<PAGE> 1
Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided from operating activities were $304,710 in 1999 and $681,219
in 1998. The decrease can be primarily attributed to increases for working
capital requirements.
FINANCING ACTIVITIES
Westlinks ability to maintain and grow its operating income and cash flow is
dependent upon continued capital spending to replace depleting assets. Westlinks
believes its future cash flow from operations, borrowing capacity and future
equity issues should be sufficient to fund capital expenditures and to service
debt.
The Company increased total debt by $1.8 million in 1999 to $2.6 million. The
increase was used for capital expenditures and acquisitions.
The Company currently has a credit facility with a Canadian chartered bank. The
credit facility consists of a $4.5 million revolving reducing demand loan and a
$1.0 million non-revolving reducing demand loan. The revolving reducing demand
loan reduces by $150,000 per month commencing March 1, 2000 and bears interest
at Prime plus one and one-half percent (Prime + 1.5%). The non-revolving
reducing demand loan is payable in full on December 31, 2000 and bears interest
at Prime plus one and three quarters percent (Prime + 1.75%).
In 1999 the Company raised $1,237,278 from the issue of shares through private
placements and the exercise of stock options.
INVESTING ACTIVITIES
The timing of most of Westlinks capital expenditures is discretionary. Westlinks
has no material long-term commitments associated with its capital expenditure
plans or operating agreements. Consequently, Westlinks has a significant degree
of flexibility to adjust the level of such expenditures as circumstances
warrant. The level of capital expenditures will vary in future periods depending
on the success it experiences on planned infill drilling activities in future
periods, oil and gas price conditions and other related economic factors.
Financing for budgeted expenditures will be accomplished by the use of
internally generated funds, existing credit lines, proceeds from the selective
sale of non-core assets and new equity financing.
Capital expenditures amounted to $3,768,926 and $327,021 in 1999 and 1998,
respectively. The increase was due to the purchase of two producing properties,
Sylvan Lake and the Bigoray during the fourth quarter, for approximately $3.6
million.
In 1999 the Company purchased all the issued and outstanding shares of a
separate subsidiary for $400,000. This purchase resulted in the Company having
the right to acquire the Bigoray property.
The proceeds on disposal of capital assets for 1999 and 1998 were $796,800 and
$2,027,700, respectively. These proceeds were from the sale of certain non-core
oil and gas properties.
8 Westlinks Resources Ltd.
<PAGE> 2
RESULTS OF OPERATIONS
Total oil and gas revenues net of royalties were $2,073,121 in 1999 compared to
$1,689,935 in 1998 which represents a 27% increase. The revenues benefited from
higher commodity prices, especially crude oil in the last half of 1999 and
increased volumes.
Oil sales revenues before royalties increased 58% from $1,465,292 in 1998 to
$2,379,417 in 1999. This increase was due to a 57% increase in the realized
prices. In 1999 the Company's average per barrel crude oil price realized
was $25.43 compared to $15.72 in 1998. The revenues have been adjusted to
reflect the cost of the Company's hedging program, which totaled $72,882. In
addition, oil production increased from 86,511 barrels to 93,487 barrels
representing an increase of approximately 8%. The increase in production was due
to acquisitions made in the fourth quarter.
During the fourth quarter the Company made two significant producing oil
property acquisitions at Bigoray and Sylvan Lake. The increase in production
from these properties on a daily basis was 175 bbl/day and 80 bbl/day
respectively. Actual production during the month of December was 440 boe per day
compared to the 1999 yearly average of 279 boe per day.
Gas revenues before royalties decreased 58% from $320,880 in 1998 to $136,039 in
1999 as a result of the sale of several non-core properties during the year.
Overall gas production volumes were down 72% from 220,400 mcf in 1998 to 61,068
mcf in 1999. Actual gas prices realized increased from $1.68 per mcf in 1998 to
$2.16 per mcf in 1999.
Total royalties for 1999 and 1998 were $442,335 and $96,237 respectively. As a
percentage of oil and gas revenues royalties were 18% in 1999 and 5% in 1998.
The increase is largely due to the Company's purchase of producing
properties that are not eligible to receive Alberta Royalty Tax Credits which
significantly reduce the impact of Crown royalties and the settlement of a gross
overriding royalty dispute.
