<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number: 1-14754
-------------------------------
PENDARIES PETROLEUM LTD.
(Exact name of Registrants as specified in its charter)
Canada 52-2051576
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8 Greenway Plaza, Suite 910
Houston, TX 77046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 355-2900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
============================================================================================
Title of Each Class Name of Each Exchange on Which Registered
- --------------------------------------------------------------------------------------------
<S> <C>
Common Shares (No Par Value) American Stock Exchange
============================================================================================
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 10, 2000, non-affiliates held an aggregate market value of
approximately $33,660,000 of our Common Shares.
On February 10, 2000, we had 8,879,470 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated as to
1. Notice and Proxy Statement for the 1. Part III, Items 10, 11, 12, 13
Annual Meeting of Shareholders to
be held April 14, 2000
i
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
Item 1. BUSINESS 1
Item 2. PROPERTIES 9
Item 3. LEGAL PROCEEDINGS 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 10
Item 5. MARKET FOR THE COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 10
Item 6. SELECTED FINANCIAL DATA 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 16
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 16
Item 11. EXECUTIVE COMPENSATION 17
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 17
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 17
</TABLE>
ii
<PAGE>
PART I
Item 1. Business
- -----------------
The Company
Pendaries Petroleum Ltd. is a Canadian corporation formed on September 9,
1996 under the Business Corporations Act (New Brunswick). We engage in the
exploration and development of oil and gas properties in the offshore waters of
China. Our corporate headquarters is located at 8 Greenway Plaza, Suite 910,
Houston, Texas, 77046. At December 31, 1999, we had 6 employees in Houston,
Texas, and 1 employee in Beijing, China.
We conduct operations through our wholly-owned subsidiary Sino-American
Energy Corporation, a Texas corporation. Original Sino-American shareholders
hold stock options to acquire a total of 311,000 Sino-American Class A shares,
which are convertible into Pendaries shares.
History
Senior management of Sino-American has been engaged in the oil and gas
industry in Asia since the late 1970's when Robert Rigney, our Chief Executive
Officer since our founding, began selling oil field equipment to the Chinese
government. These activities led Mr. Rigney to various other oil and gas related
ventures throughout the 1970's and 1980's, including his consulting work on
behalf of the Chinese government and his exporting crude oil from China. In the
early 1990's, Mr. Rigney acted as an agent for the Chinese government to help
identify foreign oil and gas companies possessing appropriate Western technology
to use in China. Mr. Rigney's efforts enabled the Chinese government to grant
concession rights in oil and gas properties to foreign operators and their
partners who could best exploit these opportunities. Mr. Rigney has also helped
various Chinese oil and gas enterprises train their employees to use Western oil
and gas technology and applications.
In 1990, a large U.S. refining company asked Mr. Rigney to identify for
them investment opportunities in China. Mr. Rigney introduced the refining
company to Kerr-McGee Corporation. Kerr-McGee sold the refining company an
option to participate in up to 10% of any of Kerr-McGee's Chinese oil and gas
investments made during 1994 and 1995. In 1995, Sino-American purchased this
participation option from the refining company. In 1994, 1995, and 1996, Kerr-
McGee acquired interests in four blocks in the Bohai Bay and one block in the
South China Sea. We exercised the option to participate in these five blocks.
In November 1996, we purchased an interest in three producing oil and gas
properties located in Alberta, Canada for $1,966,088. In November 1999, we sold
all of our interest in the Alberta properties for approximately $1,200,000,
which approximated its book value. We will use the proceeds to partially fund
exploration and development activities in our two core Bohai Bay blocks.
At the end of 1998, we owned an interest in five oil and gas exploration
petroleum contracts covering blocks in the Gulf of Bohai and the Pearl River
Mouth Basin of the South China Sea. A wholly-owned subsidiary of Kerr-McGee
serves as the operator of all five blocks. We, the operator, and in one
concession an additional partner, as owners of the working interests, serve as
the foreign contractors for these petroleum contracts. In addition, a Chinese
government company serves as the Chinese counter party to each petroleum
contract. For each block covered by a petroleum contract, the foreign
contractors maintain an operating agreement among themselves for handling the
operational issues. During 1999 we and the operator decided to concentrate our
resources and efforts on the two primary blocks in the Bohai Bay which have
exhibited the most potential for success, Block 04/36 and Block 05/36. As a
result, we relinquished the other two smaller blocks in the Bohai Bay and the
block in the South China Sea.
1
<PAGE>
In Block 04/36, originally three companies held interests in the block.
Effective September 1, 1999, Murphy Exploration & Petroleum Company, who owned a
45% interest in Block 04/36, dropped out of the block. This allowed us and Kerr-
McGee, the two remaining foreign contractors, to pick up Murphy's interest
without cost, other than the obligation to pay our increased proportional shares
of prospect expenses. As a result, we elected to increase our proportionate
interest from 10% to 18.2%. The operator, Kerr-McGee, elected to increase its
proportionate interest from 45% to 81.8%. Thus, we and the operator are the only
foreign contractors under the petroleum contract for Block 04/36. The China
National Offshore Oil Corporation, or CNOOC, is the Chinese counter party to the
contract.
In Block 05/36, we own a 15% interest, the operator owns a 50% interest,
and Newfield Exploration Company, another U.S. independent oil and gas company,
owns the remaining 35% interest. CNOOC is the Chinese counter party to this
petroleum contract as well.
Oil and gas exploration in our two Bohai Bay blocks are governed by
separate petroleum contracts. In addition, we entered into an operating
agreement for each block. The table below lists our interest in each of the two
remaining concessions, the acreage held, the concession dates and exploration
periods, as determined by the petroleum contracts.
<TABLE>
<CAPTION>
Block Pendaries Original Current Concession End of
Interest Acreage Acreage Date Exploration
Period
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
04/36 Block 18.2% 560,000 420,000 August 1994 August 2001
05/36 Block 15.0% 416,000 312,000 January 1996 January 2003
</TABLE>
In each block, CNOOC has the option to obtain as much as a 51% working
interest in the development and production periods by paying its proportionate
share of the development and operating costs and receiving its proportionate
share of oil and gas production. Although the foreign contractors bear 100% of
the costs, they receive up to a 71% share of the oil and gas produced until they
have recovered these costs.
The Petroleum Contracts
The petroleum contract for each block has a maximum term of 30 years,
divided into three periods: the exploration period, the development period and
the production period.
Exploration Period
The exploration period lasts seven years and consists of three phases.
During the exploration period the foreign contractors bear exclusive
responsibility for work performed and expenditures incurred and are obligated to
drill a specified number of wells in each block during each of the three phases.
Phase One
During the first three years of the exploration period, the foreign
contractors were obligated to incur minimum exploration expenditures of $5
million in each of the four Bohai Bay blocks and $6 million in the South
China Sea contract area. We met the minimum exploration expenditures as of
December 31, 1999 on all of the blocks except one of the relinquished Bohai
Bay blocks. The operator and its Chinese counterpart, China National
Petroleum Corporation, are negotiating the consideration by the foreign
contractors, if any, regarding the unfulfilled commitment on the
relinquished Bohai Bay block.
2
<PAGE>
Phase Two
During the following two years of the exploration period, the foreign
contractors must incur minimum exploration expenditures of $3 million in
both the 04/36 Block and the 05/36 Block. We have met the minimum
expenditure on Block 04/36 and fully expect to meet the minimum required on
Block 05/36 during 2000. We did not enter this phase on the three
relinquished blocks, and therefore incurred no commitments or obligations.
Phase Three
During the last two years of the exploration period, the foreign
contractors are obligated to incur minimum exploration expenditures of $2.5
million in the 04/36 Block and $3.0 million in the 05/36 Block. We have met
the minimum expenditure on Block 04/36. We have not entered this phase on
Block 05/36.
Development Period
The development period for any oil and/or gas field discovered during the
exploration period commences on the date the Chinese Ministry of Energy approves
the development plan for such field. The petroleum contracts do not impose a
time limit on the development of a field.
Production Period
The production period of any oil and/or gas field begins on the field's
date of commencement of commercial production as determined jointly by the
operator, CNOOC and the governing Chinese authority and continues for 15
consecutive years.
Relinquishment
At the end of phase one of the exploration period, the foreign contractors
must relinquish 25% of the contract area, excluding the development and/or
production areas. At the end of phase two of the exploration period, the foreign
contractors must relinquish 25% of the remaining contract area, excluding the
development and/or production areas. At the end of phase three of the
exploration period, the foreign contractors must relinquish all contract areas
not under development or production. After completion of all work and financial
obligations, the foreign contractors may relinquish their entire interest in any
block at the end of its exploration period.
Due to the extensive exploration efforts expended on Block 04/36, at the
beginning of the second phase, CNOOC did not require relinquishment of 25% of
the contract area. The second phase continued until August, 1999. Upon entry
into the third phase in September 1999, the foreign contractors relinquished 25%
of the contract area.
In March 1999, the foreign contractors entered into phase two on Block
05/36 and relinquished 25% of the contract area. We do not believe that the
potential for production on either block was harmed by the relinquishment of the
contract areas.
3
<PAGE>
Murphy Agreement
On April 24, 1998, we entered into an agreement with Murphy Exploration &
Production Company to purchase its 45% interest in Block 04/36. We later
extended the purchase date from December 21, 1998 to March 22, 1999. The Murphy
Agreement provided that we would pay a total of $38 million for Murphy's
interest, with $35 million to be paid in cash and the remaining $3 million in
our common shares. Due to the adverse change in the condition of the oil and gas
industry after our entering into the Murphy Agreement, we elected on March 22,
1999 to let the agreement expire. In April of 1998 we paid the non-refundable
deposit of $1 million to Murphy and recorded it as an additional investment in
our opportunity to increase our interest in Block 04/36.
When Murphy withdrew from this block in September 1999, we exercised our
right under the contract to acquire, without additional charge, our pro rata
share of Murphy's 45% interest in the block and its associated future costs. By
doing so, we increased our interest and our share of future costs in Block 04/36
from 10% to 18.2%.
Business Strategy
Our business strategy focuses on participating in the exploration and
development of offshore Chinese oil and gas properties. Except for a small
investment in Canada for three years, to date we have focused on business in
China because of our experience in the area and the opportunities which are
available to us. Our business plan involves several key elements, such as:
. Maintaining Strategic Alliances between Chinese and Western Oil and
-------------------------------------------------------------------
Gas Companies
-------------
Our Chairman and CEO, Robert Rigney, has been involved in the Asian
and U.S. oil and gas industries for more than 21 years. In addition,
Urick Ho, a Vice President, Director and head of our Beijing office,
has over 16 years of experience in the oil and gas industry in China.
During our years of operations in China, we have fostered alliances
between Chinese governing authorities, Chinese companies and other
larger Western oil and gas companies. We continue to build our
relationships to aid us in our dealings with the Chinese government.
. Developing Prospects and Using Existing Resources in China
----------------------------------------------------------
We believe that potentially significant undeveloped reserves underlie
the Bohai Bay blocks. We have identified numerous potential prospects
in shallow offshore waters, which are near large onshore oil fields.
