<PAGE>
SECURITES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
November 30, 1998 1-13630
CEC RESOURCES LTD
(Exact name of Registrant as specified in its Charter)
Alberta, Canada 98-0018241
(State of Incorporation) (I.R.S. Employer Identification No.)
1605, 700 6th Ave. S.W. T2P OT8
Calgary, Alberta, Canada (Zip Code)
(Address of principal executive offices)
Registrants telephone number, including area code:
(403) 265-7605
Securities registered pursuant to
Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
Common Stock, (no par value) American Stock Exchange
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, 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. [X]
The aggregate market value of the voting stock excluding shares held by
persons who may be considered affiliates of the registrant as of January 31,
1999 is $4,215,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of January 31, 1999.
Outstanding at
Class January 31, 1999
----- ----------------
Common Stock, no par value 1,532,400 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
ANNUAL REPORT (SEC FORM 10K)
INDEX
Securities and Exchange Commission
Item Number and Description
<TABLE>
<CAPTION>
PAGE
----------
PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties - Oil and Gas Operations 3
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Item 7A. Quantitative and Qualitative Disclosure Regarding Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 29
Item 13. Certain Relationships and Related Transactions 31
PART IV AND SIGNATURES
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
Signatures 57
</TABLE>
2
<PAGE>
PART I
Item 1. BUSINESS
CEC Resources Ltd. (the "Company" or "Resources") was incorporated on May
31, 1955 under the Business Corporations Act (Alberta) in Canada and was
acquired by the former parent of Columbus Energy Corp. ("Columbus") in 1969 and
by Columbus on July 31, 1984. Resources is an independent oil and gas company
and considered a "junior oil" company in Canada. It remained a wholly-owned
subsidiary of Columbus until spun-off from Columbus by a rights offering in
February 1995. Resources engages in the production of crude oil and natural
gas and acquires and develops leaseholds and other interests in oil and gas
properties in the provinces of Alberta and Saskatchewan. Resources also has
ownership interests in one liquids extraction plant and several gas gathering
and compression systems in Alberta. Prior to year end substantially all of
Resources' oil and gas properties were operated by other industry companies.
With certain acquisitions completed in fiscal 1999, the Company has increased
the percent of oil and gas properties which it operates.
Resources' principal office is located at Suite 1605, 700 6th Avenue S.W.,
Calgary, Alberta, Canada T2P 0T8. Resources also has a United States office
located at 1700 Broadway, Suite 1150, Denver, Colorado 80290.
The Company's business strategy is to develop its existing proved oil and
natural gas reserves and to acquire additional oil and gas properties. The
Company employs a staff of oil and gas industry professionals to direct in this
effort.
The Company's business is comprised of two segments which are the direct
ownership of oil and natural gas properties and the ownership of natural gas
processing, compression and gathering facilities.
The Company owns working interests in 16 oil wells located in Saskatchewan,
Canada and 47 natural gas wells located in Alberta, Canada.
The Company also owns an interest in a natural gas liquids processing
facility located in Alberta, Canada.
Item 2. PROPERTIES
The following disclosures set forth the Company's oil and gas producing
activities. Currency amounts are in Canadian dollars, unless otherwise stated.
Estimated Oil and Gas Reserve Quantities and Revenues
The estimated reserve amounts and future net revenues were determined by
Sproule
3
<PAGE>
Associates Limited, independent geological and petroleum engineering
consultants for fiscal year 1998, and by Reed Ferrill & Associates, an
independent consulting petroleum engineering firm for fiscal years 1997 and
1996. The Company owned only Canadian reserves during this period.
<TABLE>
<CAPTION>
PROVED OIL GAS RESERVES
Oil and Liquids Natural Gas
Proved reserves: (Thousands of Barrels) (Millions of cubic feet)
-------------------------- ----------------------------
<S> <C> <C>
November 30, 1995 363 23,115
Revision to previous (9) (2,664)
estimates
Extensions, 366 414
discoveries, and other
additions
Sales and abandonments - (217)
Production (40) (1,468)
----------------- -----------------
November 30, 1996 680 19,180
Revision to previous (271) (2,020)
estimates
Extensions, 7 331
discoveries, and other
additions
Production (46) (1,217)
----------------- -----------------
November 30, 1997 370 16,274
Revision to previous (56) (9,510)
estimates
Extensions, discoveries 57 400
and other additions
Production (49) (1,123)
----------------- -----------------
November 30, 1998 322 6,041
================= =================
Proved developed reserves
(producing and
non-producing):
November 30, 1996 513 16,068
November 30, 1997 287 13,180
November 30, 1998 285 4,439
</TABLE>
Proved Developed Producing Reserves
As of November 30, 1998, Resources has approximately 3.9 billion cubic feet
of proved developed producing gas reserves which represents 65% of the Company's
total
4
<PAGE>
proved gas reserves. Resources also has approximately 144,000 barrels ("Bbl") of
oil and 81,000 barrels of natural gas liquids ("Ngl" or "liquids") of proved
developed producing reserves which together represent 70% of the Company's total
proved oil reserves.
The reserves in this category can be materially affected positively or
negatively by either currently prevailing or future prices because they
determine the economic lives of the producing wells.
Proved Developed Non-Producing Reserves
As of November 30, 1998, Resources has approximately 500 million cubic feet
of proved developed non-producing reserves representing 9% of the Company's
total proved gas reserves. Resources' oil and liquids reserves in this category
are approximately 60,000 barrels or 19% of its total proved oil reserves.
The reserves in this category are primarily reserves behind the casing in
existing wells and recompletion of those zones will be required to place them on
production. Also included are any wells which have been completed and were
awaiting connection to a gas pipeline as of each year end, provided such
pipeline connection does not require significant investment.
Proved Undeveloped Reserves
As of November 30, 1998, Resources' proved undeveloped reserves total
approximately 1.6 billion cubic feet of gas, or 26% of the Company's total
proved natural gas reserves, and approximately 38,000 barrels of oil and
liquids, or 11% of the Company's total proved oil reserves.
These reserves are attributable to wells which have been completed and were
awaiting pipeline connection as of the end of the year where such pipeline
connection would require significant investment and also undrilled locations
offsetting production in the Carbon, East Carbon, Harmon and Rowley areas of
Alberta.
Probable Reserves
As of November 30, 1998, Resources' probable natural gas reserves are
approximately 600 million cubic feet. Resources' oil and gas liquids reserves
in this category are approximately 6,000 barrels.
The reserves in this category are primarily reserves which may reasonably
be assumed to exist because of geophysical or geological indications and
drilling done in the
5
<PAGE>
regions which contain proven reserves. The reserves in this category are not
included in the schedule of Standardized Measure of Discounted Future Net Cash
Flow (the "Standardized Measure").
The following table compares the Company's estimated proved reserves as of
November 30, 1997 and 1998.
<TABLE>
<CAPTION>
Oil and Liquids Natural Gas
(Thousands of Barrels) (Millions of Cubic Feet)
---------------------- ------------------------
November 30, 1997
<S> <C> <C>
Proved developed producing 252 5,342
Proved developed non-producing 35 7,838
Proved undeveloped 83 3,094
----------- -----------
Total 370 16,274
----------- -----------
November 30, 1998
Proved developed producing 225 3,896
Proved developed non-producing 60 543
Proved undeveloped 37 1,602
----------- -----------
Total 322 6,041
----------- -----------
</TABLE>
The decrease in proved developed producing reserves from 1997 to 1998 is
primarily attributable to fiscal 1998 production. The majority of the decrease
in proved developed non-producing and proved undeveloped reserves is
attributable to the following factors:
The unsuccessful completion of a well in the East Carbon area resulted in
more stringent reservoir engineering interpretations of log characteristics and
analogous production in two natural gas zones. The unsuccessful completion also
disproved a geological hypothesis that was formally presumed in the
determination of proved undeveloped reserves in these two natural gas zones.
In 1998, a zone in the East Carbon area was remapped due to new offset well
information, resulting in geologic interpretations that did not support the
assignment of proved reserves for a location.
Standardized Measure
The Standardized Measure schedule is presented below pursuant to the
disclosure requirements of the United States Securities and Exchange Commission
("SEC") and Statement of Financial Accounting Standards No. 69, "Disclosures
About Oil and Gas Producing Activities" (SFAS 69). Future cash flows are
calculated using year-end oil and gas prices and operating expenses, and are
discounted using a 10% discount factor.
Under SEC guidelines, Future Net Revenues ("FNR") shown below must be
calculated using prices that were in effect on November 30 of each year and are
projected forward based on existing contracts or the spot market price on that
date. Accordingly, the FNR has been calculated using the spot market sales
price in effect on November 30, 1998 and the sales price of long-term contracts
in effect prior to the end of the 1998 fiscal year.
6
<PAGE>
The prices utilized in this calculation are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Natural Gas
1998 $ 2.80/Mcf
1999 2.69/Mcf
2000 2.60/Mcf
2001 2.58/Mcf
2002 - forward 2.49/Mcf
Ngl $12.67/Bbl
Oil $16.94/Bbl
</TABLE>
The standardized measure is intended to provide a standard of comparable
measurement of the Company's estimated proved oil and gas reserves based on
economic and operating conditions existing as of November 30, 1998, 1997 and
1996. Pursuant to SFAS 69, the future oil and gas revenues are calculated by
applying to the proved oil and gas reserves the oil and gas prices at November
30 of each year relating to such reserves. Future price changes are considered
only to the extent provided by contractual arrangements in existence at year
end. Production and development costs are based upon costs at each year end.
Future income taxes are computed by applying statutory tax rates as of the year
end with recognition of tax basis, resource allowance, tax pool carryforwards
and earned depletion carryforwards as of that date and relating to the proved
properties. Discounted amounts are based on a 10% annual discount rate.
Changes in the demand for oil and gas, price changes and other factors make such
estimates inherently imprecise and subject to revision.
7
<PAGE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO ESTIMATED PROVED OIL AND GAS RESERVES
(thousands of dollars)
<TABLE>
<CAPTION>
November 30,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Future oil and gas revenues $20,403 $31,984 $ 59,858
Future cost:
Production cost (4,619) (7,620) (10,521)
Crown royalty (1,772) (5,515) (9,982)
Development cost (682) (1,260) (1,712)
Future income taxes (2,559) (3,039) (9,144)
------- ------- --------
Future net cash flows 10,771 14,550 28,499
Discount at 10% (2,599) (4,584) (10,800)
------- ------- --------
Standardized measure of discounted future net cash flows $ 8,172 $ 9,966 $ 17,699
======= ======= ========
</TABLE>
As required by SFAS 69, the tax computation does not consider the Company's
annual interest expense and general and administrative expenses or future
drilling and equipment costs. Because of these factors, the tax provisions
shown do not represent the much lower future tax expense expected as long as
Resources remains an active operating company.
