did not deal at arm's length, or to the non-resident
and any person with whom the non-resident did not deal at arm's length.
Certain United States Federal Income Tax Consequences
The following discussion is based upon the sections of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
This discussion does not consider the potential effects, both adverse and
beneficial, of any recently proposed legislation that, if enacted, could be
applied, possibly on a retroactive basis, at any time. The following discussion
is for general information only and it is not intended to be, nor should it be
construed to be, legal or tax advice to any holder or prospective holder of
shares of the Company and no opinion or representation with respect to the
United States Federal income tax consequences to any such holder or prospective
holder is made. Accordingly, holders and prospective holders of shares of the
Company should consult their own tax advisors about the Federal, state, local
and foreign tax consequences of purchasing, owning and disposing of shares of
the Company.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of shares of the Company
who is a citizen or resident of the United States, a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof, any entity that is taxable as a corporation for U.S. tax
purposes and any other person or entity whose ownership of shares of the
Company is effectively connected with the conduct of a trade or business in the
United States. A U.S. Holder does not include persons subject to special
provisions of Federal income tax law, such as tax exempt organizations,
qualified retirement plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
nonresident alien individuals or foreign corporations whose ownership of shares
of the Company is not effectively connected with conduct of trade or business
in the United States, shareholders who acquired their stock through the
exercise of employee stock options or otherwise as compensation and
shareholders who hold their stock as ordinary assets and not as capital assets.
12
<PAGE>
Distributions on Shares of the Company
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to shares of the Company are required to include in
gross income for United States Federal income tax purposes the gross amount of
such distributions to the extent that the Company has current or accumulated
earnings and profits as defined under U.S. Federal tax law, without reduction
for any Canadian income tax withheld from such distributions. Such Canadian tax
withheld may be credited, subject to certain limitations, against the U.S.
Holder's United States Federal income tax liability or, alternatively, may be
deducted in computing the U.S. Holder's United States Federal taxable income by
those who itemize deductions. (See more detailed discussion at "Foreign Tax
Credit" below). To the extent that distributions exceed current or accumulated
earnings and profits of the Company, they will be treated first as a return of
capital up to the U.S. Holder's adjusted basis in the shares and thereafter as
gain from the sale or exchange of the shares. Preferential tax rates for net
capital gains are applicable to a U.S. Holder that is an individual, estate or
trust. There are currently no preferential tax rates for long-term capital
gains for a U.S. Holder that is a corporation.
Dividends paid on the shares of the Company will not generally be eligible
for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations. A U.S. Holder that is a
corporation may, under certain circumstances, be entitled to a 70% deduction of
the United States source portion of dividends received from the Company (unless
the Company qualifies as a "foreign personal holding company" or a "passive
foreign investment company," as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the Company. The
availability of this deduction is subject to several complex limitations that
are beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of shares of the Company may be entitled, at
the option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim
a credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to
all foreign taxes paid by (or withheld from) the U.S. Holder during that year.
There are significant and complex limitations that apply to the credit, among
which is the general limitation that the credit cannot exceed the proportionate
share of the U.S. Holder's United States Federal income tax liability that the
U.S. Holder's foreign source income bears to his or its worldwide taxable
income. In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
"passive income," "high withholding tax interest," "financial services income,"
"shipping income," and certain other classifications of income. The
availability of the foreign tax credit and the application of the limitations
on the credit are fact specific and holders and prospective holders of shares
of the Company should consult their own tax advisors regarding their individual
circumstances.
Disposition of Shares of the Company
A U.S. Holder will recognize a gain or loss upon the sale of shares of the
Company equal to the difference, if any, between (i) the amount of cash plus
the fair market value of any property received, and (ii) the shareholder's tax
basis in the shares of the Company. This gain or loss will be a capital gain or
loss if the shares are a capital asset in the hands of the U.S. Holder, and
will be a short-term or long-term capital gain or loss depending upon the
holding period of the U.S. Holder. Gains and losses are netted and combined
according to special rules in arriving at the overall capital gain or loss for
a particular tax year. Deductions for net capital losses are subject to
significant limitations. For U.S. Holders which are individuals, any unused
portion of such net capital loss may be carried over to be used in later tax
years until such net capital loss is thereby exhausted. For U.S. Holders which
are corporations (other than corporations subject to Subchapter S of the Code),
an unused net capital loss may be carried back three years for the loss year
and carried forward five years from the loss year to be offset against capital
gains until such net capital loss is thereby exhausted.
13
<PAGE>
Other Considerations
In the following circumstances, the above sections of this discussion may
not describe the United States Federal income tax consequences resulting from
the holding and disposition of shares of the Company.
Foreign Personal Holding Company. If at any time during a taxable year more
than 50% of the total combined voting power or the total value of the Company's
outstanding shares is owned, directly or indirectly, by five or fewer
individuals who are citizens or residents of the United States and 60 % or more
of the Company's gross income for such year was derived from certain passive
sources (e.g., from dividends received from its subsidiaries), the Company
would be treated as a "foreign personal holding company." In that event, U.S.
Holders that hold shares of the Company would be required to include in gross
income for such year their allowable portions of such passive income to the
extent the Company does not actually distribute such income.
Foreign Investment Company. If 50% or more of the combined voting power or
total value of the Company's outstanding shares are held, directly or
indirectly, by citizens or residents of the United States, United States
domestic partnerships or corporations, or estates or trusts other than foreign
estates or trusts (as defined by Code Section 7701 (a)(31)), and the Company is
found to be engaged primarily in the business of investing, reinvesting, or
trading in securities, commodities, or any interest therein, it is possible
that the Company might be treated as a "foreign investment company" as defined
in Section 1246 of the Code, causing all or part of any gain realized by a U.S.
Holder selling or exchanging shares of the Company to be treated as ordinary
income rather than capital gain.
Passive Foreign Investment Company. As a foreign corporation with U.S.
Holders, the Company could potentially be treated as a passive foreign
investment company ("PFIC"), as defined in Section 1297 of the Code, if 75% or
more of its gross income in a taxable year is passive income, or the average
percentage of the Company's assets (by value) during the taxable year which
produce passive income or which are held for production of passive income is at
least 50%. Passive income is generally defined to include gross income in the
nature of dividends, interest, royalties, rents and annuities; excess of gains
over losses from transactions in commodities (other than certain transactions
in commodities by producer, processor, merchant or handler of such
commodities); certain foreign currency gains; and other similar types of
income. Upon any excess distribution (as defined in Section 1291 (b) of the
Code) with respect to, or gain from the disposition of, shares of a PFIC, U.S.
Holders owning such shares are subject to an additional tax and to an interest
charge on such excess distribution or gain based on the value of deferral of
tax for the period during which the shares of the PFIC are owned, in addition
to treatment of any gain realized on the disposition of shares of the PFIC as
ordinary income rather than as a capital gain. However, if the U.S. Holder
makes a timely election to treat a PFIC as a qualified electing fund ("QEF")
with respect to such shareholder's interest therein, the above-described rules
generally will not apply. Instead, the electing U.S. Holder would include
annually in his gross income his pro rata share of the PFIC's ordinary earnings
and any net capital gain regardless of whether such income or gain was actually
distributed. A U.S. Holder of a QEF can, however, elect to defer the payment of
United States Federal income tax on such income inclusions. In the alternative,
if the stock of the PFIC is marketable stock and the U.S. Holder elects market-
to-market treatment, the above-described rules generally will not apply.
Instead, each year the U.S. Holder will include in gross income any increase in
the value of such stock, and generally will deduct from gross income any
decrease in the value of such stock. Special rules apply to U.S. Holders who
own their interests in a PFIC through intermediate entities or persons.
Controlled Foreign Corporation. If more than 50% of the voting power of all
classes of stock or the total value of the stock of the Company is owned,
directly or indirectly, by citizens or residents of the United States, United
States domestic partnerships and corporations or estates or trusts other than
foreign estates or trusts, each of whom own 10% or more of the total combined
voting power of all classes of stock of the Company ("United States
shareholder"), the Company could be treated as a "controlled foreign
corporation" under Subpart F of the Code. This classification would effect many
complex results including the required inclusion by such United States
shareholders in income of their pro rata share of "Subpart F income" (as
specially defined by the Code) of the Company. In addition, under Section 1248
of the Code, a gain from the sale or
14
<PAGE>
exchange of shares by a U.S. Holder who is or was a United States shareholder
at any time during the five year period ending with the sale or exchange is
treated as ordinary dividend income to the extent of earnings and profits of
the Company attributable to such stock accumulated while the U.S. Holder held
such stock and the Company was a controlled foreign corporation. Because of the
complexity of Subpart F, and because it is not clear that Subpart F would apply
to the U.S. Holders of shares of the Company, a more detailed review of these
rules is outside of the scope of this discussion.
The foregoing summary is a general discussion of the material United States
Federal income tax considerations to U.S. holders of shares of the Company
under current law. It does not discuss all the tax consequences that may be
relevant to particular holders in light of their circumstances or to holders
subject to special rules, such as tax-exempt organizations, qualified
retirement plans, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, non-resident
alien individuals or foreign corporations whose ownership of shares of the
Company is not effectively connected with the conduct of a trade or business in
the United States, shareholders who acquired their stock through the exercise
of employee stock options or otherwise as compensation, shareholders who hold
their stock as ordinary assets and not capital assets and any other non-U.S.
holders. In addition, U.S. holders may be subject to state, local or foreign
tax consequences. This discussion is not intended to be, nor should it be
construed to be, legal or tax advice to any holder or prospective holder of
shares of the Company and no opinion or representation with respect to the
United States Federal income tax consequences to any such holder or prospective
holder is made. Holders and prospective holders should therefore consult with
their own tax advisors with respect to their particular circumstances. This
discussion covers all material tax consequences.
Item 8. Selected Financial Data
The selected financial data set forth below, presented in accordance with
Canadian generally accepted accounting principles and denominated in U.S.
dollars, should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Month Period Years Ended June 30,
------------------------ --------------------------------------------------
Dec. 31, Dec. 31,
1999 1998 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenue........... $ 4,785,811 $ 3,131,443 $ 7,022,338 $ 3,645,511 $ 440,142 $ 273,466
Net (Loss) Revenue...... (1,563,551) (6,723,219) (8,930,165) (10,572,359) (1,096,489) (1,255,727)
Loss per common share... (0.03) (0.12) (0.16) (0.26) (0.04) (0.08)
Share Capital........... 50,666,631 50,297,448 50,485,327 32,312,036 20,133,202 10,761,671
Special Warrants........ -0- -0- -0- 17,600,442 5,072,166 -0-
Total Assets............ 38,062,649 46,017,473 38,461,878 56,137,341 22,542,053 8,955,800
Long-Term Liabilities... 8,766,646 8,750,000 7,450,000 10,695,654 -0- -0-
Shareholders' Equity.... 25,632,233 29,033,557 27,014,480 35,317,797 21,237,046 7,962,339
</TABLE>
Had the foregoing selected financial data been presented in accordance with
U.S. generally accepted accounting principles, the data presented would be as
follows:
<TABLE>
<CAPTION>
Six Month Period Years Ended June 30,
------------------------ --------------------------------------------------
Dec. 31, Dec. 31,
1999 1998 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenue........... $ 4,785,811 $ 3,131,443 $ 7,022,338 $ 3,645,511 $ 440,142 $ 273,466
Net (Loss) Revenue...... (1,563,551) (6,723,219) (8,930,166) (10,572,359) (1,096,489) (1,255,727)
Loss per common share... (0.03) (0.12) (0.16) (0.18) (0.03) (0.08)
Share Capital........... 51,860,343 51,491,160 51,679,039 33,505,748 21,326,914 11,955,383
Special Warrants........ -0- -0- -0- 17,600,442 5,072,166 -0-
Total Assets............ 38,049,721 46,004,545 38,448,950 56,124,413 22,529,125 8,942,872
Long-Term Liabilities... 8,766,646 8,750,000 7,450,000 10,695,654 -0- -0-
Shareholders' Equity.... 25,463,034 28,864,358 26,845,281 35,202,598 21,067,847 7,853,796
</TABLE>
15
<PAGE>
The Company has never paid cash dividends on its common shares and does not
expect to do so for the foreseeable future. The Company intends to use retained
earnings to finance growth of its business.
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the financial condition and operating results of
the Company should be read in conjunction with consolidated financial
statements and related notes of the Company. Except as otherwise indicated all
amounts are expressed in U.S. dollars.
Since its entry into the oil and gas industry in 1993, the Company has
continued to raise capital for its exploration and development programs, most
of which are based in the United States. Substantially all of the oil and gas
activities are conducted jointly with others and, accordingly, the amounts
reflect only the Company's proportionate interest in such activities.
Inflation has not had a material impact on the Company's results of
operations and is not expected to have a material impact on the Company's
results of operations in the future.
Results of Operations--Six Month Period Ended December 31, 1999 Compared to Six
Month Period Year Ended December 31, 1998
Oil and gas revenues increased to $4.8 million for the six-month period
ending December 31, 1999 from $3.1 million for the same period in 1998. The
Company incurred a net loss of $1.5 million for the six-month period ending
December 31, 1999 compared to a net loss of $6.7 million for the same period in
1998. The increase in gross revenues was attributable to an increase in both
the Company's production and the increase in prices received for that
production. During this period, the Company's cumulative production increased
to 1.90 Bcf of gas, and 20.0 thousand barrels of condensate, up from 1.76 Bcf
of gas, and 9.43 thousand barrels of condensate for the same period in 1998.
During the six-month period ending December 31, 1999, the average product
prices were $2.29 per Mcf and $21.69 per barrel, compared to $1.72 per Mcf and
$11.77 per barrel for the same period in 1998.
During the six-month period ending December 31, 1999 production expenses and
taxes increased to $1.3 million from $1.2 million in 1998. Direct lease
operating expenses decreased to $0.3 million in 1999 from $0.4 million in 1998
and on a unit of production basis, to $0.136 per Mcfe in 1999, from $0.225 per
Mcfe in 1998. This reduction was primarily attributable to the effects of
restructuring operations and reductions in operating field staff. Production
taxes for this period in 1999 were $0.5 million, compared to $0.25 million in
1998 or $0.238 per Mcfe in 1999, from $0.143 per Mcfe in 1998. Production taxes
are calculated based on a percentage of revenue from production. Therefore,
higher production and higher prices contributed to the increases.
Depletion and depreciation expenses remained relatively constant from the
six-month period ending December 31, 1999 to the same period in 1998. On a unit
basis, such expenses decreased to $0.578 per Mcf, from $0.648 in 1998 primarily
as a result of increases in proved reserves.
General and administrative expenses decreased 58% to $1.7 million during the
six-month period ending December 31, 1999 from $4.0 million for the same period
in 1998. The decrease was attributable to the restructuring implemented during
1999. Net interest expense for the period increased to $0.3 million in 1999
from $0.1 million in 1998. This increase was attributable to both the increase
in borrowings under the senior credit facility and reduction in cash balances
earning interest. In November 1999, the Company settled litigation relating to
the plugging and abandonment of the White Estate No. 1 well. The settlement and
legal costs relating to this litigation totaled $1.9 million.
Results of Operations--Fiscal Year Ended June 30, 1999 Compared to Fiscal Year
Ended June 30, 1998
The Company incurred a net loss of $8.9 million for the year ended June 30,
1999 compared to a net loss of $10.6 million for the year ended June 30, 1998.
Oil and gas revenues increased to $7.0 million in fiscal 1999
16
<PAGE>
from $3.6 million in 1998. This was directly attributable to the Company's
drilling and completion activities in the Green River Basin of Wyoming. The
Company's annual production increased to 4.1 Bcf of gas and 41.9 thousand
barrels of condensate during 1999, up from 1.8 Bcf of gas and 14.0 thousand
barrels of condensate during 1998. During 1999 the average product prices
received were $1.54 per Mcf and $15.95 per barrel, compared to an average of
$1.81 per Mcf and $13.26 per barrel in 1998.
Depletion and depreciation expense increased to $1.8 million in 1999 from
$1.4 million in 1998. The increase in depletion and depreciation expense was
attributable to increased production. The per mcf equivalent oil and gas
depletion and depreciation rate fell to $0.41 in 1999. The decline in the per
mcfe depletion and depreciation rate was attributable to the effects of the
ceiling test write-down of $3.4 million incurred in December, 1998, additions
to reserves and reduced finding and development costs. The book value of oil
and gas properties was $33.2 million at June 30, 1999, compared to $37.3
million at June 30, 1998. The causes of this decrease were the sale and write-
downs of oil and gas properties and the costs of drilling of additional wells.
Direct lease operating expenses increased to $0.9 million in 1999 from $0.25
million in 1998. Production taxes and gathering fees increased to $1.7 million
in 1999 from $0.7 million in 1998. Both increases were directly attributable to
increases in production in the Green River Basin of Wyoming.
During 1999, the Company recognized a property impairment charge of $3.4
million, as a result of the capitalized cost of oil and gas properties
exceeding a "ceiling" on such costs computed in accordance with GAAP. This
impairment was caused by the lower commodity prices at December 31, 1998. The
ceiling test impairment is a direct line item on the income statement. In June
1999, the Company sold a working interest in certain undeveloped leaseholds for
$5 million in cash, which had been split between proven and unproven properties
and $8.2 million in carried work commitments which reduced the carrying value
of unproven properties. The $ 8.2 million in carried work commitments will not
be reflected on the books until they are incurred which will be in December
1999.
General and administrative expenses increased to $5.8 million in 1999 from
$3.4 million in 1998. This increase in total general and administrative
expenses was primarily attributable to increases in staffing and activity
during the first and second quarters of fiscal 1999. During the third and
fourth quarters, the Company implemented a restructuring plan to reduce general
and administrative expenses. During fiscal 1999, the Company wrote-off $2.0
million of debt that had been on the books in excess of two years. These debts
were owed primarily by junior joint venture partners for amounts expended by
the Company in drilling farm-out prospects on these partners' behalf for which
the Company was never reimbursed. The Company evaluated the ability of the
joint venture partners to repay the debts and determined that repayment was
unlikely.
Included in unproven properties is $2.5 million of prepaid environmental
costs, which relate to the Company's agreement to purchase specified nitrogen
oxide emission off-sets. These off-sets are to be utilized by the Company in
the future development of its oil and gas properties in the Mesa Area as the
asset that will generate the off-sets is under construction. Of the total
payment, $2.0 million was in the form of a note that bears interest at 10%
payable in installments of $.75 million and $1.25 million on July 15, 1999 and
2000, respectively. The $0.2 million of interest on this note at June 30, 1999
has been capitalized as part of the prepaid environmental cost.
Results of Operations--Fiscal Year Ended June 30, 1998 Compared to Fiscal Year
Ended June 30, 1997
The Company incurred a net loss of $10.6 million on oil and gas revenues of
$3.6 million for the fiscal year ended June 30, 1998. This compares to a net
loss of $1.1 million on oil and gas revenues of $0.4 million for the fiscal
year ended June 30, 1997.
Increases in revenue were attributable to the Company's drilling and
completion activities in the Green River Basin of southwest Wyoming and
partially offset by declines in product prices. During fiscal 1998 the
17
<PAGE>
average product prices received were $1.81 per Mcf of gas and $13.26 per barrel
of condensate, compared to an average of $2.02 per Mcf and $21.68 per barrel in
fiscal 1997.
The Company's annual production increased to 1.8 Bcf of gas and 14,000
barrels of condensate during fiscal 1998, up significantly from 300 MMcf of gas
and 8,000 barrels of condensate during fiscal 1997 due to the Company's
drilling and completion activities in the Green River Basin.
Oil and gas depletion and depreciation expenses rose to $1.2 million in
fiscal 1998 from $60,600 in fiscal 1997. This increase was attributable to
increases in production and increases in the Company's spending on property
acquisitions in 1998. At June 30, 1998 the carrying value of oil and gas
properties was $37.4 million, up from $16.3 million at June 30, 1997. This
increase was mainly attributable to property acquisition and exploration
activities in the Green River Basin. This increase was offset by $8.2 million
of accounting charges associated with property writedown costs. See the
discussion below and note 3 to the consolidated financial statements.