During 1998, due to a dispute on the calculation of gross overriding royalties,
the Company stopped paying the royalties, the dispute was resolved in 1999 and
the gross overriding royalties pertaining to 1998 were paid in 1999. In
addition, Crown royalties are calculated on a sliding scale basis and were
impacted by rising commodity prices. Operating costs were $782,281 in 1999 which
was 8% lower than the 1998 operating costs of $849,107. On a boe basis,
operating costs were $7.68 in 1999 compared to $7.87 in 1998. The decrease was
the result of the sale of non-core properties with high operating costs, the
fourth quarter acquisitions with lower operating costs and the Company's
continuing efforts to reduce costs.
Because the Company follows the "successful efforts" method of accounting,
capital expenditures that are incurred which do not result in economically
recoverable reserves are charged to exploration expenses. Exploration expenses
were $148,125 in 1999 compared to $3,570 in 1998. The majority of this increase
was due to the costs incurred in an unsuccessful attempt to acquire interests in
various independent oil and gas companies.
General and administrative expenses increased 68% from $426,895 in 1998 to
$718,569 in 1999. On a boe basis administrative expenses increased from $3.96 to
$7.06. The increase was largely due to a one-time management restructuring
charge of approximately $190,000 and the addition of staff during the last
quarter as a result of the property acquisitions. With the recent staff
additions during the fourth quarter the Company now has the necessary critical
mass and as additional acquisitions are made and production increases,
administrative costs should decrease on a boe basis
Administrative costs for the fourth quarter decreased to $5.04 per boe as a
result of the fourth quarter acquisitions.
Interest expense decreased 29% from $185,153 in 1998 to $131,872 in 1999. The
decrease was due to lower debt outstanding for the first three quarters of 1999
as compared to 1998. Due to the acquisitions in the fourth quarter long term
debt increased to $2.6 million by year end.
Depletion and depreciation for 1999 and 1998 was $841,580 and $804,943
respectively. On a boe basis depletion and depreciation was $8.26 and $7.46. The
increase reflects a higher cost base in the Company's capital assets.
During the year the Company disposed of several non-core oil and gas properties,
which resulted in a gain of $91,402, in addition an investment in a private
company was disposed of which resulted in gain of $160,000. During 1998 non-core
properties were sold which resulted in a gain of $946,738.
During the year ended December 31, 1999 and December 31, 1998 the Company had
interest income of $1,493 and $7,373, respectively. The reason for the decrease
was due to lower average cash balances for the 1999 period as compared to the
1998 period.
Westlinks Resources Ltd. 9
<PAGE> 3
Net income before taxes for 1999 and 1998 was $(296,411) and $374,378.
The Company accounts for income taxes using the liability method of income tax
allocation. Under this method income tax assets and liabilities are recorded to
recognize future income tax inflows and outflows arising from the settlement or
recovery of assets and liabilities at the carrying values. Income tax assets are
also recognized for the benefits from tax losses and deductions that cannot be
identified with particular assets or liabilities. The future income taxes assets
and liabilities are determined based on the tax laws and rates that are
anticipated to apply in the period of realization. In 1999 Westlinks had a
future income tax recovery of $246,884 compared to future income taxes of
$120,297 in 1998. The recovery was largely due to loss carry forwards not
previously recognized.
To date the Company has not paid any income taxes. The Company currently has
approximately $485,000 of tax loss carry forwards and $5.9 million of tax pools,
which can be claimed, against future income.
In 1999 the Company had a net loss of $49,527 compared to net income in 1998 of
$254,081.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
Periodically, Westlinks will use financial instruments in an attempt to protect
future cash flows. Certain of these crude oil sales contracts set a fixed price
that was subsequently settled against a higher floating price, resulting in a
hedging cost to Westlinks of $72,882. Westlinks has currently entered into two
separate crude oil sale contracts, which require the delivery of 100 barrels at
$29.70 per barrel and 100 barrels at $32.00 per barrel. Both crude oil sale
contracts expire in August 2000.
MARKET RISKS
The development, production and marketing of crude oil and natural gas reserves
carry certain risks. There is risk associated with accessing capital when
required and at competitive rates; the economic risk of finding reserves and
bringing them on-stream at reasonable cost and the financial risk of selling
these commodities at a competitive price in potentially turbulent markets.
Production from the core areas is mainly crude oil. The price Westlinks receives
for its crude oil production is impacted by several factors. These include the
quality of the oil, prices of competing fuels, value of refined products,
distance to markets and supply/demand balance. The Company is also exposed to
risk from exchange fluctuations between the U.S. and Canadian dollars as it
receives the majority of its oil revenues from contracts paid in U.S. dollars.
The current increase in commodity prices, combined with a strengthening economy,
has contributed to a slightly stronger Canadian dollar. The pace of economic
recovery in the U. S. has put pressure on the Bank of Canada to raise short term
lending rates, which has pushed prime lending rates to 7.0% percent. The
Company's exposure to fluctuations in these areas is small relative to
commodity price swings.