8
<PAGE>
CHANGE IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS FROM ESTIMATED PROVED OIL AND GAS RESERVES
FOR THE THREE YEARS ENDED NOVEMBER 30, 1998
(thousands of dollars)
<TABLE>
<CAPTION>
November 30,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Standardized measure-beginning of year $ 9,966 $17,699 $ 9,286
Sale of oil and gas net of productions costs (2,248) (2,482) (2,250)
Net changes in prices, crown royalty and production costs 8,457 (8,672) 11,238
Extensions, discoveries and other additions 787 358 4,936
Sales and abandonments - - (129)
Revisions to previous estimates (11,135) (2,207) (3,590)
Previously estimated development costs incurred during the period - 90 411
Changes in development costs 586 316 (49)
Accretion of discount 1,131 2,242 1,066
Other 794 (758) 133
Change in future income tax (166) 3,380 (3,353)
-------- ------- -------
Net increase (decrease) (1,794) (7,733) 8,413
-------- ------- -------
Standardized measure-end of year $ 8,172 $ 9,966 $17,699
======== ======= =======
</TABLE>
Production
Resources' net oil and gas production for each of the past three fiscal
years is shown on the following table:
<TABLE>
<CAPTION>
Year ended November 30,
-------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Oil - Bbls 25,000 22,000 15,000
Ngl - Bbls 24,000 24,000 25,000
Gas - Mmcf 1,124 1,217 1,468
</TABLE>
9
<PAGE>
Average price and cost per unit of production for the past three fiscal
years are as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average sales price per Bbl of oil $18.49 $26.10 $26.34
Average sales price per Mcf of gas $ 2.06 $ 1.83 $ 1.44
Average sales price per Bbl of Ngl $14.61 $22.03 $19.28
Average production cost per barrel of oil equivalent
("BOE") $ 3.01 $ 2.33 $ 2.17
</TABLE>
Natural gas is converted to oil at the ratio of six Mcf of natural gas to
one Bbl of oil. Production costs include only lease operating expenses.
Developed Properties
A summary of the gross and net interest in producing wells and gross and
net interest in producing acres as of November 30, 1998 is shown in the
following table:
<TABLE>
<CAPTION>
Gross Net
----- ---
Oil Gas Oil Gas
--- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Wells 16 47 5 19
== == = ==
Acres 18,876 6,993
====== =====
</TABLE>
Undeveloped Properties
The following table sets forth the Company's ownership in undeveloped
properties as of November 30, 1998:
<TABLE>
<CAPTION>
Gross Acres Net Acres
------------------- -------------------
<S> <C> <C>
Alberta 7,360 3,242
Saskatchewan 9,840 4,710
----- -----
Total Undeveloped
Properties 17,200 7,952
====== =====
</TABLE>
10
<PAGE>
Drilling Activities
The Company engages in exploratory and development drilling in association
with other oil and gas companies. In most cases, the Company participates in
wells operated by other industry partners but acts as the operator of some of
the wells in which it owns an interest. The table below sets forth information
regarding the Company's drilling activity for the last three fiscal years. The
net interest shown is the Company's working interest ("WI").
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- ----------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
EXPLORATORY
Wells Drilled:
Oil - - - - 3 1.5
Gas - - 1 .60 2 .67
Dry - - - - 1 .20
DEVELOPMENT
Wells Drilled:
Oil - - 1 .50 - -
Gas - - 1 1.0 6 2.83
Dry - - - - - -
TOTAL
Wells Drilled:
Oil - - 1 .50 3 1.5
Gas - - 2 1.6 8 3.5
Dry - - - - 1 .20
---------- ---------- ---------- ---------- ---------- ----------
- - 3 2.10 12 5.20
========== ========== ========== ========== ========== ==========
</TABLE>
Current Operations Activity
The Company is engaged in the production of oil and the production,
gathering, compression and processing of natural gas liquids and natural gas.
The Company owns working interests in 47 natural gas wells located in Alberta,
Canada and working interests in 16 oil wells located in Saskatchewan, Canada.
The Company also owns an interest in the Carbon Plant (a natural gas liquids
processing facility) and associated natural gas gathering and compression
facilities located in Alberta, Canada.
The Company's primary focus is the operation and development of its natural
gas properties in the Carbon Field area of Central Alberta.
The Company intends to develop additional proved reserves at its existing
11
<PAGE>
properties and to seek to acquire additional natural gas properties in the
Carbon Field area and other areas.
Neutrino Acquisition
- --------------------
In December 1998, the Company acquired working interests in 16 producing
natural gas wells and associated leaseholds in the Wayne-Rosedale Field, located
in Alberta, Canada from Neutrino Resources Ltd. for approximately $2.3 million.
The acquisition was funded with cash and bank financing. The acquisition
increased Resources' working interest ownership in the Wayne-Rosedale Field from
approximately 33.3% to 66.3% Through this transaction Resources became operator
of the East Carbon Field wells and gas gathering system, thereby creating
opportunities for increased efficiencies and profitability due to greater
control of field operations. Oil and gas reserves related to the acquisition
are not included in the reserve tables listed previously as of November 30, 1998
since closing did not take place until December 1998. The following increase to
proved reserves and values would have been added had the closing taken place by
November 30, 1998 using year end prices of $16.94 per barrel of oil, $12.67 per
barrel of natural gas liquids and $2.61 per Mcf of natural gas.
<TABLE>
<CAPTION>
Oil and Liquids Natural Gas
(Thousands of Barrels) (Millions of Cubic Feet)
----------------------------------- -----------------------------------
<S> <C> <C>
Proved reserves 51 2,287
======== ========
Proved developed reserves 30 1,434
======== ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Future net cash flows before income taxes (thousands of dollars) $ 4,894
-------
Future net cash flows before income taxes, discounted at 10% $ 3,759
(thousands of dollars) -------
</TABLE>
Title to Properties
The Company holds title to its properties pursuant to leases from third
parties or the Crown. Management of the Company believes the Company has
satisfactory title to its properties. Oil and gas interests are subject to
customary interests and burdens, including overriding royalties and operating
agreements. The Company's properties may also be subject to liens incident to
operating agreements, as well as minor encumbrances, easements and restrictions.
As is customary in the oil and gas industry, the Company does not regularly
investigate title to oil and gas leases when it acquires undeveloped acreage.
Title is typically examined before any drilling or development is undertaken.
The methods of title examination adopted by the Company are reasonably
calculated, in the opinion of
12
<PAGE>
management of the Company, to insure that production from its properties, if
obtained, will be readily salable for the account of the Company. Management of
the Company is not aware of any material pending or threatened claims affecting
title to the Company's proved acreage.
The Company's producing and non-producing properties are subject to
customary royalty interests liens for current taxes, and other burdens, none of
which, in the opinion of management of the Company, materially interferes with
the use of or adversely affects the value of such properties.
Competition, Markets for Oil and Gas & Customers
The oil and gas industry is highly competitive. Major oil and gas companies
and independent producers are active bidders for undeveloped acreage and
desirable oil and gas properties, as well as for the equipment and labor
required to operate such properties. With the Company's solid financial position
and its growth strategy, Resources is in position to take advantage of
opportunities in the currently depressed oil and gas industry.
With the completion of two significant pipeline expansion projects which
have added 1.1 BCF/d of export capacity from Alberta, the natural gas pricing
scenario for producers with Alberta reserves has improved. The Company is in
position to take advantage of any favorable price changes due to its high
percentage of natural gas production.
Resources sells its natural gas production to natural gas marketing
companies. The operator of the Carbon gas plant pays Resources for liquids sold
from the plant. The amount paid by the plant operator for liquids exceeds 10%
of the Company's revenues.
The marketability of oil and natural gas is affected by numerous industry
factors. The Company has utilized forward pricing contracts to fix the sales
price on a percentage of its natural gas sales. In the Company's judgment,
termination by any purchaser under which its present sales are made would not
have a material impact upon its ability to sell its production to another
purchaser at similar prices.
Government Regulation
The petroleum and natural gas industry operates in Canada under federal and
provincial legislation and regulations which govern land tenure, royalties,
production rates, environmental protection, exports and other matters. Federal
authorities do not regulate the price of oil and gas in export trade, but
instead rely on market forces to establish these prices. Legislation exists that
regulates the quantities of oil and gas which may be removed from the provinces
or exported from Canada.
13
<PAGE>
Producers pay provincial royalties for production from Crown leases and
freehold royalties on freehold leases. Provincial royalties are subject to a
sliding scale which fluctuates with changes in productivity and prices. The
sliding scale formula is designed to retain funds in the oil and gas industry
when commodity prices are low, with increases in the royalty rates in times of
high commodity prices when the industry's need for royalty rate relief is not as
great.
The Alberta government requires that gas royalties be paid on the basis of
the Gas Reference Price (determined monthly on the basis of a weighted average
field price) or on the basis of the producer's Corporate Average Price. This
requirement discourages natural gas price discounting. Resources has elected to
use the Gas Reference Price. The Alberta government permits gas gathering and
processing costs (based on corporate average capital costs and deemed operating
costs) to be deducted in computing the Crown royalty. Effective January 1,
1990, the Alberta government revised the Alberta Royalty Tax Credit ("ARTC")
formula to a sliding scale, based on oil and gas prices. From January 1995 to
the present, ARTC entitlements are equal to the lessor of Alberta Crown
Royalties paid and $2,000,000, multiplied by the weighted average royalty tax
credit rate which ranges from 75% to 25%.
Environmental Regulations
The industry is also subject to environmental regulation pursuant to
legislation of the Canadian Federal and provincial governments. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced in association with certain oil and gas industry
operations and can affect the location of wells and facilities and the extent to
which exploration and development is permitted. In addition, legislation
requires that well and facility sites and access be abandoned and reclaimed to
the satisfaction of provincial authorities. A breach of such regulations
may result in the imposition of fines and penalties, the suspension of
operations and potential civil liability. The Environmental Protection and
Enhancement Act imposes environmental standards and requires compliance with
various legislative criteria (including reporting and monitoring) in Alberta.