Oil and gas production expenses consisted of operating expenses and
production taxes. Operating expenses increased to $0.25 million in fiscal 1998
from $52,660 in fiscal 1997. Production taxes, including gathering fees,
increased to $.7 million in fiscal 1998 from $25,000 in fiscal 1997. Both
increases are directly attributable to the Company's drilling and completion
activities in the Green River Basin.
During fiscal 1998, the Company recognized a property impairment charge of
$2.1 million, as a result of the capitalized costs of oil and gas properties
exceeding a "ceiling" on such costs computed in accordance with prescribed
accounting guidelines. This writedown, and the loss on abandonment of
properties of $6.1 million, was directly attributable to the oil and gas
properties of Ultra Petroleum (USA) Inc. and the decision to plug and abandon
its White Estates #1 property in Texas. This sour gas well was a source of
growing safety and environmental concern. As a result, reserves associated with
the property and present value included in prior statements were written down.
General and administrative expenses increased to $3.9 million in fiscal 1998
from $1.4 million in fiscal 1997. This increase in total general and
administrative expenses was primarily caused by the cost associated with
establishment of a United States operating company and the increase in the
number of employees and associated costs required to support the Company's
leasehold acquisition, drilling programs, environmental compliance and
regulatory compliance.
Plan of Operations
The Company's goal for the fiscal year ending December 31, 2000 is to drill
18 gross (9.91 net) wells in the Green River Basin, consisting of both Pinedale
Anticline wells, and 40 acre down-spacing wells in the Jonah field. The
Pinedale Anticline wells are subject to finalization of the EIS and issuance of
the ROD. The 40 acre down-spacing wells of the Jonah field was subject to the
final issuance of the Environmental Assessment / Finding of No Significant
Impact by the Bureau of Land Management which was issued June 15, 2000. The
Company will begin drilling in the Jonah Field upon the issuance of permits by
the BLM and Wyoming Oil and Gas Commission. The finalization of the EIS with
the issuance of the ROD is expected by August, 2000, whereafter drilling
operations on the Pinedale Anticline can commence. The Company has had no
drilling or completion activity since December 31, 1999. The Company received
its 77 square mile 3-D processed seismic data over the Mesa area of the
Pinedale Anticline on February 29, 2000 and is in the process of interpreting
the data in advance of drilling.
Liquidity and Capital Resources
In the six-month period ending December 31, 1999 the Company relied on its
existing senior credit facility and proceeds from the June, 1999 asset sale to
finance its capital expenditures. The Company participated in the drilling of 6
gross (3.125 net) wells, the completion of 4 gross (1.7 net) wells and the
18
<PAGE>
acquisition of 77 square miles of 3D seismic on its acreage in the Green River
Basin. For the six-month period ending December 31, 1999 capital expenditures
were $6.2 million. At December 31, 1999, the Company reported a cash position
of $0.4 million compared to $0.7 million cash on hand at June 30, 1999. The
reduced cash position is primarily attributable to the reduction of principal
outstanding under the existing senior credit facility. Working capital at
December 31, 1999 decreased to $0.2 million from $0.7 million at June 30, 1999
primarily due to a reduction in cash.
Historically, the Company's capital expenditures have exceeded cash flow
from operating activities. Excluding the one time charge to settle litigation
surrounding the White Estate #1 well, the Company has produced positive cash
flow for the past three fiscal quarters. This positive cash flow and the
availability under the senior credit facility are projected to be sufficient to
fund the Company's budgeted capital expenditures for 2000, which are projected
to be $20.5 million. The senior credit facility provides for a $40 million
revolving credit line with an initial base of $18 million bearing interest at
either the bank's prime rate or LIBOR plus two and one half percent. The
Company as of December 31, 1999 had $4.7 million of outstanding bank
indebtedness. Approximately $18 million of this capital expenditure budget is
expected to be used to drill 18 gross (9.91 net) exploratory and development
wells in the Green River Basin, consisting of both the Pinedale Anticline
exploratory wells and the 40 acre down-spaced wells in the Jonah Field.
However, future cash flows and continued availability of financing are subject
to a number of uncertainties beyond the Company's control such as production
rates, the price of gas and oil, continued results of the Company's drilling
program and the general condition of the capital markets for oil and gas
companies. There can be no assurances that adequate funding will be available
to execute the Company's planned future capital program.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 10. Directors and Officers of Registrant.
Name, Position, and Tenure
Registrant: Ultra Petroleum Corp.
<TABLE>
<CAPTION>
Name Position Tenure
---- -------------------------- ----------------------------
<S> <C> <C>
Michael D. Watford...... Chairman of Board 1 Feb. 1999 to present
CEO 1 Feb. 1999 to present
President 3 Dec. 1999 to present
Director 1 Feb. 1999 to present
John R. Hislop.......... Director 28 March 1993 to present
Dr. William C. Helton... Director 12 Aug. 1994 to present
Stephen Kneller......... Vice President Exploration 11 Sept. 1998 to present
Charlotte Kauffman...... Corporate Secretary 4 Dec. 1998 to present
Kristen Miller.......... Asst. Corp. Secretary 3 Dec. 1999 to present
R.G. "Jerry" Albertus... President 14 May 1996 to 3 Dec. 1999
Director 14 May 1996 to 3 Dec. 1999
Lorne Hanson............ Director 30 July 1997 to 3 Dec. 1999
G. Harold Laycraft...... Director 24 March 1997 to 3 Dec. 1999
Michael Schoen.......... Director 19 Aug. 1999 to 3 Dec. 1999
</TABLE>
There are no family relationships between any director or executive officer
and any other director or executive officer.
19
<PAGE>
Item 11. Compensation of Directors and Officers.
The aggregate amount of salary and bonuses paid to the directors and
officers of the Company (four persons) for the six-month period ending December
31, 1999 was $402,300.
<TABLE>
<CAPTION>
Salary Bonus
Name and Principal Position Period Ending ($) USD ($) USD
--------------------------- ----------------- -------- --------
<S> <C> <C> <C>
Michael D. Watford...................... December 31, 1999 $120,000 $120,000
CEO & President
Chairman of the Board
Charlotte Kauffman...................... December 31, 1999 $ 50,000 $ 20,000
Corporate Secretary and General Counsel
Stephen Kneller......................... December 31, 1999 $ 49,500 $ 9,900
VP Exploration
Kristen Miller.......................... December 31, 1999 $ 23,500 $ 9,400
Asst. Corp. Secretary
</TABLE>
Item 12. Options to Purchase Securities From Registrant or Subsidiaries.
The following share options relating to the Company's common stock and held
by officers and directors were outstanding at June 1, 2000:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price Expiry Date
--------- ---------- ------------------------
$CDN
<S> <C> <C> <C>
Stephen Kneller................. 50,000 $4.95 4 June 2000
Charlotte Kauffman.............. 50,000 $4.42 7 July 2000
Charlotte Kauffman.............. 20,000 $5.00 12 December 2000
Stephen Kneller................. 15,000 $5.00 12 December 2000
Kristen Miller.................. 10,000 $4.90 21 May 2001
Michael Watford................. 1,650,000 $1.46 28 January 2009
Charlotte Kauffman.............. 150,000 $1.20 30 November 2009
Stephen Kneller................. 150,000 $1.20 30 November 2009
Kristen Miller.................. 125,000 $1.20 30 November 2009
W. Charles Helton............... 300,000 $1.00 9 December 2009
John Hislop..................... 300,000 $1.00 9 December 2009
Michael Watford................. 250,000 $0.81 24 March 2010
All directors and officers as a
group (six persons)............ 3,070,000 $0.81-5.00 4 June 00 to 24 March 10
</TABLE>
The exercise prices for the above stock options were determined in
accordance with TSE listing policy and as a minimum reflect the closing price
of the Company's shares on the TSE on the trading day immediately preceding the
day on which the directors granted the options. No compensation expense
resulted from the granting of such options.
Item 13. Interest of Management In Certain Transactions.
General Information
Other than as set forth below and other than transactions carried out in the
normal course of business of the Company or any of its affiliates, none of the
Company's directors or officers, nor any of the Company's shareholders
beneficially owning shares carrying more than 10% of the voting rights attached
to the shares of the Company, nor any associate or affiliate of any of the
foregoing persons, has since July 1, 1997, had any material interest, direct or
indirect, in any transactions which materially affected the Company or any of
its subsidiaries or in any proposed transaction which has or would materially
affect the Company or any of its subsidiaries.
20
<PAGE>
Under the Business Corporations Act (Yukon Territory), a director is
statutorily obligated to disclose at the first opportunity, at a meeting of the
directors or in a written notice to the other members of the board, the nature
and extent of his interest in any proposed contract or transaction with the
company on whose board he serves.
Related Party Transactions
The Company had the following transactions and balances with related
parties:
a. John R. Hislop is a Director of Gemini Energy Corp. f/k/a Arrowhead
Minerals Corp. ("Gemini"). Gemini and the Company are partners with varying
working interests in the Bull Draw, Gemini and Warbonnet Prospects, in the
Green River Basin, Sublette County, Wyoming.
b. Included in office expense for the six-month period of December 31,
1999 is $106,899 paid to Caravel Management Corp. Caravel was the office
management company that provided services for the Company while the office
was located in Vancouver, British Columbia. The Company terminated
Caravel's services as of December 31, 1999. Caravel's expenses were
composed of salaries for 10 employees, office rent, equipment leasing,
internet services, advertising and investor relations expenses. Caravel
Management Corp. is a company owned by John R. Hislop, a director of the
Company.
Management of the Company believes that the terms and conditions of each of
the transactions describe above were at least as fair to the Company as could
have been obtained from unaffiliated persons or entities in arms' length
transactions.
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities.
Not applicable.
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
Not applicable.
21
<PAGE>
PART IV
Item 17. Financial Statements.
The following financial statements are attached hereto and made a part of
this report:
<TABLE>
<CAPTION>
Description of Document Page
----------------------- ----
<C> <S> <C>
(1) Consolidated Balance Sheets for the Six-Months Ended December 31,
1999 and Fiscal Years Ended June 30, 1999 and 1998.................. *
(2) Consolidated Statements of Operations and Deficit for the Six-Months
Ended December 31, 1999 and 1998 and the Years Ended June 30, 1999,
1998 and 1997....................................................... *
(3) Consolidated Statements of Cash Flow for the Six-Months Ended
December 31, 1999 and 1998 and the Years Ended June 30, 1999, 1998
and 1997............................................................ *
(4) Supplementary Disclosures about Oil and Gas Producing Activities
dated December 31, 1999 (Unaudited--Prepared Internally by Company
Management)......................................................... *
(5) Auditors' Report Dated February 29, 2000............................ *
</TABLE>
Item 18. Financial Statements.
Not applicable.
Item 19. Financial Statements and Exhibits.
<TABLE>
<CAPTION>
Description of Document Page
----------------------- ----
<C> <S> <C>
(a) Financial Statements
(1) See Item 17 above.............................................. *
(b) Exhibits
(1) Agreements re: Green River Basin Prospect
(i) Purchase and Sale Agreement between Anschutz Wyoming Corp.
and Ultra CO and Ultra WY, dated May 17, 1999 (1)
(ii) Participation Agreement between Anschutz Wyoming Corp. and
Ultra CO and Ultra WY, dated June 18, 1999 (1)
(iii) Purchase and Sale Agreement between Questar Exploration and
Production Company and Ultra CO and Ultra WY, dated May 17,
1999 (1)
(iv) Participation Agreement between Questar Exploration and
Production Company and Ultra CO and Ultra WY, dated June 18,
1999 (1)
</TABLE>
--------
(1) Previously filed with Form 20-F dated December 15, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ULTRA PETROLEUM CORP.
Date: June , 2000 /s/ Michael D. Watford
By:__________________________________
Name: Michael D. Watford
Title: Director, Chairman of the
Board, CEO and President
23
<PAGE>
APPENDIX J
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 20-F
----------------
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Fiscal Year Ended June 30, 1999
Commission File Number: 0-29370
ULTRA PETROLEUM CORP.
(Exact Name of Registrant as specified in its charter)
ULTRA PETROLEUM CORP.
(Translation of Registrant's Name into English)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
609 West Hastings Street, Suite 1100
Vancouver, BC V6B 4W4
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares without par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the Company's classes
of capital or common stock as of June 30, 1999: 56,751,125 common shares
without par value.
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
Indicate by check mark which financial statement item the registrant has
elected to follow.
ITEM 17 [X] ITEM 18
Currency: All dollar amounts set forth in this report are in United States
dollars, except where otherwise indicated.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I.................................................................... 1
Item 1. Description of Business......................................... 1
Item 2. Description of Property......................................... 5
Item 3. Legal Proceedings............................................... 7
Item 4. Control of Registrant........................................... 7
Item 5. Nature of Trading Market........................................ 8
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders......................................................... 8
Item 7. Taxation........................................................ 9
Item 8. Selected Financial Data......................................... 13
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 14
Item 9A. Quantitative and Qualitative Disclosures About Market Risk..... 17
Item 10. Directors and Officers of Registrant........................... 17
Item 11. Compensation of Directors and Officers......................... 17
Item 12. Options to Purchase Securities From Registrant or
Subsidiaries................................................... 18
Item 13. Interest of Management In Certain Transactions................. 18
PART II................................................................... 19
Item 14. Description of Securities to be Registered..................... 19
PART III.................................................................. 19
Item 15. Defaults Upon Senior Securities................................ 19
Item 16. Changes in Securities and Changes in Security for Registered
Securities..................................................... 19
PART IV................................................................... 20
Item 17. Financial Statements........................................... 20
Item 18. Financial Statements........................................... 20
Item 19. Financial Statements and Exhibits.............................. 20
</TABLE>
ii
<PAGE>
PART I
Item 1. Description of Business
General
Ultra Petroleum Corp. (the "Company") was incorporated on November 14, 1979,
under the laws of the Province of British Columbia, Canada. The Company
explores for and develops oil and gas, primarily in the Green River Basin of
southwest Wyoming, where it leases approximately 267,216 gross (198,467 net)
acres covering approximately 410 square miles. The Company currently derives
approximately 90% of its revenue from the sale of natural gas and approximately
10% from the sale of condensate.
During the fiscal year ended June 30, 1999, the Company drilled, caused to
be drilled or purchased a total of 16 gross (4.91 net) wells. For the period
from July 1, 1999 to December 31, 1999 the Company has continued its
exploration and development program with 7 wells drilling or to be drilled. For
further information concerning the Company's drilling results see "Item 2--
Description of Property."
The Company plans to continue to obtain financing to enable field
development, to use advanced technology to improve the Company's drilling
success ratio, and to continue to search for ways to reduce finding and
development costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Plan of Operations."
In June 1999, the Company sold an undivided fifty (50%) percent of its
working interest in a three township area, 15,760 net acres, on the northern
end of the Pinedale Anticline ("Mesa" or "Mesa Area") to Anschutz Wyoming
Corporation ("Anschutz") and Questar Exploration and Production Company
("Questar"), holder of a preferential right to purchase, for a total of $13.2
million dollars. The consideration was divided between $5MM in cash, $7.5MM as
a carried amount for the drilling and completing of wells within the three
township area and $700,000 carried cost for a 3-D seismic program across the
Mesa Area.
In 1998, the U.S. Bureau of Land Management ("BLM") initiated a requirement
for an Environmental Impact Statement (EIS) for the Pinedale Anticline area in
the Green River Basin. This EIS encompasses approximately 200,000 gross acres
under lease by the Company north of the Jonah Field, and where most of the
Company's exploration and development is taking place. Management believes that
there are substantial gas reserves to be found in this area as does the BLM,
which was an important reason to require an environmental assessment of the
full field development consequences. This environmental assessment will include
an analysis of the geological and reservoir characteristics of the area plus
the necessary environmental studies related to wildlife, surface use, socio-
economic and air quality issues. It will play an important role in determining
the Company's ability to develop its natural gas resources in the region. The
preliminary draft of the EIS was issued in mid-September, and the draft EIS was
issued mid-November, 1999. The operators, including the Company, are reviewing
the draft EIS so that they may submit their comments to the BLM by late-
December, 1999. The draft provides for a great deal of flexibility for the
operators, but will require continued up front planning before a company
submits its application for a permit to drill on each well. The Record of
Decision (ROD) on the EIS is expected in March of 2000. Until the EIS is
completed, the Company's development of its land position subject to the EIS
will be limited to no more than eight surface locations. The Company believes
that the potential exists for drilling multiple well bores out of these eight
locations. In addition to locations on federal lands, the Company co-owns
leases on a significant area of state and privately owned lands in the vicinity
of the Mesa that do not fall under the jurisdiction of the BLM and are not
subject to the EIS process. Since the ROD is expected to be issued prior to the
2000 drilling season, the Company anticipates sufficient locations for its
drilling activities for 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Plan of Operations."
The Company has two wholly-owned subsidiaries through which it conducts its
operations in the United States, Ultra Petroleum (USA) Inc., a Colorado
corporation, and Ultra Resources, Inc., a Wyoming corporation.
1
<PAGE>
Factors That May Affect Future Results
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes,
projects, intends or anticipates will or may occur, including such matters as:
future availability of capital, development and exploration expenditures
(including the amount and nature thereof); drilling of wells; timing and amount
of future production of oil and gas; business strategies; operating costs and
other expenses; cash flow and anticipated liquidity; prospect development and
property acquisitions; marketing of oil and gas; and the impact of Year 2000
requirements. Factors that could cause actual results to differ materially
("Cautionary Disclosures") are described below in "Risk Factors," and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Cautionary disclosures include, but are not limited to: general
economic conditions; the market prices of oil and gas; the risks associated
with exploration; the Company's ability to find, acquire, market, develop and
produce new properties; operating hazards attendant to the oil and gas
business; downhole drilling and completion risks that are generally not
recoverable from third parties or insurance; the outcome of the Bureau of Land
Management's EIS relating to the Company's core properties in the Green River
Basin of southwest Wyoming; uncertainties in the estimation of proved reserves
and in the projection of future rates of production and timing of exploration
and development expenditures; potential mechanical failure or under performance
of individually significant productive wells; the strength and financial
resources of the Company's competitors; the Company's ability to find and
retain skilled personnel; climatic conditions; labor relations; availability
and cost of material and equipment; delays in anticipated start-up dates;
environmental risks; the results of financing efforts; actions or inactions of
third-party operators of the Company's properties; regulatory developments; and
third-party Year 2000 compliance actions. All statements attributable to the
Company or persons acting on its behalf are expressly qualified in their entity
by these cautionary disclosures. The Company disclaims any obligation to update
or revise any forward-looking statement to reflect events or circumstances
occurring hereafter or to reflect the occurrence of anticipated or
unanticipated events.
Risk Factors
In addition to the risks set forth above and elsewhere in this report, the
Company is subject to the following risks.
Volatility of Oil and Gas Prices and Markets. The Company's revenues are
determined, to a large degree, by prevailing prices for oil and gas.
Historically, oil and gas prices and markets have been volatile and are likely
to continue to be volatile. Prices for oil and gas are subject to wide
fluctuations in response to relatively minor changes in supply of and demand
for oil and gas, market uncertainty and numerous additional factors that are
beyond the control of the Company.
Concentration of Oil and Gas Operations. The Company's core assets, and the
focus of its oil and gas operations, are in the Green River Basin of southwest
Wyoming. During the two fiscal years ended June 30, 1999 and continuing through
fiscal 2000, nearly all of the Company's drilling activity has occurred or will
occur in the Green River Basin, on its land position of 267,216 gross acres
covering an area of approximately 410 square miles. The Company's concentration
in this area, while considered a competitive advantage by the Company, entails
risks as well. These risks include non-diversification of the Company's
resources, exploration risks that are inherent in deep, tight gas resources
(such as highly complex drilling and completion procedures that must be
carefully executed), as well as significant environmental regulations and
oversight by regulatory authorities in the Green River Basin. See
"Environmental Impact Statement." Moreover, the size of the Company's Green
River Basin prospect will make it difficult to fully explore or hold the entire
acreage position.