Accessing capital when required and at competitive rates is highly dependent on
market conditions. Westlinks has utilized various financing vehicles to fund its
capital programs, including private placements of common shares and asset
dispositions, which has resulted in an effective use of debt financing. The
Company continuously monitors its capital mix, paying particular attention to
its debt levels, as market conditions remain volatile.
There are numerous uncertainties inherent in estimating quantities of reserves
and the cash flows that would result from these reserves, including many factors
that are beyond the control of the Company. Evaluations of reserves, including
those contained in this report, represent estimates only and include a number of
assumptions.
Westlink's future reserves, production and cash flows are dependent on its
success in developing the current reserve base and acquiring additional lands
for development. Without the addition of reserves, the Company's existing
reserves and production are subject to continued decline. The oil and natural
gas industry is subject to extensive controls and regulations imposed by various
levels of government. All current legislation is a matter of public record and
Westlinks is unable to predict what additional legislation or amendments may be
enacted.
The oil and natural gas industry is also subject to environmental regulation
pursuant to local, provincial and federal legislation. Westlinks is committed to
meeting its responsibilities to protect the environment.
10 Westlinks Resources Ltd.
<PAGE> 4
MANAGEMENT'S REPORT TO THE SHAREHOLDERS
The financial statements of the Company are the responsibility of management and
the Board of Directors of the Company. They have been prepared by management in
accordance with accounting principles generally accepted in Canada, applied on a
consistent basis.
In fulfilling its responsibilities, management has developed and maintains a
system of internal controls designed to safeguard assets from loss or
unauthorized use and ensure the accuracy of the financial records. The financial
statements necessarily include certain estimates that are made after
consideration of the information available and using careful judgments.
The Board of Directors is responsible for reviewing and approving the financial
statements and, through its Audit Committee, ensuring that management fulfills
its responsibilities. The Audit Committee meets regularly with management and
the external auditors to satisfy itself that each party is properly discharging
its responsibilities. The Audit Committee reviews the financial statements and
recommends their approval to the Board of Directors.
Collins Barrow has been appointed by the shareholders of Westlinks as the
external auditors of the Company. The Auditors' report to the Shareholders for
the year ended December 31, 1999, is presented herein.
/s/ Peter Sekera /s/ Lynn Thurlow
------------------------------ --------------------------------
Peter Sekera Lynn Thurlow
Chief Executive Officer Chief Financial Officer
------------------------------------------------------------------------------
AUDITORS' REPORT
To the Shareholders Westlinks Resources Ltd.
We have audited the consolidated balance sheets of Westlinks Resources Ltd. as
at December 31, 1999 and 1998 and the consolidated statements of income (loss)
and retained earnings and cash flow for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1999
and 1998 and the results of its operations and its cash flow for the years then
ended in accordance with generally accepted accounting principles.
/s/ Collins Barrow
------------------------------------
CHARTERED ACCOUNTANTS
Calgary, Alberta
March 31, 2000
Westlinks Resources Ltd. 11
<PAGE> 5
WESTLINKS RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
==============================================================================
<TABLE>
<CAPTION>
1999 1998
(restated -
note 9)
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments $ 42,288 $ 73,839
Accounts receivable 648,787 231,388
------------------------------------------------------------------------------
727,075 305,227
Capital assets (note 4) 7,016,726 3,622,447
Investments (note 5) -- 240,000
------------------------------------------------------------------------------
$7,743,801 $4,167,674
==============================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 687,042 $ 222,700
Current portion of long-term debt 1,075,000 100,000
------------------------------------------------------------------------------
1,762,042 322,700
Long-term debt (note 6) 1,525,000 700,000
Future income taxes (note 7) 297,793 240,476
Provision for future site restoration 181,332 132,696
------------------------------------------------------------------------------
3,766,167 1,395,872
------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (note 8) 3,663,330 2,407,971
Retained earnings 314,304 363,831
------------------------------------------------------------------------------
3,977,634 2,771,802
------------------------------------------------------------------------------
$7,743,801 $4,167,674
==============================================================================
</TABLE>
Contingency (note 13)