The Alberta Energy and Utilities Board, pursuant to its governing legislation,
also plays a role with respect to the regulation of environmental impacts of oil
and gas activities.
Resources believes that it is in compliance with applicable environmental
laws and regulations, and that the environmental regulations as presently in
effect, will not have a material effect upon its capital expenditures, or
competitive position in the industry. Consequently, Resources does not
anticipate the need for any material capital expenditures for environmental
control facilities for the current year. Resources believes that it is
reasonably likely that the trend in environmental legislation and regulation
will continue toward stricter standards. No assurance can be given as to the
future capital expenditures which may be required for compliance with
environmental regulations which come into force in the future.
14
<PAGE>
Operating Hazards
The oil and gas business involves a variety of operating risks including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations, and environmental hazards such as oil spills,
gas leaks, ruptures and discharge of toxic substances. The occurrence of any of
these events might result in substantial losses to the Company due to injury and
loss of life, severe damage to and destruction of property, natural resources
and equipment, pollution and other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. The Company maintains insurance against some, but not all,
potential risks; however, there can be no assurance that any such insurance that
is obtained will be adequate to cover all losses or exposure for liability.
Furthermore, the Company cannot predict whether such insurance will continue to
be available at premium levels that justify its purchase. Generally, the
Company has elected not to obtain blow-out insurance when drilling a well since
it has not operated in areas with abnormally high pressures or with known severe
lost circulation problems.
Item 3. LEGAL PROCEEDINGS
Resources is not a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of
security holders.
15
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Resources has traded on the American Stock Exchange
regular list since July 6, 1995. The common stock initially began trading on
the American Stock Exchange Emerging Companies Marketplace on March 24, 1995
about one month after it was divested by Columbus to its shareholders by a
rights offering. The reported high and low sales prices in U.S. dollars for the
periods listed below were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C> <C>
1999:
12/01/98 through 01/31/99 $4.7500 $4.1250
1998:
First quarter $6.2500 $4.8750
Second quarter 5.1250 4.8750
Third quarter 5.6250 4.8750
Fourth quarter 5.6875 4.2500
1997:
First quarter $5.8750 $4.7500
Second quarter 5.2500 4.5000
Third quarter 5.1875 4.8750
Fourth quarter 7.2500 4.8750
1996:
First quarter $5.6250 $5.1250
Second quarter 5.5000 5.1250
Third quarter 5.5000 5.0000
Fourth quarter 5.8750 5.2500
</TABLE>
As of January 31, 1999 the most recently reported closing sales price of
Resources common stock was $4.375 per share.
As of November 30, 1998, there were approximately 60 holders of record of
Resources' common stock and an estimated 430 or more beneficial owners who hold
their shares in brokerage accounts.
The Company has never paid any cash dividends on its common stock and does
not contemplate the payment of cash dividends since it plans to use available
earnings for its drilling, development and acquisition programs. Payment of
future cash dividends would
16
<PAGE>
also be dependent on earnings, financial requirements and other factors.
Item 6. SELECTED FINANCIAL DATA
The table below sets forth selected historical financial and operating data
for the Company as of the dates and for the periods indicated. The historical
financial data for each of the years in the five-year period ended November 30,
1998, were derived from the financial statements of the Company which have been
audited by PricewaterhouseCoopers LLP, Chartered Accountants. This information
is not necessarily indicative of the Company's future performance. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Company's Financial Statements and notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues $ 3,253 $ 3,309 $ 3,212 $ 3,794 $ 3,673
Net earnings $ 240 $ 605 $ 526 $ 870 $ 1,033
Earnings per share $.16 $.38 $.35 $.58 $.69
Average common shares outstanding(3) 1,545 1,580 1,505 1,500 1,500
Cash Flow Data(1) (2)
Cash provided by operating activities $ 1,366 $ 1,724 $ 1,656 $ 1,933 $ 2,145
Cash used in investing activities $ (564) $(1,265) $(2,333) $(2,064) $(1,989)
Cash provided by (used in) financing $ (209) $ (98) $ 604 $ - $ -
activities
Balance sheet data
Total assets $11,235 $11,378 $10,166 $ 8,729 $ 7,852
Working capital $ 2,120 $ 1,149 $ 981 $ 937 $ 684
Long-term debt, excluding current maturities $ - $ - $ - $ - $ -
Stockholders' equity $ 8,722 $ 8,691 $ 8,184 $ 7,054 $ 6,184
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See discussion of cash flows in "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
(2) Certain of the amounts above have been restated because the Company elected
to adopt for fiscal 1998 Canadian Institute of Chartered Accountants
("CICA") 1540, Cash Flow Statements. Cash flow data for fiscal years ending
November 30, 1998, 1997 and 1996 are presented in conformance with CICA
1540.
(3) Restated for a five-to-one stock split on October 27, 1994.
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion below summarizes the Company's financial condition and
results of operations and should be read in conjunction with the financial
statements and related notes. The financial statements contained in this report
have been prepared in accordance with generally accepted accounting principles
("GAAP") in Canada. Certain disclosures required by U.S. GAAP differ from
Canadian GAAP and are detailed in the notes to the financial statements.
The information below contains several forward-looking statements within
the meaning of the United States Private Securities Litigation Reform Act of
1995. These statements involve inherent uncertainties, including price
volatility, development, operational and implementation risks, as well as other
factors that may cause the actual financial performance of Resources to be
materially different from predicted financial performance.
Liquidity and Capital Resources
Management considers Resources' liquidity to be substantially better than
most other small Canadian oil and gas companies based on the fact that it has
positive working capital, a history of excellent cash flow relative to its
modest market capitalization, and has established a $2.5 million credit facility
agreement with Canadian Imperial Bank of Canada ("CIBC").
Fiscal net earnings were $240,000 or $.16 per share in 1998, $605,000 or
$.38 per share in 1997, and $526,000 or $.35 per share in 1996. At November 30,
1998, Resources' stockholders' equity had increased by $31,000 since November
30, 1997 to $8,722,000 and it had positive working capital of $2,120,000.
For 1998 cash provided by operating activities was $1,366,000 while the
amount in 1997 was $1,724,000. The decrease from 1997 to 1998 is primarily
attributable to increased lease operations and general and administrative
expenses ("G&A"). Cash used in investing activities was higher in 1996 and 1997
primarily due to reduced drilling activity in 1998. Cash used in financing
activities increased as the result of the Company's purchase of 99,600 shares of
its own stock partially offset by the proceeds from the issuance of 70,000
shares of common stock.
CIBC Relationship
- -----------------
In December, 1998, Resources secured a financing commitment with CIBC. The
primary purpose of the loan is to assist the Company in the acquisition of oil
and gas reserves. The initial commitment is a $2.5 million revolving production
loan. The revolving phase of the loan will expire on April 30, 1999 and may be
renewed by CIBC. The interest
18
<PAGE>
rate on outstanding borrowings is the CIBC Prime Rate plus 3/4 of 1%. The
Company has a long standing relationship with CIBC and believes the opportunity
exists to increase the commitment to assist the Company in future acquisitions.
Results of Operations
The Company's total revenues decreased by $56,000 in 1998 compared to 1997
primarily due to price decreases in oil and Ngls which were partially offset by
a price increase in gas. Lease operating expenses increased by $128,000 in 1998
compared to 1997 primarily due to well workovers and additional compression
charges. G & A costs increased $233,000 in 1998 compared to 1997 primarily due
to hiring full time employees. Depreciation, depletion, and amortization
("DD&A") increased by $205,000 in 1998 compared to 1997 primarily due to the
Company's proved developed non-producing and proved undeveloped natural gas
reserves. The above factors contributed to income tax expenses that were lower
by $223,000 in 1998 compared to 1997 and net earnings which were $365,000 lower
in 1998 compared to 1997.
Oil and Gas Operations Comparisons for 1998, 1997 and 1996
The increases (decreases) in the components of oil and gas revenues during
the periods presented are summarized as follows:
<TABLE>
<CAPTION>
Production
Price Change Quantity Change Revenue Change
------------ --------------- --------------
1998 vs. 1997
<S> <C> <C> <C>
Oil (29%) 14% (17%)
NGL (35%) - (35%)
Gas 13% (8%) 4%
1997 vs. 1996
Oil (1%) 47% 55%
NGL 14% (4%) 7%
Gas 27% (17%) 5%
</TABLE>
Natural gas revenues in fiscal 1998 were 4% higher than in 1997 because 13%
higher average prices received more than offset 8% lower sales volumes due to
plant and compressor down time and normal well productivity decline. Revenues
from oil were 17% lower in 1998 compared to last year because of a 29% decrease
in oil prices, which overshadowed a 14% increase in volume. Plant liquids sales
volumes were flat from 1997 to 1998 and revenues as well as prices were
similarly affected by the global oil price decrease as product prices and
revenues decreased by 35% from 1997 to 1998.
19
<PAGE>
Natural gas revenues for fiscal 1997 were 5% higher than in 1996 because
27% higher average prices received more than offset 17% lower sales volumes due
to plant and compressor down time and normal well productivity decline.
Revenues from oil were 55% higher in 1997 compared to 1996 because of a 47%
volume increase primarily from a new well which overcame the 1% price decrease.
Plant liquids sales volumes decreased 4% and prices increased 14% in 1997
compared to 1996.
Royalty expense consists primarily of Crown royalties in addition to
freehold and gross overriding royalties. The Company is eligible for the
Alberta Royalty Tax Credit ("ARTC") that varies inversely with prevailing prices
for oil and gas sales in Alberta. For 1998 the net Crown royalty rate was 6% of
oil and gas sales compared to 8% in 1997. This decrease was attributed to a 13%
increase from 1997 to 1998 in the gas sales price received by the Company
coupled with a 4% decrease from 1997 to 1998 in the reference price used to
calculate Crown royalty expense.
Lease operating expenses for fiscal 1998 were 22% as a percentage of oil
and gas sales compared to 17% for 1997 and 20% for 1996. The increase in 1998
compared to 1997 is attributed to well workovers and a full year of production
of oil wells in the Company's Hoffer area and additional compression in the East
Carbon area. This increase was partially offset by variable expense decreases
related to production declines. Lease operating expenses per BOE sold were
$2.92, $2.27 and $2.12 for 1998, 1997 and 1996, respectively. This trend is
attributed to increased well workovers and fixed cost absorption on a declining
production base. Resources has always followed the U.S. practice of converting
its natural gas to BOE based on the heating value ratio of six Mcf of natural
gas to one barrel of oil rather than a ratio of 10 to 1 which historically has
approximated price ratios. The latter ratio is used almost exclusively by
Canadian public companies. Resources' share of processing fees charged to its
wells have been deducted from its field services revenues where Resources' one-
third Carbon plant ownership is involved. It is anticipated that the Company
will be able to exert greater control over its East Carbon lease operating
expenses in fiscal 1999, as Resources is now the operator as a result of the
Neutrino acquisition discussed in "Current Operations Activity".
