<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
----------------------
Commission File No. 1-14754
----------------------
PENDARIES PETROLEUM LTD.
(Exact name of registrant as specified in its charter)
----------------------
PROVINCE OF NEW BRUNSWICK, CANADA
(State of other jurisdiction of incorporation)
Internal Revenue Service - Employer Identification No. 52-2051576
8 Greenway Plaza, Suite 910, Houston, TX 77046
(713) 355-2900
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subjected to such
filing requirements for the past 90 days. Yes [X] No [_]
The total number of shares of the registrant's Common Shares, no par value,
outstanding on September 30, 2000 was 9,225,970.
1
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PENDARIES PETROLEUM LTD.
------------------------
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999........................................ 3
Consolidated Statements of Operations and Deficit for
the three and nine months ended September 30, 2000 (Unaudited)
With Comparative Figures for the Preceding Year.......................... 4
Consolidated Statements of Cash Flow for the
nine months ended September 30, 2000 (Unaudited)
With Comparative Figures for the Preceding Year.......................... 5
Notes to Consolidated Financial Statements (Unaudited)................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... None
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 16
Item 2. Changes in Securities and Use of Proceeds................................ 16
Item 3. Defaults Upon Senior Securities.......................................... 16
Item 4. Submission of Matters to a Vote of Security Holders...................... 16
Item 5. Other Information........................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................... 16
SIGNATURES............................................................................. 17
</TABLE>
2
<PAGE>
Item 1. FINANCIAL STATEMENTS
PENDARIES PETROLEUM LTD.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, 2000 and December 31, 1999
----------------------------------------
(All figures are in U.S. dollars)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 897,764 $ 6,983,680
Accounts receivable - 43,577
Prepaid expenses and other assets 96,258 231,651
----------- -----------
994,022 7,258,908
----------- -----------
PROPERTY AND EQUIPMENT
Oil and gas properties, recorded under the full cost method
Proved 22,824,526 17,761,478
Unproved 2,626,003 2,565,343
Furniture, fixtures and office equipment 233,660 172,517
Accumulated depreciation, depletion and amortization (106,683) (76,484)
----------- -----------
Net property and equipment 25,577,506 20,422,854
----------- -----------
Total assets $26,571,528 $27,681,762
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 109,049 $ 36,845
Accrued liabilities 33,211 40,962
----------- -----------
Total current liabilities 142,260 77,807
----------- -----------
SHAREHOLDERS' EQUITY
Common shares
Authorized, unlimited number of common shares
Issued 9,225,970 and 8,879,470 common shares, respectively 33,056,488 32,580,051
Retained deficit (6,627,220) (4,976,096)
----------- -----------
Total shareholders' equity 26,429,268 27,603,955
----------- -----------
Total liabilities and shareholders' equity $26,571,528 $27,681,762
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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PENDARIES PETROLEUM LTD.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(All figures are in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three-Month Nine-Month
Period Ended Period Ended
September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUE
Oil and gas revenue $ - $ 149,726 $ - $ 321,796
------------- ---------- ----------- ------------
EXPENSES
Oil and gas operating expenses - 56,145 - 213,031
General and administrative expenses 357,324 319,021 1,197,541 1,075,100
Depreciation, depletion and amortization 10,853 50,323 30,199 140,374
Capital raising costs 550,632 - 550,632 -
Exchange (gain) / loss 6,008 (4,058) 35,018 (38,721)
------------- ---------- ----------- ------------
$ 924,817 $ 421,431 $ 1,813,390 $1,389,784
------------- ---------- ----------- ------------
OTHER INCOME
Interest income 24,220 76,478 162,266 241,292
------------- ---------- ----------- -----------
NET LOSS $(900,597) $(195,227) $(1,651,124) $ (826,696)
============= ========== ============ ===========
NET LOSS PER SHARE
Basic $ (.10) $ (.02) $ (.18) $ (.09)
============= ========== ============ ===========
Fully diluted $ (.10) $ (.02) $ (.18) $ (.09)
============= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
PENDARIES PETROLEUM LTD.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
------------------------------------
(Unaudited)
(All figures are in U.S. dollars)
<TABLE>
<CAPTION>
For the For the
Nine-Month Nine-Month
Period Ended Period Ended
September 30, September 30,
2000 1999
-------------- ---------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,651,124) $ (826,696)