Approved by the Board
/s/ [signature] , Director
-------------------------------
/s/ [signature] , Director
-------------------------------
12 Westlinks Resources Ltd.
<PAGE> 6
WESTLINKS RESOURCES LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
==============================================================================
<TABLE>
<S> <C> <C>
1999 1998
(restated -
note 9)
Revenue
Oil and gas $2,515,456 $1,786,172
Less: royalties, net of Alberta Royalty Tax Credits (442,335) (96,237)
Interest 1,493 7,373
-------------------------------------------------------------------------------
2,074,614 1,697,308
-------------------------------------------------------------------------------
Expenses
Operating 782,281 849,107
Exploration 148,125 3,570
General and administrative 718,569 426,895
Interest 131,872 185,153
Depletion and depreciation 841,580 804,943
-------------------------------------------------------------------------------
2,622,427 2,269,668
-------------------------------------------------------------------------------
Loss before the following (547,813) (572,360)
Gain on sale of capital assets 91,402 946,738
Gain on sale of investments 160,000 --
-------------------------------------------------------------------------------
Income (loss) before taxes (296,411) 374,378
Future income taxes (recovery) (note 7) (246,884) 120,297
-------------------------------------------------------------------------------
Net income (loss) (49,527) 254,081
Retained earnings, beginning of year 363,831 109,750
-------------------------------------------------------------------------------
Retained earnings, end of year $ 314,304 $ 363,831
===============================================================================
Net income (loss) per share (note 8[g]) $ (0.02) $ 0.11
===============================================================================
</TABLE>
Westlinks Resources Ltd. 13
<PAGE> 7
WESTLINKS RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
===============================================================================
<TABLE>
<CAPTION>
1999 1998
(restated -
note 9)
<S> <C> <C>
Operating activities
Net income (loss) $ (49,527) $ 254,081
Add (deduct) items not affecting cash
Depletion and depreciation 841,580 804,943
Gain on sale of capital assets (91,402) (946,738)
Gain on sale of investments (160,000) --
Future income taxes (recovery) (246,884) 120,297
-------------------------------------------------------------------------------
Funds provided from operations 293,767 232,583
Change in non-cash working capital balances
(Increase) decrease in accounts receivable (453,399) 689,780
Increase (decrease) in accounts payable and
accrued liabilities 464,342 (241,144)
-------------------------------------------------------------------------------
Cash provided from operations 304,710 681,219
-------------------------------------------------------------------------------
Financing activities
Agreement payable -- (3,830,538)
Note payable -- (500,000)
Shareholder loan -- (250,164)
Due to related company -- 12,370
Long-term debt 1,800,000 800,000
Issuance of common shares, net of share issue costs 1,237,278 (29,524)
Issuance of warrants -- 50,500
-------------------------------------------------------------------------------
Cash provided from (used in) financing activities 3,037,278 (3,747,356)
-------------------------------------------------------------------------------
Investing activities
Acquisition of subsidiary (note 2[a]) (400,000) --
Cash acquired on amalgamation (note 2[b]) -- 23,563
Purchase of capital assets (3,768,926) (327,021)
Proceeds on disposal of capital assets 796,800 2,027,700
Due from related party -- (30,000)
Note receivable -- 523,697
Abandonment costs (1,413) (11,792)
-------------------------------------------------------------------------------
Cash provided from (used in) investing activities (3,373,539) 2,206,147
-------------------------------------------------------------------------------
Decrease in cash (31,551) (859,990)
Cash and short-term investments, beginning of year 73,839 933,829
-------------------------------------------------------------------------------
Cash and short-term investments, end of year $ 42,288 $ 73,839
===============================================================================
Funds provided from operations per share $ 0.10 $ 0.10
===============================================================================
Supplement cash flow information:
Interest received in the year $ 1,493 $ 7,373
===============================================================================
Interest paid in the year $ 131,872 $ 185,153
===============================================================================
</TABLE>
14 Westlinks Resources Ltd.
<PAGE> 8
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
1. Company activities
The company's activities are the exploration for and development of oil and
gas properties in Western Canada.
2. Business combinations
(a) Effective August 12, 1999, the company acquired all of the issued and
outstanding shares of 759795 Alberta Ltd. ("759795"), a related party
by virtue of a common director for cash consideration of $400,000. The
transaction has been accounted for using the purchase method of
accounting for a business combination at the exchange amount as there
was a substantive change in ownership and the amount is supported by
independent evidence. The results of operations of 759795 are included
in the accounts from August 12, 1999, being the date the company
acquired control.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Capital assets $ 722,282
Future income taxes (322,282)
---------
$ 400,000
=========
</TABLE>
(b) Effective June 30, 1998, the company was amalgamated with PTR
Resources Ltd. ("PTR"), a related party by virtue of common
shareholders, director and officer. The transaction was accounted for
using the purchase method of accounting for a business combination at
the carrying amount. The results of operations from PTR are included
from June 30, 1998, the effective date of the transaction.