Field netbacks which are commonly reported by Canadian energy companies
equate to oil and gas sales less royalties and lease operating expenses.
Resources' average field netback was $9.23/BOE in 1998, $9.69/BOE in 1997 and
$7.68/BOE in 1996. If natural gas had been converted to oil using the Canadian
practice of a 10:1 ratio, then reported field netbacks would have been
$13.45/BOE in 1998, $14.32/BOE in 1997 and $11.67/BOE in 1996.
Field Services Business Segment
The Company receives operating service revenue generated by its share of
processing fees at the Carbon area liquid extraction plant. The Company also
processes Resources' own
20
<PAGE>
gas, and that portion of the processing fee revenue attributable thereto is not
reported in this segment and offsets an identical amount of process expense
otherwise chargeable to lease operations. The Carbon plant also processes gas of
unrelated third parties which in fiscal 1998 amounted to approximately 37% of
the plant's volumes and represents the majority of field services profit.
Resources also derives revenues and net cash flow from separate gathering
and compression facilities in which it has ownership. Amounts applicable to
Resources' own production have likewise been eliminated from both revenue and
expense of these operations.
General and Administrative Expenses
G&A expenses relate to the direct costs of Resources which do not originate
from either its limited operation of properties or the providing of services.
As explained in Note 7 to the financial statements, each month Resources incurs
certain direct and indirect G&A costs for management services provided by
Columbus. These costs are primarily for labor, related benefits and other
overhead costs billed by Columbus as allocated by its employees. G&A costs
increased in 1998 by $233,000 compared to 1997 primarily due to hiring full time
employees, which was partially offset by a reduction in Columbus expenses as
additional full time employees were hired. Effective March 31, 1999, the
Company will no longer incur management fees from Columbus.
Depreciation, Depletion and Amortization
DD&A of oil and gas assets are determined based upon the unit of production
method. This expense is not only related to the current level of production,
but also is dependent upon past costs to find, develop and recover those
reserves. The liquid extraction plant, other gathering and compression
facilities and office equipment are depreciated on a straight line method.
For 1998, the depletion rate of oil and gas properties was $4.02/BOE (6:1)
for the Company, compared to $3.01/BOE for fiscal 1997, and $2.15/BOE for fiscal
1996. The 1998 increase was primarily due to a downward adjustment to the
Company's year end proved reserves. The above calculated amounts for 1998, 1997
and 1996 include $62,000, $33,000 and $30,000 respectively, for estimated future
site restoration costs.
Exploration Activity
Under the full cost method of accounting, all exploration costs associated
with continuing efforts to acquire or review prospects and outside geological
and seismic
21
<PAGE>
consulting work are capitalized. A total of $54,000 of exploration costs were
capitalized during 1998. These charges include seismic and consulting costs in
the Carbon, East Carbon and Harmon areas of Alberta. A total of $230,000 of
exploration costs were capitalized during 1997. These charges included seismic
costs in the Maxim area of Saskatchewan and in the East Carbon area of Alberta
which totaled $67,000 and compared with 1996's $181,000 primarily in the Hoffer
area of Saskatchewan and 3-D seismic coverage for the Nisku reef oil project in
the Carbon field. Also included was $108,000 of seismic cost which was
capitalized during first quarter 1997 and had been added to leasehold costs
related to undeveloped reserves in the Carbon field.
Income Taxes
In 1997, the Company adopted CICA 3465, Income Taxes. Since 1993,
Resources has paid current taxes to Revenue Canada based on its taxable income
after utilization, to the extent allowed, of its tax pool carryforwards.
Currently payable taxable income for future periods is dependent upon the level
and type of capital expenditures that are incurred in these periods as well as
percentage limitations for utilization of existing tax pools. For fiscal 1998,
current income taxes are estimated to be $19,000. For the 1997 and 1996 fiscal
years Resources paid no current federal tax because additions to deductible
property tax pools coupled with carryover balances were sufficient to result in
no taxable income.
Effects of Changing Prices
The Canadian economy experienced considerable inflation during the late
1970's and early 1980's but in recent years has been fairly stable at relatively
low levels. The Company, along with most other business enterprises, was then
and will be affected in the future by any recurrence of such inflation.
Changing prices, or a change in the dollar's purchasing power, distorts the
traditional measures of financial performance which are generally expressed in
terms of the actual number of dollars exchanged and do not take into account
changes in the purchasing power of the monetary unit. This results in the
reporting of many transactions over an extended period as though the dollars
received or expended were of common value, which does not accurately portray
financial performance.
Oil and gas prices fluctuate over time as a function of market economics.
Refer to the price change table in the discussion "Oil and Gas Operations
Comparisons for 1998, 1997 and 1996" for information on product price
fluctuation over the past three years. This table clearly depicts the effect of
changing prices on the Company's revenue stream.
Operating expenses have been relatively stable but also can become
distorted since they represent a larger percentage of revenues when lower
product prices prevail. Competition in the industry can significantly affect
the cost of acquiring leases, although in recent years this factor has been less
important as more operators have withdrawn from
22
<PAGE>
active exploration programs. Inflation, as well as a recessionary period, can
cause significant swings in the interest rates that companies pay on bank
borrowings. These factors are anticipated to continue to affect the Company's
operations both positively and negatively for the foreseeable future.
EXCHANGE RATE OF THE CANADIAN DOLLAR
All dollar amounts set forth in this report are in Canadian dollars except
where otherwise indicated. The following table sets forth the rates of exchange
for the Canadian dollar, expressed in United States dollars:
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rate at end of period .6563 .7021 .7414 .7362 .7272
Average rate during period .6785 .7251 .7331 .7278 .7347
High .7105 .7292 .7515 .7474 .7632
Low .6343 .7019 .7215 .7025 .7167
</TABLE>
On January 29, 1999, the noon buying rate in Canadian dollars was $0.6634 U.S. =
$1.00 Canadian.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using
two digits rather than four, or other methods, to define the applicable year.
Computer programs that have date sensitive software may recognize a date using
"00" as the year 1900, rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to price transactions, send invoices or
engage in similar normal business activities. In addition to affecting
mainframe and mid-range computer systems, this problem potentially impacts
computer chips integrated in security, plant automation, and pipeline control
and metering systems.
Resources is currently completing an external review of all Year 2000
issues by contacting and/or sending out questionnaires to all of its natural gas
purchasers, gathering system and plant operators, downstream pipeline operators,
equipment and service providers, operators of its oil and gas properties,
financial institutions and vendors providing payroll and medical benefits and
services. Management has set a deadline of April 1999 for this external review
process to be completed. Once this review has been completed, a schedule of
necessary revisions to existing systems as well as requisite contingency plans
will be designed and implemented.
23
<PAGE>
The Company utilizes a service bureau for its accounting processing. The
service bureau is working on a new software release that would bring its system
into compliance at no cost to the Company. The Company is also evaluating
accounting systems and making a determination whether to bring all accounting
services and processing in-house. Only software that is certified Year 2000
compliant will be considered. If the Company brings these services and
processing in-house, a July 1999, deadline will be established for completion of
system evaluation and implementation. The Company is also dependent upon
personal computer based software programs and files that may not be Year 2000
compliant. The Company has set a deadline of April 1999, to be internally
compliant with Year 2000 specifications.
Management expects costs for the Company to become Year 2000 compliant will
not be significant. The Company does not believe that any loss of revenue will
occur as a result of the Year 2000 problem. However, despite the Company's
efforts to identify and remedy Year 2000 problems, there may be related failures
that disrupt Resources' business temporarily. In addition, the timetable for
the Company's planned completion of its own Year 2000 modifications and the
estimated costs to accomplish this are management's best estimates. These
assessments involve many assumptions concerning future events, including the
continued availability of certain resources, particularly personnel able to
locate, reprogram or replace, and test the Company's hardware and software in
accordance with the Company's established schedule. There can be no guarantee
that the Company's estimates will prove accurate, and actual results could
differ significantly because of the non-compliance of third parties of business
importance to the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operation or cashflow of the Company due to adverse changes
in financial and commodity market prices and rates. In regard to interest rate
risk, the Company in fiscal 1999 established a $2.5 million credit facility
with a Canadian bank as described in "Liquidity and Capital Resources" under
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Note 14 to the Financial Statements of the Company. The
interest rate for borrowings under this facility are variable. In regard to
foreign currency risk, the Company's operations except for certain
administration functions performed in the Company's Denver, Colorado office, are
conducted in Canada. The Company does not use financial instruments relating to
currency and exchange rates. For information on the exchange rate of the
Canadian dollar, refer to "Exchange Rate of the Canadian Dollar" under Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In regard to commodity price risk, the Company does use certain
financial instruments in an attempt to manage this risk as described in Note 9
to the Financial Statements of the Company.
24
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent accountants and financial statements listed in
the accompanying index are filed as part of this report. See Index to Financial
Statements on page 35.
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
The directors and executive officers of CEC Resources Ltd. are listed with
brief statements setting forth the present principal occupations and other five
year biographical information concerning each. Each director listed has served
continuously since his/her election.
<TABLE>
<CAPTION>
Name of Director and/or Officer, Principal Occupation and Five Year First Became
Biographical Information Age Director in
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James C. Crawford, Q.C. * 64 1995
Director. Mr. Crawford has been a partner in the law firm McDonald &
Crawford, Calgary, Alberta, and is Chairman of the Board of Directors
of Belfast Petroleum Inc.
Loyola G. Keough * 42 1998
Director. Mr. Keough has been a partner in the law firm Bennett
Jones, Calgary, Alberta. He is a Director of WBI Canadian Pipeline
Ltd. and Interenergy Sheffield Processing Company (Canada) Ltd.
Patrick R. McDonald 41 1998
Director. President and Chief Executive Officer of Resources since
July 1998. From 1987 until 1997 Mr. McDonald was Chairman and
President of Interenergy Corporation, Denver, Colorado. Since
January 1998, he has been the sole member of McDonald Energy, LLC.