Items not affecting cash
Depreciation, depletion and amortization 30,199 140,374
Directors' share compensation 30,000 -
Changes in non-cash working capital items --
Accounts receivable 43,577 (80,382)
Accounts payable 72,204 (5,454)
Accrued liabilities (7,751) (53,069)
Prepaid expenses and other assets 135,393 (14,297)
----------- -----------
Net cash used in operating activities (1,347,502) (839,524)
----------- -----------
CASH FLOW USED IN INVESTING ACTIVITIES
Net additions to proved and unproved oil and gas properties (5,123,708) (797,385)
Additions to furniture, fixtures and office equipment (61,143) 557
----------- -----------
Net cash used in investing activities (5,184,851) (796,828)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from exercise of common stock options 446,437 50,000
----------- -----------
Net cash provided by financing activities 446,437 50,000
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (6,085,916) (1,586,352)
CASH AND CASH EQUIVALENTS, beginning of period 6,983,680 7,873,280
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 897,764 $ 6,286,928
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
PENDARIES PETROLEUM LTD.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
(Unaudited)
(All figures are in U.S. dollars)
1. SUBSEQUENT EVENTS
-----------------
Effective October 13, 2000, the Company entered into a definitive agreement
with Ultra Petroleum Corp. ("Ultra") pursuant to which Ultra proposes to
acquire all of the outstanding common shares of Pendaries in exchange for
common shares of Ultra. Upon completion of the transaction, Pendaries will
become a wholly-owned subsidiary of Ultra and existing Pendaries
shareholders will own approximately 21% of the outstanding shares of Ultra
after the transaction.
Under the agreement, Ultra will issue 1.58 shares of its common stock for
each one share of Pendaries common stock. Based on the number of Pendaries
common shares outstanding (including 264,500 outstanding in-the-money
Pendaries stock options), Ultra will issue an aggregate of approximately 15
million shares of its common stock to the holders of Pendaries common
stock. The average closing price of Ultra's shares on the Toronto Stock
Exchange ("TSE") for the 10 days prior to the signing of the agreement was
U.S. $2.64 and the average closing price of Pendaries' shares on the
American Stock Exchange ("AMEX") for the preceding 10 days prior to the
signing of the agreement was U.S. $3.18. Ultra will continue to be listed
on the TSE after the closing. Ultra has applied to be listed on the AMEX,
but there can be no assurance that Ultra's application will be accepted.
Listing on AMEX is not a condition to closing the arrangement.
In conjunction with this agreement, but not conditional upon its closing,
Ultra has provided a U.S. $5.0 million line of credit to Pendaries'
subsidiary, Sino-American Energy Corporation ("Sino-American"). The line of
credit bears interest at the prime rate of Bank One, Texas N. A. The credit
facility is fully guaranteed by Pendaries and secured by all of the stock
of Sino-American. Under the terms of the credit facility, any amounts
borrowed by Sino-American must be repaid by December 31, 2001 unless
extinguished by an earlier closing of the arrangement with Ultra.
Following completion of the arrangement, the senior management of Ultra
will consist of Michael Watford as Chairman, CEO and President, Bobby Fogle
(currently Pendaries' Vice-President, Finance) as Vice-President,
Accounting and Fox Benton, III as Vice-President, Finance. In addition,
upon completion of the arrangement, Robert Rigney will be appointed as a
director of Ultra, and at the next meeting of Ultra shareholders following
completion of the arrangement, a second current member of our board of
directors will be nominated for election as a director of Ultra. Mr. Rigney
will also serve as a consultant to Ultra.
The transaction will be completed pursuant to a plan of arrangement (the
"Arrangement") which must be approved by The Court of Queen's Bench of New
Brunswick, Canada. The transaction is subject to customary conditions,
including approval of the shareholders of both Pendaries and Ultra, and is
expected to close in early 2001. A proxy circular in respect of the
Pendaries shareholders' meeting is expected to be mailed to shareholders
following clearance by the U. S. Securities and Exchange Commission later
this year. Ultra has agreed to hold its shareholders' meeting on or before
December 15, 2000.
During the course of the nine months ended September 30, 2000, the Company
incurred $550,632 in costs associated with its financing efforts, the share
exchange agreement and line of credit agreement with Ultra. The Company's
financing efforts included an extensive effort to raise capital through a
private placement of equity as well as the preparation of the documents for
a shareholders' rights offering. When the decision was made to enter into
an arrangement agreement with Ultra, all such costs were expensed.