Limited Financial Resources. The Company's ability to continue exploration
and development of its properties will be dependent upon its ability to
continue to raise significant additional financing or obtain some other
arrangements with industry partners in lieu of raising financing. Any
arrangements that may be entered
2
<PAGE>
into could be expensive to the Company. There can be no assurance that the
Company will be able to raise additional capital in light of factors such as
the market demand for its securities, the state of financial markets for
independent oil companies (including the markets for debt), oil and gas prices
and general market conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Environmental and Other Governmental Regulation. Oil and gas operations are
subject to various federal, state and local governmental regulations. The
production, handling, transportation and disposal of oil and gas and their by-
products are subject to regulation under federal, state and local environmental
laws. To date, the Company has been required to expend significant resources in
order to satisfy applicable environmental laws and regulations, and it may be
assumed that the Company's costs of complying with these regulations will
continue to be substantial. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Compliance costs under existing
legal requirements and under any new requirements that might be enacted could
become material. Additional matters subject to governmental regulation include
discharge permits for drilling operations, performance bonds, reports
concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve
supplies of oil and gas. Any move to curtail production or control prices could
be materially detrimental to the Company.
Environmental Impact Statement. The U.S. Bureau of Land Management is
preparing an Environmental Impact Statement ("EIS") relating to the area north
of the Jonah Field in the Green River Basin of Wyoming where most of the
Company's exploration and development is taking place. Many factors will be
taken into account in the EIS, including factors that may limit the Company's
ability to pursue development of its affected land position. Management
believes that the EIS will define the development of the Pinedale Anticline and
surrounding area. At this time it is not possible to predict the outcome of the
EIS with reasonable certainty. Any adverse impact to the Company from the EIS
could be particularly detrimental to the Company because its operations are
concentrated in the Green River Basin. Until the EIS is completed, the
Company's development of its land position subject to the EIS will be limited
to no more than eight surface locations. In addition to locations on federal
lands, the Company owns leases on a significant area of state and privately
owned lands in the vicinity of the Mesa that do not fall under the jurisdiction
of the BLM and are not subject to the EIS process. The Company intends to
pursue all permitable activity on its leasehold interests. At this time, the
Company anticipates that the EIS will be completed by the 2000 drilling season.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Plan of Operations."
Operating Hazards and Uninsured Risks. The oil and gas business involves a
variety of operating risks, including fire, explosion, pipe failure, casing
collapse, abnormally pressured formations, and environmental hazards such as
oil spills, gas leaks, and discharges of toxic gases. The occurrence of any of
these events with respect to any property operated or owned (in whole or in
part) by the Company could have a material adverse impact on the Company. The
Company and the operators of its properties maintain insurance in accordance
with customary industry practices and in amounts that management believes to be
reasonable. However, insurance coverage is not always economically feasible and
is not obtained to cover all types of operational risks. The occurrence of a
significant event that is not fully insured could have a material adverse
effect on the Company's financial condition.
Drilling and Operating Risks. The Company's oil and gas operations are
subject to all of the risks and hazards typically associated with drilling for,
and production and transportation of, oil and gas. These risks include the
necessity of spending large amounts of money for identification and acquisition
of properties and for drilling and completion of wells. In the drilling of
exploratory or development wells, failures and losses may occur before any
deposits of oil or gas are found. The presence of unanticipated pressure or
irregularities in formations, blow-outs or accidents may cause such activity to
be unsuccessful, resulting in a loss of the Company's investment in such
activity. If oil or gas is encountered, there can be no assurance that it can
be produced in economic quantities sufficient to justify the cost of continuing
such operations or that it can be marketed satisfactorily.
3
<PAGE>
Conflicts of Interest. There are conflicts of interest to which directors
and officers of the Company are subject in connection with the operations of
the Company. Some of the directors and officers are engaged and will continue
to be engaged in the search for oil and gas and oil and gas properties on
behalf of entities outside of the Company, and situations may arise where these
directors and officers will be in direct competition with the Company. Some of
the Company's directors and their associated companies hold interests in
certain properties in which the Company also has an interest. It is the
Company's policy that conflicts will be dealt with in accordance with the
relevant provisions of the Company Act (British Columbia). For further
information, see "Item 13--Interest of Management in Certain Transactions."
Uncertainty of Estimates of Reserves and Future Net Revenues. The financial
statements included in this report contain estimates of the Company's oil and
gas reserves and the discounted future net revenues from those reserves, as
prepared by independent petroleum engineers and/or the Company. There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves, including many factors beyond the control of the Company. Those
estimates are based on several assumptions that the United States Securities
and Exchange Commission (the "SEC") requires oil and gas companies to use, for
example, constant oil and gas prices. Such estimates are inherently imprecise
indications of future net revenues. Actual future production, revenues, taxes,
operating expenses, development expenditures and quantities of recoverable oil
and gas reserves might vary substantially from those assumed in the estimates.
Any significant variance in these assumptions could materially affect the
estimated quantity and value of reserves. In addition, the Company's reserves
might be subject to revisions based upon future production, results of future
exploitation and development, prevailing oil and gas prices and other factors.
Financial Reporting Impact of Full Cost Method of Accounting. The Company
follows the full cost method of accounting for its oil and gas properties. A
separate cost center is maintained for expenditures applicable to each country
in which the Company conducts exploration and/or production activities. Under
such method, the net book value of properties on a country by country basis,
less related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after tax future net revenues from proved oil and gas
properties, discounted at 10% per year. In calculating discounted future net
revenues, oil and gas prices in effect at the time of the calculation are held
constant, except for changes which are fixed and determinable by existing
contracts. The net book value is compared to the ceiling on a quarterly basis.
The excess, if any, of the net book value above the ceiling is required to be
written off as an expense. Under SEC full cost accounting rules, any write-off
recorded may not be reversed even if higher oil and gas prices increase the
ceiling applicable to future periods. Future price decreases could result in
reductions in the carrying value of such assets and an equivalent charge to
earnings.
Competition. The oil and gas industry is highly competitive. The Company
competes in the areas of property acquisitions and the development and
production of oil and gas with major oil companies and other independent oil
and gas concerns, as well as with individual producers and operators. Many of
these competitors have substantially greater financial and other resources than
the Company.
Year 2000 Compliance. As the year 2000 approaches, a significant business
issue has emerged regarding how existing application software programs and
operating systems can accommodate the date value for the year 2000. Many
existing software application products, including software application products
used by the Company and its suppliers, were designed to accommodate only a two-
digit date value, which represents the year. For example, information relating
to the year 1996 is stored in the system as "96." As a result, the year 1999
(i.e., "99") could be the maximum date value that these systems will be able to
process accurately. The Company presently believes that with modifications to
existing software and conversion to new software, the year 2000 issue will not
pose significant operational problems for the Company's computer systems or
business operations. Management believes that information technology systems of
the Company are substantially Year 2000 compliant. However, if such
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have a material adverse impact on the operations of the
Company. In addition, there can be no assurance that unforeseen problems in the
Company's computer systems, or the systems of third parties on which the
Company's computers rely, will not have an adverse effect on the Company's
systems or operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
4
<PAGE>
Item 2. Description of Property
As of June 30, 1999, the Company owned developed oil and gas leases totaling
4,750 gross (1,621 net) acres and undeveloped oil and gas leases totaling
267,216 gross (198,467 net) acres, plus associated production equipment. The
acreage and other additional information concerning the Company's oil and gas
operations are presented in the following tables. Holding costs of leases not
held by production are approximately $280,000 for the fiscal year ending June
30, 2000.
Estimated Net Quantities of Oil and Gas and Standardized Measure of Future Net
Cash Flows
All of the Company's oil and gas reserves are located in the United States.
Information concerning the estimated net quantities of all the Company's proved
reserves, changes therein and the standardized measure of future net cash flows
from such reserves as of July 1, 1999, is presented as unaudited supplementary
information included in the consolidated financial statements included in this
report. The estimates are based upon the reports of Gilbert Lausten Jung &
Associates , independent petroleum engineers for each of the three fiscal years
ended June 30, 1997 , 1998 and 1999. The Company has no long-term supply or
similar agreements with foreign governments or authorities, and the Company
does not own an interest in any reserves accounted for by the equity method.
Net Oil and Gas Production, Average Price and Average Production Cost
The net quantities of gas and condensate produced and sold by the Company
for each of the last three fiscal years, the average sales price per unit sold
and the average production cost per unit are presented below.
<TABLE>
<CAPTION>
Gas and Condensate*
-----------------------------------------------------
Average
Net Production
Condensate Net Gas Sales Gas Sales Cost Per
Fiscal Year Ended June Production Production Price Per Price Per Equivalent
30, (Bbls) (MCF) Bbl MCF MCF**
---------------------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
1997.................... 8,000 300,000 $21.68 $2.02 $0.25
1998.................... 14,000 1,800,000 $13.26 $1.81 $0.33
1999.................... 42,000 4,129,000 $15.95 $1.54 $0.32
</TABLE>
--------
* Equivalent barrels have been calculated on the basis of six thousand cubic
feet (6 MCF) of natural gas equals one barrel of oil.
** Average production cost includes lifting costs, remedial workover expenses
and production taxes.
Gross and Net Productive Wells
As of June 30, 1999, the Company's total gross and net wells were as
follows:
Productive Wells*
Gas and Condensate
------------------
Gross Wells Net Wells
----------- ---------
48 14.86
--------
* A gross well is a well in which a working interest is owned. The number of
net wells represents the sum of fractional working interests the Company
owns in gross wells. Productive wells are producing wells plus shut-in wells
the Company deems capable of production.
5
<PAGE>
Gross and Net Developed and Undeveloped Acres
As of June 30, 1999, the Company had total gross and net developed and
undeveloped oil and gas leasehold acres as set forth below. The developed
acreage is stated on the basis of spacing units designated by state regulatory
authorities.
<TABLE>
<CAPTION>
Leasehold Acreage*
---------------------------
Developed Undeveloped
----------- ---------------
Gross Net Gross Net
----- ----- ------- -------
<S> <C> <C> <C> <C>
Louisiana........................................ 430 13 -- --
Texas............................................ 160 40 3,684 747
Wyoming.......................................... 4,160 1,568 263,532 197,720
----- ----- ------- -------
All States....................................... 4,750 1,621 267,216 198,467
</TABLE>
--------
* Gross acres are those acres in which a working interest is owned. The number
of net acres represents the sum of fractional working interests the Company
owns in gross acres.
Exploratory Wells and Developed Wells
For each of the three fiscal years ended June 30, 1999, the number of net
wells drilled by the Company was as follows:
<TABLE>
<CAPTION>
Net
Net Exploratory Development Total Net
Wells Drilled Wells Drilled Wells Drilled
--------------- -------------- -------------
Fiscal Year Ended June 30, Productive Dry Productive Dry
-------------------------- ---------- ---- ---------- ---
<S> <C> <C> <C> <C> <C>
1999.......................... 0.68 0.50 3.73 0 4.91
1998.......................... 2.93 1.60 3.44 0 7.97
1997.......................... 0.43 0 0.95 0 1.38
</TABLE>
Recent Activities
From July 1, 1999 through October 31, 1999, the Company is drilling or has
drilled 6 gross (3.125 net) wells, of which 3 gross (1.275 net) are awaiting
completion and 2 gross (0.85 net) were drilling and 1 gross (1 net) was a dry
hole.
Supply Contracts or Agreements
The Company is not obligated to provide a fixed or determinable quantity of
oil and gas in the future under any existing contract or agreement, beyond the
short-term contracts customary in division orders and off lease marketing
arrangements within the industry. However, the Company has entered into the one
agreement discussed below that provide for funding arrangements in return for
production payments and gas deductions.
By virtue of the Purchase and Sale Agreement dated as of June 18, 1999,
Questar is obligated to fund the drilling of wells on behalf of the Company up
to the amount of $7.2 million net to the Company's interest prior to January 1,
2000 ("Carried Amount"). Any amounts unspent out of this Carried Amount as of
January 1, 2000 are immediately payable to the Company.
Reserve Estimates Filed with Agencies
No estimates of total proved net oil and gas reserves for the fiscal year
ended June 30, 1999 have been filed with any federal authority or agency. Other
than the estimates of reserves at June 30, 1998, filed with the Securities and
Exchange Commission, the Company did not file reserve reports with any other
United States federal agencies within the past 12 months.
6
<PAGE>
Item 3. Legal Proceedings
On January 15, 1999, Alamo Resources, Inc. ("Alamo") filed suit against the
Company in the 392nd Judicial District Court, Henderson County, Texas alleging
that the Company trespassed and wrongfully plugged a well it operated in
Henderson County, Texas called the White Estate No. 1. Alamo was top lessee of
the property and thus claimed a right to operate the well and that the Company
committed negligence and gross negligence in operating the well that resulted
in a loss of reserves. The Company had plugged the well for a number of
reasons, primarily due to safety and lack of available market for sour gas
making it uneconomic for the Company to leave the well shut-in. The Company
settled the suit with Alamo effective December 6, 1999. The Company paid $1.61
MM in cash to the plaintiffs in full settlement of the suit.
The Company is currently involved in various other routine disputes and
allegations incidental to its business operations. While it is not possible to
determine the ultimate disposition of these matters, the Company, after
consultation with legal counsel, believes that the final resolution of all such
currently pending or threatened litigation is not likely to have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
Item 4. Control of Registrant
To the knowledge of the Company, (i) the Company is not owned or controlled,
directly or indirectly, by another corporation or by any foreign government and
(ii) there are no arrangements that may, at a subsequent date, result in a
change of control of the Company.
The following table sets forth each individual or entity which owns, of
record or beneficially, directly or indirectly, or is known by the Company to
own beneficially, directly or indirectly, more than 10% of any class of the
Company's voting securities as of October 31, 1999.
<TABLE>
<CAPTION>
Type of Number of
Name and Address Ownership Common Shares Percentage
---------------- --------- ------------- ----------
<S> <C> <C> <C>
RIS Resources
International
Corporation............ Direct 11,726,245 20.66%
609 West Hastings Street
Suite 1100
Vancouver, BC Canada
V6B 4W4
</TABLE>
The following table sets forth the total amount of the Company's voting
securities owned by the Company's executive officers and directors, as a group,
as of October 31, 1999.
<TABLE>
<CAPTION>
Amount Percentage
Title of Class Identity of Group Owned of Class
-------------- --------------------------------------- --------- ----------
<S> <C> <C> <C>
Common......... Officers & Directors (nine individuals) 1,679,531 2.96%
</TABLE>
7
<PAGE>
Item 5. Nature of Trading Market
The common shares of the Company are listed and posted for trading on the
Toronto Stock Exchange ("TSE"). The common shares were listed on the Vancouver
Stock Exchange ("VSE") until December 31, 1998. The following table sets forth
the high and low closing bid prices on the VSE through September 30, 1998 and
on the TSE thereafter through June 30, 1999 and the volume of shares traded for
the periods indicated.
<TABLE>
<CAPTION>
Quarter Ending High Low Volume
-------------- ----- ----- ----------
($CDN)
<S> <C> <C> <C>
September 30, 1997.................................... $9.15 $4.20 13,442,662
December 31, 1997..................................... $8.65 $4.50 8,338,168
March 31, 1998........................................ $7.30 $4.06 12,366,978
June 30, 1998......................................... $5.65 $3.55 10,514,001
September 30, 1998.................................... $3.85 $1.68 7,074,696
December 31, 1998..................................... $2.02 $1.14 6,073,344
March 31, 1999........................................ $1.54 $1.06 5,897,735
June 30, 1999......................................... $1.37 $0.96 5,934,003
</TABLE>
On October 31, 1999 the closing bid price of the Company's common shares on
the TSE was CDN $1.33 per share.
To the best of the Company's knowledge, as of October 31, 1999, 21,977,054
of its common shares representing 38.7% of the common shares outstanding, were
held by 445 registered holders in the United States. The Company is not listed
for trading on any securities exchange in the United States. The Company's
common shares are not registered to trade in the United States in the form of
American Depository Receipts or similar certificates.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
There are no governmental laws, decrees or regulations in Canada relating to
restrictions on the import/export of capital affecting the remittance of
interest, dividends or other payments to non-residential holders of the
Company's shares. Any such remittances to United States residents, however, may
be subject to a 15% withholding tax pursuant to Article X of the reciprocal tax
treaty between Canada and the United States. See Item 7--Taxation.
Except as provided in the Investment Canada Act (the "Act"), there are no
limitations under the laws of Canada or in the charter or any other constituent
documents of the Company on the right of foreigners to hold and/or vote the
shares of the Company. The Act requires a non-Canadian making an investment to
acquire control of a Canadian business, the gross assets of which exceed
certain defined threshold levels, to file an application for review with
Investment Canada, the federal agency created by the Act. As a result of the
Canada-U.S. Free Trade Agreement, the Act was amended in January 1989 to
provide distinct threshold levels for Americans who acquire control of a
Canadian business. A Canadian business is defined in the Act as a business
carried on in Canada that has a place of business in Canada, an individual or
individuals in Canada who are employed or self-employed in connection with the
business, and assets in Canada used in carrying on the business.
An American, as defined in the Act, includes: an individual who is an
American national or a lawful permanent resident of the United States; a
government or government agency of the United States; and American-controlled
entity, corporation or limited partnership; and a corporation, limited
partnership or trust which is not controlled in fact through ownership of its
voting interests of which two-thirds of its board of directors, general
partners or trustees, as the case may be, are any combination of Canadians and
Americans.
8
<PAGE>
The following investments by a non-Canadian are subject to review by
Investment Canada:
(a) all direct acquisitions of control of Canadian businesses with
assets of $5 million or more;
(b) all indirect acquisitions of control of Canadian businesses with
assets of $50 million or more if such assets represent less than 50% of the
value of the assets of the entities, the control of which is being
acquired; and
(c) all indirect acquisitions of control of Canadian businesses with
assets of $5 million or more if such assets represent more than 50% of the
value of the assets of the entities, the control of which is being
acquired.
Review is required when investments by Americans exceeds $150 million for
direct acquisitions of control. For purposes of the Act, direct acquisition of
control means, a purchase of the voting interest in a corporation, partnership,
joint venture or trust carrying on a Canadian business, or any purchase of all
or substantially all of the assets used in carrying on a Canadian business;
indirect acquisition of control means, a purchase of the voting interest of a
corporation, partnership, joint review or trust, whether a Canadian or foreign
entity, which controls a corporation, partnership, joint venture or trust
company carrying on a Canadian business in Canada.
The acquisition of certain Canadian businesses is excluded from the higher
thresholds set out for Americans. These excluded businesses include oil, gas,
uranium, financial services (except insurance); transportation services and
cultural services (i.e., the publication, distribution or sale of books,
magazines, periodicals (other than printing or typesetting businesses), music
in print or machine readable form, radio, television, cable and satellite
services; the publication, distribution, sale of exhibitions of film or video
recordings or audio or video music recordings). Direct or indirect acquisitions
of control of these excluded business are reviewable at the $5 and $50 million
thresholds.
A non-Canadian shall not implement an investment reviewable under the Act
unless the investment has been reviewed and the Minister responsible for
Investment Canada is satisfied or is deemed to be satisfied that the investment
is likely to be of net benefit to Canada. The factors to be taken into account
include:
1. The effect of the investment on the legal and economic activities in
Canada, including the effect on employment and resource processing, on the
utilization of particular components and services produced in Canada, and
on exports from Canada;
2. The degree and significance of participation by Canadians in the
Canadian business;
3. The effect of the investment on productivity, industrial efficiency,
technological development, product innovation and product variety in
Canada;
4. The effect of the investment on competition within an industry or
industries in Canada; and
5. The compatibility of the investment with national industrial economic
or cultural policies enunciated by the federal government or legislation or
the legislature or government of any Province likely to be significantly
affected by the investment.
A non-Canadian or American making the following investments: (i) an
investment to establish a new Canadian business; and (ii) an investment to
acquire control of a Canadian business which investment is not subject to
review under the Act, must notify Investment Canada, within prescribed time
limits, of such investments.