Mr. McDonald is a Petroleum Geologist.
Craig W. Sandahl * 71 1995
Director. Mr. Sandahl has been a private investor in the oil and gas
and banking industries. He is a member of the Board of Directors of
the Chief Executives Organization.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Name of Director and/or Officer, Principal Occupation and First Became
Biographical Information Age Director in
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harry A. Trueblood, Jr. 73 1972
Director. Mr. Trueblood was President and Chief Executive Officer of
Resources from 1972 until July 1998. Mr. Trueblood has served as
Chairman, President and CEO of Columbus Energy Corp., since 1982 and
was a founder and former President and/or Chairman and CEO of
Consolidated Oil and Gas, Inc., the former parent of both Columbus
and Resources, from 1958 to 1988. He is a member and former Director
of the Chief Executives Organization.
Peter N.T. Widdrington * 68 1995
Director. Mr. Widdrington is Director of Canadian Imperial Bank of
Commerce, Laidlaw Inc., SNC-Lavalin Group Inc., Talisman Energy Inc.
and Radiology Corporation of America Inc. He is a member of the
Board of Directors and former President of the Chief Executives
Organization.
Richard C. Frantz 42
Vice President-Business Development of Resources since November 1998.
Mr. Frantz was Vice President, KN Energy, from 1997 to 1998; Vice
President, Interenergy Corporation, from 1996 to 1997; Vice
President, Premier Enterprises, from 1988 to 1996.
Harold C. Gutjahr 68
Corporate Secretary of Resources since 1979. Mr. Gutjahr is Corporate
Secretary for Columbus Energy Corp.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Name of Director and/or Officer, Principal Occupation and
Biographical Information Age
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Robert R. Morrison 36
Vice President - Engineering and Operations of Resources since
December 1998. Prior to joining CEC, Mr. Morrison was employed as
Senior District Engineer for Tarragon Oil and Gas Limited from 1993
to 1998.
Kevin D. Struzeski 40
Chief Financial Officer-Treasurer for Resources since November 1998.
Mr. Struzeski was employed as Accounting Manager MediaOne Group from
1997 to 1998 and prior to that he was employed as Controller,
Interenergy Corporation from 1995 to 1997 and Accounting Manager,
Snyder Oil from 1993 to 1995.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Member of the Audit Committee.
Item 11. EXECUTIVE COMPENSATION
The Company entered into a written agreement in 1995 with Columbus to
provide management services until new management was retained, either by merger,
acquisition or direct employment. On June 30, 1998, the Company entered into a
Stock Purchase Agreement ("Agreement") with McDonald Energy, LLC. ("McDonald"),
a Colorado limited liability company solely owned by Patrick R. McDonald. The
Agreement provided that Patrick R. McDonald become a director, president and
chief executive officer of Resources as of July 1, 1998 at an annual salary of
U.S. $120,000 pursuant to a three year employment agreement, and was granted a
five year employee stock option for 78,000 shares exercisable at U.S. $5.50 per
share. Mr. McDonald's salary for 1998 was U.S. $50,000. The Company has paid
no direct cash compensation to the officers of Columbus for the period that they
served as officers of Resources. The Company continues to be charged by
Columbus for the specific time each Columbus officer or employee devotes to the
Company on a monthly basis. See "Certain Relationships and Related
Transactions". The management agreement with Columbus will expire in March
1999.
The following table sets forth certain information regarding compensation
paid during each of the last three years to the Company's Chief Executive
Officer and the other executive officers who earned over U.S. $100,000 in salary
and bonus in fiscal 1998 (referred to subsequently as the "named executive
officers").
27
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Awards Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary(U.S.$) Bonus(U.S.$) Options (#) Compensation(U.S.$)
- --------------------------- -------- --------------- ------------ -------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Patrick R. McDonald, 1998 $50,000(1) 0 78,000 0
President
- -------------------------------------------------------------------------------------------------------------------------
(1) Appointed July 1, 1998.
</TABLE>
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made during fiscal 1998 to the Company's named executive officers.
<TABLE>
<CAPTION>
Potential Realizable Value
Assumed Annual Rates of
Number of % of Total Options Stock Price Appreciation
Securities Granted to for Option Term (2)
Underlying Options Employees in Exercise Price Expiration 5% 10%
Name Granted (1) Fiscal Year (U.S.$/Share) Date (U.S. $) (U.S.$)
- ---------------------- ------------------ ------------------------ ---------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Patrick R. McDonald 78,000 66.1 $5.50 07/01/03 $145,902 $331,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options granted at the closing price of the Company's common stock on that
date.
(2) These columns present hypothetical future realizable values of the options,
obtainable upon exercise of the options net of the option's exercise price,
assuming that the market price of the Company's common stock appreciates at
a 5% and 10% compound annual rate over the term of the options. The 5% and
10% rates of market price appreciation are presented as examples pursuant to
rules of the SEC and do not reflect management's prediction of the future
market price of the Company's common stock. No gain to the optionees is
possible without an increase in the market price of the common stock above
the option price. There can be no assurance that the potential realizable
values shown in this table will be achieved. The potential realizable
values presented are NOT intended to indicate the value of the options.
---
Compensation of Directors
The directors of Resources who are neither officers nor employees are
currently paid an annual directors' fee of CDN $400 per quarter, plus CDN $700
per meeting for attendance at all regular and special meetings of the Board of
Directors. In 1998, each outside director was granted a 6,000-share, three-year
stock option except for Mr. Loyola Keough who was granted a 10,000 share, five
year option. The exercise prices of each of the options are equal to at the
closing price of the American Stock Exchange on the date of grant which was U.S.
$5.375.
28
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning persons known by the
Company to be beneficial owners of more than five percent of the Company's
voting securities as of January 31, 1999. All information is taken from or
based on filings made by such beneficial owners with the Securities and Exchange
Commission ("SEC") or information provided by such owners to the Company.
Except as indicated in the footnotes, each person identified in the table holds
sole voting and investment power with respect to the shares shown opposite such
person's name.
<TABLE>
<CAPTION>
Title Name and Address Amount and Nature of Percent
of Class of Beneficial Owner Beneficial Ownership of Class
- -------- ------------------- -------------------- --------
<S> <C> <C> <C>
Common Stock no par Patrick R. McDonald 471,800(1) 25.4
value McDonald Energy, LLC
1700 Broadway, Suite 1150
Denver, CO 80290
Harry A. Trueblood 335,696(2) 21.8
1660 Lincoln Street, Suite 2400
Denver, CO 80264
Carl Seaman 217,209(3) 14.2
63 Hunting Ridge Road
Greenwich, CT 06831
Craig W. Sandahl 120,050(4) 7.7
13875 Virginia Foothills Drive
Reno, NV 89511
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Patrick R. McDonald is the sole member of McDonald Energy, LLC, includes
250,000 shares underlying a one year option which expires June 30, 1999.
Also includes 78,000 employee stock options exercisable after July 1, 1999
and 73,800 shares owned by CEC Resources Holdings, LLC of which McDonald
Energy, LLC has 58.3% interest.
(2) Includes 6,000 shares underlying exercisable stock options. Does not
include 28,911 shares which are owned by Lucile B. Trueblood, Mr.
Trueblood's wife, which she acquired as her separate property and as to
which Mr. Trueblood disclaims any beneficial ownership. Includes 207,000
shares owned by the Harry A. Trueblood Charitable Remainder Unitrust dated
June 1, 1998 to which shares Mr. Trueblood disclaims ownership; but as the
only trustee, does hold sole voting rights to such shares.
(3) Includes 79,957 shares owned by Carl and Associates, a partnership in which
Mr. Seaman owns an 80% partnership interest and as to which Mr. Seaman
shares voting and investment power. Does not include 2,032 shares which are
owned by Linda Seaman, Mr. Seaman's wife, which she acquired as her separate
property and as to which Mr. Seaman disclaims any beneficial ownership.
(4) Includes 26,000 shares underlying exercisable stock options.
29
<PAGE>
Security Ownership of Management
The table below provides information as to each class of Resources' equity
securities beneficially owned as of January 31, 1999 by (i) each director, (ii)
each "named executive officer" (as defined in SEC rules), and (iii) all
directors and officers as a group. All information is taken from or based on
filings made by such persons with the SEC or provided by such persons to the
Company. Except as indicated in the footnotes, each person identified in the
table holds sole voting and investment power with respect to the shares shown
opposite such person's name.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
Title of Class Of Beneficial Owner Beneficial Ownership of Class
- ------------------------------------- ----------------------------------- ---------------------- -----------------
<S> <C> <C> <C>
Common Stock - no par value Patrick R. McDonald McDonald 471,800(1) 25.4
Energy, LLC
Harry A. Trueblood, Jr. 335,696(2) 21.8
Craig W. Sandahl 120,050(3) 7.7
Peter N.T. Widdrington 27,000(3) 1.7
James C. Crawford 26,500(3) 1.7
Loyola G. Keough 10,000(4) *
All directors and executive 1,056,046 52.3
officers as a group (10 persons
including the above)
* Less than one percent
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Footnote 1 under "Security Ownership of Certain Beneficial Owners".
(2) See Footnote 2 under "Security Ownership of Certain Beneficial Owners".
(3) Includes 26,000 shares underlying exercisable stock options.
(4) Represents 10,000 shares underlying exercisable stock options.
30
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has never entered into any transactions with officers or
directors of the Company with respect to participation in oil and gas
operations, and the present management of the Company has no intention of doing
so in the future. However, if any transaction with an officer or director of
the Company does occur, it is the Company's intention to cause any such
transaction to be on terms that are no less favorable to the Company than the
terms that could be obtained from an unrelated third party in an arms-length
transaction.
During fiscal 1998, Columbus Energy Corp. received U.S. $218,000 from the
Company for providing certain management services pursuant to the management
agreement described "Executive Compensation".
31
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS FORM 8-K
(a) Financial statements and schedules included in this report:
See "Index to Financial Statements" Page 35
All schedules are omitted since either the required information is set
forth in the financial statements or in the notes thereto or the
information called for is not present in the accounts or is not required
under the exception stated in Rule 5.04.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed on behalf of the Registrant
during the fourth quarter of fiscal 1998:
NONE
(c) Exhibits:
Exhibit No.
- -----------
* 2(a) Agreement of Purchase and Sale between Neutrino Resources Inc. and CEC
Resources Ltd. (Exhibit 2(a) to Form 8-K dated December 31, 1998).