6
<PAGE>
The Company's future success is dependent upon securing additional
financing to fund its exploration program and operations. The inability to
obtain additional financing would substantially impact the Company's
ability to continue as a going concern. While Pendaries expects to close
the transaction with Ultra in early 2001, the Company has been informed by
Arthur Andersen LLP, its independent public accountants, that if the
transaction does not close before the Company files its December 31, 2000
financial statements and is unable to secure additional financing, their
report on those statements will include an explanatory paragraph expressing
uncertainty regarding the Company's ability to continue as a going concern.
2. NATURE OF OPERATIONS
--------------------
Pendaries Petroleum Ltd. ("Pendaries" or "the Company"), a New Brunswick,
Canada corporation, is a holding company whose primary interests are in
exploration, development and production of oil and gas properties in the
People's Republic of China.
3. NATURE OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
------------------------------------------------------
The Company completed an initial public offering and became a public
company in Canada on December 12, 1996.
The consolidated interim financial statements included herein have been
prepared by the Company without audit and reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
the results of the interim period pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). These statements are
presented on a basis consistent with annual audited consolidated financial
statements. Certain information, accounting policies and footnote
disclosures normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have been
omitted, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated interim
financial statements should be read in conjunction with the consolidated
financial statements and the summary of significant accounting policies and
notes thereto included in the Company's latest annual report on Form 10-K
for the year ended December 31, 1999 filed with the SEC.
The consolidated financial statements include the accounts of Pendaries,
Pendaries Production, Inc., Sino-American Energy Corporation (Sino-
American) and Sino-American Overseas Energy Corporation. All significant
intercompany transactions and balances have been eliminated.
The Company's registration statement filed on Form 20-F was declared
effective by the U.S. SEC in June 1998. This permitted the Company to list
its common shares for trading on the American Stock Exchange.
7
<PAGE>
4. OIL AND GAS PROPERTIES - ALBERTA, CANADA
----------------------------------------
In November 1996, the Company purchased an interest in three producing oil
and gas properties located in Alberta, Canada for $1,966,088. In November
1999, Pendaries sold all of its interest in the Alberta properties for
approximately $1,200,000, which approximated its book value. The Company
used the proceeds to partially fund exploration and development activities
in its two core Bohai Bay blocks.
5. OIL AND GAS PROPERTIES - CHINA
------------------------------
At the end of 1998, the Company owned an interest in five oil and gas
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 is the operator of all five blocks. The Company, the operator,
and in one concession an additional partner, as owners of the working
interests, serve as the foreign contractors under 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 the
Company and the operator decided to concentrate their 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, the
Company and the operator relinquished the other two smaller blocks in the
Bohai Bay and the block in the South China Sea.
Originally three companies held interests in Block 04/36. Effective
September 1, 1999, Murphy Exploration & Production Company ("Murphy"),
which owned a 45% interest in Block 04/36, dropped out of the block. This
allowed Pendaries and Kerr-McGee, the two remaining foreign contractors, to
pick up Murphy's interest without cost, other than the obligation to pay
their increased proportional shares of prospect expenses. As a result, the
Company increased its proportionate interest from 10% to 18.2%. The
operator, Kerr-McGee, increased its proportionate interest from 45% to
81.8%. Thus, the Company 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 under the contract.
In Block 05/36, Pendaries owns 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 under this petroleum contract as well.
Oil and gas exploration in the two Bohai Bay blocks are governed by
separate petroleum contracts. The table below provides details on the
Company's interest in each of each of these two concessions.
8
<PAGE>
Block Pendaries Original Current Concession End of
Interest Acreage Acreage Date Exploration
Period
------------------------------------------------------------------------
04/36 Block 18.2% 560,000 454,000 August August
1994 2001
05/36 Block 15.0% 416,000 312,000 January January
1996 2003
In each block, CNOOC has the option to obtain as much as a 51% working
interest during 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 exploration costs, they receive up to a 68%
share of the oil and gas produced (rather than the 45% share that they
would otherwise be entitled to) until they have recovered these exploration
costs.
Block 04/36 contains the discovery field, the CFD 2-1, on which one
exploration and three successful appraisal wells were drilled in 1996 and
1997. In addition, a successful discovery well was drilled on the CFD 11-1
field in late 1999 and was followed by two successful appraisal wells in
early 2000. On block 05/36, one field, the CFD 12-1, has been discovered to
date. The successful discovery well was drilled in mid 2000 and was
followed by a successful appraisal well in the third quarter of 2000.