The assets acquired were as follows:
<TABLE>
<S> <C>
Cash $ 23,563
Accounts receivable 132
Future income tax asset 7,327
Notes receivable 523,697
Due from related parties (10,139)
Accounts payable and accrued liabilities (29,541)
Share issuance costs 19,960
---------
534,999
Less: Investment previously acquired at cost (76,104)
---------
$ 458,895
=========
The consideration for the purchase price was as follows:
Shares issued -- 647,837 common (note 8[b]) $ 534,999
Shares eliminated on amalgamation (note 8[b,c]} (76,104)
---------
$ 458,895
=========
</TABLE>
Westlinks Resources Ltd. 15
<PAGE> 9
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
===============================================================================
3. Significant accounting policies
These financial statements have been prepared using accounting principles
generally accepted in Canada which include:
(a) Principles of consolidation
The consolidated financial statements include the accounts of the
company and its wholly-owned subsidiary, 759795.
(b) Cash and cash equivalents
Cash and cash equivalents consists of balances with banks and
short-term investments with maturities not exceeding 90 days.
(c) Exploration and development costs
The company follows the successful efforts method of accounting for
its oil and gas exploration and development costs. The initial
acquisition costs of oil and gas properties and the costs of drilling
and equipping development wells and successful exploratory wells are
capitalized. The costs of exploration wells classified as unsuccessful
are charged to expense. All other exploration expenditures, including
geological and geophysical costs and annual rentals on exploratory
acreage, are charged to expense as incurred.
Capitalized costs of producing properties and equipment are depleted
and depreciated using the unit of production method based on estimated
proven reserves determined by independent and company engineers. Costs
subject to depletion also include estimated future capital associated
with proven properties. For the purposes of the calculation, natural
gas reserves and production are converted to equivalent volumes of
crude oil based on their approximate relative energy content.
All property and equipment is periodically evaluated and if conditions
warrant, an impairment provision is provided.
(d) Future site restoration costs
Estimated site restoration costs are provided over the life of the
proven reserves on a unit-of-production basis. Costs which include the
cost of production equipment removal and environmental clean up are
estimated each year by management based on current regulations, costs,
technology and industry standards. The annual charge is included in
the provision for depletion and depreciation and the actual
restoration expenditures are charged to the accumulated provision
account as incurred.
(d) Measurement uncertainty
The amounts recorded for depletion and depreciation of exploration and
development costs and the provision for future site restoration are
based on estimated proven reserves, production rates, future oil and
natural gas prices and future costs. By their nature, these estimates
are subject to measurement uncertainty and the effect of changes in
such estimates in future periods could be significant.
16 Westlinks Resources Ltd.
<PAGE> 10
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
(f) Joint venture accounting
Substantially all of the company's exploration and production
activities are conducted jointly with others, and accordingly these
financial statements reflect only the company's proportionate interest
in such activities.
(g) Depreciation
Office equipment and other is depreciated using the declining balance
method at rates ranging from 20% to 30% per annum.
(h) Investments
The company records its investments using the cost method of
accounting whereby the investments are initially recorded at cost.
Earnings are recognized only to the extent received or receivable.
Where there has been a permanent decline in value, the investment is
stated at estimated net realizable value.
(i) Stock options
The company has a stock option plan as described in note 8(d). No
compensation expense is recognized when stock options are issued to
officers, directors and employees. Any consideration received by the
company on exercise of stock options is credited to share capital.
(j) Flow-through shares
The company, from time to time, issues flow-through shares to finance
a portion of its capital expenditure program. Pursuant to the terms of
the flow-through share agreements, the tax deductions associated with
the expenditures are renounced to the subscribers. Accordingly, share
capital is reduced and a future tax liability is recorded equal to the
estimated amount of future income taxes payable by the company as a
result of the renunciations, when the expenditures are made.
(k) Income taxes
Income taxes are accounted for using the liability method of income
tax allocation. Under the liability method, income tax assets and
liabilities are recorded to recognize future income tax inflows and
outflows arising from the settlement or recovery of assets and
liabilities at the carrying values. Income tax assets are also
recognized for the benefits from tax losses and deductions that cannot
be identified with particular assets or liabilities, provided those
benefits are more likely than not to be realized. Future income tax
assets and liabilities are determined based on the tax laws and rates
that are anticipated to apply in the period of realization.
(l) Risk management
The company purchases forward contracts to hedge its exposure to the
risks associated with fluctuating oil prices. Gains and losses
associated with risk management activities are recognized as
adjustments to oil and gas revenue at the time the related production
is sold.