We are using advanced technologies to identify potential reserves and
to conduct further geologic and geophysical activities so that we may
exploit such opportunities. Based on our interpretations of available
data and testing results, we continue to focus our efforts in areas
which we believe provide the greatest potential for results.
In addition, we believe the market demand in the Pacific regions is
increasing and the fiscal structure of the country seems to be strong.
China's oil and gas facility infrastructure continues to grow. These
potential reserves in the Bohai Bay are located only sixty miles from
a large petrochemical and refining complex on the China coast. During
our involvement in China, we have monitored these factors and believe
they add value to the potential oil and gas investment opportunities
in China.
4
<PAGE>
Oil and Gas Operations in China
The 'net' interests shown in the table below assume that CNOOC exercises
its full rights under each petroleum contract and acquires a 51% working
interest after a field is declared commercial.
Oil and Gas Acreage
This table sets forth our acreage position held at December 31, 1999:
<TABLE>
<CAPTION>
Developed Undeveloped
-------------------------------- ------------------------------
Gross Net Gross Net
---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
CHINA
Block 04/36/(1)/ - - 420,000 76,440
Block 05/36/(2)/ - - 312,000 46,800
---------------- ------------- -------------- -------------
TOTAL - - 732,000 123,240
================ ============= ============== =============
</TABLE>
(1) In September of 1999, the foreign contractors moved into phase three of the
exploration period and were required to relinquish 25% of the block's
acreage. Our share of the relinquishment totaled 140,000 gross acres or
12,485 net acres.
(2) The foreign contractors moved into phase two of the exploration period and
were required to relinquish 25% of the block's acreage. Our share of the
relinquishment totaled 103,782 gross acres or 9,255 net acres.
Relinquishment was effective March 31, 1999.
Productive Wells
As of December 31, 1999, we had no developed producing wells on either of
our Bohai Bay blocks.
Drilling Activity
This table sets forth the results of our drilling activities in China
during 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
Gross Net Gross Net Gross Net
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells: /(1)/
Productive/(2)/ 1 .18 - - 3 .30
Nonproductive/(3)/ - - 2 .2 1 .15
Development Wells: /(1)/
Productive/(2)/ - - - - - -
Nonproductive/(3)/ - - - - - -
------ ------ ------ ------ ------ ------
TOTAL 1 .18 2 .2 4 .45
====== ====== ====== ====== ====== ======
</TABLE>
(1) An exploratory well is a well drilled either in search of a new, as yet
undiscovered oil or gas reservoir or to greatly extend the known limits of a
previously discovered reservoir. A developmental well is a well drilled
within the presently proved productive area of an oil or gas reservoir, as
indicated by reasonable interpretation of available data, with the objective
of completing in that reservoir.
(2) A productive well is an exploratory or development well found to be capable
of producing either oil or gas in sufficient quantities to justify
completion as an oil or gas well.
(3) A nonproductive well is an exploratory or development well that is not a
producing well.
In November 1999 we spudded the CFD 11-1-1 well located in Block 04/36, in
approximately 82 feet of water. By early December, this well encountered
multiple stacked pay zones from 2,600 feet to 4,600 feet. The operator logged
over 280 feet of net oil pay and tested five zones within these intervals. Four
zones between 2,620 feet and 4,470 feet tested oil and, in selected flow tests
of the well, flowed at a combined rate of 2,500 barrels of oil per day.
5
<PAGE>
In December 1999, the operator spudded an appraisal well approximately two
miles northeast of the discovery well to test the lateral extent of the
reservoirs. Selected flow test results indicated a combined flow rate of more
than 1,400 barrels of oil per day from three zones. This well encountered
approximately 210 feet of net oil pay. The well was drilled to a total depth of
5,082 feet. The operator moved the rig off of the location in early February
2000.
In March 2000 we plan to spud an additional appraisal well, the CFD 11-1-3,
more than one mile north of the discovery well to further evaluate the lateral
extent of the reservoirs. After drilling that well, we plan to use a 3-D seismic
survey to aid in planning the placement of the development wells.
In addition, we plan to spud an exploratory well in the second quarter of
2000 to evaluate a similar prospect trend on Block 05/36.
Discovery fields CFD 11-1 and CFD 2-1, are located within 60 miles of
Tanggu, a large petrochemical and refining complex on the China coast. The
quantity and quality of the oil and the closeness of the refining complex both
enhance the possibility of early development of this area.
Employees
At December 31, 1999, we had 6 employees in Houston, Texas, and 1 employee
in Beijing, China.
Regulatory Matters
Environmental
Our operations are subject to various laws and regulations relating to the
protection of the environment, which have become increasingly stringent. We
believe our current operations comply with environmental laws and regulations.
To our knowledge, no environmental claims are pending or threatened against us.
However, current regulatory requirements may change, currently unforeseen
environmental incidents might occur or we may discover past non-compliance with
environmental laws with respect to our properties.
Title to Properties
Title to the China properties remains with CNOOC. However, we believe that
we, together with Kerr-McGee, the operator of the Bohai Bay blocks, have the
various central, provincial or local approvals necessary to conduct our business
on these China properties. We, and to our knowledge Kerr-McGee, are not aware of
any further approvals which are required to allow us to carry on our business or
the absence of which could cause us to lose our rights under the petroleum
contracts for these China properties.
Production
During most of 1999 we realized revenues from producing oil and gas
properties in Alberta. However, in November 1999 we sold these producing oil and
gas properties. We currently own no producing oil and gas properties.
6
<PAGE>
These tables summarize sales volumes, sales price and production cost
information for our net oil and gas production in Alberta, Canada for 1997, 1998
and 1999. "Net" production refers to the production for our interest that we
owned until November 1999 after deducting royalties and other similar interests.
<TABLE>
<CAPTION>
Year Ended December 31,
1999/(2)/ 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Net production volume
Crude oil - (Bbls) 11,039 14,000 12,000
Natural gas - (Mcf) 89,248 132,000 145,000
Equivalent - BOE/(1)/ 25,914 36,000 36,167
Average sales price
Per equivalent BOE/(1)/ $ 13.41 $ 12.91 $ 16.78
Average production cost $ 8.40 $ 4.89 $ 6.66
</TABLE>
(1) Based on a 6 Mcf gas to 1 Bbl oil conversion ratio.
(2) During 1999 we realized revenues from producing oil and gas properties
in Alberta, Canada until we sold those properties in November 1999.
Competition
The oil and gas industry is highly competitive in all its phases. We
encounter strong competition from many other energy companies, including many
that possess greater resources.
Price Volatility
Our properties in China are not yet producing. The expected revenues from
our China properties depend on prevailing prices for oil. The price obtainable
for any oil production is likely to be affected by future market factors beyond
our control, including:
. market demand on a regional, national and worldwide basis,
. domestic and foreign economic conditions that determine levels of
industrial production,
. variations in governmental regulations and tax laws,
. the marketing of alternate fuels, and
. fluctuating supply and demand.
Under the petroleum contracts for our Bohai Bay blocks, we have the right
to take our share of the oil and sell it anywhere in the world.
Product Marketing
We do not foresee any difficulty in marketing production from China as it
becomes available. Due to significant oil and gas development underway in the
Bohai Basin, storage, terminal, and transportation facilities are under
construction or completed. These infrastructure developments and the fact that
we may sell our production on the world market lead us to believe we will be
able to economically market and transport China production.
7
<PAGE>
Regulations
We believe that we and Kerr-McGee, the operator of the Bohai Bay blocks,
have the various central, provincial and/or local approvals necessary to conduct
our business in China. Unanticipated changes in regulations could adversely
impact our ability to carry on our business or cause us to lose our rights under
the petroleum contracts.
Currently, the Chinese legal requirements regarding occupational health and
safety and environmental matters which apply to us, and the enforcement of these
requirements by China, do not appear to be as rigorous as in North America.
Should this situation change, we could, in the future, be required to take
additional steps to comply with such laws, including making capital
expenditures, which could be material.
Estimated Net Quantities of Proved Oil Reserves and Present Value of Estimated
Future Net Reserves
Ryder Scott Company, an independent petroleum consulting firm located in
Houston, Texas, has conducted an independent evaluation of our oil reserves and
the present value of future net cash flows associated with such reserves based
on constant price assumptions. This evaluation was effective as of January 1,
2000. The January 1, 2000 table below summarizes the information from the Ryder
Scott report. Ryder Scott Company, in its report, based its analysis on
economically recoverable reserves.
Block 04/36 contains all of our proved undeveloped reserves. We presently
have no proved developed reserves in China. We drilled a discovery well in the
CFD 2-1 Field in 1996 and three successful appraisal wells in 1997. In addition,
we drilled a discovery well on the CFD 11-1 Field in December 1999 and a
successful delineation well in February 2000. We will continue to evaluate both
fields during 2000.
The present worth of estimated future net cash flows contained in the
following tables may not represent the fair market value of the reserves. The
notes following the tables summarize assumptions relating to costs, prices for
future production and other matters. Assumptions related to price and cost may
not be accurate, and the variances could be material. All estimated future net
cash flows are stated after deducting royalties and estimated future capital and
operating expenditures. The Ryder Scott report uses factual data supplied by us,
Kerr-McGee, published industry information sources and Ryder Scott's non-
confidential files.
As of January 1, 2000
Estimated Reserves and Economics
Based on Constant Price Assumptions
Before Income Taxes
<TABLE>
<CAPTION>
Estimated Reserves
---------------------------
Net Net Estimated Present Worth (Net)(US$000's)/(1)(2)/
-------------------------------------------------------
Oil Gas Discounted at
-------------------------------------
(MBO) (MMCF) Undiscounted 10% 15% 20%
-------- -------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proved Developed Reserves........... - - $ - $ - $ - $ -
Proved Undeveloped Reserves......... 7,837 - 124,582 60,534 43,608 31,837
-------- -------- ------------- ----------- ----------- ----------
Total Proved Reserves............... 7,837 - $ 124,582 $ 60,534 $ 43,608 $ 31,837
======== ======== ============= =========== =========== ==========
</TABLE>
(1) The present value of estimated future net revenues attributable to
Pendaries' reserves was prepared using constant prices as of the calculation
date.
(2) Calculated using an average oil price of $24.25 per barrel for proved
undeveloped reserves in China.
8
<PAGE>
We had a $116 million increase in undiscounted future net cash flow from
proved undeveloped reserves in China before income taxes between year-end 1998
and year-end 1999 which was due to three factors: approximately 6% of this
increase was due to the additional interest in Block 04/36 acquired from Murphy;
approximately 24% of this increase was due to increased reserves from drilling;
and approximately 70% of the increase was due to price increases.
Estimations of quantities of proved reserves, future rates of production
and the timing of development expenditures, include numerous uncertainties and
many factors beyond our control. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured
exactly. The accuracy of any reserve estimate depends on the quality of
available data, engineering and geological interpretation and judgment and the
existence of development plans. As a result, estimates of reserves made by
different engineers for the same property will often vary. Results of drilling,
testing and production subsequent to the date of an estimate may justify
revisions. Accordingly, reserve estimates generally differ from the quantities
of oil and gas ultimately produced. Further, both the present value of and the
estimated future net revenues from proved reserves contain assumptions that may
not prove to be correct, including geological success, prices, future production
levels and costs. The meaningfulness of our estimates depends on the accuracy of
these underlying assumptions.