Item 7. Taxation
The following is a summary of the principal Canadian federal income tax
considerations generally applicable in respect of the common shares. The tax
consequences to any particular holder of common shares will vary according to
the status of that holder as an individual, trust, corporation, or member of a
partnership,
9
<PAGE>
the jurisdiction in which that holder is subject to taxation, the place where
the holder is resident and, generally, according to that holder's particular
circumstances. This summary is applicable only to holders who are resident in
the United States, have never been resident in Canada, hold their common shares
as capital property and will not use or hold the common shares in carrying on
business in Canada.
The following general discussion respecting taxation is based upon the
Company's advice from its auditors and lawyers. No opinion was requested by the
Company or provided by such auditors and lawyers.
Generally, dividends paid by Canadian corporations to non-resident
shareholders are subject to a withholding tax of 25% of the gross amount of
such dividends. However, Article X of the reciprocal tax treaty between Canada
and the United States reduced to 15% the withholding tax on the gross amount of
dividends paid to residents of the United States. The treaty provides a further
reduction in the withholding tax rate on the gross amount of dividends to 6%
for dividends paid in 1996 and 5% for dividends paid thereafter where a U.S.
corporation owns at least 10% of the voting stock of the Canadian corporation
paying the dividends.
A non-resident who holds shares of the Company as capital property will not
be subject to tax on capital gains realized on the disposition of such shares
unless such shares are "taxable Canadian property" within the meaning of the
Income Tax Act (Canada) and no relief is afforded under any applicable tax
treaty. The shares of the Company would be taxable Canadian property of a non-
resident if at any time during the five year period immediately preceding a
disposition by the non-resident of such shares not less than 25% of the issued
shares of any class of the Company belonged to the non-resident, the person
with whom the non-resident did not deal at arm's length, or to the non-resident
and any person with whom the non-resident did not deal at arm's length.
Certain United States Federal Income Tax Consequences
The following discussion is based upon the sections of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
This discussion does not consider the potential effects, both adverse and
beneficial, of any recently proposed legislation that, if enacted, could be
applied, possibly on a retroactive basis, at any time. The following discussion
is for general information only and it is not intended to be, nor should it be
construed to be, legal or tax advice to any holder or prospective holder of
shares of the Company and no opinion or representation with respect to the
United States Federal income tax consequences to any such holder or prospective
holder is made. Accordingly, holders and prospective holders of shares of the
Company should consult their own tax advisors about the Federal, state, local
and foreign tax consequences of purchasing, owning and disposing of shares of
the Company.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of shares of the Company
who is a citizen or resident of the United States, a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof, any entity that is taxable as a corporation for U.S. tax
purposes and any other person or entity whose ownership of shares of the
Company is effectively connected with the conduct of a trade or business in the
United States. A U.S. Holder does not include persons subject to special
provisions of Federal income tax law, such as tax exempt organizations,
qualified retirement plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
nonresident alien individuals or foreign corporations whose ownership of shares
of the Company is not effectively connected with conduct of trade or business
in the United States, shareholders who acquired their stock through the
exercise of employee stock options or otherwise as compensation and
shareholders who hold their stock as ordinary assets and not as capital assets.
Distributions on Shares of the Company
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to shares of the Company are required to include in
gross income for United States Federal income tax purposes the gross
10
<PAGE>
amount of such distributions to the extent that the Company has current or
accumulated earnings and profits as defined under U.S. Federal tax law, without
reduction for any Canadian income tax withheld from such distributions. Such
Canadian tax withheld may be credited, subject to certain limitations, against
the U.S. Holder's United States Federal income tax liability or, alternatively,
may be deducted in computing the U.S. Holder's United States Federal taxable
income by those who itemize deductions. (See more detailed discussion at
"Foreign Tax Credit" below). To the extent that distributions exceed current or
accumulated earnings and profits of the Company, they will be treated first as
a return of capital up to the U.S. Holder's adjusted basis in the shares and
thereafter as gain from the sale or exchange of the shares. Preferential tax
rates for net capital gains are applicable to a U.S. Holder that is an
individual, estate or trust. There are currently no preferential tax rates for
long-term capital gains for a U.S. Holder that is a corporation.
Dividends paid on the shares of the Company will not generally be eligible
for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations. A U.S. Holder that is a
corporation may, under certain circumstances, be entitled to a 70% deduction of
the United States source portion of dividends received from the Company (unless
the Company qualifies as a "foreign personal holding company" or a "passive
foreign investment company," as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the Company. The
availability of this deduction is subject to several complex limitations that
are beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of shares of the Company may be entitled, at
the option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim
a credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to
all foreign taxes paid by (or withheld from) the U.S. Holder during that year.
There are significant and complex limitations that apply to the credit, among
which is the general limitation that the credit cannot exceed the proportionate
share of the U.S. Holder's United States Federal income tax liability that the
U.S. Holder's foreign source income bears to his or its worldwide taxable
income. In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
"passive income," "high withholding tax interest," "financial services income,"
"shipping income," and certain other classifications of income. The
availability of the foreign tax credit and the application of the limitations
on the credit are fact specific and holders and prospective holders of shares
of the Company should consult their own tax advisors regarding their individual
circumstances.
Disposition of Shares of the Company
A U.S. Holder will recognize a gain or loss upon the sale of shares of the
Company equal to the difference, if any, between (i) the amount of cash plus
the fair market value of any property received, and (ii) the shareholder's tax
basis in the shares of the Company. This gain or loss will be a capital gain or
loss if the shares are a capital asset in the hands of the U.S. Holder, and
will be a short-term or long-term capital gain or loss depending upon the
holding period of the U.S. Holder. Gains and losses are netted and combined
according to special rules in arriving at the overall capital gain or loss for
a particular tax year. Deductions for net capital losses are subject to
significant limitations. For U.S. Holders which are individuals, any unused
portion of such net capital loss may be carried over to be used in later tax
years until such net capital loss is thereby exhausted. For U.S. Holders which
are corporations (other than corporations subject to Subchapter S of the Code),
an unused net capital loss may be carried back three years for the loss year
and carried forward five years from the loss year to be offset against capital
gains until such net capital loss is thereby exhausted.
11
<PAGE>
Other Considerations
In the following circumstances, the above sections of this discussion may
not describe the United States Federal income tax consequences resulting from
the holding and disposition of shares of the Company.
Foreign Personal Holding Company. If at any time during a taxable year more
than 50% of the total combined voting power or the total value of the Company's
outstanding shares is owned, directly or indirectly, by five or fewer
individuals who are citizens or residents of the United States and 60% or more
of the Company's gross income for such year was derived from certain passive
sources (e.g., from dividends received from its subsidiaries), the Company
would be treated as a "foreign personal holding company". In that event, U.S.
Holders that hold shares of the Company would be required to include in gross
income for such year their allowable portions of such passive income to the
extent the Company does not actually distribute such income.
Foreign Investment Company. If 50% or more of the combined voting power or
total value of the Company's outstanding shares are held, directly or
indirectly, by citizens or residents of the United States, United States
domestic partnerships or corporations, or estates or trusts other than foreign
estates or trusts (as defined by the Code Section 7701 (a)(31)), and the
Company is found to be engaged primarily in the business of investing,
reinvesting, or trading in securities, commodities, or any interest herein, it
is possible that the Company might be treated as a "foreign investment company"
as defined in Section 1246 of the Code, causing all or part of any gain
realized by a U.S. Holder selling or exchanging shares of the Company to be
treated as ordinary income rather than capital gain.
Passive Foreign Investment Company. As a foreign corporation with U.S.
Holders, the Company could potentially be treated as a passive foreign
investment company ("PFIC"), as defined in Section 1297 of the Code, if 75% or
more of its gross income in a taxable year is passive income, or the average
percentage of the Company's assets (by value) during the taxable year which
produce passive income or which are held for production of same is at least
50%. Passive income is generally defined to include gross income in the nature
of dividends, interest, royalties, rents and annuities; excess of gains over
losses from certain transactions in any commodities not arising inter alia from
a PFIC whose business is actively involved in such commodities; certain foreign
currency gains; and other similar types of income. U.S. Holders owning shares
of a PFIC are subject to an additional tax and to an interest charge based on
the value of deferral of tax for the period during which the shares of the PFIC
as owned, in addition to treatment of any gain realized on the disposition of
shares of the PFIC as ordinary income rather than as a capital gain. However,
if the U.S. Holder makes a timely election to treat a PFIC as a qualified
electing fund ("QEF") with respect to such shareholder's interest therein, the
above-described rules generally will not apply. Instead, the electing U.S.
Holder would include annually in his gross income his pro rata share of the
PFIC's ordinary earning and any net capital gain regardless of whether such
income or gain was actually distributed. A U.S. Holder of a QEF can, however,
elect to defer the payment of United States Federal income tax on such income
inclusions. Special rules apply to U.S. Holders who won their interests in a
PFIC through intermediate entities or persons.
Controlled Foreign Corporation. If more than 50% of the voting power of all
classes of stock or the total value of the stock of the Company is owned,
directly or indirectly, by citizens or residents of the United States, United
States domestic partnerships and corporations or estates or trust other than
foreign estates or trusts, each of whom own 10% or more of the total combined
voting power of all classes of stock of the Company ("United States
shareholder"), the Company could be treated as a "controlled foreign
corporation" under Subpart F of the Code. This classification would effect many
complex results including the required inclusion by such United States
shareholders in income of their pro rata share of "Subpart F income" (as
specially defined by the Code) of the Company. Subpart F requires current
inclusions in the income of United States shareholders to the extent of a
controlled foreign corporation's accumulated earnings invested in "excess
passive" assets (as defined by the Code). In addition, under Section 1248 of
the Code, a gain from the sale or exchange of shares by a U.S. Holder who is or
was a United States shareholder at any time during the five year period ending
with the sale or exchange is treated as ordinary dividend income to the extent
of earnings and profits of the Company attributable to the stock sold or
exchanged. Because of the complexity of Subpart F, and
12
<PAGE>
because it is not clear that Subpart F would apply to the U.S. Holders of
shares of the Company, a more detailed review of these rules is outside of the
scope of this discussion.
The foregoing summary is a general discussion of the material United States
Federal income tax considerations to U.S. holders of shares of the Company
under current law. It does not discuss all the tax consequences that may be
relevant to particular holders in light of their circumstances or to holders
subject to special rules, such as tax-exempt organizations, qualified
retirement plans, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, non-resident
alien individuals or foreign corporations whose ownership of shares of the
Company is not effectively connected with the conduct of a trade or business in
the United States, shareholders who acquired their stock through the exercise
of employee stock options or otherwise as compensation, shareholders who hold
their stock as ordinary assets and not capital assets and any other non-U.S.
holders. In addition, U.S. holders may be subject to state, local or foreign
tax consequences. This discussion is not intended to be, nor should it be
construed to be, legal or tax advice to any holder or prospective holder of
shares of the Company and no opinion or representation with respect to the
United States Federal income tax consequences to any such holder or prospective
holder is made. Holders and prospective holders should therefore consult with
their own tax advisors with respect to their particular circumstances. This
discussion covers all material tax consequences.
Item 8. Selected Financial Data
The selected financial data set forth below, presented in accordance with
Canadian generally accepted accounting principles and denominated in U.S.
dollars, should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended June 30, 1999 1998 1997 1996 1995
-------------------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Gross Revenue........... $7,022,338 $ 3,645,511 $ 440,142 $ 273,466 $ 20,142
Net (Loss).............. (8,930,165) (10,572,359) (1,096,489) (1,255,727) (111,646)
Loss per common share... (0.16) (0.26) (0.04) (0.08) (0.01)
Share Capital........... 50,485,327 32,312,036 20,133,202 10,761,671 9,004,894
Special Warrants........ -0- 17,600,442 5,072,166 -0- -0-
Total Assets............ 38,461,878 56,137,341 22,542,053 8,955,800 8,234,990
Long-Term Liabilities... 7,450,000 10,695,654 -0- -0- -0-
Shareholders' Equity.... 27,014,480 35,317,797 21,237,046 7,962,339 7,388,788
Had the foregoing selected financial data been presented in accordance with
U.S. generally accepted accounting principles, the data presented would be as
follows:
<CAPTION>
Years Ended June 30, 1999 1998 1997 1996 1995
-------------------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Gross Revenue........... $7,022,338 $ 3,645,511 $ 440,142 $ 273,466 $ 183,966
Net (Loss).............. (8,930,166) (10,572,359) (1,096,489) (1,255,727) (1,362,911)
Loss per common share... (0.16) (0.18) (0.03) (0.08) (0.11)
Share Capital........... 51,679,039 33,505,748 21,326,914 11,955,383 10,198,606
Special Warrants........ -0- 17,600,442 5,072,166 -0- -0-
Total Assets............ 38,448,950 56,124,413 22,529,125 8,942,872 8,295,687
Long-Term Liabilities... 7,450,000 10,695,654 -0- -0- -0-
Shareholders' Equity.... 26,845,281 35,202,598 21,067,847 7,853,796 7,183,552
</TABLE>
The Company has never paid cash dividends on its common shares and does not
expect to do so for the foreseeable future. The Company intends to use retained
earnings to finance growth of its business.
13
<PAGE>
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and operating results of
the Company should be read in conjunction with consolidated financial
statements and related notes of the Company. Except as otherwise indicated all
amounts are expressed in U.S. dollars.
Since its entry into the oil and gas industry in 1993, the Company has
continued to raise capital for its exploration and development programs, most
of which are based in the United States. Substantially all of the oil and gas
activities are conducted jointly with others and, accordingly, the accounts
reflect only the Company's proportionate interest in such activities.
Results of Operations--Fiscal Year Ended June 30, 1999 Compared to Fiscal Year
Ended June 30, 1998
The Company incurred a net loss of $8.93 MM for the year ended June 30, 1999
compared to a net loss of $10.57 MM for the year ended June 30, 1998. Oil and
gas revenues increased to $7.0 MM in fiscal 1999 from $3.64 MM in 1998. This
was directly attributable to the Company's drilling and completion activities
in the Green River Basin of Wyoming. The Company's annual production increased
to 4.1 Bcf of gas and 41.9 thousand barrels of condensate during 1999, up from
1.9 Bcf of gas and 14.0 thousand barrels of condensate during 1998. During 1999
the average product prices received were $ 1.54 per Mcf and $15.95 per barrel,
compared to an average of $1.81 per Mcf and $13.24 per barrel in 1998.
Depletion and depreciation expense increased to $1.79 MM in 1999 from $1.37
MM in 1998. The increase in depletion and depreciation expense was attributable
to increased production. The per mcf equivalent ("mcfe") oil and gas depletion
and depreciation rate fell to $0.41 in 1999. The decline in the per mcfe
depletion and depreciation rate was attributable to the effects of the ceiling
test write-down of $3.41 MM incurred in December, 1998, additions to reserves
and reduced finding and development costs. The book value of oil and gas
properties was $33.25 MM at June 30, 1999, compared to $37.39 MM at June 30,
1998. The components of this decrease were the sale and write-downs of oil and
gas properties, and the costs of drilling of additional wells.
Direct lease operating expenses increased to $852,257 in 1999 from $248,638
in 1998. Production taxes and gathering fees increased to $1.71 MM in 1999 from
$704,553 in 1998. Both increases were directly attributable to increases in
production in the Green River Basin of Wyoming.
During 1999, the Company recognized a property impairment charge of $3.41
MM, as a result of the capitalized cost of oil and gas properties exceeding a
"ceiling" on such costs computed in accordance with GAAP. This impairment was
caused by the lower commodity prices at December 31, 1998. The ceiling test
impairment is a direct line item on the income statement. In June 1999, the
Company sold a working interest in certain undeveloped leaseholds for $5 MM in
cash, which had been split between proven and unproven properties and $8.2 MM
in carried work commitments which reduced the carrying value of unproven
properties. The $ 8.2 MM in carried work commitments will not be reflected on
the books until they are incurred which will be in December 1999.
General and administrative expenses increased to $5.86 MM in 1999 from $3.4
MM in 1998. This increase in total general and administrative expenses was
primarily attributable to increases in staffing and activity during the first
and second quarters of fiscal 1999. During the third and fourth quarters, the
Company implemented a restructuring plan to reduce general and administrative
expenses. During fiscal 1999, the Company wrote-off $2.019 MM of debt that had
been on the books in excess of two years. These debts were owed primarily by
junior joint venture partners for amounts expended by the Company in drilling
farm-out prospects on these partners' behalf for which the Company was never
reimbursed. The Company evaluated the ability of the joint venture partner to
repay the debts and determined that repayment was unlikely.
Included in unproven properties is $2.5 MM of prepaid environmental costs,
which relate to the Company's agreement to purchase specified nitrogen oxide
emission off-sets. These off-sets are to be utilized
14
<PAGE>
by the Company in the future development of its oil and gas properties in the
Mesa Area as the asset that will generate the off-sets is under construction.
Of the total payment, $2.0 MM was in the form of a note that bears interest at
10% payable in installments of $750,000 and $1.25 MM on July 15, 1999 and 2000,
respectively. The $229,161 of interest on this note at June 30, 1999 has been
capitalized as part of the prepaid environmental cost.
Results of Operations--Fiscal Year Ended June 30, 1998 Compared to Fiscal Year
Ended June 30, 1997
The Company incurred a net loss of $10.57 million on oil and gas revenues of
$3.65 million for the fiscal year ended June 30, 1998. This compares to a net
loss of $1.10 million on oil and gas revenues of $427,000 for the fiscal year
ended June 30, 1997.
Increases in revenue were attributable to the Company's drilling and
completion activities in the Green River Basin of southwest Wyoming and
partially offset by declines in product prices. During fiscal 1998 the average
product prices received were $1.81 per Mcf of gas and $13.26 per barrel of
condensate, compared to an average of $2.02 per Mcf and $21.68 per barrel in
fiscal 1997.
The Company's annual production increased to 1.8 Bcf of gas and 14,000
barrels of condensate during fiscal 1998, up significantly from 300 MMcf of gas
and 8,000 barrels of condensate during fiscal 1997 due to the Company's
drilling and completion activities in the Green River Basin.
Oil and gas depletion and depreciation expenses rose to $1.23 million in
fiscal 1998 from $60,600 in fiscal 1997. This increase was attributable to
increases in production and increases in the Company's spending on property
acquisitions in 1998. At June 30, 1998 the carrying value of oil and gas
properties was $37.40 million, up from $16.30 million at June 30, 1997. This
increase was mainly attributable to property acquisition and exploration
activities in the Green River Basin. This increase was offset by $8.20 million
of accounting charges associated with property writedown costs. See the
discussion below and note 3 to the consolidated financial statements.
Oil and gas production expenses consisted of operating expenses and
production taxes. Operating expenses increased to $249,000 in fiscal 1998 from
$52,660 in fiscal 1997. Production taxes, including gathering fees, increased
to $705,000 in fiscal 1998 from $25,000 in fiscal 1997. Both increases are
directly attributable to the Company's drilling and completion activities in
the Green River Basin.
During fiscal 1998, the Company recognized a property impairment charge of
$2.08 million, as a result of the capitalized costs of oil and gas properties
exceeding a "ceiling" on such costs computed in accordance with prescribed
accounting guidelines. This writedown, and the loss on abandonment of
properties of $6.12 million, was directly attributable to the oil and gas
properties of Ultra Petroleum (USA) Inc. and the decision to plug and abandon
its White Estates #1 property in Texas. This sour gas well was a source of
growing safety and environmental concern. As a result, reserves associated with
the property and present value included in prior statements were written down.
General and administrative expenses increased to $3.96 million in fiscal
1998 from $1.40 million in fiscal 1997. This increase in total general and
administrative expenses was primarily caused by the cost associated with
establishment of a United States operating company and the increase in the
number of employees and associated costs required to support the Company's
leasehold acquisition, drilling programs, environmental and regulatory
compliance.
Year 2000
As the Year 2000 approaches, a significant business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value for the year 2000. Many existing software
application products, including software application products used by the
Company and its vendors
15
<PAGE>
and customers, were designed to accommodate only a two-digit date value, which
represents the year. For example, information relating to the year 1996 is
stored in the system as "96." As a result, the year 1999 (i.e. "99") could be
the maximum date value that these systems will be able to process accurately.