* 3 Articles of Association (Exhibit 3 to Registration Statement No. 33-
86996).
* 3(a) Articles of Continuance and Amendments thereto (Exhibit 3(a) to
Registration Statement 33-86996).
* 3(b) By-Laws (Exhibit 3(b) to Registration Statement No. 33-86996).
*10(a) Employee Incentive Share Option Plan (Exhibit 10(a) to Registration
Statement No. 33-86996).
*10(b) Firm Service Gas Sale Agreement (Exhibit 10(b) to Registration Statement
No. 33-86996).
*10(c) Administrative Services Agreement (Exhibit 10(c) to Registration
Statement No. 33-86996).
32
<PAGE>
*10(d) Indemnity Agreement Between CEC Resources Ltd. and Harry A. Trueblood,
Jr. (Exhibit 10(d) to Registration Statement No. 33-86996).
*10(e) Indemnity Agreement Between CEC Resources Ltd. and Margaret Cartwright
(Exhibit 10(e) to Registration Statement No. 33-86996).
*10(f) Separation pay policy adopted effective February 24, 1995 for officers
and employees (Exhibit 10(a) to Form 10-Q dated October 11, 1995).
*10(g) Employment agreement by and between CEC Resources Ltd. and Patrick R.
McDonald (Exhibit 10(a) to Form 8-K dated July 7, 1998).
*10(h) Stock purchase agreement by and between McDonald Energy, LLC and CEC
Resources Ltd. (Exhibit 10(b) to Form 8-K dated July 7, 1998).
*10(i) Option agreement among CEC Resources Ltd. and McDonald Energy, LLC
(Exhibit 10(c) to Form 8-K dated July 7, 1998).
10(j) Financing Commitment by and between CEC Resources Ltd. and Canadian
Imperial Bank of Canada.
11 Statement of computation of per share earnings.
23(a) Consent of PricewaterhouseCoopers LLP Chartered Accountants.
23(b) Consent of Reed W. Ferrill and Associates, Inc.
23(c) Consent of Sproule Associates Limited.
27 Financial Data Schedule
- --------------------------------------------------------------------------------
*Incorporated by reference
33
<PAGE>
CEC RESOURCES LTD.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Auditors' Report 35
Financial Statements:
Balance Sheets at November 30, 1998 and 1997 36
Statements of Income for the years ended
November 30, 1998, 1997 and 1996 38
Statements of Stockholders' Equity for the years ended
November 30, 1998, 1997 and 1996 39
Statements of Cash Flows for the years ended
November 30, 1998, 1997 and 1996 40
Notes to the Financial Statements 41
</TABLE>
34
<PAGE>
AUDITORS' REPORT
To the Stockholders of CEC Resources Ltd.
We have audited the balance sheets of CEC Resources Ltd. as at November 30,
1998 and 1997, and the statements of income, stockholders' equity and cash flows
for each of the three years in the period ended November 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of CEC Resources Ltd. as at November 30, 1998
and 1997 and the results of its operations and its of cash flows for each of the
three years in the period ended November 30, 1998, in accordance with accounting
principles generally accepted in Canada.
PricewaterhouseCoopers LLP
Chartered Accountants
February 16, 1999
Calgary, Canada
- ---------------
COMMENTS BY THE AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
- -----------------------------------------------------------------------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the company's financial statements, such as the change described in Note 4 to
the financial statements. Our report to the shareholders dated February 16, 1999
is expressed in accordance with Canadian reporting standards which do not
require a reference to such a change in accounting principles in the auditor's
report when the change is properly accounted for and adequately disclosed in the
financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
February 16, 1999
Calgary, Canada
- ---------------
35
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
November 30,
-----------------------------------------
1998 1997
------------ ----------------
(Reclassified,
Note 3)
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,666 $ 1,073
Accounts receivable:
Oil and gas sales 466 404
Crown royalty refund and other 333 266
Joint interest partners 8 3
Income tax receivable (Note 6) - 53
------------ ----------------
Total current assets 2,473 1,799
------------ ----------------
Property and equipment:
Oil and gas assets, full cost method (Note 5) 16,192 16,047
Liquid extraction plant 1,477 1,473
Other property and equipment 108 49
------------ ----------------
17,777 17,569
Less: Accumulated depreciation, depletion, amortization and
valuation allowance (Notes 2 and 5) (9,015) (7,990)
------------ ----------------
Net property and equipment 8,762 9,579
------------ ----------------
$11,235 $11,378
============ ================
(continued)
</TABLE>
36
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
November 30,
----------------------------------------
1998 1997
---------------- ----------------
(Reclassified,
Note 3)
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 220 $ 483
Due to former Parent (Note 7) 17 35
Income tax payable (Note 6) 3 -
Undistributed oil and gas production receipts 113 132
------------ ----------------
Total current liabilities 353 650
------------ ----------------
Future site restoration costs 165 103
Deferred income taxes (Note 6) 1,995 1,934
Commitments and contingent liabilities (Note 10)
Stockholders' equity (Note 3):
Preferred stock, authorized unlimited number of
shares, no par value; none issued
Share capital, common stock, authorized unlimited number of
shares, without nominal or par value; 1,544,400 shares
issued in 1998 and 1,589,000 in 1997 (Note 8) 1,534 1,106
Retained earnings 7,188 7,683
------------ ----------------
8,722 8,789
------------ ----------------
Less: 15,000 shares held for cancellation - (98)
------------ ----------------
Total stockholders' equity 8,722 8,691
------------ ----------------
$ 11,235 $ 11,378
============ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
<S> <C> <C>
On behalf of the Board: /s/ Loyola G. Keough /s/ James C. Crawford
---------------------------- ----------------------------
Loyola G. Keough James C. Crawford
Director Director
</TABLE>
37
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
(in Canadian dollars)
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Oil and gas sales $3,235 $3,451 $3,093
Royalties (586) (722) (462)
Alberta royalty tax credit 309 335 239
Field services 246 217 324
Other 49 28 18
------ ------ ------
Total revenues 3,253 3,309 3,212
------ ------ ------
Costs and expenses:
Lease operating expenses 710 582 620
Field services 148 185 244
General and administrative 984 751 747
Depreciation, depletion and amortization 1,087 882 746
------ ------ ------
Total costs and expenses 2,929 2,400 2,357
------ ------ ------
Operating income 324 909 855
------ ------ ------
Other expense 4 1 5
------ ------ ------
Earnings before income taxes 320 908 850
Provision for income taxes (Note 6) 80 303 324
------ ------ ------
Net earnings $ 240 $ 605 $ 526
====== ====== ======
Earnings per share:
Basic $.16 $.38 $.35
====== ====== ======
Fully diluted $.16 $.38 $.35
====== ====== ======
Average number of common shares outstanding:
Basic 1,545 1,580 1,505
====== ====== ======
Fully diluted 1,549 1,584 1,511
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Three Years Ended November 30, 1998
(in Canadian dollars)
(in thousands, except shares)
<TABLE>
<CAPTION>
Share Capital Shares Held for Cancellation
----------------------------------- -------------------------------------
(Reclassified, Note 3)
Retained
Shares Amount Earnings Shares Amount
------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
Balances, December 1, 1995 1,500,000 $ 502 $6,552 - $ -
Exercise of employee stock options 10,000 32 - - -
(Note 8)
- - -
Issuance of common stock (Note 8) 79,000 572 - - -
Net earnings - - 526 - -
--------- ------ ------ --------------- ----------------
Balances, November 30, 1996 1,589,000 1,106 7,078 - -
Purchase of shares - - - 15,000 (98)
Net earnings - - 605 - -
--------- ------ ------ --------------- ----------------
Balances, November 30, 1997 1,589,000 1,106 7,683 15,000 (98)
Cancellation of 15,000 shares (15,000) (11) (87) (15,000) 98
Purchase and cancellation of shares (99,600) (74) (648) - -
Shares issued (Note 8) 70,000 513 - - -
Net earnings - - 240 - -
--------- ------ ------ --------------- ----------------
Balances, November 30, 1998 1,544,400 $1,534 $7,188 - $ -
========= ====== ====== =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF CASH FLOWS (Note 4)
<TABLE>
<CAPTION>
Year Ended November 30
--------------------------------------------------
1998 1997 1996
---- ---- ----
(in Canadian dollars)
(in thousands)
<S> <C> <C> <C>
Net earnings $ 240 $ 605 $ 526
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,087 882 746
Future income taxes 61 299 299
Other - - 9
Changes in operating assets and liabilities:
Accounts receivable and other (134) (221) (17)
Due to (receivable from) former Parent (18) (6) 10
Accounts payable 93 12 159
Income taxes payable (receivable) 56 39 (78)
Other current liabilities (19) 114 2
------ ------- -------
Net cash provided by operating activities 1,366 1,724 1,656
------ ------- -------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 53 - 20
Additions to oil and gas properties (566) (1,190) (2,324)
Additions to liquid extraction plant and (51) (75) (29)
other ------ ------- -------
Net cash used in investing activities (564) (1,265) (2,333)
------ ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 513 - 572
Proceeds from exercise of stock options - - 32
Purchase of common stock (722) (98) -
------ ------- -------
Net cash provided by (used in) financing (209) (98) 604
activities ------ ------- -------
Net increase (decrease) in cash and cash 593 361 (73)
equivalents
Cash and cash equivalents at beginning of year 1,073 712 785
------ ------- -------
Cash and cash equivalents at end of year $1,666 $ 1,073 $ 712
====== ======= =======
Supplemental disclosure of cash flow
information:
Cash paid (received) during the period for:
Income taxes, net of refunds $ (36) $ 3 $ 103
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
(1) FORMATION AND OPERATIONS OF THE COMPANY
CEC Resources Ltd. ("Resources" or "the Company") was incorporated as an
Alberta, Canada corporation on May 31, 1955 and, since its acquisition in 1969
as a wholly-owned Canadian subsidiary by its former parent, Consolidated Oil &
Gas, Inc., has been engaged in exploration, development and production of oil
and gas reserves in Canada and oil and gas field services. Resources was a
wholly-owned subsidiary of Columbus Energy Corp. ("Parent" or "Columbus") from
1984 until February 24, 1995 when 100% of the Resources shares were sold by its
Parent to its shareholders or the public in a rights offering.
(2) ACCOUNTING POLICIES
The financial statements of the Company are prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") and require the use
of management's estimates. The following is a summary of the significant
accounting policies followed by the Company.