Our proved developed oil and gas reserves in Canada, which were 106 MBO and
1,059 MMcf at January 1, 1999, were sold in November 1999.
Proved undeveloped oil reserves in China increased from 1,852 MBO at
January 1, 1999 to 7,837 MBO at January 1, 2000. The increase was due to the
increase in our foreign contractor's interest from 10% to 18.2% in Block 04/36
and also due to the discovery well drilled on the CFD 11-1 field in that block
during 1999.
We have identified numerous potential prospects on our Bohai Bay concession
and have prepared reserve estimates on 6 of these prospects. While substantial
potential and probable reserves have been assigned to these fields and
prospects, the tables presented above do not include potential or probable
reserves.
You may review the Ryder Scott reports pertaining to proved and probable
reserves as of January 1, 2000, at our offices in Houston, Texas, during normal
business hours.
Forward-Looking Statements
This Form 10-K contains forward-looking statements relating to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by words such as "plan," "estimate," "expect,"
"predict," "anticipate," "currently," "budgeted," "projected," "should,"
"assume," "believe," or other words that convey the uncertainty of future events
or outcomes. However, our actual results may differ materially from those
anticipated in our forward-looking statements, as a result of various factors,
such as those discussed in this Form 10-K. Although we believe that our
expectations are reasonable, we cannot guarantee future results of levels of
activity, performance or achievements.
Item 2. Properties
In addition to our properties described in Item 1 of this Form 10-K, we
have various operating leases for renting office space, office equipment and
vehicles. We maintain an office at 8 Greenway Plaza, Suite 910, Houston, Texas,
77046 which comprises 4,678 square feet of lease space. Our lease payments total
$72,485 per annum. Our office lease expires on November 1, 2002.
9
<PAGE>
Item 3. Legal Proceedings
Neither we, any of our subsidiaries, nor our properties are a party or
subject to any material pending legal proceedings. However, legal or
administrative proceedings arise from time to time in the ordinary course of our
business, due to its nature.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters for a vote of security holders during the
fourth quarter of 1999.
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters
We listed on The Toronto Stock Exchange on December 12, 1996 and then on
the American Stock Exchange on June 24, 1998. This table summarizes the closing
price range and trading volume of our common shares on the American Stock
Exchange and The Toronto Stock Exchange during the periods indicated:
<TABLE>
<CAPTION>
CLOSING PRICE/(1)/
HIGH LOW VOLUME/(2)/
---------------------------- ---------------------------- --------------
PERIOD (CALENDAR YEAR) TSE Amex TSE Amex
------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1996
December 12 to December 31 Cdn $13.25 - Cdn $11.75 - 598,110
1997
1/st/ Quarter Cdn $24.00 - Cdn $11.80 - 1,146,819
2/nd/ Quarter Cdn $20.95 - Cdn $13.75 - 743,875
3/rd/ Quarter Cdn $19.75 - Cdn $14.00 - 762,535
4/th/ Quarter Cdn $19.64 - Cdn $ 9.60 - 1,500,503
1998
1/st/ Quarter Cdn $12.50 - Cdn $ 7.50 - 143,572
2/nd/ Quarter Cdn $ 8.50 $3.88 Cdn $ 5.50 $3.50 1,381,258
3/rd/ Quarter Cdn $ 5.20 $3.63 Cdn $ 1.51 $1.31 649,820
4/th/ Quarter Cdn $ 1.50 $1.06 Cdn $ .57 $ .31 3,345,650
1999
1/st/ Quarter Cdn $ 1.40 $ .94 Cdn $ .72 $ .38 1,186,455
2/nd/ Quarter Cdn $ 2.65 $1.88 Cdn $ .80 $ .50 1,310,470
3/rd/ Quarter Cdn $ 1.70 $1.31 Cdn $ 1.10 $ .63 822,500
4/th/ Quarter Cdn $ 5.00 $3.44 Cdn $ 1.50 $ .94 1,972,225
</TABLE>
(1) Closing prices after June 1998 are reflected for the American Exchange in
U.S. dollars and The Toronto Stock Exchange in Canadian dollars.
(2) Volumes after June 1998 are consolidated market volumes.
Dividends
Neither we nor Sino-American have paid any dividends to date, and we have no
plans to do so in the future. We intend to reinvest our earnings to finance the
growth of our business. Our future payment of dividends will depend on our need
to finance growth, our financial condition and other factors which the board of
directors may consider appropriate.
10
<PAGE>
Item 6. Selected Financial Data
This table sets forth our selected historical information, presented in
accordance with Canadian GAAP, using U.S. dollars. You should also refer to the
consolidated financial statements and all notes.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
Statement of Operations Data: 1997 1998 1999
--------------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Oil and gas income $ 606,922 $ 464,833 $ 347,653
-------------- ------------- -------------
606,922 464,833 347,653
-------------- ------------- -------------
Expenses:
Oil and gas operating 240,807 176,179 217,561
General and administrative 2,174,867 2,407,639 1,395,803
Depreciation, depletion and amortization 321,304 291,334 162,345
Write-off of registration costs - 299,397 -
Stock option settlement - 450,000 -
Exchange loss 47,868 90,873 53,223
-------------- ------------- -------------
2,784,846 3,715,422 1,828,932
-------------- ------------- -------------
Other Income:
Interest income 911,942 540,211 324,877
-------------- ------------- -------------
Loss before income taxes (1,265,982) (2,710,378) (1,156,402)
Income tax recovery 381,641 - -
-------------- ------------- -------------
Net loss $ (884,341) $ (2,710,378) $ (1,156,402)
============== ============= =============
Loss Per Share:
Basic and fully diluted $ (.10) $ (.31) $ (.13)
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 15,133,285 $ 7,873,280 $ 6,983,680
Property and equipment $ 16,134,591 $ 20,654,529 $ 20,422,854
Total assets $ 31,499,576 $ 28,842,010 $ 27,681,762
Shareholders' equity $ 31,223,625 $ 28,682,148 $ 27,603,955
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
You should read this discussion together with our consolidated financial
statements, including all notes. Because the majority of our business activity
is conducted in U.S. dollars, we use the U.S. dollar as our reporting currency.
We prepared our consolidated financial statements in accordance with Canadian
generally accepted accounting principles for the years ended December 31, 1997,
1998 and 1999. You should also read Note 12 to our annual audited consolidated
financial statements regarding reconciliation to U.S. generally accepted
accounting principles.
11
<PAGE>
During 1999, after reviewing the results of our exploration wells drilled
between 1996 and 1998, we decided to relinquish our smallest two blocks located
in the Bohai Bay and the Pearl River Mouth Basin to concentrate all of our
efforts and resources on our two remaining large blocks which have shown the
highest probability for success, Bohai Bay blocks 04/36 and 05/36. In December
1999, we drilled a 5,000-foot exploration well in Block 04/36 in the Bohai Bay
to test the shallow sand structure in prospect CFD 11-1. In February 2000 we
successfully tested a delineation well on the same structure to approximately
5,000 feet and plan two wells for the spring of 2000 to continue to evaluate the
lateral extent of the reservoirs in our two blocks.
Liquidity and Capital Resources
We incurred capital expenditures of $1,166,448 in 1999, $4,868,554 in 1998
and $7,844,927 in 1997. We used these funds primarily to pay for Sino-American's
share of drilling, geological and geophysical costs in its concession areas in
China, which we described in Item 1.
Capital Expenditures
--------------------
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Capital costs - China $1,098,526 $4,843,827 $7,739,641
Capital costs - U.S. 65,343 - -
Capital costs - Furniture and Fixtures 2,579 24,727 105,286
---------- ---------- ----------
$1,166,448 $4,868,554 $7,844,927
========== ========== ==========
</TABLE>
Prior to going public in 1996 we privately raised capital of $5,066,000. At
the end of 1996 and in early 1997, we netted proceeds of $26,734,572 from our
initial public offering. In addition, Sino-American shareholders have exercised
stock options to purchase shares of Sino-American common stock which they
exchanged for our stock. Through these exchanges, we raised $456,924 in 1997,
$42,000 in 1998 and $50,000 in 1999. Cumulatively through 1999, we have raised
$32,349,496 in capital.
At year-end 1999 we had available cash of $6,983,680 and total liabilities
of $77,807, as compared to $7,873,280 of cash and $159,862 of liabilities at
year-end 1998. The fact that available cash amounts were reduced approximately
$900,000 during 1999 primarily reflects the receipt of net proceeds of
approximately $1.2 million in 1999 from the sale of our Canadian oil and gas
properties. We will continue to invest our cash resources in liquid, low-risk
investments in order to have funds available to meet capital requirements
anticipated for further exploratory and confirmation programs.
12
<PAGE>
For 2000, we have recommended to the operator the following drilling and
seismic program for our China concessions. The costs shown in this section are
based on our estimates, which may not reflect the ultimate cost incurred by the
operator. Costs shown are net to our interests.
Budgeted 2000 Exploration Costs
US $000's
<TABLE>
<CAPTION>
Geological Overall
Prospect Well and Development
Area Activity Block Cost Geophysical Plans Total
---- -------- ----- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
CFD 11-1-2 Confirmation Drilling 04/36 $ 965 $ - $ - $ 965
CFD 11-1-3 Confirmation Drilling 04/36 870 - - 870
CFD 11-1 3-D Seismic Survey 04/36 - 545 - 545
CFD 12-1-1 Exploratory Drilling 05/36 645 - - 645
CFD 11-1-4 Confirmation Drilling 04/36 768 - - 768
CFD 11-1-5 Confirmation Drilling 04/36 768 - - 768
CFD 2-1-5 Confirmation Drilling 04/36 1,555 - - 1,555
CFD 11-1 Overall Field Development Plan 04/36 - - 90 90
CFD 2-1 Overall Field Development Plan 04/36 - - 75 75
------ ----------- ---- ------
TOTALS $5,571 $545 $165 $6,281
</TABLE>
The above drilling schedule would allow us to begin construction of
development facilities on the CFD 2-1 field in the second quarter of 2001, with
first production in the second quarter of 2002. We could also begin
construction of the development facilities on the CFD 11-1 field during the
second quarter of 2001, with first production in the fourth quarter of 2002.
The CFD 2-1 field contains proved undeveloped reserves. The discovery well
was drilled in mid-1996 and three confirmation wells were drilled in 1997, with
3-D seismic shot, processed and interpreted in 1998.
The CFD 11-1 field also contains proved undeveloped reserves. One
exploration well was drilled in December 1999, and one delineation well was
drilled in early 2000. We have not yet shot 3-D seismic in this field, but it
is budgeted in 2000 along with further delineation drilling.
Our current projections of total cash requirements attributable to our
China interests through the end of 2003 are as follows:
Estimated Capital Costs / 2000 - 2003
US $000's
<TABLE>
<CAPTION>
Less Net Net Cash
Exploration Development Operating Required Cumulative
Year Capital Capital Income Per Year Total
--- ------- ------- ------ -------- -----
<S> <C> <C> <C> <C> <C>
2000 *$ 6,281 $ - $ - $ 6,281 $ 6,281
2001 2,650 5,506 - 8,156 $14,437
2002 2,225 13,373 (6,447) 9,151 $23,588
2003 725 6,450 (22,923) (15,748) $ 7,840
------- --------- -------- --------
$11,881 $ 25,329 $(29,370) $ 7,840
TOTALS
</TABLE>
* From preceding table.