Westlinks Resources Ltd. 17
<PAGE> 11
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
4. Capital assets
<TABLE>
<CAPTION>
============================
1999 1998
----------------------------
<S> <C> <C>
Petroleum and natural gas properties
and equipment thereon $8,120,552 $4,430,715
Office equipment and other 66,887 42,159
----------------------------
8,187,439 4,472,874
Accumulated depletion and depreciation (1,170,713) (850,427)
----------------------------
$7,016,726 $3,622,447
============================
</TABLE>
During 1999, the estimated future cash flows from the reserves were less
than the capitalized costs of the assets in several areas where the company
participates. As a result, the company wrote down petroleum and natural gas
properties by $65,652 (1998 - $NIL). This amount is included in depletion
and depreciation expense.
Future capital included in the calculation of depletion and depreciation
includes the cost to develop proven undeveloped reserves of $4,148,000
(1998 - $71,000) and the recovery of future salvage values of $281,694
(1998 - $200,000).
Costs of unproven petroleum and natural gas properties amounting to $18,654
at December 31, 1999 (1998 - $NIL) have been excluded from the depletion
calculation.
The estimated future site restoration costs to be accrued over the
remaining life of the proved reserves are approximately $540,634 (1998 -
$379,000).
5. Investments
<TABLE>
<CAPTION>
============================
1999 1998
----------------------------
<S> <C> <C>
Alsask Energy Services Ltd., a private company, 240,000
common voting shares at cost, representing 27% of
the issued and outstanding common shares $ - $ 240,000
============================
</TABLE>
During the year ended December 31, 1999, the shares were sold for $400,000
of capital assets for a gain of $160,000.
18 Westlinks Resources Ltd.
<PAGE> 12
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
6. Long-term debt
(a) At December 31, 1999, the company had a $3,025,000 (1998 - $1,300,000)
revolving reducing credit facility at a Canadian chartered bank of
which $2,600,000 was drawn. The interest rate on the facility is prime
plus 1.5% per annum. The required reduction in the facility and the
bank loan is:
<TABLE>
<CAPTION>
============================
Credit
Bank Loan Facility
----------------------------
<S> <C> <C>
2000 $1,075,000 $1,500,000
2001 1,500,000 1,500,000
2002 25,000 25,000
---------- ----------
$2,600,000 $3,025,000
========== ==========
</TABLE>
The bank has indicated that it has no intention of demanding current
repayment of the facility. As a result, the portion of the facility
not reducing in the next fiscal year has been classified as long-term.
(b) At December 31, 1999, the company had a $1,000,000 non-revolving
acquisition demand loan at a Canadian chartered bank to assist in
financing acquisitions of producing petroleum reserves, which had not
been drawn upon at year end. The interest rate on this facility is
prime plus 1.75% per annum. Monthly repayments must be made over the
lessor of the half life of the reserves acquired, or 48 months and
commences the month following drawdown of the facility.
(c) At December 31, 1999, the company had a $500,000 treasury risk line
for interest rate and foreign exchange risk management, which had not
been drawn upon at year end. The facility allows for various risk
management products, including swaps and forwards, with a maximum term
of 36 months.
The above facilities are secured by a $10,000,000 floating charge debenture
over all the assets of the company and a fixed charge against certain major
producing oil and gas properties.
The principal repayments are subject to annual review. Subsequent to the
year ended December 31, 1999, the company has negotiated an increase in
the amount available under its revolving reducing credit facility (note
7[a]) from $3,025,000 to $4,500,000 with reductions to the available credit
of $150,000 per month commencing March 1, 2000.
In addition, the company has negotiated a $1,000,000 non-revolving reducing
demand loan to assist in financing the company's drilling program. The
interest rate is prime plus 1.75% per annum, and will be due in full upon
the earlier of the sale of equipment and December 31, 2000.