Currency
--------
The amounts in these financial statements and notes thereto are in Canadian
dollars, unless otherwise stated.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
temporary investments to be cash equivalents. Results of hedging activities,
when employed, are included in cash flow from operations in the statements of
cash flows.
Oil and Gas Properties
----------------------
The Company follows the full cost method of accounting whereby all costs
associated with the acquisition of, exploration for and the development of oil
and gas reserves are capitalized. Such costs include land acquisition costs,
geological and geophysical expenditures, drilling productive and non-productive
wells and tangible production equipment. General and administrative expenses
are capitalized to the extent such costs are directly associated with
acquisition, exploration and development of oil and gas properties. Proceeds
from the sale of petroleum and natural gas properties reduce capitalized costs
without recognition of a gain or loss unless such a sale would significantly
alter the rate of depletion and depreciation.
41
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
Capitalized costs, including tangible production equipment, are depleted
using the unit of production method based on proved reserves of oil and gas,
before royalties, as estimated by independent engineers. For purposes of the
calculation, oil and gas reserves are converted to a common unit of measure on
the basis of six thousand cubic feet of gas to one barrel of oil. Depreciation
of the liquid extraction plant and other assets are calculated using the
straight line method over their estimated useful lives.
In applying the full cost method, the Company performs a ceiling test which
restricts the net capitalized costs from exceeding an amount equal to the
estimated undiscounted value of future net revenues from proven oil and gas
reserves, based on current prices and costs, after deducting estimated future
operating costs, development costs, general and administrative expense and
income tax expense.
Estimated future site abandonment and restoration costs are provided using
the unit of production method over the life of proven reserves with the current
year provision included in depreciation, depletion and amortization expense.
Site abandonment and restoration expenditures incurred are recorded as a
reduction of the accumulated accrual.
Income Taxes
------------
The liability method is used in measuring income taxes based on temporary
differences including both timing differences and other differences between the
tax basis of an asset or liability and its carrying amount in the financial
statements. This method uses the tax rate and tax law expected to apply to
taxable income in the periods in which the future income tax asset or liability
is expected to be realized. The Company is subject to tax under applicable
Canadian tax law.
Field Services
--------------
The Company recognizes revenue for field services provided to third parties
from its one-third ownership in the Carbon area liquids extraction plant as well
as from facilities in other fields.
The Company's share of the cost of providing such third party services is
expensed and shown as "field services" cost.
Earnings Per Share
------------------
Basic earnings per share is calculated using the weighted average number of
shares of common stock outstanding during the year. Fully diluted earnings per
share is calculated
42
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
assuming the exercise of outstanding options.
(3) RECLASSIFICATION
Effective for the 1998 fiscal year, Resources has classified its
stockholders' equity to conform to Canadian laws in Alberta to combine stated
capital and additional paid-in capital as share capital as well as to net the
purchase of shares against those accounts when they are cancelled. Accordingly,
year end stockholder equity balances for 1995 through 1997 have been
reclassified as follows:
<TABLE>
<CAPTION>
November 30, Additional
Share Capital Common Stock Paid-in Capital
------------- ------------- ---------------
<S> <C> <C> <C> <C>
1995 As previously reported $ - $ 300 $ 202
Reclassification 502 (300) (202)
As reclassified ------- ----- -----
$ 502 $ - $ -
======= ===== =====
1996 As previously reported $ - $ 318 $ 788
Reclassification 1,106 (318) (788)
As reclassified ------- ----- -----
$ 1,106 $ - $ -
======= ===== =====
1997 As previously reported $ - $ 318 $ 788
Reclassification 1, 106 (318) (788)
As reclassified ------- ----- -----
$ 1,106 $ - $ -
======= ===== =====
</TABLE>
43
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(4) STATEMENTS OF CASH FLOWS
The Company elected to adopt Canadian Institute of Chartered Accountants
(CICA) 1540, Cash Flow Statements for fiscal 1998. This statement requires a
business enterprise to provide a statement of cash flows in place of a statement
of changes in financial position. Application of this statement is required for
fiscal years beginning on or after August 1, 1998, and earlier application is
encouraged. Cash flow information for earlier years that is presented with
corresponding information for the initial year of application is restated to
conform to the requirements of CICA 1540 as follows:
<TABLE>
<CAPTION>
Net Cash Provided by Operating Net Cash Provided by
Year Ended November 30, 1997 Activities (Used In) Investing Activities
- -------------------------------------- ------------------------------- --------------------------------------
<S> <C> <C>
As previously reported $2,108 $(1,649)
Restatement (384) 384
------ -------
As Restated $1,724 $(1,265)
====== =======
</TABLE>
There are no restatements for the year ended November 30, 1996. The
adjustments for 1997 were due to capital expense accruals that are excluded in
calculating cash flows from investing activities.
(5) OIL AND GAS PRODUCING ACTIVITIES
The following tables set forth the capitalized costs related to oil and gas
producing activities, costs incurred in oil and gas property acquisition,
exploration and development activities, and results of operations for producing
activities:
<TABLE>
<CAPTION>
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(in thousands)
<S> <C> <C>
November 30,
-------------------------------
1998 1997
---- ----
Costs being amortized (a) (b) $15,527 $15,383
Less accumulated depreciation, depletion, amortization and valuation allowance (8,003) (7,117)
------- -------
Total net properties $ 7,524 $ 8,266
======= =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes well facilities cost of $664,000 in 1998 and 1997 that are
amortized on a straight-line basis.
(b) In 1998 and 1997 no costs are excluded from amortization.
44
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
<TABLE>
<CAPTION>
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
(in thousands)
Year Ended November 30,
---------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs:
Proved $ 10 $ - $ -
Unproved - 54 65
Exploration costs 54 230 181
Development costs 134 1,159 1,889
----- ------ ------
Total costs incurred $ 198 $1,443 $2,135
===== ====== ======
</TABLE>
During the three years ended November 30, 1998, no general and administrative
expenses have been capitalized.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
(in thousands)
Year Ended November 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $3,235 $3,451 $3,093
Royalties, net of credits 277 387 223
Production (lifting) costs (a) 710 582 620
Depletion and amortization (b) 949 746 614
------ ------ ------
1,299 1,736 1,636
Imputed income tax 325 579 624
------ ------ ------
Results of operations from producing activities
(excluding overhead and interest costs) $ 974 $1,157 $1,012
====== ====== ======
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Production costs only include lease operating expenses.
(b) Depletion and amortization expense per equivalent barrel of production:
1998 - $4.02, 1997 - $3.01, 1996 - $2.15
45
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
MAJOR CUSTOMERS
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Customer 1
Amount sold $2,315,000 $2,190,000 $1,997,000
Percent of revenue 72% 64% 65%
Customer 2
Amount sold $ 425,000 $ 651,000 $ 636,000
Percent of revenue 13% 16% 21%
</TABLE>
The Company sells its own natural gas production in the Carbon and East
Carbon areas directly to gas marketing companies. The operator of the gas
processing plant pays Resources for liquids sold at the plant tailgate and those
amounts are included in Customer 2.
During the fourth quarter of 1998, the Company made a change in
accounting estimate in proved reserves due to a significant decrease in proved
developed non-producing and proved undeveloped reserves. The majority of this
decrease is attributable to the unsuccessful completion of a well in the East
Carbon area and additional offset well information. The effect of this change on
current year operations was an increase in depletion expense of $190,000.
(6) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal $ 19 $ - $ 23
Alberta - 4 2
----- ----- ----
19 4 25
----- ----- ----
Future:
Federal 58 209 215
Alberta 3 90 84
----- ----- ----
61 299 299
----- ----- ----
Total income tax expense $ 80 $ 303 $324
===== ===== ====
</TABLE>
46
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
The total tax provision has resulted in effective tax rates which differ
from the statutory Federal income tax rates. The reasons for these differences
are illustrated by the following table:
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Percent of Pretax Earnings
-------------------------------------------
<S> <C> <C> <C>
Federal Canadian and provincial statutory rates 45% 45% 45%
Resource allowance (46) (19) (13)
Crown royalties, net of credits 26 14 6
Statutory rate change - - 1
Adjustments of prior year amounts and other - (7) (1)
---- ---- ----
Effective rate 25% 33% 38%
==== ==== ====
</TABLE>
The tax effect of significant temporary differences representing Canadian
deferred tax assets and liabilities and charges were as follows (in thousands):
<TABLE>
<CAPTION>
Current Year
Dec. 1, 1997 Activity Nov. 30, 1998
------------ ------------ -------------
<S> <C> <C> <C>
Deferred income tax liabilities:
Temporary differences, principally oil and
gas properties $1,934 $61 $1,995
====== === ======
</TABLE>
For Canadian income tax purposes, Resources has the following tax
attributes available at November 30, 1998 to reduce future taxable income which
have been included in calculating the temporary differences above:
Accumulated property exploration and development costs of $1,696,000,
earned depletion base of $1,167,000 and undepreciated capital cost of
$1,152,000. The tax attributes of carryforward pools are included to
determine the temporary differences shown as deferred tax liabilities.
These attributes generally do not expire.
47
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
The earnings before income taxes for financial statements differed from
taxable income as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------------------------------
1998 1997 1996
-------------- --------------------- ---------------------
<S> <C> <C> <C>
Earnings before income taxes per financial statements
$ 320 $ 908 $ 850
Differences between income before taxes for
financial statement purposes and taxable income:
Book depletion, depreciation and amortization 1,087 882 746
Non-deductible crown royalties, net 190 286 126
Capital cost allowance (354) (409) (429)
Resource allowance (329) (379) (241)
Tax pools utilized (818) (1,283) (1,082)
Earned depletion allowance (22) - -
Other (7) (5) 30
------ ------- -------
Canadian taxable income $ 67 $ - $ -
====== ======= =======
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company incurs certain direct and indirect general and administrative
costs for management services provided by its former Parent in lieu of
expanding the number of its own full-time employees. These costs are
primarily for labor, related benefits and other overhead costs. The following
table sets forth these costs, in thousands, for each period:
Year Ended November 30, 1998 $334
Year Ended November 30, 1997 394
Year Ended November 30, 1996 445
(8) CAPITAL STOCK
During November 1996, the Company issued 79,000 shares of common stock at
U.S. $5.25 per share by private placement using an investment letter under a
Regulation D exemption of which 38,000 shares were purchased by Resources' then
President and Chairman of the Board.