13
<PAGE>
We believe the amounts budgeted through 2003 should allow us to fully
develop the proved reserves on both the CFD 2-1 and CFD 11-1 fields and to drill
one exploration well on each of six additional seismically identified prospects
in our two blocks. If we are successful in our future exploration efforts, then
we may require more capital than shown in this schedule.
We have $7.0 million in cash reserves, which we currently believe is
sufficient to fund cash requirements through most of the year 2000. We believe
that the $8.2 million required in 2001 and the $9.2 million required in the
first half of 2002 can be funded by means of conventional debt and equity
financing. We currently expect initial production income to begin in mid-2002.
We have based the preceding estimates on a number of assumptions, which may
prove to be inaccurate or unlikely, including:
. the timing of the development plan for various fields,
. the accuracy of the costs and reserve projections, and
. the pace at which the operator and foreign contractors proceed with
these exploration and development plans.
We have scheduled a large portion of our future capital requirements for
development rather than exploration activities. We cannot be sure that the
development costs can be financed in a conventional manner. Based on our
assumptions, we currently project that net revenues will exceed capital
requirements on a yearly basis beginning in 2003, which would result in positive
cash flow from such properties.
Results of Operations
Revenues
Our revenues have come solely from oil and gas properties in Alberta,
Canada acquired in November 1996. We sold these properties in November 1999.
Oil and gas revenues decreased from $606,922 in 1997 to $464,833 in 1998,
primarily due to the decline in oil prices. Oil and gas revenues further
decreased to $347,653 in 1999 due to loss of income from the Wintering Hills
Field relating to workover operations carried out on that field, normal
reservoir depletion, and the sale of the properties in the fourth quarter of
1999.
Expenses
Oil and gas operating expenses decreased from $240,807 in 1997 to $176,179
in 1998, due to fewer workover and remedial operations being carried out in
Canada in 1998. Oil and gas operating expenses increased from $176,179 in 1998
to $217,561 in 1999 due to the plugging and workover costs related to the Grand
Forks Field.
General and administrative expenses increased from $2,174,867 in 1997 to
$2,407,639 in 1998. This increase was due to SEC registration expenses, listing
on the American Stock Exchange and one-time charges incurred in connection with
the closing of our Toronto, Canada office and personnel reductions. In 1999,
general and administrative expenses decreased by $1,011,836 to $1,395,803,
primarily due to reductions in staff, reduced salaries and related costs, cost
savings in connection with the closing of the Toronto, Canada office, and
reduced outside professional costs.
14
<PAGE>
During 1998, we wrote off $299,397 of registration expenses incurred
primarily in the first and second quarters of 1998 in anticipation of an
offering of securities in the U.S. and Canada which we cancelled.
During 1998, we settled litigation with a former president of our wholly
owned subsidiary, Sino-American, who believed he was entitled to more than the
100,000 stock options we believed were granted to him. He received $450,000
and a new Stock Option Agreement covering only 100,000 shares. We charged the
$450,000 settlement amount to expense.
We incurred an exchange loss of $47,868 in 1997 as compared to $90,873 in
1998 and $53,223 in 1999. The losses occurred due to the relative strength of
the U.S. dollar as compared to the Canadian dollar.
Other Income
Interest income decreased from $911,942 in 1997 to $540,211 in 1998 to
$324,877 in 1999, due to the use of our initial public offering proceeds for
capital requirements and payment of expenses.
Income Taxes
We recorded a recovery of income taxes of $381,641 in 1997 and none in both
1998 and 1999. We follow Accounting Recommendation Section 3465, "Income Taxes"
of the Handbook of the Canadian Institute of Chartered Accounts and determined
that the losses incurred in 1998 and 1999 did not meet the criteria stated in
Section 3465 to record a future income tax asset.
Net Loss
Our net loss for 1997 totalled $884,341 or $0.10 per share, compared to a
net loss in 1998 of $2,710,378 or $0.31 per share, and $1,156,402 or $0.13 per
share for 1999.
Year 2000
The Year 2000 issue relates to the inability of computer programs and
equipment to properly calculate, store or use dates after December 31, 1999,
which could cause system failures, miscalculations and the disruption of normal
business operations. Throughout 1999 we implemented our four part Year 2000 plan
consisting of: inventory and vendor representation review, in-house testing,
third party integration and development of a contingency plan.
After evaluating our in-house systems and all Year 2000 representations
that we received from our software vendors and third parties who perform
functions we out-source, we determined that our in-house software and non-
information technology was either capable of addressing the Year 2000 or did not
use dates. Therefore, we expect all in-house systems to perform their functions
in a customary manner throughout the Year 2000.
During our in-house testing phase we did not encounter any system
disruptions and expect that these systems will function properly through the
Year 2000. However, the operators of our properties maintain our "mission
critical" equipment on-site. We relied on our operators' favorable Year 2000
representations regarding these systems.
15
<PAGE>
Throughout 1999 we relied on Year 2000 readiness reports periodically
issued by our third party suppliers, service providers and customers. By
December 31, 1999 approximately 98% provided favorable representations. These
third parties received similar representations from us. Based on the
representations received, we do not expect material disruption in our business
as a result of Year 2000 issues involving third parties.
During 1999, we prepared a contingency plan which required employees to
manually complete otherwise automated tasks, such as calculations. In addition,
during 1999 we identified and arranged for other vendors, purchasers and third
party contractors if needed. Our ability to continue business activities would
most likely not be materially affected by implementing our contingency plan.
Our most reasonably likely worst case Year 2000 scenario would involve a
disruption of third party services affecting the productivity of core equipment,
substantially decreasing our oil and gas exploration. We determined that it is
not economically feasible to maintain a separate and duplicate secondary power
supply all of the operator's "mission critical" equipment. Therefore,
unanticipated prolonged losses of these services could cause material
disruptions in our business.
We will continue to use our resources to monitor and address any situation
related to the Year 2000 issue. Throughout 1999, we did not incur any
significant costs relating to the assessment and remediation of Year 2000
issues.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, accounting policy disclosures, notes
to financial statements, business segment information and independent auditors'
report are presented on pages 20 through 48 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
We are incorporating by reference all information appearing under the
captions "Election of Directors" and "Executive Officers" in our definitive
proxy statement. Our definitive proxy statement will be filed within 120 days
after the close of our fiscal year in connection with the April 14, 2000 Annual
Shareholders' meeting.
16
<PAGE>
Item 11. Executive Compensation
We are incorporating by reference all information appearing under the
caption "Remuneration of Directors and Executive Officers - Statement of
Executive Compensation" in our definitive proxy statement. Our definitive proxy
statement will be filed within 120 days after the close of the fiscal year in
connection with the April 14, 2000 Annual Shareholders' meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management
We are incorporating by reference all information appearing under the
caption "Principal Shareholders" in our definitive proxy statement. Our
definitive proxy statement will be filed within 120 days after the close of the
fiscal year in connection with the April 14, 2000 Annual Shareholders' meeting.
Item 13. Certain Relationships and Related Transactions
We are incorporating by reference all information appearing under the
caption "Transactions with Affiliates" (if any such captioned information is
included) in our definitive proxy statement. Our definitive proxy statement
will be filed within 120 days after the close of the fiscal year in connection
with the April 14, 2000 Annual Shareholders' meeting.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Our consolidated financial statements, together with the report of Arthur
Andersen LLP dated January 28, 2000, immediately follow the Exhibits
herein:
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................ 21
Consolidated Balance Sheets......................................................... 22
Consolidated Statements of Operations and Retained Deficit.......................... 23
Consolidated Statements of Shareholders' Equity..................................... 24
Consolidated Statements of Cash Flow................................................ 25
</TABLE>
2. Financial Statement Schedules
None
3. Exhibits
(a) The following exhibits are filed as a part of this Form 10-K.
Exhibit No. Exhibit
3(a)* Articles of Incorporation
3(a)* By-Laws
10(c)*+ Pendaries Petroleum Ltd. 1997 Nonqualified Stock Option
Plan
17
<PAGE>
10(d)* Exchange Rights agreement between Pendaries and Sino-
American dated August 29, 1996
10(e)*+ 1997 Stock Compensation Plan
10(f)* Petroleum Contract for Block 04/36 dated August 17, 1994
between CNOOC, Kerr-McGee and Murphy Pacific Rim, Ltd.
10(g)* English translation of MOFTEC approval, dated September 14,
1994, of Petroleum Contract for Block 04/36 between CNOOC,
Kerr-McGee and Murphy Pacific Rim, Ltd.
10(h)* Operating Agreement for Block 04/36 dated February 6, 1995
between Kerr-McGee and Murphy Pacific Rim, Ltd.
10(i)* Petroleum Contract for Block 05/36 dated January 23, 1996
between CNOOC, Kerr-McGee and Huffco China, LDC
10(j)* English translation of MOFTEC approval, dated December 30,
1996, of Petroleum Contract for Block 05/36 between CNOOC,
Kerr-McGee and Huffco China, LDC
10(k)* Operating Agreement for Block 05/36 between Kerr-McGee,
Huffco China, LDC and Setsco
21 List of Subsidiaries of Pendaries Petroleum Ltd.
23(a) Consent of Arthur Andersen LLP
23(b) Consent of Ryder Scott Company
27 Financial Data Schedule
*Incorporated by reference from Registration Statement No. 1-14754 on Form 20-F
filed on June 18, 1998.
+Compensatory Plan.
(b) Form 8-Ks filed during the fourth quarter of 1999:
Form 8-K filed with the S.E.C. on October 7, 1999
Form 8-K/A filed with the S.E.C. on November 22, 1999
18
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Pendaries Petroleum Ltd. has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
PENDARIES PETROLEUM LTD.
March 3, 2000 /s/ Bobby J. Fogle
--------------------------------
Bobby J. Fogle
Vice President -Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Pendaries and
in the capacities and on the dates indicated.
March 3, 2000 /s/ Robert E. Rigney
----------------------------------
Robert E. Rigney
Chairman of the Board, Director
(Principal Executive Officer)
Pendaries Petroleum Ltd.
March 3, 2000 /s/ Bobby J. Fogle
----------------------------------
Bobby J. Fogle
Vice President -Finance, Director
(Principal Financial Officer)
Pendaries Petroleum Ltd.
March 3, 2000 /s/ Paul H. Farrar
----------------------------------
Paul H. Farrar
Director
Pendaries Petroleum Ltd.
March 3, 2000 /s/ Urick Ho
----------------------------------
Urick Ho
Vice President, Director
Pendaries Petroleum Ltd.
March 3, 2000 /s/ James C.
----------------------------------
James C. Roe
Director
Pendaries Petroleum Ltd.
March 3, 2000 /s/ Ben F.
----------------------------------
Ben F. Barnes
Director
Pendaries Petroleum Ltd.