The Company expects to finish the review, resolution and testing of all its
internal computer systems prior to December 1, 1999, to complete its year 2000
compliance program. Essentially all of the Company's office computer systems
are desktop computers, including its accounting system. The maker of the
Company's accounting software has represented that it has run a 2000 compliant
version in-house, and the Company upgraded to that version in November, 1999.
All other office desktop systems are either already year 2000 compliant or will
be upgraded before December 1, 1999. The Company does not expect that the cost
of upgrading any of its computer systems will have a material impact on the
Company's financial position, results of operations or cash flows. The
Company's oil and gas production operations equipment is not dependent on any
material amount of in-house computerized controls or embedded chip devices and
as such is not deemed to be affected by year 2000 compliance issues. Oil and
gas operations are significantly dependent on the year 2000 readiness of
respective customers and on supplies provided by third parties, particularly
for energy in the form of electricity and natural gas. The Company has
contacted significant suppliers, purchasers and other key business relations to
ascertain their year 2000 readiness to assess the extent to which the Company's
operations may be impacted should their organization not become year 2000
compliant. The Company cannot assure that there will not be material adverse
effects to the Company if customers or the Company's suppliers have
difficulties related to year 2000 readiness. The Company believes the
availability of supplies and services from third parties is the most
significant risk related to the year 2000 issue.
Plan of Operations
During the fiscal year ended June 30, 1999, the Company drilled a total of
16 gross (4.91 net) wells and completed or partially completed a total of 15
gross (4.41 net) wells with one gross (0.5 net) wells plugged and abandoned.
Additionally, during the period, the Company participated in acquisitions and
divestitures of resulting in a net reduction of four gross (minus 0.6398 net)
wells in the Company's well count.
The Company's goal for the fiscal year ending June 30, 2000 is to drill 16
gross (7.0625 net) wells in the Green River Basin, primarily on the Pinedale
Anticline, where the Company has current confirmation, delineation and step out
wells being drilled and completed. By October 31, 1999, the Company had 6 gross
(3.125 net) new wells either drilling, completing or producing in the Mesa
Project Area of the Pinedale Anticline. All of these wells encountered over-
pressured, Lance gas sands, with 5 gross (2.215 net) wells that appear
commercial and 1 gross (1 net) well that is a dry hole. Of the 5 gross (2.125
net) wells that appear commercial, 3 gross (1.275 net) are awaiting completion
and 2 gross (0.85 net) are drilling. These five new wells are being connected
to the existing pipeline infrastructure utilized for the three previous wells
drilled on the Mesa Area which will transport the gas to the Questar Blacks
Fork processing plant. Another 4 gross (2.55 net) wells were committed and
waiting on drilling rig availability in the field. Additionally, the Company
has acquired a 77 square mile 3-D seismic survey over much of the Mesa Project
Area and will begin interpretation of the data early in 2000.
Liquidity and Capital Resources
In 1999, the Company relied on sales of assets and its senior credit
facility to finance operations. The Company successfully negotiated an increase
in its senior credit facility from $2.65 MM to $12 MM. The increase was
directly related to the Company's improving financial condition and increases
in the value of the Company's oil and gas properties. The Company received $5
MM in cash and $8.2 MM in carried work commitments from the sale of assets in
June 1999, which allowed the reduction of senior indebtedness and reduction in
payables. The majority of the Company's capital expenditures have been in the
Green River Basin of Wyoming. For the year ended June 30, 1999 capital
expenditures were $22 MM. At June 30, 1999, the Company reported a cash
position of $782,702 compared to $5.9 MM of cash on hand at June 30, 1998.
Working capital decreased from $8.11 MM at June 30, 1998 to $698,204, primarily
due to reduction of receivables and cash on hand.
16
<PAGE>
Historically, the Company's capital expenditures and general and
administrative costs have exceeded its cash flow from operating activities.
Management has rectified this imbalance and in May 1999, the Company achieved
positive cash flow. The positive cash flow and the recent asset sale coupled
with increased borrowing capacity are projected to be adequate to meet the
Company's capital requirements for the fiscal year ended June 30, 2000 which
are estimated to be $12 MM. However, future cash flows and the continued
availability of financing are subject to a number of uncertainties such as
production rates, the price of oil and gas, and the continued results of the
Company's drilling programs. There can be no assurances that capital resources
will be sufficient to fund the Company's future capital expenditures.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 10. Directors and Officers of Registrant
Name, Position, and Tenure
Registrant: Ultra Petroleum Corp.
<TABLE>
<CAPTION>
Name Position Tenure
---- -------------------------- ----------------------------
<S> <C> <C>
Michael D. Watford...... Chairman of Board 1 Feb. 1999 to present
CEO 1 Feb. 1999 to present
Director 1 Feb. 1999 to present
R.G. "Jerry" Albertus... President 14 May 1996 to present
Director 14 May 1996 to present
John R. Hislop.......... Chief Financial Officer 14 May 1996 to 11 Sept. 98
Director 28 March 1993 to present
G. Harold Laycraft...... Director 24 March 1997 to present
Lorne Hanson............ Director 30 July 1997 to present
Dr. William C. Helton... Director 12 Aug. 1994 to present
Michael Schoen.......... Director 19 Aug. 1999 to present
Stephen Kneller......... Vice President Exploration 11 Sept. 1998 to present
Charlotte Kauffman...... Corporate Secretary 4 Dec. 1998 to present
Mark C. Jarvis.......... Director 13 Nov. 1996 to 18 Aug. 1999
Corporate Secretary 13 March 1997 to 4 Dec. 1998
Marc A. Bruner.......... Chairman of Board 23 Jan. 1996 to 29 Jan. 1999
Director 8 Nov. 1996 to 25 March 1999
</TABLE>
There are no family relationships between any director or executive officer
and any other director or executive officer.
Item 11. Compensation of Directors and Officers
The aggregate amount of salary paid to the directors and officers of the
Company (eleven persons) for the year ended June 30, 1999 was $658,560.
17
<PAGE>
Item 12. Options to Purchase Securities From Registrant or Subsidiaries.
The following share options relating to the Company's common stock and held
by officers and directors were outstanding at October 31, 1999:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price Expiry Date
--------- ----------- ---------------------
$CDN
<S> <C> <C> <C>
John Hislop....................... 314,860 $3.79 7 February 2000
R.G. Albertus..................... 200,000 $3.79 7 February 2000
Charlotte Kauffman................ 125,000 $3.79 7 February 2000
Stephen Kneller................... 50,000 $4.95 4 June 2000
Charlotte Kauffman................ 50,000 $4.42 7 July 2000
R.G. Albertus..................... 75,000 $5.00 12 December 2000
Charlotte Kauffman................ 20,000 $5.00 12 December 2000
Stephen Kneller................... 15,000 $5.00 12 December 2000
R.G. Albertus..................... 100,000 $6.63 26 August 2000
Lorne Hanson...................... 20,000 $6.63 26 August 2000
Michael Watford................... 1,650,000 $1.46 28 January 2009
All directors and officers as a
group (nine persons)............. 2,619,860 $1.46-$6.63 7-Feb-00 to 28-Jan-09
</TABLE>
The exercise prices for the above stock options were determined in
accordance with TSE listing policy and as a minimum reflect the average closing
price of the Company's shares for the 10 trading days on the TSE immediately
preceding the day on which the directors granted and publicly announced the
options. No compensation expense resulted from the granting of such options.
Item 13. Interest of Management In Certain Transactions.
General Information
Other than as set forth below and other than transactions carried out in the
normal course of business of the Company or any of its affiliates, none of the
Company's directors or officers, nor any of the Company's shareholders
beneficially owning shares carrying more than 10% of the voting rights attached
to the shares of the Company, nor any associate or affiliate of any of the
foregoing persons, has since July 1, 1997, had any material interest, direct or
indirect, in any transactions which materially affected the Company or any of
its subsidiaries or in any proposed transaction which has or would materially
affect the Company or any of its subsidiaries.
Under the Company Act (British Columbia), a director is statutorily
obligated to disclose at the first opportunity, at a meeting of the directors
or in a written notice to the other members of the board, the nature and extent
of his interest in any proposed contract or transaction with the company on
whose board he serves.
Related Party Transactions
The Company had the following transactions and balances with related
parties:
a. Mark Jarvis, the Company's former Director, is currently the
President and a director of Arrowhead Minerals Corp. ("Arrowhead").
Arrowhead and the Company are co-venturers in oil and gas properties as
follows: the ACU 34-1, Monty Prospect, Texas; the South Evetts Prospect,
Texas, the Bull Draw, Gemini and Warbonnet Prospects, Wyoming. At 1999
fiscal year end, the Company included $12,200 (1998--$998,682; 1997--
$12,200) owing to Arrowhead in its accounts payable and $18,595 in its
accounts receivable (1998--$1,779,352; 1997--nil).
b. John R. Hislop, a Director of the Company, is President and a
director of RIS Resources International Corporation ("RIS"), a company some
of whose assets were acquired by Ultra in 1996. At 1999 fiscal year end,
the Company included $ 0 (1998--$109,250; 1997--$2,003) owing from RIS in
its
18
<PAGE>
accounts receivable and $ 0 (1998--nil; 1997--$23,587) owing to RIS in
accounts payable. John R. Hislop is a Director of Arrowhead Minerals Corp.
("Arrowhead"). Arrowhead and the Company are co-venturers in oil and gas
properties as follows: the ACU 34-1, Monty Prospect, Texas; the South
Evetts Prospect, Texas, the Bull Draw, Gemini and Warbonnet Prospects,
Wyoming. At 1999 fiscal year end, the Company included $12,200 (1998--
$998,682; 1997--$12,200) owing to Arrowhead in its accounts payable and in
its accounts receivable $18,595 (1998--$1,779,352; 1997--nil).
c. G.H. Laycraft, a director of the Company, is the Chairman of
Transglobe Energy Corp. ("Transglobe"). The Company and Transglobe are co-
venturers in the following oil and gas properties of the Company located in
Texas: the Monty Prospect. At 1999 year end, the Company reported $0
(1998--$0; 1997--$74,446) owing to Transglobe in its accounts payable and
$3,010 (1998--$30,677; 1997--$10,837) owing from Transglobe in its accounts
receivable.
d. Included in office expense is $404,806 (1998--$416,167; 1997--
$139,358) paid to Caravel Management Corp., which is composed of salaries
for 10 employees, office rent, equipment leasing, internet services,
advertising and investor relations expenses. Caravel Management Corp. is a
company owned by John R. Hislop, a director of the Company.
Management of the Company believes that the terms and conditions of each of
the transactions describe above were at least as fair to the Company as could
have been obtained from unaffiliated persons or entities in arms' length
transactions.
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities.
Not applicable.
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
Not applicable.
19
<PAGE>
PART IV
Item 17. Financial Statements.
The following financial statements are attached hereto and made a part of
this report:
<TABLE>
<CAPTION>
Description of Document Page
----------------------- ----
<C> <S> <C>
(1) Consolidated Balance Sheets for the Fiscal Years Ended June 30,
1999 and 1998 (Audited--Prepared Externally by the Company Auditor,
KPMG) *
(2) Consolidated Statements of Operations and Deficit for the Fiscal
Years Ended June 30, 1999, 1998 and 1997 (Audited--Prepared
Externally by the Company Auditor, KPMG) *
(3) Consolidated Statements of Changes in Financial Position for the
Fiscal Years Ended June 30, 1999, 1998 and 1997 (Audited--Prepared
Externally by the Company Auditor, KPMG) *
(4) Supplementary Disclosures about Oil and Gas Producing Activities
dated June 30, 1999 (Unaudited--Prepared Internally by Company
Management) *
(5) Auditors' Report Dated August 18, 1999 *
</TABLE>
Item 18. Financial Statements.
Not applicable.
Item 19. Financial Statements and Exhibits.
<TABLE>
<CAPTION>
Description of Document Page
----------------------- ----
<C> <S> <C>
(a) Financial Statements
(1) See Item 17 above *
(b) Exhibits
(1) Corporate Charter and By-Laws (1)
(2) May 22, 1996 Agreement between the Company and RIS (1)
(3) Agreements re: Green River Basin Prospect
(i) July 19, 1996 CNG Producing Company Farmout Agreement (1)
(ii) July 19, 1996 Western Gas Resources, Inc. Agreement (1)
(iii) Jonah Field Development Agreement between Halliburton
Energy Services, Inc. and Ultra CO, dated May 30, 1997 (1)
(iv) Farmout and Option Agreement between Ultra CO and Celsius
Energy Company, effective March 31, 1997 (1)
(v) Letter Agreement between the Company and Ultra CO, and
Arrowhead Resources (USA) Ltd., dated August 19, 1997, as
amended by letter agreement dated October 30, 1997 (1)
(vi) Gas Gathering Agreement between Ultra CO and Ultra WY, and
Jonah Gas Gathering Company, dated November 7, 1997 (1)
(vii) Hoback Basin Letter Agreement between Ultra CO and Ultra
WY, and Lance Oil & Gas Company, Inc., dated November 14,
1997 (1)
(viii) Participation Agreement among Ultra WY, HS Resources Inc.
and Holmes P. McLish, dated December 14, 1997 (1)
(ix) First Amended and Restated Johan Field Development
Agreement between Halliburton Energy Services, Inc. and
Ultra CO and Ultra WY, dated April 1, 1998 (1).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Description of Document Page
----------------------- ----
<C> <S> <C>
(x) Credit Agreement between Wells Fargo Bank and Ultra dated
July 24, 1998 (1).
(xi) Purchase and Sale Agreement between Anschutz Wyoming Corp.
and Ultra CO and Ultra WY, dated May 17, 1999 (2)
(xii) Participation Agreement between Anschutz Wyoming Corp. and
Ultra CO and Ultra WY, dated June 18, 1999 (2)
(xiii) Purchase and Sale Agreement between Questar Exploration and
Production Company and Ultra CO and Ultra WY, dated May 17,
1999 (2)
(xiv) Participation Agreement between Questar Exploration and
Production Company and Ultra CO and Ultra WY, dated June
18, 1999 (2)
</TABLE>
--------
(1) Previously filed with Form 20-F dated April 28, 1998 and Form 20-F dated
December 22, 1998.
(2) Filed herewith.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ULTRA PETROLEUM CORP.
Date: December , 1999 /s/ Michael D. Watford
By:__________________________________
Name: Michael D. Watford
Title: Director, Chairman of the
Board and CEO
22
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------- -------------
(Expressed in U.S. Dollars)
ASSETS
------
<S> <C> <C>
Current Assets
Cash and equivalents.......................... $ 782,702 $ 5,896,243
Restricted cash............................... 969,543 113,481
Accounts receivable........................... 2,524,685 9,286,603
Amounts due from related parties (Note 7)..... 44,206 1,941,880
Prepaid expenses and other current assets..... 374,466 188,408
Note receivable............................... -- 750,000
------------- -------------
4,695,602 18,176,615
Oil and gas properties, using the full cost
method of accounting (Note 2).................. 33,297,219 37,391,681
Capital assets (Note 3)......................... 469,057 569,045
------------- -------------
TOTAL ASSETS.................................... $ 38,461,878 $ 56,137,341
============= =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS'S EQUITY
-------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities...... $ 2,966,168 $ 4,614,706
Amounts due to related parties (Note 7)....... 52,069 1,038,551
Current portion of long-term debt (Note 4).... 979,161 4,416,633
------------- -------------
3,997,398 10,069,890
Deferred revenue................................ 350,000 450,000
Long-term debt (Note 4)......................... 7,100,000 10,245,654
Shareholder's equity:
Share capital (Note 5)........................ 50,485,327 32,312,036
Special warrants (Note 6)..................... -- 17,600,442
Deficit....................................... (23,470,847) (14,540,681)
------------- -------------
Commitments and contingencies (Notes 11 and
13)............................................ 27,014,480 35,371,797
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..... $ 38,461,878 $ 56,137,341
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
/s/ Michael D. Watford /s/ R.G. "Jerry" Albertus
------------------------------- -------------------------------
Michael D. Watford R.G. "Jerry" Albertus
Director Director
23
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
(Expressed in U.S. Dollars)
<S> <C> <C> <C>
REVENUES:
Natural gas sales................... $ 6,352,315 $ 3,471,661 $ 405,216
Oil sales........................... 670,023 173,850 21,327
------------ ------------ -----------
7,022,338 3,645,511 426,543
------------ ------------ -----------
EXPENSES:
Production expenses and taxes....... 2,571,081 953,191 77,625
Depletion and depreciation.......... 1,794,307 1,377,190 76,849
Ceiling test write-down (Note 2).... 3,416,786 2,081,300 --
Loss on abandonment of oil and gas
property (Note 2).................. -- 6,115,305 --
Bad debt............................ 2,019,416 -- --
General and administrative.......... 5,861,125 3,405,403 1,382,157
Interest............................ 576,506 406,062 --
------------ ------------ -----------
16,239,221 14,338,451 1,536,631
OTHER INCOME:
Interest............................ 151,709 120,581 13,599
Other............................... 135,008 -- --
------------ ------------ -----------
286,717 120,581 13,599
------------ ------------ -----------
LOSS FOR THE YEAR..................... (8,930,166) (10,572,359) (1,096,489)
DEFICIT, beginning of year............ (14,540,681) (3,968,322) (2,871,833)
------------ ------------ -----------
DEFICIT, end of year.................. $(23,470,847) $(14,540,681) $(3,968,322)
============ ============ ===========
LOSS PER COMMON SHARE................. $ (0.16) $ (0.26) $ (0.04)
============ ============ ===========
Weighted average common shares
outstanding.......................... 55,804,459 40,469,589 25,500,520
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
(Expressed in U.S. Dollars)
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Loss for the year..................... $ (8,930,166) $(10,572,359) $(1,096,489)
Add (deduct):
Items not involving cash:
Depletion and depreciation........ 1,794,307 1,377,190 76,849
Ceiling test write-down........... 3,416,786 2,081,300 --
Provision for bad debts........... 2,019,416 -- --
Loss on abandonment of property... -- 6,115,305 --
Net changes in non-cash working
capital:
Restricted cash................... (859,062) (113,481) --
Accounts receivable............... 6,640,176 (11,008,683) (79,033)
Prepaid expenses and other current
assets........................... (186,058) (118,003) (70,405)
Note receivable................... (750,000) (750,000) --
Accounts payable and accrued
liabilities...................... (2,635,020) 4,623,260 123,338
Deferred revenue.................. (100,000) 450,000 --
------------ ------------ -----------
1,913,379 (7,915,481) (1,045,740)
------------ ------------ -----------
INVESTING ACTIVITIES:
Oil and gas property expenditures... (21,996,324) (30,695,675) (7,684,768)
Purchase of capital assets.......... (58,319) (654,148) (81,359)
Proceeds from sale of oil and gas
properties......................... 21,038,000 184,647 --
Bid deposit......................... -- 1,133,000 (1,133,000)
------------ ------------ -----------
(1,016,643) (30,032,176) (8,899,127)
------------ ------------ -----------
FINANCING ACTIVITIES:
(Decrease) increase in long-term
debt............................... (6,583,126) 14,387,287 188,208
Issuance of shares.................. 18,173,291 12,178,834 9,371,531
Issuance of special warrants........ -- 17,600,442 5,072,166
Conversion of special warrants...... (17,600,442) (5,072,166) --
Share subscriptions................. -- -- (72,501)
------------ ------------ -----------
(6,010,277) 39,094,397 14,559,404
------------ ------------ -----------
(DECREASE) INCREASE IN CASH DURING
YEAR................................. (5,113,541) 1,146,740 4,614,537
CASH AND CASH EQUIVALENTS, beginning
of year.............................. 5,896,243 4,749,503 134,966
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end of
year................................. $ 782,702 $ 5,896,243 $ 4,749,503
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars unless otherwise noted)
Years ended June 30, 1999, 1998 and 1997
INCORPORATION AND NATURE OF OPERATIONS:
Ultra Petroleum Corp. (the "Company") is incorporated under the laws of
British Columbia, Canada and its principal business activity is the exploration
and development of oil and gas properties located primarily in the United
States
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Ultra Petroleum (U.S.A.) Inc. and Ultra
Resources, Inc.