3-D seismic has been shot over the CFD 2-1 field and is currently being
shot over an area which covers both the CFD 11-1 and the CFD 12-1 fields,
as well as nine other prospects in the area. After the 3-D seismic data is
analyzed (expected to be finished in the first quarter of 2001), the
Company and its partners plan to drill 8 to 15 wells in 2001.
6. RELINQUISHMENT
--------------
At the end of phase one of the exploration period, the foreign contractors
must relinquish 25% of the contract area acreage, 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 acreage, 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 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 acreage. On March 16, 2000,
approximately 34,000 acres were added back to the block in an area where
the block line had divided a prospect.
In March 1999, the foreign contractors entered into phase two on Block
05/36 and relinquished 25% of the contract area acreage. Management does
not believe that the potential for production on either block was harmed by
the relinquishment of the contract areas.
9
<PAGE>
The Company anticipates that block 04/36 will go into the development phase
once the exploration period ends and that CNOOC will approve the
development plan. The Company believes the foreign contractors will have
met all the exploration commitments on block 04/36 before the exploration
period expires.
7. COMMON SHARES
-------------
Issuance of Stock Options
-------------------------
On March 9, 1999, certain outside directors of the Company were granted
stock options for a total of 84,500 common shares. The exercise price was
$.59 per common share and the options expire on March 9, 2004. On April
20, 2000, certain directors, officers and employees of the Company were
issued options to purchase an aggregate of 122,000 common shares. The
exercise price was $2.00 per common share, the market price on the date of
issuance, with an expiration date of April 20, 2005.
No stock options were granted in the third quarter of 1999 or 2000.
Issuance of Common Shares
-------------------------
On March 9, 1999, certain outside directors of the Company were issued
47,500 common shares as compensation, the value of which was $28,209. On
April 20, 2000, certain outside directors of the Company were issued 15,000
common shares as compensation valued at $2.00 per common share for a total
of U.S. $30,000.
No compensatory shares were issued in the third quarter of 1999 or 2000.
Stock Option Exercise and Cancellations
----------------------------------------
In the third quarter of 2000, 90,000 Sino-American options with an exercise
price of $1.25 were exercised. As of September 30, 2000, 28,000 Sino-
American options expired unexercised. After these exercises and
expirations, no Sino-American options remain outstanding. Also in the third
quarter of 2000, 22,600 Pendaries options were exercised with an exercise
price of $.59. At September 30, 2000, the number of outstanding shares was
9,225,970 and the number of outstanding shares on a fully diluted basis was
9,801,470. Of the 575,500 options outstanding, 264,500 are in-the-money
with exercise prices ranging from $.59 to $2.00.
8. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
------------------------------------------------------------------------
These consolidated financial statements are expressed in U.S. dollars,
which is the functional currency in all areas of operation, and are
prepared in accordance with generally accepted accounting principles in
Canada ("Canadian GAAP") which conform in all material respects with those
in the United States ("U.S. GAAP") for the years presented, except as
outlined below.
10
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Oil and Gas Properties
----------------------
In Canada, if the net capitalized costs of oil and gas properties in a cost
center exceed an amount equal to the sum of estimated future net revenues
from proved oil and gas reserves in the cost center and the costs of
properties not being amortized, both adjusted for income tax effects, such
excess is charged to expense. Also, the total capitalized costs of all
cost centers are subject to a further recoverability test which includes,
among other things, provision for site development and restoration and
future general, administrative and financial costs. This is not consistent
with U.S. GAAP. For U.S. GAAP, if the net capitalized costs of oil and gas
properties in a cost center exceed an amount equal to the sum of estimated
discounted present value at 10% of future net revenues from proved oil and
gas reserves in the cost center and the costs of properties not being
amortized, both adjusted for income tax effects, such excess is charged to
expense. Included in the estimated future net cash flows are Canadian
provincial tax credits expected to be realized beyond the date at which the
legislation, under its provisions, could be repealed. To date, the Canadian
provincial government has not indicated an intention to repeal this
legislation.
There were no material differences between Canadian GAAP and U.S. GAAP
during the quarters and nine months ended September 30, 2000 and 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements included elsewhere in this report
and with the Company's Annual Report filed on Form 10-K for the year ended
December 31, 1999.