19
<PAGE>
Pendaries Petroleum Ltd.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
TOGETHER WITH AUDITORS' REPORT
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of
PENDARIES PETROLEUM LTD.:
We have audited the consolidated balance sheet of PENDARIES PETROLEUM LTD. (a
New Brunswick Corporation) and subsidiaries as of December 31, 1999 and 1998,
and the consolidated statements of operations and retained deficit,
shareholders' equity and cash flow for each of the three years in the period
ended December 31, 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pendaries Petroleum
Ltd. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in Canada.
Arthur Andersen LLP
Houston, Texas
January 28, 2000
21
<PAGE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
(all figures are in U.S. dollars)
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,983,680 $ 7,873,280
Accounts receivable 43,577 105,750
Prepaid expenses and other assets 231,651 208,451
----------- -----------
7,258,908 8,187,481
----------- -----------
PROPERTY AND EQUIPMENT
Oil and gas properties, recorded under the full-cost method
Proved 17,761,478 7,890,804
Unproved 2,565,343 13,238,236
Furniture, fixtures and office equipment 172,517 169,938
Accumulated depreciation, depletion and amortization (76,484) (644,449)
----------- -----------
20,422,854 20,654,529
----------- -----------
$27,681,762 $28,842,010
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 36,845 $ 44,627
Accrued liabilities 40,962 115,235
----------- -----------
77,807 159,862
----------- -----------
SHAREHOLDERS' EQUITY
Common shares (Note 4), unlimited authorized;
8,879,470 and 8,781,970 common shares issued 32,580,051 32,501,842
Retained deficit (4,976,096) (3,819,694)
----------- -----------
27,603,955 28,682,148
----------- -----------
$27,681,762 $28,842,010
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
REVENUE
Oil and gas income $ 347,653 $ 464,833 $ 606,922
----------- ----------- -----------
347,653 464,833 606,922
----------- ----------- -----------
EXPENSES
Oil and gas operating expenses 217,561 176,179 240,807
General and administrative expenses 1,395,803 2,407,639 2,174,867
Depreciation, depletion and amortization 162,345 291,334 321,304
Write-off of registration costs (Note 4) - 299,397 -
Stock option settlement (Note 4) - 450,000 -
Canadian exchange loss (Note 1) 53,223 90,873 47,868
----------- ----------- -----------
1,828,932 3,715,422 2,784,846
----------- ----------- -----------
OTHER INCOME
Interest Income 324,877 540,211 911,942
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,156,402) (2,710,378) (1,265,982)
RECOVERY OF INCOME TAXES - - 381,641
----------- ----------- -----------
NET LOSS (1,156,402) (2,710,378) (884,341)
RETAINED DEFICIT, beginning of year (3,819,694) (1,109,316) (224,975)
------------ ----------- -----------
RETAINED DEFICIT, end of year $(4,976,096) $(3,819,694) $(1,109,316)
=========== =========== ===========
LOSS PER SHARE (Note 6)
Basic $ (.13) $ (.31) $ (.10)
=========== =========== ===========
Fully Diluted $ (.13) $ (.31) $ (.10)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
23
<PAGE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars)
(see Note 4)
<TABLE>
<CAPTION>
Total Cumulative Retained
Total Common Translation Earnings
Shares Equity Adjustment (Deficit)
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 7,805,970 $26,120,158 $ - $ (224,975)
Underwriters' over allotment options 375,000 2,823,247 - -
Sino-American shares canceled (150,000) - - -
Exercise of Sino-American warrants 115,000 944,488 - -
Exercise of Pendaries stock options by
underwriter 250,000 1,912,679 - -
Exercise of Sino-American stock options 326,500 456,924 - -
Employees' share compensation 4,000 49,030 - -
Other adjustments - 22,235 4,180 -
Loss - - - (884,341)
--------- ----------- ------------ -----------
Balance at December 31, 1997 8,726,470 32,328,761 4,180 (1,109,316)
Directors' share compensation 15,000 131,081 - -
Exercise of Sino-American stock options 40,500 42,000 - -
Other adjustments - - (4,180) -
Loss - - - (2,710,378)
--------- ----------- ------------ -----------
Balance at December 31, 1998 8,781,970 32,501,842 - (3,819,694)
Directors' share compensation 47,500 28,209 - -
Exercise of Sino-American stock options 50,000 50,000 - -
Loss - - - (1,156,402)
--------- ----------- ------------ -----------
Balance at December 31, 1999 8,879,470 $32,580,051 $ - $(4,976,096)
========= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
24
<PAGE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss $(1,156,402) $(2,710,378) $ (884,341)
Items not affecting cash
Depreciation, depletion and amortization 162,345 291,334 321,304
Decrease in future income taxes - - (381,641)
Directors' share compensation 28,209 131,081 -
Loss on disposition of Canadian assets 9,388 57,282 -
Changes in non-cash working capital items
Accounts receivable 62,173 107,493 (127,695)
Accounts payable (7,782) (43,433) (113,373)
Accrued liabilities (74,273) (72,656) (17,990)
Prepaid expenses and other assets (23,200) (189,994) (4,290)
----------- ----------- -----------
(999,542) (2,429,271) (1,208,026)
----------- ----------- -----------
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES
Net additions to proved and unproved oil and gas
properties (1,163,869) (4,843,827) (7,739,641)
Additions to furniture, fixtures and office (2,579) (24,727) (105,286)
equipment
Net proceeds from sale of Canadian oil and gas
properties 1,226,390 - -
----------- ----------- -----------
59,942 (4,868,554) (7,844,927)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common shares 50,000 42,000 6,208,603
Cumulative translation effects - (4,180) 4,180
----------- ----------- -----------
50,000 37,820 6,212,783
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (889,600) (7,260,005) (2,840,170)
CASH AND CASH EQUIVALENTS, beginning of year 7,873,280 15,133,285 17,973,455
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 6,983,680 $ 7,873,280 $15,133,285
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
25
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Pendaries Petroleum Ltd. ("Pendaries" or "the Company"), a New Brunswick
corporation, is a holding company whose primary interests are in exploration,
development and production of oil and gas properties in the People's Republic
of China.
On September 3, 1996, Pendaries conveyed to the Class A stockholders of Sino-
American Energy Corporation ("Sino-American") the right to exchange 6,250,000
(as amended 6,251,000) Class A shares (including Class A shares attributable
to options and warrants outstanding on that date) of Sino-American for
6,251,000 common shares of Pendaries ("Exchange Rights Agreement" or the
"Agreement"). Of the 6,251,000 Class A shares originally outstanding, all had
been exchanged during 1998 and early 1999. A total of 311,000 Sino-American
stock options remain outstanding.
Sino-American and its wholly owned subsidiary, Sino-American Overseas Energy
Corporation ("Sino-American Overseas"), a Cayman Island corporation, are
engaged in the exploration, development and production of oil and gas
properties in the People's Republic of China.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada. The consolidated
financial statements include the accounts of Pendaries, Sino-American, Sino-
American Overseas and Pendaries Production, Inc. (which as yet has no
operations). All significant intercompany transactions and balances have been
eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include all cash held in financial instruments with
original maturities of three months or less.
26
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and non-productive costs
incurred in connection with the exploration and development of oil and gas
reserves are capitalized in separate cost centers on a country-by-country
basis. Such capitalized costs include: contract and concession acquisition;
geological, geophysical and other exploration work; drilling, completion of
oil and gas wells, construction of production facilities and gathering lines;
and certain direct, general and administrative costs and other related costs.
The Company also capitalizes interest costs related to unevaluated oil and
gas properties.
Capitalized costs associated with the acquisition and evaluation of unproved
properties are excluded from amortization until it is determined whether
proved reserves can be assigned to such properties or until the value of the
properties is impaired or the properties are relinquished. Unproved
properties are assessed periodically to determine whether any impairment has
occurred.
If the net capitalized costs of oil and gas properties in a cost center
exceed an amount equal to the sum of estimated future net revenues from
proved oil and gas reserves in the cost center and the costs of properties
not being amortized, both adjusted for income tax effects, such excess is
charged to expense. The total capitalized costs of all cost centers is
subject to a further recoverability test which includes, among other things,
provisions for site development and restoration, future general,
administrative and financial costs. Net capitalized costs are assessed
quarterly to determine whether any impairment has occurred. (See Note 12.)
Substantially all of the Company's exploration, development and production
activities are conducted jointly with others, and accordingly, the Company's
financial statements reflect only a proportionate interest in such
activities.
The Company owned an interest in producing oil and gas properties in Alberta,
Canada which were sold in the fourth quarter of 1999. During the period of
ownership, depletion was provided based on the Company's proportionate
interest of production in respect of proved reserves.
The Company currently has no producing oil and gas properties in the People's
Republic of China. Therefore, related capitalized costs of oil and gas
properties are not currently subject to amortization.
27
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Revenue Recognition
In 1999, 1998 and 1997, the Company's revenues were derived from interest
income, plus oil and gas production related to its activities in Canada. The
Canadian properties were sold during the last quarter of 1999 for net
proceeds of $1,200,000, which approximated book value.
Income Taxes
The Company adopted the Accounting Recommendation Section 3465, "Income
Taxes" of the Handbook of the Canadian Institute of Chartered Accountants,
beginning with its fiscal year ended December 31, 1997. The adoption of
Section 3465 changed the Company's method of accounting for income taxes to
the liability method from the previous deferral method of income tax
allocation. The liability method requires that future income tax assets and
liabilities be recognized for the expected future tax effects of all
temporary differences between the income tax and financial reporting bases of
assets and liabilities. This section also provides recommendations that
future income tax assets related to deductible temporary differences and
unused tax losses and income tax reductions should be recognized to the
extent that future income tax assets are considered more likely than not to
be realized.
Liquidity and Capital Resources
At December 31, 1999 the Company had available cash of $6,983,680 and total
liabilities of $77,807, as compared to $7,873,280 and $159,862, respectively,
at December 31, 1998. The fact that available cash amounts were reduced
approximately $900,000 during 1999 primarily reflects the receipt of net
proceeds of approximately $1.2 million in 1999 from the sale of the Canadian
oil and gas properties. The Company will continue to invest our cash
resources in liquid, low-risk investments in order to have funds available to
meet capital requirements anticipated for further exploratory and
confirmation programs.
28
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Total cash requirements attributable to the Company's China interests through
the end of 2003 are projected as follows:
Estimated Capital Costs/ 2000-2003
US $000's
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Less Net Net Cash
Exploration Development Operating Required Cumulative
Year Capital Capital Income Per Year Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 $ 6,281 $ - $ - $ 6,281 $ 6,281
2001 2,650 5,506 - 8,156 $ 14,437
2002 2,225 13,373 (6,447) 9,151 $ 23,588
2003 725 6,450 (22,923) (15,748) $ 7,840
--------- --------- -------- --------
TOTALS $ 11,881 $ 25,329 $(29,370) $ 7,840
-----------------------------------------------------------------------------------------------
</TABLE>
The above schedule provides for the projected cash required to fully develop
the proved reserves on both the CFD 2-1 and CFD 11-1 fields, and to drill one
exploration well on each of six additional seismically identified prospects.
Should the Company be successful in its future exploration efforts, then
capital, in addition to that scheduled above, may be required.