All material intercompany transactions and balances have been eliminated
upon consolidation.
(b) Accounting principles:
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada.
(c) Revenue recognition and deferred revenue:
Revenues from oil and gas operations are recognized at the time the oil is
sold or natural gas is delivered. The cash received upon dedicating certain
production volumes to a gas pipeline was deferred and is being included in
natural gas sales on a straight line basis over the term of the five year
dedication.
(d) Restricted cash:
Restricted cash represents cash received by the Company from production sold
where the final division of ownership of the production is unknown or in
dispute.
(e) Capital assets:
Capital assets are recorded at cost. Depreciation is provided on a straight-
line basis over 5 years.
(f) Oil and gas properties:
The Company follows the full cost method of accounting for oil and gas
operations whereby all costs associated with the exploration for and
development of oil and gas reserves are capitalized to the Company's single
cost center. Such costs include land acquisition costs, geological and
geophysical expenses, carrying charges on non-producing properties, costs of
drilling both productive and non-productive wells and overhead charges directly
related to acquisition, exploration and development activities.
The capitalized cost, together with the costs of production equipment, are
depleted and depreciation on the unit-of-production method based on the
estimated gross proven reserves as determined by independent petroleum
engineers. Oil and gas reserves and production are converted into equivalent
units based upon relative energy content.
Costs of acquiring and evaluating unproved properties are initially excluded
from the costs subject to depletion and depreciation. These unproved properties
are assessed periodically to ascertain whether
26
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
impairment has occurred. When proved reserves are assigned or the property is
considered to be impaired, the cost of the property or the amount of the
impairment is added to the costs subject to depletion and depreciation.
The total capitalized cost of oil and gas properties less accumulated
depletion and depreciation are limited to an amount equal to the estimated
future net revenue from proven reserves plus the cost (net of impairment) of
unproven properties, less estimated future site restoration costs, general and
administrative expenses, financing costs and income taxes.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the rate of depletion and depreciation.
Substantially all of the Company's exploration, development and production
activities are conducted jointly with others and accordingly these financial
statements reflect only the Company's proportionate interest in such
activities.
(g) Foreign currency translation:
The Company has adopted the United States dollar as its reporting currency,
which is also its functional currency. The Company and its subsidiaries are
considered to be integrated operations and the accounts in Canadian dollars are
translated using the temporal method. Under this method, monetary assets and
liabilities are translated at the rates of exchange in effect at the balance
sheet date; non-monetary assets at historical rates and revenue and expense
items at the average rates for the period other than depletion and depreciation
which are translated at the same rates of exchange as the related assets. The
net effect of the foreign currency translation is included in current
operations.
(h) Use of estimates:
Preparation of consolidated financial statements in accordance with
generally accepted accounting principles in Canada requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(i) Reclassifications:
Certain amounts in the financial statements of the prior years have been
reclassified to conform to the 1999 financial statement presentation.
2. OIL AND GAS PROPERTIES:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Developed Properties:
Acquisition, equipment, exploration and
drilling costs................................ $18,474,826 $18,732,612
Less accumulated depletion, depreciation and
amortization.................................. (2,969,605) (1,333,605)
----------- -----------
15,505,221 17,399,007
Unproven Properties:
Acquisition and exploration costs.............. 15,062,837 17,492,674
Environmental costs............................ 2,729,161 2,500,000
----------- -----------
$33,297,219 $37,391,681
=========== ===========
</TABLE>
27
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1999, the Company sold its interest in approximately 15,000 net
undeveloped acres and a working interest in several wells for $5,000,000 in
cash and $8,200,000 in future work commitments which will be recorded as the
drilling program progresses. $2,758,000 of the proceeds have been allocated to
the acreage sold and $2,242,000 to the well interests sold. Such amounts have
been recorded as a reduction to the carrying values of the Unproven and
Developed properties, respectively.
During the quarter ended December 31, 1998, the Company recorded a ceiling
test write-down of $3,416,786.
Effective July 1, 1998, the Company assigned an interest in certain wells as
payment of debt the Company had incurred on drilling these wells. The Company
did not recognize any gain or loss on this transaction and, accordingly, the
carrying value of oil and gas properties and the long-term debt account were
reduced by the same amount.
At June 30 1998, a ceiling test write-down in the amount of $8,196,605 was
recorded. This write-down has been reflected in the 1998 statement of
operations in two separate components: (i) a loss on abandonment of oil and gas
property in the amount of $6,115,305 and (ii) a ceiling write-down in the
amount of $2,081,300.
Included in Unproven Properties is $2,500,000 of prepaid environmental
costs, which relate to the Company's agreement to purchase specified nitrogen
oxide emission off-sets. These off-sets are to be utilized by the Company in
the future development of its oil and gas properties as the asset that will
generate the off-sets is under construction. $2,000,000 of the total purchase
was in the form of a note that bears interest at 10% payable in installments of
$750,000 and $1,250,000 on July 15, 1999 and 2000, respectively. The $229,161
of interest due on this note at June 30, 1999 has been capitalized as part of
the prepaid environmental cost.
3. CAPITAL ASSETS:
<TABLE>
<CAPTION>
1999 1998 Net
Accumulated Net Book Book
Cost Depreciation Value Value
-------- ------------ -------- --------
<S> <C> <C> <C> <C>
Computer equipment................... $422,131 $149,888 $272,243 $317,368
Office equipment..................... 181,179 73,387 107,792 135,997
Field equipment...................... 145,175 66,327 78,848 115,680
Other................................ 38,161 27,987 10,174 --
-------- -------- -------- --------
$786,646 $317,589 $469,057 $569,045
======== ======== ======== ========
</TABLE>
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Bank indebtedness................................. $5,850,000 $ 2,450,000
Note payable...................................... 2,229,161 2,000,000
Production loan payable........................... -- 8,511,716
Acreage commitment, without interest, matures July
1, 1998.......................................... -- 1,700,571
---------- -----------
8,079,161 14,662,287
Less: current portion............................. (979,161) (4,416,633)
---------- -----------
$7,100,000 $10,245,654
========== ===========
</TABLE>
28
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bank indebtedness:
The bank indebtedness bears interest at the bank's prime rate, which was
7.75% at June 30, 1999. The Company's borrowing base is $12,000,000 and any
outstanding debt is secured by all of the Company's oil and gas interests.
Note payable:
The note payable relates to the purchase of nitrogen oxide emission off-sets
discussed in Note 3. The note bears interest at 10% and is payable in
installments of $750,000 and $1,250,000 on July 15, 1999 and 2000,
respectively.
Production loan payable:
The repayment terms of the production loan were based on and secured by a
percentage of production proceeds from specified wells. As described in Note 3,
during 1999 the Company assigned an interest in certain wells as complete
payment of the production loan.
Acreage commitment:
The acreage commitment relates to the Company's acquisition of a leasehold
interest in land. The commitment did not bear interest and was liquidated in
July 1998 in the normal course of operations.
5. SHARE CAPITAL:
(a) AUTHORIZED:
100,000,000 Common shares with no par value
(b) ISSUED:
<TABLE>
<CAPTION>
Number of
Shares Amount
---------- -----------
<S> <C> <C>
Balance, June 30, 1997............................... 35,192,305 $20,133,202
Shares issued during the year:
For cash........................................... 6,544,800 5,170,951
For acquisition of oil and gas properties.......... 6,354,610 7,007,883
---------- -----------
Balance, June 30, 1998............................... 48,091,715 32,312,036
---------- -----------
Shares issued during the year:
For cash........................................... 1,165,910 572,849
For conversion of special warrants................. 7,236,100 17,600,442
---------- -----------
Balance, June 30, 1999............................... 56,493,725 $50,485,327
========== ===========
</TABLE>
(c) SHARE OPTIONS:
<TABLE>
<CAPTION>
Number of Price range
Options (Cdn. $s)
---------- --------------
<S> <C> <C>
Balance, June 30, 1998.......................... 3,463,220 $0.50 to $7.10
Granted......................................... 2,150,000 $1.46 to $3.85
Exercised....................................... (545,600) $0.50 to $1.05
Cancelled....................................... (1,445,360) $3.79 to $7.10
----------
Balance, June 30, 1999 3,622,260 $1.05 to $6.96
==========
</TABLE>
29
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The share options outstanding at June 30, 1999 were held as follows:
<TABLE>
<CAPTION>
Number of Exercise Expiry
Relationship of Optionholder Shares Price (Cdn) Period/Date
---------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Directors.................................. 307,400 $ 1.05 7/99-12/99
Directors/Employees........................ 1,664,860 $3.79-$6.96 1/00-12/00
Director................................... 1,650,000 $ 1.46 1/09
---------
3,622,260
=========
</TABLE>
No compensation resulted from the granting of these options as all were
granted at or above the market value of the common shares at the date of grant.
(d) SHARE PURCHASE WARRANTS:
<TABLE>
<CAPTION>
Number of Price range
Warrants (Cdn. $s)
---------- --------------
<S> <C> <C>
Balance, June 30, 1998........................... 1,455,000 $0.48 to $4.62
Issued upon conversion of Special Warrants....... 5,832,100 $4.02 to $5.20
Exercised........................................ (205,000) $0.48 to $0.56
Expired.......................................... (1,250,000) $4.02 to $4.62
----------
Balance, June 30, 1999........................... 5,832,100 $4.02 to $5.20
==========
</TABLE>
6. SPECIAL WARRANTS:
<TABLE>
<CAPTION>
Number of
Special
Warrants Amount
---------- ------------
<S> <C> <C>
Balance, June 30, 1997............................. 5,911,840 $ 5,072,166
---------- ------------
Special warrants issued during the year:
October 1997....................................... 27,500 70,890
December 1997...................................... 4,400,600 9,813,180
May 1998........................................... 2,808,000 7,716,372
---------- ------------
7,236,100 17,600,442
Special warrants converted during the year......... (5,911,840) (5,072,166)
---------- ------------
Balance, June 30, 1998............................. 7,236,100 17,600,442
Special warrants converted during the year......... (7,236,100) (17,600,442)
---------- ------------
Balance, June 30, 1999............................. -- $ --
========== ============
</TABLE>
Special Warrants are each convertible into one Common Share and one Share
Purchase Warrant. Special Warrants converted during 1999 were at prices ranging
from $4.05 Cdn to $4.50 Cdn.
30
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. RELATED PARTY TRANSACTIONS:
The following amounts were paid to directors and officers of the Company or
its affiliates:
<TABLE>
<CAPTION>
For the year ended June
30,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Office rent and administration services to a
company controlled by a director.............. $404,806 $416,167 $139,358
-------- -------- --------
Management bonus to directors and officers..... $190,743 $187,663 $202,767
-------- -------- --------
Wages/fees to directors and officers........... $193,320 $292,851 $ --
-------- -------- --------
</TABLE>
Amounts due from related parties:
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998 1997
------- ---------- -------
<S> <C> <C> <C>
RIS Resources International Corp................. $ -- $ 109,250 $ 2,003
Enterprise Exploration and Production Inc........ 22,601 22,601 --
Transglobe Energy Corporation.................... 3,010 30,677 10,837
Arrowhead Minerals Corporation................... 18,595 1,779,352 --
------- ---------- -------
Total.......................................... $44,206 $1,941,880 $12,840
======= ========== =======
</TABLE>
Amounts due to related parties:
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998 1997
------- ---------- --------
<S> <C> <C> <C>
Arrowhead Minerals Corporation.................. $12,200 $ 998,682 $ 12,200
RIS Resources International Corp................ -- -- 23,587
Enterprise Exploration and Production Inc....... 39,869 39,869 39,869
Transglobe Energy Corporation................... -- -- 74,446
------- ---------- --------
Total......................................... $52,069 $1,038,551 $150,102
======= ========== ========
</TABLE>
The above amounts due from and to related parties were incurred in the
normal course of oil and gas operations.
Related party relationships:
(a) RIS Resources International Corp. ("RIS")
One of the Company's directors is President and a director of RIS. During
fiscal 1997, the Company acquired all the oil and gas assets of RIS, in
exchange for 9,382,845 Common shares of the Company.
(b) Enterprise Exploration and Production Inc. ("Enterprise")
One of the Company's directors is the owner of Enterprise. The Company and
Enterprise both own working interests in one of the Company's oil and gas
properties.
(c) Transglobe Energy Corporation ("Transglobe")
One of the Company's directors is a director and Chairman of Transglobe. The
Company and Transglobe both own working interests in a number of the same oil
and gas properties.
31
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(d) Arrowhead Minerals Corporation ("Arrowhead")
The Company's former president and one of the Company's former officers, who
are also directors of the Company, are directors of Arrowhead. The Company and
Arrowhead both own working interests in a number of the same oil and gas
properties.
8. INCOME TAXES:
At June 30, 1999, the Company has available non-capital loss carry forwards
as follows:
<TABLE>
<CAPTION>
Losses for Losses for
Financial Timing Tax Expiry
Statements Differences Purposes Dates
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Canada (Cdn dollars)......... $ 7,767,860 $ 479,718 $ 7,288,142 1999-2006
----------- ----------- -----------
United States (US dollars)... $17,796,250 $(6,578,853) $24,375,103 2009-2019
----------- ----------- -----------
</TABLE>
No benefit from these losses has been recorded in the accounts because of
the uncertainty associated with their ultimate realization. The benefit of the
Canadian loss carryforwards can only be realized when the company generates
taxable income in Canada. The Company currently has no producing operations in
Canada.
9. EMPLOYEE BENEFITS:
The Company sponsors a qualified tax-deferred savings plan in accordance
with provisions of Section 401(k) of the Internal Revenue Code for its U.S.
employees. Employees may defer up to 15% of their compensation, subject to
certain limitations. The Company matches the employee contributions up to 5% of
employee compensation. The plan runs on a calendar year and began in February,
1998. The expense associated with the Company's contribution was $58,978 and
$18,672 in the years ended June 30,1999 and 1998, respectively.
10. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND
THE UNITED STATES:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada, ("Canadian GAAP"), which
differ in certain respects from generally accepted accounting principles in the
United States, ("US GAAP").
Had the Company followed US GAAP, the carrying value of the Oil and Gas
Properties would not be materially different than under Canadian GAAP. Under US
GAAP, the Company is required to discount future net revenues at 10% for
purposes of calculating any required ceiling test write-down. Under Canadian
GAAP, future net revenues are not discounted, however, they are reduced for
estimated future general and administrative expenses and interest. In 1999 and
1998, the calculation under Canadian GAAP approximated that determined under US
GAAP.
Total Shareholders Equity under US GAAP would be $169,199 lower due to the
manner in which escrowed share were accounted for in fiscal 1995.
Under US GAAP, the totals for Cash Used in Investing Activities and for Cash
Provided by Financing Activities on the June 30, 1997 consolidated statements
of changes in financial position would both decrease by $3,064,064. The issue
of common shares as consideration for the acquisition of oil and gas properties
or the settlement of a liability does not impact the Company's cash flows, and
accordingly, under US GAAP these transactions are excluded from the statement
of changes in financial position.
32
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. COMMITMENTS AND CONTINGENCIES:
The Company is committed to payments, under an operating lease for office
space, of $371,000 in fiscal 2000 and 2001, $376,000 in 2002 and $380,000 in
fiscal 2003. Approximately 50% of these payments are offset by a sublease with
the same term as the primary lease.
On January 15, 1999, Alamo Resources, Inc. ("Alamo") filed suit against the
Company in the 392nd Judicial District Court, Henderson County, Texas alleging
that the Company trespassed and wrongfully plugged a well it operated in
Henderson County, Texas called the White Estate No. 1. Alamo was top lessee of
the property and thus claims a right to operate the well and that the Company
committed negligence and gross negligence in operating the well that resulted
in a loss of reserves. The Company had plugged the well for a number of
reasons, primarily due to safety and a lack of an available market for sour gas
making it uneconomic for the Company to leave the well shut-in. The Company
believes that it has meritorious defenses to Alamo's allegations and has filed
a motion for partial summary judgment for the trespass claim. No prediction can
be made as to the outcome of the matter.
The Company is currently involved in various other routine disputes and
allegations incidental to its business operations. While it is not possible to
determine the ultimate disposition of these matters, management, after
consultation with legal counsel, is of the opinion that the final resolution of
all such currently pending or threatened litigation is not likely to have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
For certain of the Company's financial instruments including accounts
receivable, note receivable, accounts payable, accrued liabilities and
management fees payable, the carrying amounts approximate fair value due to the
immediate or short-term maturity of these financial instruments.
The carrying value for notes payable approximates fair market value because
the various borrowing rates are similar to the current rates presently
available to the Company for loans with similar terms and maturity.
13. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (UNAUDITED):
The Year 2000 Issue ("Y2K") arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar problems
may arise is some systems which use certain dates in 1999 to represent
something other than a date. The effects of the Y2K issue may be experienced
before, on, or after January 1, 2000, and, if not addressed, the impact on
operations and financial reporting may range from minor errors to significant
systems failure which could affect an entity's ability to conduct normal
business operations.
The Company has taken and continues to take definitive action to assure the
proper functioning of its business processes during the Y2K critical time
frame. The Company has reviewed its information technology and overall business
systems for potential susceptibility to errors caused by the Y2K problem and
conducted a successful simulation of its systems and processes on December 18,
1998. The Company's internal equipment and software can recognize, manipulate
and compare (in normal functioning) all dates during and after the year 2000,
and operate in accordance with the products' intended specifications. Within
the Company's field operations, no electronic equipment that could be
susceptible to Y2K errors has been identified. The Company has contacted its
vendors and is in the process of monitoring key vendor compliance. It is not
possible to be certain that all aspects of the Y2K issues affecting the entity,
including those related to the efforts of customers,
33
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
suppliers, or third parties, will be fully resolved. Nevertheless, the Company
does not expect Y2K issues to cause any material impairment of its business.
14. DISCLOSURE ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED):
The following information about the Company's oil and gas producing
activities is presented in accordance with United States Statement of Financial
Accounting Standards No. 69: Disclosure About Oil and Gas Producing Activities:
A. OIL AND GAS RESERVES:
The determination of oil and gas reserves is complex and highly
interpretive. Assumptions used to estimate reserve information may
significantly increase or decrease such reserves in future periods. The
estimates of reserves are subject to continuing changes and, therefore, an
accurate determination of reserves may not be possible for many years because
of the time needed for development, drilling, testing, and studies of
reservoirs. The following unaudited table is based upon estimates prepared by
Gilbert, Lausten, and Jung Associates Ltd. These are estimated quantities of
proved oil and gas reserves for the Company and the changes in total proved
reserves as of June 30, 1999 and 1998 and for each of the years in the three
year period ended June 30, 1999. All such reserves are located in the United
States.
B. ANALYSES OF CHANGES IN PROVEN RESERVES:
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- -----------
<S> <C> <C>
Reserves, July 1, 1996.............................. 1,144,000 2,700,000
Extensions, discoveries and additions............... 386,000 43,300,000
Production.......................................... (8,000) (300,000)
Revisions........................................... (897,000) (2,600,000)
Acquisition of reserves in place.................... 1,134,000 2,400,000
Sale of reserves in place........................... 0 0
---------- -----------
Reserves, July 1, 1997.............................. 1,759,000 45,500,000
---------- -----------
Extensions, discoveries and additions............... 206,000 20,400,000
Production.......................................... (14,000) (1,800,000)
Revisions........................................... (1,372,000) (6,800,000)
Acquisition of reserves in place.................... 0 0
Sale of reserves in place........................... 0 (200,000)
---------- -----------
Reserves, July 1, 1998.............................. 579,000 57,100,000
---------- -----------
Extensions, discoveries and additions............... 66,000 8,640,000
Production.......................................... (42,000) (4,129,000)
Revisions........................................... 125,000 8,400,000
Acquisition of reserves in place.................... 0 0
Sale of reserves in place........................... (308,000) (28,575,000)
---------- -----------
Reserves, July 1, 1999.............................. 420,000 41,436,000
---------- -----------
Proved developed reserves:
July 1, 1997........................................ 67,000 6,730,000
========== ===========
July 1, 1998........................................ 224,000 22,300,000
========== ===========
July 1, 1999........................................ 350,000 34,400,000
========== ===========
</TABLE>
34
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
C. STANDARDIZED MEASURE:
The unaudited standardized measure of discounted future net cash flows
related to proven oil and gas reserves are as follows (000US$):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows.......................... $ 81,797 $ 86,770 $100,821
Future production costs...................... (13,638) (20,140) (26,882)
Future development costs..................... (3,677) (18,809) (11,686)
Future income taxes.......................... (9,756) (4,536) (16,877)
-------- -------- --------
Future net cash flows........................ 54,726 43,285 45,376
Discount at 10%.............................. (28,695) (27,536) (23,591)
-------- -------- --------
Standardized measure of discounted future net
cash flows.................................. $ 26,031 $ 15,749 $ 21,785
======== ======== ========
</TABLE>
The estimate of future income taxes is based on the future net cash flows
from proved reserves adjusted for the tax basis of the oil and gas properties
but without consideration of general and administrative and interest expenses.