11
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999:
The Company incurred a net loss of $900,597 ($.10) and $195,227 ($.02) for the
quarters ended September 30, 2000 and 1999, respectively. The $705,370 increase
in net loss was a result of the following:
Oil and gas revenue from the Company's properties located in Alberta, Canada of
$149,726 in the third quarter of 1999 was zero for the same period in 2000 due
to the sale of these oil and gas properties in November of 1999. Oil and gas
operating expenses of $56,145 for the third quarter of 1999 were zero for the
same period in 2000 for the same reason.
General and administrative expense increased from $319,021 in the third quarter
of 1999 to $357,324 in the third quarter of 2000. The $38,303 increase was
mainly due to outside professional costs and losses on currency transactions.
Depreciation, depletion and amortization decreased by $39,470 from $50,323 in
1999 to $10,853 in 2000 due to the sale of the Canadian oil and gas properties.
During the course of the three months ended September 30, 2000, the Company
incurred $448,137 in costs associated with its financing efforts, the share
exchange agreement and line of credit agreement with Ultra. The Company's
financing efforts included an extensive effort to raise capital through a
private placement of equity as well as the preparation of the documents for a
shareholders' rights offering. When the decision was made to enter into a share
exchange agreement with Ultra, all such costs, in addition to $102,495 from the
second quarter of 2000, were expensed. There were no such costs in 1999.
The Company incurred an exchange loss of $6,008 for the three months ending
September 30, 2000 as compared to an exchange gain of $4,058 in the same period
of 1999 due to the strengthening of the U.S. dollar in relation to the Canadian
dollar in the 2000 period.
Interest income decreased by $52,258 from $76,478 in the third quarter of 1999
to $24,220 in the third quarter of 2000. The decrease was due to the reduction
of cash available for investment in the 2000 period.
Nine Months Ended September 30, 2000 and 1999:
The Company incurred a net loss of $1,651,124 ($.18) and $826,696 ($.09) for the
nine months ended September 30, 2000 and 1999, respectively. The $824,428
increase in net loss was due to the following:
Oil and gas revenue from the Company's properties located in Alberta, Canada of
$321,796 for the nine months ended September 30, 1999 was zero for the same
period in 2000 due to the sale of these Canadian properties in November of 1999.
For the same reason, oil and gas operating expenses of $213,031 for the nine
months ended September 30, 1999 were zero for the same period in 2000.
12
<PAGE>
General and administrative expense increased from $1,075,100 in the first nine
months of 1999 to $1,197,541 for the comparable period of 2000. The $122,441
increase was due to increased outside professional costs.
Depreciation, depletion and amortization decreased by $110,175 from $140,374 in
1999 to $30,199 in 2000 due to the sale of the Canadian oil and gas properties
in November 1999.
During the course of the nine months ended September 30, 2000, the Company
incurred $550,632 in costs associated with its financing efforts, the share
exchange agreement and line of credit agreement with Ultra. The Company's
financing efforts included an extensive effort to raise capital through a
private placement of equity as well as the preparation of the documents for a
shareholders' rights offering. When the decision was made to enter into a share
exchange agreement with Ultra, all such costs were expensed. There were no such
costs in 1999.
The Company incurred an exchange loss of $35,018 for the nine months ended
September 30, 2000 as compared to an exchange gain of $38,721 in the same period
of 1999 as a result of the strengthening of the U.S. dollar against the Canadian
dollar in the 2000 period.
Interest income decreased by $79,026 from $241,292 in the nine month period of
1999 to $162,266 in the same period of 2000. The decrease was due to the
reduction of cash available for investment in the 2000 period.
LIQUIDITY AND CAPITAL RESOURCES
From inception (July 5, 1994) the Company's equity transactions by year are
shown below. Of the total, $31,504,198 represents cash raised by issuance of
common equity, $1,325,000 represents oil and gas properties paid for by issuance
of common equity, and $227,290 represents services paid for by issuance of
common equity.
<TABLE>
<CAPTION>
Common
Share Exercise of Exercise of
Period Equity Warrants Options Total
---------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995 $ 3,287,500 $ - $ - $ 3,287,500
1996 22,812,658 - 20,000 22,832,658
1997 68,000 944,488 5,196,115 6,208,603
1998 131,081 - 42,000 173,081
1999 28,209 - 50,000 78,209
Through September 30,
2000 30,000 - 446,437 476,437
----------- -------- ---------- -----------
Totals $26,357,448 $944,488 $5,754,552 $33,056,488
=========== ======== ========== ===========
</TABLE>
13
<PAGE>
During the same periods the Company incurred capital expenditures as follows:
Canada Furniture,
Oil and China Fixtures
Gas Oil and Gas and
Period Properties Properties Equipment Total
------ ---------- ---------- --------- -----
1995 $ - $ 3,597,631 $ 59,758 $ 3,657,389
1996 1,966,088 2,981,853 62,613 5,010,554
1997 - 7,739,641 105,286 7,844,927
1998 - 4,843,827 (57,719) 4,786,108
1999 (1,966,088)/(1)/ 1,163,869 (2,579) (804,798)
Through September 30,
2000 - 5,123,708 66,301 5,190,009
---------- ----------- -------- ------------
Totals $ - $25,450,529 $233,660 $ 25,684,189
=========== =========== ======== ============
(1) The Company received proceeds from the sale of its Canadian
properties of $1,200,000.