Westlinks Resources Ltd. 19
<PAGE> 13
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
7. Income taxes
Income tax expense differs from that which would be expected from applying
the effective Canadian federal and provincial income tax rates of 44.62% to
income (loss) before taxes as follows:
<TABLE>
<CAPTION>
=======================
1999 1998
(restated -
note 9)
-----------------------
<S> <C> <C>
Expected tax expense recovery $(132,259) $167,047
Increase (decrease) resulting from
Non-deductible crown payments,
net of Alberta Royalty Tax Credits 74,796 16,744
Resource allowance (72,470) (49,753)
Capital loss carryforward not previously recognized (100,395) --
Non-taxable portion of capital gain (17,848) --
Other 1,292 (13,741)
-----------------------
Future income taxes (recovery) $(246,884) $120,297
=======================
</TABLE>
The components of the future income tax liability at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
=======================
1999 1998
-----------------------
<S> <C> <C>
Temporary differences related to capital assets $672,269 $ 644,901
Investment -- 46,851
Future site restoration (80,910) (59,209)
Share issuance costs (42,585) (40,199)
Tax loss carryforward (216,113) (338,294)
Attributed Royalty Income carryforward (34,868) (13,654)
-----------------------
Future tax liability $297,793 $240,476
=======================
</TABLE>
8. Share capital
(a) Authorized
Unlimited number of common voting shares
Unlimited number of preferred shares
issuable in one or more series
20 Westlinks Resource Ltd.
<PAGE> 14
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
(b) Issued
<TABLE>
<CAPTION>
====================================================
1999 1998
NUMBER
STATED (restated - STATED
NUMBER VALUE note 8[c]) VALUE
---------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of year 2,610,639 $2,360,607 2,072,700 $1,924,875
Issued for PTR shares
(notes 2[b], 8[c]) -- -- 647,837 534,999
Shares eliminated on amal-
gamation (notes 2[b], 8[c]) -- -- (109,898) (76,104)
Issued for cash pursuant to
private placement 1,175,000 1,175,000 -- --
Issued upon exercise of
options (note 8[d]) 257,000 102,800 -- --
Tax cost of flow-through share
renouncement -- -- -- (23,613)
---------- --------- --------- -----------
Balance, end of year 4,042,639 3,638,407 2,610,639 2,360,607
========== =========
Issue costs incurred,
net of income tax benefit,
$49,402 (1998 - $31,321) (125,577) (103,136)
---------- ----------
3,512,830 2,257,471
---------- ----------
Warrants
Balance, beginning of year 302,000 150,500 -- --
Issued pursuant to business
combination (note 8[e]) -- -- 300,000 150,000
Issued pursuant to
bank financing -- -- 2,000 500
---------- ---------- ---------- ----------
Balance, end of year 302,000 150,500 302,000 150,500
========== ---------- ========== ----------
$3,663,330 $2,407,971
========== ==========
</TABLE>
(c) Temba Resources Ltd. ("Temba") acquired and amalgamated with PTR to
continue as Westlinks Resources Ltd. ("Westlinks") effective June 30,
1998. Under the terms of the amalgamation, the holders of the issued
and outstanding shares of Temba received one (1) common share of the
amalgamated corporation, Westlinks, for every five (5) common shares
of Temba. The holders of the issued and outstanding shares of PTR
received one (1) common share of the amalgamated corporation for every
thirty-one and one quarter (31.25) common share of PTR. In addition,
any common shares of Temba held by PTR and any common shares of PTR
held by Temba were cancelled upon amalgamation.
Westlinks Resources Ltd. 21
<PAGE> 15
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
(d) Employee fixed stock option plan
Under the employee fixed stock option plan, the company may grant
options to its officers, directors and employees for up to 10% of the
issued common shares. Options granted under the plan have a term of
five years and vest when granted. The exercise price of each option
equals the market price of the company's shares at the grant date of
the options. At December 31, 1999, 260,000 stock options were
outstanding under the plan at an exercise price of $1.00 per share
expiring at various dates until October 31, 2004.
A summary of the status of the company's fixed stock option plan as of
December 31, 1999 and 1998, and changes during the years then ending
is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
1999 1998
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 262,000 $0.40 -- $ --
Granted 260,000 1.00 262,000 0.40
Exercised (257,000) 0.40 -- --
Cancelled (5,000) 0.40 -- --
-------- ----- ------- -----
Outstanding, end of year 260,000 $1.00 262,000 $0.40
======== ===== ======= =====
Options exercisable at year end 260,000 $1.00 262,000 $0.40
======== ===== ======= =====
</TABLE>
Subsequent to the year ended December 31, 1999, 183,000 stock options
were granted to officers, directors and employees of the company at
exercise prices ranging from $1.00 to $2.00. All options vested when
granted and expire in February 2005.
(e) Warrants
Included in the consideration given to I.G. Resources Inc. ("I.G.") in
1997 pursuant to a business combination were 300,000 common share
purchase warrants with an agreed aggregate value of $150,000. Each
warrant entitles I.G. to acquire one common share at a price of $2.50
until January 8, 2000. The warrants expired unexercised subsequent to
year end.
The warrants issued pursuant to the bank financing expired unexercised
subsequent to the year end.