Pendaries has approximately $7.0 million in cash reserves, which it believes
is sufficient to fund cash requirements through most of the year 2000.
Management believes that the $8.2 million required in 2001 and the $9.2
million required in the first half of 2002 can be funded by means of
conventional debt and equity financing sources. The Company expects initial
production income to begin in mid-2002.
The preceding estimates are based on a number of assumptions, the accuracy or
likelihood of the occurrence of which cannot be assured, including, for
example, the timing of the development plan for various fields, the accuracy
of the costs and reserve projections of management, and the willingness of
the operator and the other joint concession owners to proceed with these
exploration and development plans. A large portion of future capital
requirements is scheduled for development rather than exploration activities.
There is no assurance that the development costs can be financed in a
conventional manner. Based on the assumptions described above, those
estimates, of which there can be no assurance, project that beginning in
2003, net revenues on a yearly basis will exceed capital requirements, which
would result in positive cash flow from such properties.
29
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Foreign Currency Transactions
These consolidated statements are presented in U.S. dollars because the
primary transactions of the Company are denominated in U.S. dollars. Foreign
currency exchange gains and losses, if any, are recognized in income as
incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities 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.
2. OIL AND GAS EXPLORATION CONTRACTS
At the end of 1998, the Company owned an interest in five oil and gas
exploration contracts covering acreage in the Gulf of Bohai and the Pearl
River Mouth Basin of the South China Sea. During 1999, the operator of all
five blocks, a wholly owned subsidiary of Kerr-McGee Corporation, and the
Company decided to concentrate their resources and efforts on the two primary
blocks in the Bohai Bay which have exhibited the most potential for success.
As a result, two small blocks in the Bohai Bay and the block in the South
China Sea were relinquished. Costs related to these blocks have been moved to
proved oil and gas properties.
Effective September 1, 1999 a third partner who owned a 45% interest in Block
04/36 dropped out of the block. As a result, the Company elected to increase
its proportionate interest from 10% to 18.2%. The operator elected to
increase its proportionate interest from 45% to 81.8%. The Chinese
counterparty to the contract is the China National Offshore Oil Corporation
("CNOOC"), while the other partners are referred to as "Foreign Contractors."
The Foreign Contractors in Block 05/36 are the Company with 15%, the operator
with 50%, and another U.S. independent oil and gas company with 35%. CNOOC is
also the Chinese counterparty to this contract.
30
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
2. OIL AND GAS EXPLORATION CONTRACTS (Cont.)
Oil and gas exploration in the two remaining Bohai Bay blocks is governed by
two separate petroleum contracts. Below is a table listing the Company's
interest in each of the two remaining concessions, the acreage held, the
concession dates and exploration periods.
<TABLE>
<CAPTION>
Block Pendaries Original Current Concession End of
Interest Acreage Acreage Date Exploration
Period
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
04/36 Block 18.2% 560,000 420,000 August 1994 August 2001
05/36 Block 15.0% 416,000 312,000 January 1996 January 2003
</TABLE>
CNOOC has the option to participate for a 51% interest (or to such lesser
extent that CNOOC elects to participate) in the development and production
periods by paying its proportionate share of the development and operating
costs and receiving its proportional share of oil and gas production. The
Foreign Contractors recover all of their exploration costs previously
expended in each block out of a disproportionately higher share of first oil
produced.
Terms of Contracts
Each petroleum contract has a maximum term of 30 years. The contracts are
divided into three periods: the exploration period, the development period
and the production period.
Exploration Period
Work to be performed and expenditures to be incurred during the exploration
period, which consists of three phases totaling seven years, are the
exclusive responsibility of the Foreign Contractors. The Foreign Contractors
are obligated to drill a specified number of wells in each block during the
three exploration phases.
During the first three years of the exploration period, the Foreign
Contractors were obligated to incur minimum exploration expenditures of $5
million in each of the Bohai Bay blocks and $6 million in the South China Sea
contract area. Except for an exploratory well on one of the Bohai Bay blocks
which was dropped in 1999, all minimum exploration expenditures have been met
as at December 31, 1999. The operator is currently negotiating with its
Chinese counterpart the consideration, if any, regarding the unfulfilled
commitment.
31
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
2. OIL AND GAS EXPLORATION CONTRACTS (Cont.)
During the following two years of the exploration period, the Foreign
Contractors must incur minimum exploration expenditures of $3 million in
the 04/36 Block and the 05/36 Block. This minimum expenditure has been met
on Block 04/36 and will be met on Block 05/36 during 2000. The Company did
not enter into this phase on the three blocks that were dropped during 1999
and therefore, incurred no commitments or obligations.
During the last two years of the exploration period, the Foreign
Contractors are obligated to minimum exploration expenditures of $2.5
million in the 04/36 Block and $3 million in the 05/36 Block. This minimum
expenditure has been met on Block 04/36. This phase has not been reached on
Block 05/36.
Development Period
The development period for any field discovered during the exploration
period commences on the date of approval by the Ministry of Energy of the
development plan for an oil and/or gas field and has no limit on the time
required to develop a field.
Production Period
The production period of any oil and/or gas field in a block is a period of
15 consecutive years commencing on the date of commencement of commercial
production from the field.
Relinquishment
At the end of the first phase of the exploration period, the Foreign
Contractors must relinquish 25% of the contract area, excluding the
development or production areas. At the end of the second phase of the
exploration period, the Foreign Contractors are obligated to relinquish 25%
of the remaining contract area after subtracting each development area
and/or production area therefrom. At the end of the last phase of the
exploration period, the Foreign Contractors must relinquish all contract
areas not under development or production. Upon completion of all work and
financial obligations, the Foreign Contractors may relinquish their entire
interest in any block at the end of each exploration period. Due to the
extensive exploration efforts expended on Block 04/36, CNOOC granted
permission for entry into the second phase with no relinquishment, with the
second phase extending to August 1999.
32
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
2. OIL AND GAS EXPLORATION CONTRACTS (Cont.)
Upon entry into the third phase on Block 04/36 in September 1999, the
Foreign Contractors relinquished 25% of the acreage in this block. Also, in
March 1999 the Foreign Contractors entered into phase two on Block 05/36
and relinquished 25% of the acreage in that block. The Company does not
believe that the relinquished acreage was detrimental to the prospectivity
of either block.
3. MURPHY AGREEMENT
On April 24, 1998, Sino-American and the Company entered into an agreement
with Murphy Exploration & Production Company ("Murphy") to purchase its 45%
interest in the 04/36 Block (the "Murphy Agreement") which was extended to
December 21, 1998 and then to March 22, 1999. The Murphy Agreement provided
that the Company would pay a total of $38 million for Murphy's interest,
$35 million of the consideration was to be paid in cash and $3 million in
Pendaries Common Shares. Due to the adverse change in the condition of the
oil and gas industry subsequent to the signing of the Murphy Agreement, the
Company elected on March 22, 1999 to let the agreement expire. The
Company's non-refundable deposit of $1 million paid to Murphy in April 1998
was recorded as an additional investment in its oil and gas properties
related to this opportunity to increase its interest in Block 04/36.
4. COMMON SHARES
Pendaries Common Shares
The authorized share capital of Pendaries consists of an unlimited number
of common shares.
The Company completed an initial public offering in Canada on December 12,
1996 whereby 2,700,000 shares were sold with net proceeds to Pendaries of
$20,805,658. The funds were used to purchase Class B shares of Sino-
American. In January 1997, one of the underwriters exercised its option to
purchase 375,000 additional shares of Pendaries for net proceeds of
$2,823,247. In the fourth quarter of 1997, the same underwriter exercised
an option to purchase an additional 250,000 common shares resulting in
proceeds to Pendaries of $1,912,679.
Additionally, in 1997, 326,500 shares of Sino-American were issued for
proceeds to Sino-American of $456,924 through exercise of outstanding stock
options of Sino-American. The Sino-American shares were subsequently
exchanged for an equal number of common shares of Pendaries pursuant to the
Exchange Rights Agreement described in Note 1.
33
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
4. COMMON SHARES (Cont.)
Pendaries' U.S. registration statement filed on Form 20-F was declared
effective by the U.S. Securities and Exchange Commission in June 1998. This
permitted the Company to list its common shares for trading on the American
Stock Exchange. In the third quarter of 1998, the Company wrote-off
$299,397 in deferred registration costs related to the Company's initial
cross-border public offering in the Unites States which was canceled.
In 1998, 40,500 Sino-American shares were issued for proceeds to Sino-
American of $42,000 through the exercise of outstanding stock options of
Sino-American. The Sino-American shares were subsequently exchanged for an
equal number of Pendaries common shares pursuant to the Exchange Rights
Agreement described in Note 1.
Pendaries issued 4,000 common shares valued at $49,030 in 1997 to its non-
executive employees and 15,000 common shares valued at $131,081 in January
1998 to its non-management (outside) directors.
In February 1999, the outside directors of Pendaries were granted 47,500
shares as compensation attributable to 1998. The value of the share
compensation was $28,209, which was accrued at December 31, 1998. In
addition, in 1999, 50,000 Sino-American stock options were exercised and
exchanged for 50,000 shares of Pendaries common stock. The options were
exercised for $1 per share and Sino-American received $50,000 in payment
for the options.
Warrants
In consideration for certain stock offering costs, Sino-American issued
warrants to a certain underwriter to purchase 115,000 common shares for an
exercise price of $12.00 Canadian dollars each. These warrants were
exercised in 1997 for proceeds to Sino-American of U.S. $944,488.
34
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
4. COMMON SHARES (Cont.)
Stock Option Agreements
At December 31, 1999 and 1998, options outstanding to acquire Pendaries
common shares and Sino-American Class A shares are as follows:
<TABLE>
<CAPTION>
Pendaries
1999 1998
------------------------ -------------------------
Weighted Weighted
Average Average
Common Exercise Common Exercise
Pendaries: Shares Price Shares Price
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 527,000 $10.73 485,000 $11.33
Granted 191,000 .78 79,500 7.51
Exercised - - - -
Expired Unexercised (3,500) 7.51 (37,500) 11.62
------- ------ ------- ------
Outstanding at end of year 714,500 $ 8.09 527,000 $10.73
======= ====== ======= ======
<CAPTION>
Sino-American
1999 1998
----------------------- ------------------------
Weighted Weighted
Average Average
Class A Exercise Class A Exercise
Sino-American: Shares Price Shares Price
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 611,000 $1.51 651,500 $1.49
Granted - - - -
Exercised (50,000) 1.00 (40,500) 1.04
Expired Unexercised (250,000) 1.60 - -
-------- ----- ------- -----
Outstanding at end of year 311,000 $1.52 611,000 $1.51
======== ===== ======= =====
</TABLE>
Of the 714,500 and 311,000 options outstanding under the Pendaries and Sino-
American plans at December 31, 1999, respectively, all have exercise prices
between $.59 and $13.81 U.S. dollars for Pendaries options and between $1.00
and $2.00 for the Sino-American options with a weighted average exercise price
of $8.09 and $1.52 U.S. dollars, respectively, and a weighted average
remaining contractual life of 2.87 and .49 years, respectively. All of these
options are currently exercisable.