For standardized measure purposes the company estimates future income taxes
using the "year-by-year" method. For ceiling test purposes the Company
estimates future income taxes using the "short-cut" method.
D. SUMMARY OF CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS (000US$):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Standard measure, beginning.................. $ 15,749 $ 21,785 $ 18,590
Net revisions................................ 8,511 (18,473) (6,717)
Extensions, discoveries and other changes.... 6,641 9,131 20,557
Sales of reserves in place................... (21,751) (184) --
Acquisition of reserves...................... -- -- --
Changes in future development costs.......... (1,241) 1,717 58
Sales of oil and gas, net of production
costs....................................... (4,451) (3,397) (348)
Net change in prices and production costs.... 8,201 (3,460) (11,456)
Development costs incurred during year that
reduced future development costs............ 15,787 -- --
Accretion of discount........................ 1,575 2,178 1,859
Net change in income taxes................... (2,990) 6,452 (758)
-------- -------- --------
Standardized measure, ending................. $ 26,031 $ 15,749 $ 21,785
======== ======== ========
</TABLE>
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projected future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data and standardized measures 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 judgement.
As a result, estimates of different engineers often vary. 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 revenues from proved reserves and the present
value thereof are based upon certain assumptions, including geologic success,
prices,
35
<PAGE>
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
future production levels and costs that may not prove correct over time.
Predictions of 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. Historically, oil and gas prices
have fluctuated widely.
E. COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES
(US$000):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Acquisition costs--unproved properties............... $ 598 $16,245 $5,689
Exploration.......................................... 3,907 7,620 817
Development.......................................... 17,491 6,831 1,179
------- ------- ------
Total................................................ $21,996 $30,696 $7,685
======= ======= ======
</TABLE>
All of the Company's properties are in the United States.
F. RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (US$000):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ----
<S> <C> <C> <C>
Oil and gas revenue.................................. $ 7,022 $ 3,646 $427
Production expenses and taxes........................ (2,571) (953) (78)
Depletion and depreciation........................... (1,794) (1,377) (77)
------- ------- ----
Total................................................ $ 2,657 $ 1,316 $272
======= ======= ====
</TABLE>
36
<PAGE>
AUDITORS' REPORT
To the Shareholders
of Ultra Petroleum Corporation
We have audited the consolidated balance sheets of Ultra Petroleum
Corporation as at June 30, 1999 and 1998 and the consolidated statements of
operations and deficit and changes in financial position for each of the years
in the three year period ended June 30, 1999. 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 in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at June 30, 1999 and 1998
and the results of its operations and the changes in its financial position for
each of the years in the three year period ended June 30, 1999, in accordance
with generally accepted accounting principles in Canada. As required by the
Company Act (British Columbia), we report that, in our opinion, these
principles have been applied on a consistent basis.
/s/ KPMG LLP
-------------------------------------
KPMG
Chartered Accountants
Vancouver, Canada
August 18, 1999
37
<PAGE>
Exhibit xi
Purchase and Sale Agreement between Anschutz Wyoming Corporation and Ultra
CO and Ultra WY, dated May 17, 1999
38
<PAGE>
Exhibit xii
Participation Agreement between Anschutz Wyoming Corporation and Ultra CO
and Ultra WY, dated June 18, 1999
39
<PAGE>
EXHIBIT xiii
Purchase and Sale Agreement between Questar Exploration and Production
Company and Ultra CO and Ultra WY, dated May 17, 1999
40
<PAGE>
EXHIBIT xiv
Participation Agreement between Questar Exploration and Production Company
and Ultra CO and Ultra WY, dated June 18, 1999
41
<PAGE>
APPENDIX K
ULTRA PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
ASSETS ------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 155,027 $ 401,691
Restricted cash.................................. 192,478 590,271
Receivables, less allowance of $250,000 at March
31, 2000........................................ 3,290,815 2,542,109
Prepaid expenses and other current assets........ 323,250 324,570
------------ ------------
Total current assets........................... 3,961,570 3,858,641
============ ============
Oil and gas properties, using the full cost
method of accounting............................ 33,912,837 33,773,292
Capital assets................................... 427,639 430,716
------------ ------------
34,340,476 34,204,008
============ ============
Total Assets................................... $ 38,302,046 $ 38,062,649
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities......... $ 3,814,577 $ 3,663,770
------------ ------------
Total current liabilities...................... 3,814,577 3,663,770
============ ============
Long Term Liabilities:
Deferred Revenue................................. 275,000 300,000
Notes Payable.................................... 8,209,874 8,466,646
------------ ------------
Total long term liabilities.................... 8,484,874 8,766,646
============ ============
Shareholders' equity:
Share Capital.................................... 50,666,631 50,666,631
Accumulated Deficit.............................. (24,664,036) (25,034,398)
------------ ------------
Total shareholders' equity..................... 26,002,595 25,632,233
============ ============
Total Liabilities and Shareholders' Equity......... $ 38,302,046 $ 38,062,649
============ ============
</TABLE>
Approved by the board
<TABLE>
<S> <C>
------------------------------------ ------------------------------------
"Michael D. Watford" "John R. Hislop"
Director Director
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
1
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Three-Month Period
---------------------
March 31, 2000 1999
--------- ---------- ----------
<S> <C> <C>
Revenues:
Oil revenue............................................ $ 215,606 $ 193,355
Gas revenue............................................ 2,141,567 2,018,786
---------- ----------
Total Revenues....................................... 2,357,173 2,212,141
========== ==========
Operating Costs and Expenses:
Operating expenses and taxes........................... 159,004 216,456
Taxes.................................................. 242,153 153,622
Gathering.............................................. 237,391 373,764
Depreciation, depletion and amortization............... 530,409 525,494
General and administrative............................. 661,277 1,432,409
Bad debt expense....................................... -- 2,019,416
Interest............................................... 159,616 135,762
---------- ----------
Total direct expenses................................ 1,989,850 4,856,923
========== ==========
Other Income:
Interest............................................... 3,041 38,970
Other.................................................. -- --
---------- ----------
Total other income................................... 3,041 38,970
========== ==========
Net Income (Loss) for Period............................. 370,364 (2,605,812)
========== ==========
Income (Loss) per Common Share........................... 0.01 (0.05)
========== ==========
Weighted Average Common Shares Outstanding............... 56,751,125 55,607,596
========== ==========
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
2
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Three-Month Period
----------------------
March 31, 2000 1999
--------- --------- -----------
<S> <C> <C>
Cash Provided by (Used in):
Operating Activities
Income (Loss) for period............................. $ 370,364 $(2,605,812)
Add (deduct):
Items not involving cash:
Depletion and depreciation....................... 530,409 525,494
Provision for bad debts.......................... -- 2,019,416
Net changes in non-cash working capital:
Restricted cash.................................... 397,793 60,122
Accounts receivable................................ (748,706) 3,218,264
Prepaid expenses................................... 1,320 (277,167)
Accounts payable and accrued liabilities........... 150,807 (3,826,168)
Deferred Revenue................................... (25,000) (25,000)
--------- -----------
676,987 (910,851)
========= ===========
Investing Activities
Oil and gas property expenditures.................... (986,311) (4,732,877)
Purchase of capital assets........................... (40,332) (664)
Proceeds from sale of oil and gas properties......... 359,764 --
--------- -----------
(666,879) (4,733,541)
========= ===========
Financing Activities
Increase (decrease) in long term debt................ (256,772) 3,734,501
Issuance of share capital and special warrants....... -- 80,484
--------- -----------
(256,772) 3,814,985
========= ===========
Increase (decrease) in cash during the period.......... (246,664) (1,829,407)
Cash position, beginning of period..................... 401,691 3,924,365
--------- -----------
Cash position, end of period........................... $ 155,027 $ 2,094,958
========= ===========
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
3
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
ASSETS ------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 1,095,158 $ 401,691
Restricted cash.................................. 195,276 590,271
Receivables, less allowance of $250,000 at March
31, 2000........................................ 1,835,688 2,542,109
Prepaid expenses and other current assets........ 361,050 324,570
------------ ------------
Total current assets........................... 3,487,172 3,858,641
============ ============
Oil and gas properties, using the full cost
method of accounting............................ 33,912,776 33,773,292
Capital assets................................... 514,763 430,716
------------ ------------
34,427,539 34,204,008
============ ============
Total Assets................................... $ 37,914,711 $ 38,062,649
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities......... $ 3,408,805 $ 3,663,770
------------ ------------
Total current liabilities...................... 3,408,805 3,663,770
============ ============
Long Term Liabilities:
Deferred Revenue................................. 250,000 300,000
Notes Payable.................................... 7,637,529 8,466,646
------------ ------------
Total long term liabilities.................... 7,887,529 8,766,646
============ ============
Shareholders' equity:
Share Capital.................................... 50,666,631 50,666,631
Accumulated Deficit.............................. (24,048,254) (25,034,398)
------------ ------------
Total shareholders' equity..................... 26,618,377 25,632,233
============ ============
Total Liabilities and Shareholders' Equity......... $ 37,914,711 $ 38,062,649
============ ============
</TABLE>
Approved by the board
------------------------------------- -------------------------------------
"Michael D. Watford" "John R. Hislop"
Director Director
(The above statements have not been audited and are subject to year-end
adjustments)
4
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Six-Month Period
---------------------
June 30, 2000 1999
-------- ---------- ----------
<S> <C> <C>
Revenues:
Oil revenue............................................ $ 410,072 $ 558,995
Gas revenue............................................ 4,598,472 3,331,900
---------- ----------
Total Revenues....................................... 5,008,544 3,890,895
========== ==========
Operating Costs and Expenses:
Operating expenses and taxes........................... 316,013 444,759
Taxes.................................................. 506,986 302,016
Gathering.............................................. 463,215 639,157
Depreciation, depletion and amortization............... 1,028,344 619,268
General and administrative............................. 1,397,611 1,888,718
Bad debt expense....................................... -- 2,019,416
Interest............................................... 316,480 335,206
---------- ----------
Total direct expenses................................ 4,028,649 6,248,540
========== ==========
Other Income:
Interest............................................... 6,251 150,689
Other.................................................. -- --
---------- ----------
Total other income .................................. 6,251 150,689
========== ==========
Net Income (Loss) for Period............................. 986,146 (2,206,956)
========== ==========
Income (Loss) per Common Share--basic.................... 0.02 (0.04)
========== ==========
Income (Loss) per Common Share--diluted.................. 0.02 (0.04)
========== ==========
Weighted Average Common Shares--basic.................... 56,751,125 55,616,734
========== ==========
Weighted Average Common Shares--diluted.................. 58,124,438 55,616,734
========== ==========
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
5
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Six-Month Period
------------------------
June 30, 2000 1999
-------- ----------- -----------
<S> <C> <C>
Cash Provided by (Used in):
Operating Activities
Income (Loss) for period............................ $ 986,146 $(2,206,956)
Add (deduct):
Items not involving cash:
Depletion and depreciation...................... 1,028,344 619,268
Provision for bad debts......................... -- 2,019,416
Net changes in non-cash working capital:
Restricted cash................................... 394,995 (793,074)
Accounts receivable............................... 706,421 2,686,470
Prepaid expenses.................................. (36,480) 2,298,318
Accounts payable and accrued liabilities.......... (254,965) (5,215,679)
Deferred Revenue.................................. (50,000) (50,000)
----------- -----------
2,774,461 (642,237)
=========== ===========
Investing Activities
Oil and gas property expenditures................... (1,432,250) (7,439,129)
Purchase of capital assets.......................... (179,391) 22,663
Proceeds from sale of oil and gas properties........ 359,764 5,000,000
----------- -----------
(1,251,877) (2,416,466)
=========== ===========
Financing Activities
Increase (decrease) in long term debt............... (829,117) (270,839)
Issuance of share capital and special warrants...... -- 187,879
----------- -----------
(829,117) (82,960)
=========== ===========
Increase (decrease) in cash during the period......... 693,467 (3,141,663)
Cash position, beginning of period.................... 401,691 3,924,365
----------- -----------
Cash position, end of period.......................... $ 1,095,158 $ 782,702
=========== ===========
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
6
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
ASSETS ------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 1,112,176 $ 401,691
Restricted cash.................................. 197,686 590,271
Accounts Receivable.............................. 4,091,013 2,542,109
Prepaid expenses and other current assets........ 699,688 324,570
------------ ------------
Total current assets........................... 6,100,563 3,858,641
============ ============
Oil and gas properties, using the full cost
method of accounting ........................... 44,583,050 33,773,292
Capital assets................................... 485,864 430,716
------------ ------------
45,068,914 34,204,008
============ ============
Total Assets................................... $ 51,169,477 $ 38,062,649
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities......... $ 5,836,464 $ 3,663,770
------------ ------------
Total current liabilities...................... 5,836,464 3,663,770
============ ============
Long Term Liabilities:
Deferred Revenue................................. 225,000 300,000
Notes Payable.................................... 16,517,446 8,466,646
------------ ------------
Total long term liabilities.................... 16,742,446 8,766,646
============ ============
Shareholders' equity:
Share Capital.................................... 50,838,663 50,666,631
Accumulated Deficit.............................. (22,248,096) (25,034,398)
------------ ------------
Total shareholders' equity..................... 28,590,567 25,632,233
============ ============
Total Liabilities and Shareholders' Equity......... $ 51,169,477 $ 38,062,649
============ ============
</TABLE>
Approved by the board
------------------------------------- -------------------------------------
"Michael D. Watford" "John R. Hislop"
Director Director
(The above statements have not been audited and are subject to year-end
adjustments)
7
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Nine-Month Period
---------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Revenues:
Oil revenue....................................... $ 858,466 $ 771,337
Gas revenue....................................... 8,071,940 5,234,448
---------- ----------
Total Revenues.................................. 8,930,406 6,005,785
========== ==========
Operating Costs and Expenses:
Operating expenses................................ 489,731 561,541
Taxes............................................. 889,346 520,878
Gathering......................................... 752,060 910,296
Depreciation, depletion and amortization.......... 1,733,179 1,063,356
General and administrative........................ 1,777,443 2,642,084
Bad debt expense.................................. -- 2,019,416
Interest.......................................... 517,123 486,637
---------- ----------
Total direct expenses........................... 6,158,882 8,204,208
========== ==========
Other Income:
Interest.......................................... 14,780 197,149
Other............................................. -- --
---------- ----------
Total other income.............................. 14,780 197,149
========== ==========
Net Income (Loss) for Period........................ 2,786,304 (2,001,274)
========== ==========
Income (Loss) per Common Share--basic............... 0.05 (0.04)
========== ==========
Income (Loss) per Common Share--diluted............. 0.05 (0.04)
========== ==========
Weighted Average Common Shares--basic............... 56,782,123 56,340,167
========== ==========
Weighted Average Common Shares--diluted............. 58,907,872 56,340,167
========== ==========
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
8
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Three-Month Period
---------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Revenues:
Oil revenue....................................... $ 448,394 $ 212,342
Gas revenue....................................... 3,473,469 1,902,548
---------- ----------
Total Revenues.................................. 3,921,863 2,114,890
========== ==========
Operating Costs and Expenses:
Operating expenses................................ 173,717 116,782
Taxes............................................. 382,359 218,862
Gathering......................................... 288,845 271,139
Depreciation, depletion and amortization.......... 704,835 444,088
General and administrative........................ 379,832 753,366
Bad debt expense.................................. -- --
Interest.......................................... 200,643 151,431
---------- ----------
Total direct expenses........................... 2,130,231 1,955,668
========== ==========
Other Income:
Interest.......................................... 8,525 10,750
Other............................................. -- 35,710
---------- ----------
Total other income.............................. 8,525 46,460
========== ==========
Net Income (Loss) for Period........................ 1,800,157 205,682
========== ==========
Income (Loss) per Common Share--basic............... 0.03 0.00
========== ==========
Income (Loss) per Common Share--diluted............. 0.03 0.00
========== ==========
Weighted Average Common Shares--basic............... 56,843,446 56,588,779
========== ==========
Weighted Average Common Shares--diluted............. 58,969,195 56,588,779
========== ==========
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
9
<PAGE>
ULTRA PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited--prepared internally by management)
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Nine-Month Period
----------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash Provided by (Used in):
Operating Activities
Income (Loss) for period........................... $ 2,786,304 $ (2,001,274)
Add (deduct):
Items not involving cash:
Depletion and depreciation..................... 1,733,179 1,063,356
Provision for bad debts........................ -- 2,019,416
Net changes in non-cash working capital:
Restricted cash................................ 392,585 (1,009,188)
Accounts receivable............................ (1,548,904) 2,095,279
Prepaid expenses............................... (375,118) 2,293,534
Accounts payable and accrued liabilities....... 2,172,694 (3,389,870)
Deferred Revenue............................... (75,000) (75,000)
------------ ------------
5,085,740 996,253
============ ============
Investing Activities
Oil and gas property expenditures................ (12,760,525) (10,301,081)
Purchase of capital assets....................... (197,326) (226,672)
Proceeds from sale of oil and gas properties..... 359,764 5,000,000
------------ ------------
(12,598,087) (5,527,753)
============ ============
Financing Activities
Increase (decrease) in long term debt............ 8,050,800 1,004,323
Issuance of share capital and special warrants... 172,032 369,183
------------ ------------
8,222,832 1,373,506
============ ============
Increase (decrease) in cash during the period...... 710,485 (3,157,994)
Cash position, beginning of period................. 401,691 3,924,365
------------ ------------
Cash position, end of period....................... 1,112,176 766,371
============ ============
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
10
<PAGE>
APPENDIX L
YOU ARE STRONGLY URGED TO READ THE ACCOMPANYING MANAGEMENT PROXY STATEMENT,
INCLUDING THE APPENDICES ATTACHED THERETO AND THE DOCUMENTS INCORPORATED THEREIN
BY REFERENCE, BEFORE COMPLETING THIS LETTER OF TRANSMITTAL.
LETTER OF TRANSMITTAL
This Letter of Transmittal is for use by registered holders ("Registered
Shareholders") of common shares ("Pendaries Common Shares") of Pendaries
Petroleum Ltd. ("Pendaries") in connection with the proposed merger of Pendaries
and Ultra Petroleum Corp. ("Ultra") by way of a plan of arrangement (the
"Arrangement") that is being submitted for approval at the meeting (the
"Pendaries Meeting") of Registered Shareholders to be held on December 28, 2000.
You are referred to the Management Proxy Statement (the "Proxy Statement") dated
December 1, 2000 that accompanies this Letter of Transmittal. CAPITALIZED TERMS
USED BUT NOT DEFINED IN THIS LETTER OF TRANSMITTAL THAT ARE DEFINED IN THE PROXY
STATEMENT HAVE THE RESPECTIVE MEANINGS SET OUT IN THE PROXY STATEMENT.
TO: PENDARIES PETROLEUM LTD.
AND TO: ULTRA PETROLEUM CORP.