(f) At December 31, 1999, 133,334 (1998 -- 266,667) of the common shares
of the company are to be held in escrow. During 1999, 133,333 (1998 --
133,333) common shares were released from escrow. The remaining shares
will be released April 1, 2000.
(g) Net income (loss) per share is calculated based on the weighted
average number of common shares outstanding during the year of
2,928,975 (1998 -- 2,350,174). The exercise of options and warrants
would not be dilutive.
22 Westlinks Resources Ltd.
<PAGE> 16
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
9. Change in accounting policy
At December 31, 1999, the company changed its method of accounting for
income taxes from the deferral method to the liability method. This policy
has been adopted retroactively with restatement of 1998 results. The impact
of these changes on the December 31, 1999 and 1998 consolidated financial
statements are as follows:
<TABLE>
<CAPTION> BEFORE CHANGE AFTER CHANGE
IN ACCOUNTING IN ACCOUNTING
POLICY ADJUSTMENT POLICY
1999
<S> <C> <C> <C>
Capital assets $6,714,444 $ 302,282 $7,016,726
Future income taxes -- 297,793 297,793
Share capital 3,697,440 (34,110) 3,663,330
Retained earnings 275,705 38,599 314,304
Depletion and depreciation 819,119 22,461 841,580
Gain on sale of capital assets 129,925 (38,523) 91,402
Future income taxes (recovery) -- (246,884) (246,884)
Deferred tax (recovery) (69,000) 69,000 --
Net income (loss) (166,247) 116,900 (49,527)
Net income (loss) per share (0.06) 0.04 (0.02)
</TABLE>
<TABLE>
<CAPTION>
1998
<S> <C> <C> <C>
Capital assets $3,581,464 $ 40,983 $3,622,447
Deferred income taxes 69,000 (69,000) --
Future income taxes -- 240,476 240,476
Share capital 2,460,163 (52,192) 2,407,971
Retained earnings 442,132 (78,301) 363,831
Depletion and depreciation 797,403 7,540 840,943
Future income taxes -- 120,297 120,297
Net income (loss) 381,918 (127,837) 254,081
Net income (loss) per share 0.16 (0.05) 0.11
</TABLE>
10. Commitments
(a) The company is committed under leases on their office premises and
vehicles for future minimum lease payments as follows:
<TABLE>
<S> <C>
2000 $108,346
2001 80,177
2002 62,366
2003 35,162
--------
$286,051
========
</TABLE>
Westlinks Resources Ltd. 23
<PAGE> 17
WESTLINKS RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
(b) The company has entered into a fixed price contract. Under the terms
of the contract, the company is required to deliver a physical
quantity of 100 bpd at a price of $29.70/bbl expiring August 31, 2000
and 100 bpd at a price of $32.00/bbl from February 1, 2000 to August
31, 2000, at various Alberta delivery points.
11. Termination benefits
During 1999, the company terminated certain employees and officers of the
company. Included in general and administrative expense is $128,803 of
severance and related costs of the termination.
12. Financial instruments
Fair values
The fair value of all financial instruments approximate their carrying
value.
13. Contingency
On March 4, 1998, claims totalling $22,500 were filed against the company.
The company made a counterclaim of $800,000 on March 26, 1998. The company
believes that the original claims are without merit. The outcomes of the
claims and counterclaim are not determinable at this time.
14. Subsequent events
(a) Public offering
Subsequent to the year ended December 31, 1999, the company signed a
Letter of Interest with a United States underwriter to sell one
million units. Each unit will consist of common shares and common
share purchase warrants. The pricing of the units and the number of
common shares and common share purchase warrants in each unit are yet
to be finalized and will be based on market conditions and the trading
price of the company's shares at the time the units are offered to the
public. The offering is subject to the underwriter's completion of due
diligence and all necessary regulatory approvals.
(b) Acquisitions and dispositions of petroleum and natural gas assets
Subsequent to the year ended December 31, 1999, the company signed a
purchase and sale agreement with another company to purchase petroleum
and natural gas assets for $11,917,104. A non-refundable deposit of
$1,191,710 has been paid and will be applied against the purchase
price on closing, which is expected to be May 29, 2000. Management
expects to finance the purchase using a combination of working capital
and bank financing.
Subsequent to the year ended December 31, 1999, the company has
acquired $1,655,000 and disposed of $1,237,855 of petroleum and
natural gas assets through various purchase and sale agreements.
15. Comparative figures
The presentation of certain figures of the previous year has been changed
to conform with the presentation adopted for the current year.
24 Westlinks Resources Ltd.
.