35
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
4. COMMON SHARES (Cont.)
The Company uses the intrinsic value method for recognizing compensation
expense related to stock option grants to employees and uses the fair value
method for stock option grants to non-employees.
Dissenter's Claim Settlement
In 1996, as a result of the planned merger of Setsco Resources, Inc. (the
predecessor company to Sino-American) and Sino-American, a shareholder who
held 400,000 common shares of Sino-American exercised his dissenter's
rights which, if the claim had been properly pursued, would have entitled
him to be paid the fair value of such shares. In January 1997, Sino-
American, Pendaries and the dissenting shareholder settled the dispute and
all litigation and claims connected therewith. Pendaries issued 250,000
shares of its common stock to the dissenting shareholder in return for the
400,000 shares of Sino-American held by the dissenting shareholder and his
release from all claims and exchange rights. In connection with this
settlement, the Company canceled 150,000 shares of Sino-American stock.
Stock Option Settlement
In April 1998, in connection with litigation with a former President of
Sino-American over the number of stock options to which the former
President was entitled, the parties entered into a settlement agreement
pursuant to which the former President received $450,000 and agreed to
execute a new Stock Option Agreement reflecting a grant of 100,000 stock
options (the number of stock options the Company claimed had originally
been granted) and, with the exception of certain restrictions not imposed
on other option holders, containing terms substantially similar to those
contained in the Stock Option Agreements of all other option holders who
had been granted options prior to 1996.
5. INCOME TAXES
Pendaries and Sino-American have cumulative losses for Canadian and U.S.
income tax purposes of approximately $5,200,000 Canadian and $6,180,000
U.S., respectively. These tax losses are available to reduce future years
Canadian and U.S. taxable income through 2004 and 2013, respectively.
36
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
5. INCOME TAXES (Cont.)
Significant components of the Company's future income tax position are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Future income tax assets (net operating loss carryforward) $ 4,030,000 $ 4,323,000
Valuation allowance (2,100,000) (2,090,000)
----------- -----------
1,930,000 2,233,000
Future income tax liabilities (excess of basis in oil and gas
properties for financial reporting over tax basis) 1,930,000 2,233,000
----------- -----------
Net future income tax liability $ - $ -
=========== ===========
</TABLE>
Canadian GAAP requires that future income tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all
of the future income tax assets will not be realized. As such, the Company
has recorded a valuation allowance of $2,100,000 as of December 31, 1999
and $2,090,000 as of December 31, 1998.
6. LOSS PER SHARE
Basic loss per common share is calculated on the basis of 8,848,840 (1998 -
8,780,388, 1997 - 8,366,811) weighted average common shares outstanding.
Fully diluted loss per common share is calculated on the basis of 9,874,340
(1998 - 9,918,388, 1997 - 9,503,311) weighted average common shares
outstanding. This reflects the effects of share options and warrants
outstanding at December 31, 1999, 1998 and 1997. The Company's stock
options and warrants were not included in the computation of fully diluted
loss per share because to do so would have been antidilutive for the
periods presented.
RELATED PARTY TRANSACTIONS
During 1999, there were no material transactions between the Company and
its directors, executive officers or known holders of greater than five
percent of the Company's Common Stock.
37
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
8. COMMITMENTS AND CONTINGENCIES
A substantial portion of the Company's operations and reserves are located
in China, and therefore, are subject to certain risks relating to economic
and political stability in China and the surrounding region. The Company is
exposed to certain risks due to its concentration of Chinese operations,
which include possible changes in Chinese laws, particularly relating to
foreign investments and taxation, renegotiation or modification of existing
contracts, and expropriation. Adverse developments in China and future
changes in Chinese governmental regulations and policies could have a
material adverse effect on the Company. The Company does not insure against
loss of production or political risks.
i. Lease Commitments
At December 31, 1999, the Company had operating leases covering
office space in Houston, Texas. Future minimum lease payments
under these operating leases in aggregate are as follows:
2000 $ 72,485
2001 72,485
2002 60,404
--------
$205,374
========
ii. Exploration Commitments
The Company has obligations to fulfill certain commitments during
the exploratory phase of its oil and gas concession contracts in
the People's Republic of China (see Note 2).
iii. Environmental Matters
The Company's operations are subject to various laws and
regulations relating to the protection of the environment, which
have become increasingly stringent. Management believes the
Company's operations are in compliance with current environmental
laws and regulations. There are no environmental claims pending
or, to management's knowledge, threatened against the Company.
There can be no assurance, however, that current regulatory
requirements will not change, unforeseen environmental incidents
will not occur or past non-compliance with environmental laws
will be discovered on the properties.
38
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
9. SEGMENT INFORMATION
Pendaries Petroleum Ltd. is an independent oil and gas company engaged in
the exploration and development of oil and natural gas properties.
Information about the Company's operations by geographic area for the years
ended December 31,1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------ ------------
<S> <C> <C> <C>
China
Revenues $ - $ - $ -
Depreciation, depletion and amortization - - -
Operating profit (loss) - - -
Capital expenditures 1,098,526 4,843,827 7,739,641
Identifiable assets $ 20,326,821 $ 19,162,952 $ 14,445,739
Canada
Revenues $ 347,653 $ 464,833 $ 606,922
Depreciation, depletion and amortization 131,652 259,054 300,931
Operating profit (loss) (68,061) (1,116,924) (1,382,327)
Capital expenditures - - 24,608
Identifiable assets $ 903,226 $ 2,861,234 $ 4,118,842
United States
Revenues $ - $ - $ -
Depreciation and amortization 30,693 32,280 20,373
Operating profit (loss) (1,088,341) (1,593,454) 116,345
Capital expenditures 65,343 24,727 80,678
Identifiable assets $ 6,451,715 $ 6,817,824 $ 12,934,995
Total
Revenues $ 347,653 $ 464,833 $ 606,922
Depreciation, depletion and amortization 162,345 291,334 321,304
Operating profit (loss) (1,156,402) (2,710,378) (1,265,982)
Capital expenditures 1,163,869 4,868,554 7,844,927
Identifiable assets $ 27,681,762 $ 28,842,010 $ 31,499,576
</TABLE>
39
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
10. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1999
result from interest receivable from financial institutions. The cash
investments are made with large, financially sound financial institutions in
low-risk investments. Therefore, credit risk is negligible.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short-term trade receivables and payables. The carrying amount of cash,
trade receivables and payables approximates fair market value due to the
highly liquid nature of these short-term instruments.
12. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements are expressed in U.S. dollars and
are prepared in accordance with generally accepted accounting principles in
Canada ("Canadian GAAP") which conform in all material respects with those
in the United States ("U.S. GAAP") for the years presented, except as
outlined below.
Oil and Gas Properties
In Canada, if the net capitalized costs of oil and gas properties in a cost
center exceed an amount equal to the sum of the estimated future net
revenues from proved oil and gas reserves in the cost center and the costs
of properties not being amortized, both adjusted for income tax effects,
such excess is charged to expense. Also, the total capitalized costs of all
cost centers are subject to a further recoverability test which includes,
among other things, 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 gas properties in a
cost center exceed an amount equal to the sum of the estimated discounted
present value at 10% of future net revenues from proved oil and gas reserves
in the cost center and the costs of properties not being amortized, both
adjusted for income tax effects, such excess is charged to expense. Included
in the estimated future net cash flows are Canadian provincial tax credits
expected to be realized beyond the date at which the legislation, under its
provisions, could be repealed. To date, the Canadian provincial government
has not indicated an intention to repeal this legislation.
40
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
12. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Cont.)
In 1998, if U.S. GAAP had been applied instead of Canadian GAAP, the Company
would have recognized an impairment of its oil and gas properties in the
amount of $549,555 in Canada and $2,195,799 in China. There is no such
impairment in 1999 and 1997. These amounts are reflected in the summary
shown below as impairment of oil and gas properties. All Canadian oil and
gas properties were sold in November 1999. All amounts are in thousands
except for per share data and weighted average common shares outstanding.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Loss according to financial statements,
Canadian GAAP $ (1,156) $ (2,710) $ (884)
Increase due to U.S. GAAP impairment of oil and gas properties - (2,745) -
---------- ---------- ----------
Approximate loss in accordance with U.S. GAAP (1,156) (5,455) (884)
---------- ---------- ----------
Retained deficit, beginning of period (6,564) (1,109) (225)
---------- ---------- ----------
Retained deficit, end of period $ (7,720) $ (6,564) $ (1,109)
========== ========== ==========
Loss per share:
Basic $ (0.13) $ (0.62) $ (0.10)
========== ========== ==========
Diluted $ (0.13) $ (0.62) $ (0.10)
========== ========== ==========
Weighted average common shares outstanding 8,848,840 8,780,388 8,366,811
========== ========== ==========
</TABLE>
Accounting for Stock-Based Compensation
In 1995, the United States Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." With regard to its stock option
plan, the Company applies the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25 as allowed under SFAS No. 123 in
accounting for this plan, and accordingly no compensation expense has been
recognized. Had compensation expense been determined based on the fair value
at the grant dates for the stock option grants consistent with the method of
SFAS No. 123, the Company's loss per common share would have increased to
the pro forma amounts indicated below:
41
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
12. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Cont.)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------- ------------ ------------
(000's omitted except per share and share data)
<S> <C> <C> <C>
Loss:
As reported (thousands) $ (1,156) $ (2,710) $ (884)
Pro Forma (thousands) $ (1,300) $ (2,926) $ (2,309)
Loss per share:
As reported:
Basic $ (0.13) $ (0.31) $ (0.10)
Diluted $ (0.13) $ (0.31) $ (0.10)
Pro Forma:
Basic $ (0.15) $ (0.33) $ (0.27)
Diluted $ (0.15) $ (0.33) $ (0.27)
Stock options issued during period (thousands) -
Pendaries 191 79.5 285
Weighted average exercise price -
Pendaries options granted $ .78 $ 7.51 $ 13.13
Average per option compensation value of
options granted - Pendaries $ .75 $ 2.72 $ 5.00
Compensation cost (thousands) $ 144 $ 216 $ 1,425
</TABLE>
The above amounts were determined in accordance with the Black-Scholes
option pricing model, using the following assumptions: expected volatility
computed using, as of the date of grant, the weekly average of the common
shares as listed on the AMEX which was approximately 113%; expected dividend
yield - 0%; expected option term - 5 years; and a weighted average risk-free
rate of return as of the date of grant as 5.734% based on the yield of five-
year U.S. treasury securities.
Escrowed Shares Compensation Expense
In the U.S., the Securities and Exchange Commission has taken the position
that if shares of stock owned by officers and directors of an issuer are
placed in escrow in connection with such issuer's initial public offering
and if the release of such shares is conditioned upon any criteria other
than the passage of time, then upon the release of the escrowed shares,
compensation expense is required to be recognized by the issuer. The
issuer's financial statements must reflect compensation expense in an amount
equal to the excess of the price (fair value) of the issuer's common stock
at the date of release over the initial public offering price. Certain
officers and directors of the Company were required by the Alberta
Securities Commission to place shares in escrow in connection with the
42
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(all figures are in U.S. dollars unless otherwise noted)
12. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Cont.)