The difference of $766,088 is due to accumulated depletion on the
properties.
14
<PAGE>
After capital expenditures and funds used in operations, the Company had cash of
approximately $900,000 at September 30, 2000. In conjunction with the definitive
agreement with Ultra, Ultra has provided a U.S. $5.0 million line of credit to
the Company's subsidiary, Sino-American. The line of credit bears interest at
the prime rate of Bank One, Texas N.A. The credit facility is fully guaranteed
by the Company and secured by all of the stock of Sino-American. Under the terms
of the credit facility, any amounts borrowed by Sino-American must be repaid by
December 31, 2001 unless extinguished by an earlier closing of the share
exchange with Ultra.
The Company anticipates that it will have access to the full $5.0 million
provided under the line of credit from Ultra and it should be able to meet all
of its commitments for capital expenditures and general and administrative
expenses through the end of the first quarter of 2001, and possibly into the
middle of the second quarter of 2001. If for some reason the share exchange and
arrangement with Ultra were not to close, then the Company may be unable to find
another source of capital to continue operations. If the Company finds any new
capital source, that party would have to provide sufficient funds to fully pay
off the Ultra line of credit. While Pendaries expects to close the transaction
with Ultra in early 2001, the Company has been informed by Arthur Andersen LLP,
its independent public accountants, that if the transaction does not close
before the Company files its December 31, 2000 financial statements and is
unable to secure additional financing, their report on those statements will
include an explanatory fourth paragraph expressing uncertainty regarding the
Company's ability to continue as a going concern.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, sources and adequacy of
future capital, capital expenditures, drilling activity, acquisition plans and
proposals and dispositions, development activities, cost savings, production
efforts and volumes, hydrocarbon reserves, hydrocarbon prices, liquidity,
regulatory matters and competition. Such forward-looking statements generally
are accompanied by words such as "plan," "estimate," "expert," "predict,"
"anticipate," "projected," "should," "assumed," "believe," or other words that
convey the uncertainty of future events or outcomes. Such forward-looking
information is based upon management's current plans, expectations, estimates
and assumptions and is subject to a number of risks and uncertainties that could
significantly affect current plans, anticipated actions, the timing of such
actions and the Company's financial condition and results of operations. As a
consequence, actual results may differ materially from expectations, estimates
or assumptions expressed in or implied by any forward-looking statements made by
or on behalf of the Company. Among the factors that could cause actual results
to differ materially are: lack of capital to meet the Company's commitments,
fluctuations of the prices received or demand for the Company's oil and natural
gas, the uncertainty of drilling results and reserve estimates, operating
hazards, acquisition risks, requirements for capital, general economic
conditions, competition and government regulations, as well as the risks and
uncertainties discussed in this Quarterly Report, including, without limitation,
the portions referenced above, and the uncertainties set forth from time to time
in the Company's other public reports, filings and public statements.
15
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PART II -OTHER INFORMATION
Item 1. Legal Proceedings - N/A
Item 2. Changes in Securities - N/A
Item 3. Defaults Upon Senior Securities - N/A
Item 4. Submission of Matters to a Vote of Security Holders - N/A
Item 5. Other information - N/A
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits
(2) Arrangement Agreement
(10)-a Credit Agreement
(10)-b Pledge Agreement
(10)-c Guaranty Agreement
27 Financial Data Schedule
6(b) Reports on Form 8-K
Form 8-K - Date of earliest event reported October 13, 2000
-- Proposed Share Exchange with Ultra Petroleum Corp.
16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENDARIES PETROLEUM LTD.
Date: October 31, 2000 By: /s/ Bobby J. Fogle
-----------------------------
Bobby J. Fogle
Vice President, Finance and
Chief Financial Officer
17