AND TO: CIBC MELLON TRUST COMPANY, AT ITS ADDRESS SET FORTH ON THE BACK PAGE
--------------------------------------------------------------------------------
SECTION 1 -- THIS PORTION OF THE LETTER OF TRANSMITTAL IS TO BE COMPLETED BY ALL
REGISTERED SHAREHOLDERS.
The undersigned hereby delivers to you the enclosed certificate(s) for
Pendaries Common Shares, details of which are as follows:
<TABLE>
<CAPTION>
NAME(S) AND ADDRESS(ES) OF NUMBER OF
REGISTERED HOLDER(S) CERTIFICATE NUMBER(S) PENDARIES COMMON SHARES
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
The undersigned transmits herewith for exchange upon the Arrangement
becoming effective the certificates for Pendaries Common Shares described above.
(Note: If the space provided above is insufficient, please attach details
on a separate schedule to this Letter of Transmittal.)
--------------------------------------------------------------------------------
IF YOUR PENDARIES COMMON SHARES ARE REGISTERED IN THE NAME OF A BROKER,
INVESTMENT DEALER, BANK, TRUST COMPANY OR OTHER NOMINEE, YOU SHOULD IMMEDIATELY
CONTACT THAT NOMINEE FOR INSTRUCTIONS AND ASSISTANCE IN DELIVERING YOUR
PENDARIES COMMON SHARES.
PROCEDURE APPLICABLE TO REGISTERED SHAREHOLDERS
On the effective date of the Arrangement (the "Effective Date"), each of
your Pendaries Common Shares will be exchanged for 1.58 Ultra Common Shares.
YOU ARE STRONGLY URGED TO READ THE PROXY STATEMENT WHICH CONTAINS, AMONG
OTHER THINGS, A DESCRIPTION OF THE ULTRA COMMON SHARES.
No certificates representing fractional Ultra Common Shares will be issued
in connection with the Arrangement. In the event that the exchange ratio would
result in a holder of a Pendaries Common Share being entitled to a fractional
Ultra Common Share, an adjustment shall be made to the next highest whole number
of Ultra Common Shares and a certificate for the resulting whole number of Ultra
Common Shares will be issued. In calculating such fractional interests, all
Pendaries Common Shares held by a beneficial holder of Pendaries Common Shares
shall be aggregated.
<PAGE>
IF YOU DO NOT FORWARD TO CIBC MELLON TRUST COMPANY A PROPERLY COMPLETED
LETTER OF TRANSMITTAL AND CERTIFICATE(S) REPRESENTING YOUR PENDARIES COMMON
SHARES AND ALL OTHER REQUIRED DOCUMENTS, YOU WILL NOT RECEIVE THE CONSIDERATION
TO WHICH YOU ARE OTHERWISE ENTITLED UNTIL PROPER DELIVERY IS MADE.
It is understood that upon receipt of this Letter of Transmittal, the
certificates representing Pendaries Common Shares deposited herewith, and any
other required documentation, and following the Effective Date of the
Arrangement, CIBC Mellon Trust Company will send to the undersigned or hold for
pick-up, in accordance with instructions given below, certificate(s) for Ultra
Common Shares, to which the undersigned is entitled under the Arrangement. The
certificate(s) will be registered in or made payable to, as the case may be, the
name (and at the address) of the Pendaries Shareholder set forth below.
The undersigned covenants, represents and warrants that (a) the undersigned
is the owner of the Pendaries Common Shares being deposited; (b) such shares are
owned by the undersigned free and clear of all mortgages, liens, charges,
encumbrances, security interests and adverse claims; (c) the undersigned has
full power and authority to execute and deliver this Letter of Transmittal and
all information inserted into this Letter of Transmittal by the undersigned is
accurate; and (d) the undersigned will not, prior to the effective time of the
Arrangement, transfer or permit to be transferred any of such deposited
Pendaries Common Shares.
The covenants, representations and warranties of the undersigned herein
contained survive the completion of the Arrangement.
The undersigned revokes any and all authority, other than as granted in
this Letter of Transmittal whether as agent, attorney-in-fact, attorney, proxy
or otherwise, previously conferred or agreed to be conferred by the undersigned
at any time with respect to the Pendaries Common Shares being transmitted
(except as contemplated by any proxy given and not specifically revoked for use
at the Pendaries Meeting). No subsequent authority, whether as agent, attorney-
in-fact, attorney, proxy or otherwise, except a proxy granted for use at the
Pendaries Meeting, will be granted with respect to the transmitted Pendaries
Common Shares. Each authority conferred or agreed to be conferred by the
undersigned in this Letter of Transmittal shall survive the death or incapacity
of the undersigned and any obligation of the undersigned hereunder is binding
upon the heirs, legal representatives, successors and assigns of the
undersigned.
The undersigned instructs CIBC Mellon Trust Company to mail any
certificate(s) representing Pendaries Common Shares to which the undersigned is
entitled under the Arrangement, promptly after the Effective Date, by first
class insured mail, postage prepaid, to the undersigned, or to hold such
certificate(s) and/or cheque for pick-up, in accordance with the instructions
given below. If the Arrangement is not completed, the transmitted Pendaries
Common Shares and all other ancillary documents will be returned to the
undersigned in accordance with the instructions given below. The undersigned
recognizes that Pendaries has no obligation pursuant to the instructions given
below to transfer any Pendaries Common Shares from the name of the registered
holder thereof if the Arrangement is not completed.
By reason of the use by the undersigned of an English language form of this
Letter of Transmittal the undersigned is deemed to have required that any
contract evidenced by the Arrangement as accepted through this Letter of
Transmittal, as well as all documents related thereto, be drawn exclusively in
the English language. En raison de l'usage d'une version anglaise des presentes
lettre d'envoi par le soussigne, ce dernier est repute avoir demande que tout
contrat atteste par l'arrangement, qui est accepte au moyen des presentes lettre
d'envoi, de meme que tous les documents qui s'y rapportent, soient rediges
exclusivement en anglais.
2
<PAGE>
PLEASE REVIEW CAREFULLY THE INSTRUCTIONS BELOW IN COMPLETING THE FOLLOWING
INFORMATION:
<TABLE>
<CAPTION>
<S> <C>
A. REGISTRATION AND PAYMENT INSTRUCTIONS B. SPECIAL DELIVERY INSTRUCTIONS
Issue and send certificate(s) as indicated below. Fill in name and address below ONLY if the certificate(s)
and/or the cheque are to be sent to someone other than the
Registered Shareholder or to an address other than the
address of the Registered Shareholder.
Mail to the name and address below:
----------------------------------------------------- ---------------------------------------------------------------
(Name) (please print) (Name) (please print)
----------------------------------------------------- ---------------------------------------------------------------
(Street Address) (Street Address)
----------------------------------------------------- ---------------------------------------------------------------
(City) (Province or State) (Postal or Zip Code)
----------------------------------------------------- ---------------------------------------------------------------
(City) (Province or State) (Postal or Zip Code)
-----------------------------------------------------
(Telephone - Business Hours)
----------------------------------------------------- ---------------------------------------------------------------
C. SPECIAL PICK UP INSTRUCTIONS
DATED: _______________________________________, 2000
[ ] Hold certificate(s) and cheque (if any) for pick-up.
---------------------------------------------------------------
Signature of holder or authorized representative
D. INFORMATION REGARDING RESIDENCE OF PENDARIES
SHAREHOLDERS ---------------------------------------------------------------
Signature of any joint holder
The undersigned represents that he, she or it:
---------------------------------------------------------------
[ ] Is a resident of Canada for tax purposes Name of Holder (Please print)
OR ---------------------------------------------------------------
Name of authorized representative (Please print)
[ ] Is not a resident of Canada for tax purposes
Signature Guaranteed By:
If you are not a resident of Canada, indicate country (if required under Instruction 3)
of residence: ______________________________________
Canadian residents (who are individuals other than trusts) ---------------------------------------------------------------
must provide their Social Insurance Number: Authorized signature
----------------------------------------------------- ---------------------------------------------------------------
Name of guarantor (Please print)
U.S. residents/citizens must complete the Substitute
Form W-9 below.
-----------------------------------------------------
</TABLE>
Please review carefully item 9 of the Instructions set forth below regarding
backup withholding before completing the following information.
3
<PAGE>
U.S. PENDARIES SHAREHOLDERS ONLY
<TABLE>
<CAPTION>
PAYOR: CIBC MELLON TRUST COMPANY
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE Part I: PLEASE PROVIDE YOUR TAXPAYER Social Security No.
FORM W-9 IDENTIFICATION NO. OR SOCIAL SECURITY NO. IN or Taxpayer Identification No. (TIN)
THE SPACE AT THE RIGHT AND CERTIFY BY
SIGNING AND DATING BELOW _______________________
[ ] Awaiting TIN
----------------------------------------------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that: (1) The number shown on this form is my correct
Social Security Number or Taxpayer Identification Number (or I am waiting for a number to be issued to me) and
(2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue
Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you
are subject to backup withholding because of under reporting interest or dividends on your tax return.
However, if after being notified by the IRS that you were subject to backup withholding, you received another
notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2).
Signature ________________________________________________________ Date _______________________________________
----------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE "AWAITING TIN"
BOX ON THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that (i) a TIN has not been issued to
me, (ii) either (a) I have mailed an application to receive a TIN to the
appropriate Internal Revenue Service Center or Social Security Administration
Office or (b) I intend to mail or deliver an application in the near future, and
(iii) I understand that if I do not provide a TIN within 60 days, I will be
subject to backup withholding at a rate of 31% until I provide a TIN.
Signature _________________________________ Date _____________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF PAYMENTS MADE TO YOU.
4
<PAGE>
INSTRUCTIONS:
1. Use of Letter of Transmittal
(a) This Letter of Transmittal (or manually signed facsimile thereof),
together with the accompanying certificate(s) representing Pendaries
Common Shares and all other required documents, must be received by
CIBC Mellon Trust Company at the address specified below as soon as
practicable.
(b) The method used to deliver this Letter of Transmittal and the
accompanying certificate(s) representing Pendaries Common Shares (if
any) and all other required documents is at your option and risk, and
delivery will be deemed to be effective only when such documents are
actually received. Pendaries recommends that the necessary
documentation be hand delivered to CIBC Mellon Trust Company at the
address specified below and a receipt obtained; otherwise the use of
registered, insured mail, with return receipt requested, is
recommended. A pre-addressed security return envelope is enclosed for
your convenience.
2. SIGNATURES
(a) This Letter of Transmittal must be filled in, dated and signed by the
Registered Shareholder or by such person's duly authorized
representative in accordance with Instruction 4.
(b) In the case of a Registered Shareholder, if this Letter of Transmittal
is signed by the registered owner(s) of the accompanying
certificate(s), such signature(s) on this Letter of Transmittal must
correspond with the name(s) as registered or as written on the face of
such certificate(s) without any change whatsoever, and the
certificate(s) need not be endorsed. If such transmitted
certificate(s) is owned of record by two or more joint owners, all
such owners must sign this Letter of Transmittal.
(c) In the case of a Registered Shareholder, if this Letter of Transmittal
is signed by a person other than the registered owner(s) of the
accompanying certificate(s), or if certificate(s) representing Ultra
Common Shares are to be issued to a person other than the registered
owner(s):
(i) such deposited certificate(s) must be endorsed or be accompanied
by appropriate share transfer power(s) of attorney properly
completed by the registered owner(s); and
(ii) the signature(s) on such endorsement or power(s) of attorney must
correspond exactly to the name(s) of the registered owner(s) as
registered or as appearing on the certificate(s) and must be
guaranteed as noted in Instruction 3.
3. GUARANTEE OF SIGNATURES
(a) In the case of a Registered Shareholder, if this Letter of Transmittal
is signed by a person other than the registered owner(s) of the
accompanying certificate(s), such signature(s) must be guaranteed by
an Eligible Institution, or in some other manner satisfactory to CIBC
Mellon Trust Company (except that no guarantee is required if the
signature is that of an Eligible Institution).
(b) An "Eligible Institution" means a Canadian chartered bank, a major
trust company in Canada or a member firm of a recognized Medallion
Program (STAMP, SEMP or MSP).
4. FIDUCIARIES, REPRESENTATIVES AND AUTHORIZATIONS
Where this Letter of Transmittal is executed by a person as an executor,
administrator, trustee or guardian, or on behalf of a corporation, partnership
or association or is executed by any other person acting in a representative
capacity, this Letter of Transmittal must be accompanied by satisfactory
evidence of authority to act. Either Pendaries or CIBC Mellon Trust Company, in
their discretion, may require additional evidence of authority or additional
documentation.
5. DELIVERY INSTRUCTIONS
In all cases, the box entitled "Special Delivery Instructions" should be
completed. If that box is not completed, any new certificate(s) issued in
exchange for Pendaries Common Shares and cheque, if any, will be mailed to the
Pendaries Shareholder at the address of the Pendaries Shareholder as it appears
in this Letter of Transmittal. If no address
5
<PAGE>
of the Pendaries Shareholder is provided in this Letter of Transmittal, then any
new certificates will be mailed to the address of the Pendaries Shareholder as
it appears on the securities register of Pendaries.
6. MISCELLANEOUS
(a) If the space provided in this Letter of Transmittal is insufficient,
the requested information should be set out on a separate list and
attached to this Letter of Transmittal .
(b) If Pendaries Common Shares are registered in different forms (e.g.,
"John Doe" and "J. Doe"), a separate Letter of Transmittal should be
signed for each different registration.
(c) The undersigned must complete Box entitled "Information Regarding
Residence of Pendaries Shareholders" in this Letter of Transmittal
indicating whether the undersigned is a resident or non-resident of
Canada.
(d) No alternative, conditional or contingent deposits will be accepted
and no fractional Ultra Common Shares will be issued.
(e) Additional copies of this Letter of Transmittal may be obtained from
CIBC Mellon Trust Company at the office specified below.
(f) It is strongly recommended that prior to completing this Letter of
Transmittal, the undersigned read the accompanying Proxy Statement.
(g) Pendaries and Ultra reserve the right, if they so elect collectively,
in their absolute discretion, to instruct CIBC Mellon Trust Company to
waive any defect or irregularity contained in any Letter of
Transmittal received by them.
7. LOST CERTIFICATES
If a share certificate has been lost, destroyed or stolen, this Letter of
Transmittal should be completed as fully as possible and forwarded, together
with a letter describing the loss, destruction or theft, to CIBC Mellon Trust
Company at 320 Bay Street, 6th Fl. Toronto, Ont. Canada M5H 4A6. CIBC Mellon
Trust Company will respond with the replacement requirements.
8. ASSISTANCE
CIBC Mellon Trust Company (SEE BELOW FOR ADDRESS AND TELEPHONE NUMBER) OR
YOUR BROKER OR OTHER FINANCIAL ADVISER WILL BE ABLE TO ASSIST YOU IN COMPLETING
THIS LETTER OF TRANSMITTAL.
9. SUBSTITUTE FORM W-9 -- U.S. SHAREHOLDERS
In order to avoid "backup withholding" of United States income tax on
payments made on the Pendaries Common Shares or with respect to Ultra Common
Shares, a Pendaries Shareholder must generally provide the Pendaries
Shareholder's correct taxpayer identification number ("TIN") on Substitute Form
W-9 above and certify, under penalties of perjury, that such number is correct
and that the Pendaries Shareholder is not subject to backup withholding. If the
correct TIN is not provided or if any other information is not correctly
provided, a penalty of up to $500 may be imposed on the Pendaries Shareholder by
the Internal Revenue Service and payments made by the Pendaries Common Shares or
with respect to the Ultra Common Shares may be subject to backup withholding of
31%.
Backup withholding is not an additional United States income tax. Rather,
the United States income tax liability of persons subject to backup withholding
will be reduced by the amount of tax withheld. If backup withholding results in
an overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the Internal Revenue Service.
Certain persons (including, among others, corporations, certain "not-for-
profit" organizations, and certain non-U.S. persons) are not subject to backup
withholding. A Pendaries Shareholder should consult its tax adviser as to the
Pendaries Shareholder's qualification for an exemption from backup withholding
and the procedure for obtaining such exemption.
The TIN for an individual United States citizen or resident is the
individual's social security number. The "Awaiting TIN" box of the substitute
Form W-9 may be checked if a Pendaries Shareholder has not been issued a TIN
6
<PAGE>
and has applied for a TIN or intends to apply for a TIN in the near future. If
the "Awaiting TIN" box is checked, the Shareholder must also complete the
Certificate of Awaiting Taxpayer Identification Number found below the
Substitute Form W-9 in order to avoid backup withholding. If a Pendaries
Shareholder who completes the Certificate of Awaiting Taxpayer Identification
Number does not provide a TIN within 60 days, the Pendaries Shareholder will be
subject to backup withholding at a rate of 31% until a TIN is provided.
7
<PAGE>
CIBC MELLON TRUST COMPANY
320 BAY STREET
6th FL.
TORONTO, ONTARIO CANADA
M5H 4A6
TELEPHONE: 1-416-643-5576
FACSIMILE: 1-416-643-5570
8
<PAGE>
FORM OF PROXY
PENDARIES PETROLEUM LTD.
This Proxy is Solicited by the Board of Directors for a
Special Meeting of Shareholders to be Held on December 28, 2000
The undersigned hereby constitutes and appoints Robert E. Rigney and Bobby J.
Fogle, as duly authorized officers of Pendaries Petroleum Ltd. or, instead of
the foregoing, ________________, with full power of substitution and revocation
to each, the true and lawful attorney(s) and proxy (or proxies) of the
undersigned at a Special Meeting of Shareholders to be held on December 28, 2000
at 10:00 a.m. Houston Time, at The Houston City Club, One City Club Drive, Nine
Greenway Plaza, Houston, Texas 77046, and any adjournments thereof, and to vote
as designated, on the matter specified below, all of the common shares held of
record by the undersigned on December 1, 2000 at the Special Meeting with all
powers the undersigned would possess if personally present at the Special
Meeting:
--------------------------------------------------------------------------------
Approval of the Arrangement Resolution For [_] Against [_]
--------------------------------------------------------------------------------
This proxy will be voted in accordance with the specifications made hereon.
If no contrary specification is made, the proxyholder is directed to vote FOR
the above resolution.
Receipt of the Notice of Special Meeting of Shareholders and Proxy Statement
dated December 1, 2000 is acknowledged.
PLEASE SIGN AND RETURN THE PROXY IN THE ENCLOSED, POSTAGE-PAID,
PRE-ADDRESSED ENVELOPE BY DECEMBER 27, 2000.
_________________________________________
Date
_________________________________________
Signature of Shareholder
_________________________________________
Name of Shareholder (Please print)
Notes:
1. This form of proxy must be dated and signed by the shareholder or his or her
attorney authorized in writing or, if the shareholder is a corporation, by
the proper officer or officers of the corporation or its attorney authorized
in writing. Joint holders should each sign. Executors, administrators,
trustees, etc., should so indicate when signing. If undated, this proxy is
deemed to bear the date it was mailed to the shareholder.
2. Proxies must be received by CIBC Mellon Trust Company not later than 5:00
p.m. (Toronto time) on December 27, 2000 or, in the event that the special
meeting is adjourned or postponed, by no later than 5:00 p.m. (Toronto time),
on the second business day before the day fixed for the adjourned or
postponed special meeting. The fax number for CIBC Mellon Trust Company is
(416) 368-2502. If you fax the proxy, you should also mail the original in
the envelope provided. If not dated, the proxy will be deemed to be dated
the date it was mailed to the shareholder.
3. A shareholder has the right to appoint a person (who need not be a
shareholder) as proxyholder to attend and act on his or her behalf at the
special meeting other than the persons designated above. The shareholder may
exercise this right by inserting the name of his or her nominee in the space
provided above.
4. The shares represented by this proxy will be voted in accordance with the
instructions of the shareholder specified above. In the absence of any such
specification, the shares represented by this proxy will, subject to item (5)
below, be voted for the above resolution.
5. This form of proxy confers discretionary authority to the above-named
proxyholder to vote at the proxyholder's discretion in respect of amendments
or variations to matters identified in the Notice of Special Meeting or other
matters that may properly come before the special meeting.