Company's initial public offering in Canada in late 1996. The release of
122,868 of these shares is potentially subject to being recognized as
compensation. No release of such shares has occurred. If the price of the
Company's common stock were to be below the initial offering price at the
time of release, no compensation expense would be recognized.
Comprehensive Income (Loss)
During June 1997, the FASB issued SFAS No. 130, "Comprehensive Income",
which was required to be adopted in the first quarter of 1998. The Statement
requires presentation of comprehensive income (loss), which is traditional
net income (loss) adjusted for certain items reflected as direct charges to
equity. There are no significant reconciling items that would have an effect
on comprehensive income for the three years ended December 31, 1999.
Supplemental Cash Flow Disclosures
The Company paid no interest or taxes during the three year period ended
December 31,1999.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which
deferred the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company does not anticipate that the implementation of
SFAS No. 133 will have a material impact on the consolidated financial
statements.
43
<PAGE>
PENDARIES PETROLEUM LTD.
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
(all figures are in U.S. dollars unless otherwise noted)
Capitalized Costs
Capitalized costs represent total expenditures for proved and unproved mineral
interests and related support equipment and facilities utilized in oil and
natural gas exploration and production activity, together with related
accumulated depreciation, depletion and amortization.
<TABLE>
<CAPTION>
Canada U.S. China Total
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
At December 31, 1999
Proved mineral interests $ - $ - $ 17,761,478 $ 17,761,478
Unproved mineral interests - 65,343 2,500,000 2,565,343
-------------- ----------- ------------- -------------
Gross capitalized costs - 65,343 20,261,478 20,326,821
Accumulated depreciation, depletion and
amortization (-) (-) (-) (-)
-------------- ----------- ------------- ---------------
Net capitalized costs $ - $ 65,343 $ 20,261,478 $ 20,326,821
============== =========== ============= ===============
At December 31, 1998
Proved mineral interests $ 1,966,088 $ - $ 5,924,716 $ 7,890,804
Unproved mineral interests - - 13,238,236 13,238,236
-------------- ----------- ------------- ---------------
Gross capitalized costs 1,966,088 - 19,162,952 21,129,040
Accumulated depreciation, depletion and
Amortization (598,527) (-) (-) (598,527)
-------------- ----------- ------------- ---------------
Net capitalized costs $ 1,367,561 $ - $ 19,162,952 $ 20,530,513
============== =========== ============= ===============
</TABLE>
Costs Not Being Amortized
The following table sets forth a summary by year of incurred costs of unproved
oil and gas properties not being amortized at December 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997 1996 Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Unproved Oil and Gas Properties $65,343 $105,673 $1,103,968 $1,290,359 $2,565,343
</TABLE>
44
<PAGE>
PENDARIES PETROLEUM LTD.
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
(all figures are in U.S. dollars unless otherwise noted)
Costs Incurred
The following table summarizes costs incurred and capitalized in connection with
oil and gas exploration and development activities. Exploration and development
costs include applicable depreciation of support equipment and facilities used
in such activities.
<TABLE>
<CAPTION>
Canada U.S. China Total
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
At December 31, 1999
Proved property acquisitions $ - $ - $ - $ -
Unproved property acquisitions - - - -
Exploration costs - 65,343 1,098,526 1,163,869
------------ ------------ -------------- --------------
Total costs incurred $ - $ 65,343 $ 1,098,526 $ 1,163,869
============ ============ ============== ==============
At December 31, 1998
Proved property acquisitions $ - $ - $ - $ -
Unproved property acquisitions - - - -
Exploration costs - - 4,843,827 4,843,827
------------ ------------ -------------- --------------
Total costs incurred $ - $ - $ 4,843,827 $ 4,843,827
============ ============ ============== ==============
At December 31, 1997
Proved property acquisitions $ - $ - $ - $ -
Unproved property acquisitions - - - -
Exploration costs - - 7,739,641 7,739,641
------------ ------------ -------------- -------------
Total costs incurred $ - $ - $ 7,739,641 $ 7,739,641
============ ============ ============== =============
</TABLE>
45
<PAGE>
PENDARIES PETROLEUM LTD.
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
(all figures are in U.S. dollars unless otherwise noted)
Oil and Gas Reserve Information
The following tables set forth certain unaudited information concerning
Pendaries' proved oil and gas reserves at December 31, 1999, 1998 and 1997.
There are numerous uncertainties inherent in estimating the quantities of proved
reserves and projecting future rates of production and timing of development
expenditures. The following reserve data represents estimates only and should
not be construed as being exact.
<TABLE>
<CAPTION>
Natural Gas
Oil and Natural Gas Liquids (Mbbls) (MMcf)
----------------------------------------- ---------------
China Canada Total Canada
----------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
At December 31, 1996 1,858 116 1,974 968
Purchase of minerals in place - - - -
Extension, discoveries and other additions 2,539 - 2,539 -
Revisions of previous estimates - 7 7 27
Production - (12) (12) (145)
Sale of properties - - - -
-------- -------- -------- --------
At December 31, 1997 4,397 111 4,508 850
======== ======== ======== ========
Purchase of minerals in place - - - -
Extension, discoveries and other additions - - - -
Revisions of previous estimates (2,545) 9 (2,536) 341
Production - (14) (14) (132)
Sale of properties - - - -
-------- -------- -------- --------
At December 31, 1998 1,852 106 1,958 1,059
======== ======== ======== ========
Purchase of minerals in place - - - -
Extension, discoveries and other additions 4,975 - 5,985 -
Revisions of previous estimates 1,010 - - -
Production - (11) (11) (89)
Sale of properties - (95) (95) (970)
-------- -------- -------- --------
At December 31, 1999 7,837 - 7,837 -
======== ======== ======== ========
Proved Developed Reserves
December 31, 1997 - 111 111 850
December 31, 1998 - 106 106 1,059
December 31, 1999 - - - -
</TABLE>
46
<PAGE>
PENDARIES PETROLEUM LTD.
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
(all figures are in U.S. dollars unless otherwise noted)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves
The following table sets forth unaudited information concerning the discounted
future net cash flows from proved oil and gas reserves of Pendaries as of
December 31, 1999, 1998, and 1997, net of income tax expense. Income tax expense
has been computed using assumptions relating to the future tax rates and the
permanent differences and credits under the laws relating to oil and gas
activities at December 31, 1999, 1998 and 1997, and do not take into account
subsequent changes in tax laws. The information should be viewed only as a form
of standardized disclosure concerning possible future cash flows that would
result under the assumptions used, and should not be viewed as indicative of
fair market value.
<TABLE>
<CAPTION>
In Thousands
------------------------------------------
China Canada Total
----------- ------------ ------------
<S> <C> <C> <C>
Standardized measure of discounted future net cash
flows relating to proved reserves, net of income tax
expense as of December 31, 1999:
Future cash flows $ 190,014 $ - $ 190,014
Future production and development costs 65,432 - 65,432
---------- ----------- ----------
Future net inflows before income taxes 124,582 - 124,582
Discount at 10% annual rate 64,048 - 64,048
---------- ----------- ----------
Discounted future net cash flows before income taxes 60,534 - 60,534
Discounted future income taxes 18,765 - 18,765
---------- ----------- ----------
Standardized measure of discounted future net cash flows $ 41,769 $ - $ 41,769
========== =========== ==========
Standardized measure of discounted future net cash
flows relating to proved reserves, net of income tax
expense as of December 31, 1998:
Future cash flows $ 20,986 $ 2,370 $ 23,356
Future production and development costs 12,161 1,011 13,172
---------- ----------- ----------
Future net inflows before income taxes 8,825 1,359 10,184
Discount at 10% annual rate 5,096 541 5,637
---------- ----------- ----------
Discounted future net cash flows before income taxes 3,729 818 4,547
Discounted future income taxes - - -
---------- ----------- ----------
Standardized measure of discounted future net cash flows $ 3,729 $ 818 $ 4,547
========== =========== ==========
</TABLE>
47
<PAGE>
PENDARIES PETROLEUM LTD.
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
(all figures are in U.S. dollars unless otherwise noted)
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------
China Canada Total
-------------- ----------- ----------
<S> <C> <C> <C>
Standardized measure of discounted future net cash
flows relating to proved reserves, net of income tax
expense as of December 31, 1997:
Future cash flows $ 81,348 $ 3,495 $ 84,843
Future production and development costs 30,772 1,484 32,256
---------- --------- ----------
Future net inflows before income taxes 50,576 2,011 52,587
Discount at 10% annual rate 24,892 661 25,553
---------- --------- ----------
Discounted future net cash flows before income taxes 25,684 1,350 27,034
Discounted future income taxes 6,483 243 6,726
---------- --------- ----------
Standardized measure of discounted future net cash flows $ 19,201 $ 1,107 $ 20,308
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------
1999 1998 1997
-------------- ----------- ----------
<S> <C> <C> <C>
Change in standardized measure of discounted future
net cash flows related to proved reserves for the years
ended December 31:
Beginning Balance $ 4,547 $ 20,308 $ 10,554
Sales, net of production costs (100) (289) (366)
Net change in prices and production costs 9,314 (15,278) (3,421)
Extensions and discoveries, net of related costs 39,369 - 14,831
Changes in estimated future development costs (4,376) 3,742 4,536
Revisions of quantity estimates 8,533 (11,043) 75
Sale of minerals in place (1,200) - -
Accretion of discount 373 2,703 1,436
Change in income taxes (18,765) 6,726 (2,922)
Changes in production rate (timing) and other 4,074 (2,322) (4,415)
---------- --------- ----------
Ending Balance $ 41,769 $ 4,547 $ 20,308
========== ========= ==========
</TABLE>
48
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF PENDARIES PETROLUEM LTD.
Sino-American Energy Corporation
Sino-American Overseas Resources Corp.
Pendaries Production, Inc.
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation in
this Form 10-K of our report dated January 28, 1999 included in the Pendaries
Petroleum Ltd. annual consolidated financial statements for the year ended
December 31, 1999 included in this Form 10-K.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 2000
<PAGE>
EXHIBIT 23(b)
CONSENT OF RYDER SCOTT COMPANY
INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation by reference to our reports entitled
"Sino-American Energy Corporation, Estimates Reserves and Future Net Revenue
Attributable to the CFD 2-1 and CFD 11-1 Fields, Bohai Bay, China, Constant and
Escalated Pricing As of January 1, 2000" and to the data extracted from our
reports and the references to our firm relating to Pendaries Petroleum Ltd.
Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ Ryder Scott & Company
RYDER SCOTT & COMPANY
PETROLEUM ENGINEERS
March 6, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PENDARIES PETROLEUM LTD. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,994
<SECURITIES> 0
<RECEIVABLES> 44
<ALLOWANCES> 232
<INVENTORY> 0
<CURRENT-ASSETS> 7,259
<PP&E> 20,499
<DEPRECIATION> (76)
<TOTAL-ASSETS> 27,682
<CURRENT-LIABILITIES> 78
<BONDS> 0
0
0
<COMMON> 32,580
<OTHER-SE> (4,976)
<TOTAL-LIABILITY-AND-EQUITY> 27,682
<SALES> 348
<TOTAL-REVENUES> 325
<CGS> 0
<TOTAL-COSTS> 1,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,156)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