48
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
During June 1998, McDonald Energy, LLC,("McDonald") a Colorado limited
liability company solely owned by Patrick R. McDonald, currently a director,
President and Chief Executive Officer of Resources acquired 70,000 shares of
common stock by direct purchase from Resources for U.S. $5.50 per share.
On October 27, 1994 the Company's Board of Directors authorized an
unlimited number of shares of preferred stock, no par value, none of which is
currently issued.
On October 27, 1994 the Company adopted an Employee Incentive Share Option
Plan (the "Plan"). The Plan is administered by a committee appointed by the
Board of Directors of the Company. The Plan authorizes the committee to grant
options for up to 300,000 shares of the Company's common stock. The shares are
to be issued out of the Company's authorized and unissued shares and will be
issued as fully paid and non-assessable. Also, the number of Resources shares
so reserved for issuance or subject to an option under the Plan to any one
person may not exceed 5% of the number of Resources shares which are outstanding
at the time of the granting of the option.
Options may be granted to officers, directors and regular full and part-
time employees of the Company and majority-owned subsidiaries. Options may be
exercised starting one year after grant. The option term cannot be less than one
year or more than five years from the date the option is granted. The option
price may not be less than 100% of the fair market value of the last trading
price on the date the option is granted.
During 1996, the Board of Directors granted stock options for 30,000 shares
at the exercise price of U.S. $5.50 per share and an option for 10,000 shares
was exercised at the price of U.S. $3.25 per share. At November 30, 1996, there
were 80,000 shares under option at prices ranging from U.S. $3.25 to U.S. $6.00
per share, of which 50,000 shares were exercisable.
No options were granted in fiscal year 1997. At November 30, 1997, there
were 80,000 shares under option at prices ranging from U.S. $3.25 to U.S. $6.00
per share, all of which were exercisable.
During 1998, the Board of Directors granted stock options for 152,000
shares at exercise prices ranging from U.S. $4.625 to U.S. $5.50 per share and a
stock option grant of 10,000 shares at U.S. $6.00 per share expired. At
November 30, 1998 there were 222,000 shares under option at prices ranging from
U.S. $3.25 to U.S. $6.00 per share, of which 70,000 shares are exercisable.
On June 30, 1998, Resources entered into a Stock Purchase Agreement (the
49
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
"Agreement") with McDonald. In connection with the Agreement, McDonald was
granted a one-year option to purchase 250,000 shares of common stock at U.S.
$6.00 per share, all of which are exercisable and were granted in addition to
options granted to Mr. McDonald as a director and officer.
(9) Financial Instruments
The nature of the Company's operations exposes the Company to fluctuations
in commodity prices. The Company attempts to manage these risks by minimizing
its commodity price exposure through the use of derivative contracts. Gain and
losses on these contracts are deferred and recognized in income as an adjustment
to oil and gas sales revenues during the period in which the physical product to
which the contracts relate is actually sold.
During the fourth quarter of 1998, the Company entered into three AECO
C/N.I.T. based forward price hedge transactions. The terms of these
transactions are as follows:
<TABLE>
<CAPTION>
Daily Quantity Contract Quantity Price/
Period GigaJoules GigaJoules GigaJoule
- --------------- -------------- ----------------- ---------
<S> <C> <C> <C>
Nov 98 - Mar 99 1,055 159,000 $2.82
Apr 99 - Oct 99 1,055 226,000 $2.39
Dec 98 - Oct 01 1,055 1,125,000 $2.57
</TABLE>
The unrecognized gain on these contracts totaled $148,000 based on November
30, 1998 market values.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office space in Calgary, Alberta and Denver, Colorado.
These leases are month-to-month with no related future minimum lease payments.
Total rent expense for 1998, 1997 and 1996 was $64,000, $34,000 and $33,000,
respectively.
The Company adopted a separation pay policy effective February 24, 1995
which covers all regular terminations and, in addition, certain "special"
terminations of officers in the case of certain contractions and restrictions of
the Company, or in the event of a change of control of the Company. At the
discretion of the Board of Directors, officers and non-officer employees may
receive upon their retirement the same benefits they would have
50
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
received upon a friendly change of control of the Company. As of November 30,
1998 no benefits are payable.
Resources sells its natural gas production in the Carbon and East Carbon
areas directly to certain gas marketing companies. At November 30, 1998 the
Company had entered into three forward price hedge transactions, as described in
Note 9. The majority of the Company's remaining gas is contracted to a gas
marketing company on a deliverability basis and sold at published index prices
less applicable transportation and marketing charges. The Company has assigned
its firm transportation agreements through October 1999 but has reserved the
right to obtain firm transportation service in its own name.
The Company estimates that future costs of site abandonment and restoration
of well sites, gas processing plant and other facilities will be $310,000 as of
November 30, 1998 in addition to $165,000 already accrued as a liability. The
estimated costs are being recognized on the unit of production basis over the
life of the properties.
51
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(11) INDUSTRY SEGMENTS
The Company's business is primarily participating in (1) oil and gas
exploration and development, and (2) field services.
Summarized financial information concerning the business segments is as
follows:
<TABLE>
<CAPTION>
Year Ended November 30
---------------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Operating revenues from unaffiliated services (a):
<S> <C> <C> <C>
Oil and gas $ 3,007 $ 3,092 $ 2,888
Services 640 633 809
------- ------- -------
Total $ 3,647 $ 3,725 $ 3,697
======= ======= =======
Depreciation, depletion and amortization:
Oil and gas $ 952 $ 749 $ 617
Services 135 133 129
------- ------- -------
Total $ 1,087 $ 882 $ 746
======= ======= =======
Operating income:
Oil and gas $ 951 $ 1,344 $ 1,166
Services 357 316 436
General corporate expenses (984) (751) (747)
------- ------- -------
Total operating income $ 324 $ 909 $ 855
Other expense 4 1 5
------- ------- -------
Earnings before income taxes $ 320 $ 908 $ 850
======= ======= =======
Identifiable assets:
Oil and gas $10,063 $10,076 $ 8,804
Services 1,172 1,302 1,362
------- ------- -------
Total $11,235 $11,378 $10,166
======= ======= =======
Additions to property and equipment:
Oil and gas $ 258 $ 1,444 $ 2,135
Services 4 73 26
------- ------- -------
Total $ 262 $ 1,517 $ 2,161
======= ======= =======
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) Inter-segment revenues of $394,000, $416,000 and $485,000 for 1998, 1997
and 1996, respectively, are included in services revenues and are offset by
the same amounts in oil and gas operating expenses.
52
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(12) CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value because of the short maturity of these
instruments. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and accounts receivable.
The Company maintains demand deposit accounts with separate banks in
Calgary, Alberta and Denver, Colorado. The Company also invests cash in the
highest rated commercial paper of large Canadian companies, with maturities not
over 30 days, which have minimal risk of loss. At November 30, 1998 the Company
had $1,598,000 invested in such commercial paper.
Most jointly owned oil and gas properties are operated by other companies
who sell oil and liquids production to relatively large Canadian oil and gas
purchasers (see Note 5) and who pay vendors of oil and gas services on the
wells. The Company sells its own natural gas production in the Carbon and East
Carbon Areas directly to certain gas marketing companies. The risk of non-
payment by the purchasers or by those operators is monitored and is considered
minimal. The Company does not obtain collateral from these purchasers to assure
payment for sales to them. Joint interest receivables are subject to collection
under the terms of operating agreements which provide lien rights to the
operator.
In management's judgment, termination by any purchaser under which its
present sales are made would not have a material impact upon its ability to sell
its production to another purchaser at similar prices. Also, because the
Company has a high percentage of natural gas reserves, results of operations are
particularly sensitive to current pricing. The sensitivity to current prices
has been partially mitigated by the Company's use of financial instruments that
provide a fixed sales price for a percentage of the Company's production.
(13) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
The financial statements have been prepared in accordance with Canadian
GAAP which differ in certain respects from those principles that the Company
would have followed had its financial statements been prepared in accordance
with U.S. GAAP. Differences in disclosures which affect these financial
statements are:
(a) Under U.S. GAAP, cash (and cash equivalents) includes bank deposits, money
market instruments, and commercial paper with original maturities of three
months or less.
53
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
Canadian GAAP permits the inclusion of temporary investments with maturities
greater than 90 days in cash. The differences in measurement had no impact
on classification in the balance sheets.
(b) Basic earnings per share using U.S. GAAP is the same as basic earnings per
share using Canadian GAAP. Diluted earnings per share using U.S. GAAP uses
the "treasury stock method". Fully diluted earnings per share using
Canadian GAAP assumes cash proceeds from the deemed exercise of stock
options are invested in such a way as to earn a reasonable return but the
number of shares remains the same.
(c) Using the full cost accounting method under U.S. GAAP, the ceiling test is
applied to capitalized costs using a 10% discount factor. There would be no
impairment of the U.S. full cost pool under this method.
Stock Based Compensation Plans
- ------------------------------
Using U.S. GAAP, the Company would have adopted in 1996, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company would have elected to continue to
measure compensation costs for these plans using the current method of
accounting under Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation expense is recognized for stock options granted with an exercise
price equal to the market value of Resources stock on the date of grant. Had
compensation cost for the Company's stock option plan been determined using the
fair-value method in SFAS No. 123, the Company's net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------------------------
1998 1997 1996
---- ---- ----
(Thousand except per share amounts)
Net income
<S> <C> <C> <C>
As reported $ 240 $ 605 $ 526
Pro forma $ 90 $ 581 $ 526
Earnings per share (basic)
As reported $0.16 $0.38 $0.35
Pro forma $0.06 $0.37 $0.35
</TABLE>
54
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
Options are granted at 100% of fair market value on the date of grant. The
following table is a summary of stock option transactions (reported in U.S.
dollars) for the three years ended November 30, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------ --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
(options in thousands)
Shares under option at beginning of year 80 $5.44 80 $5.44 60 $5.04
Granted 152 5.26 - - 30 5.50
Exercised - - - - (10) 3.25
Expired (10) 6.00 - - - -
------------ ---------- -----------
Shares under option at end of year 222 5.29 80 5.44 80 5.44
=========== ========== ==========
Options exercisable at Nov. 30 70 5.36 80 5.44 50 5.39
Shares available for future grant at end of year 68 210 210
Weighted-average fair value of options granted $0.83 N/A $1.28
during the year
</TABLE>
The following table summarizes information about the Company's stock
options (reported in U.S. dollars) outstanding at November 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding (in thousands) Options Exercisable (in thousands)
---------------------------------- ---------------------------------
Weighted Average
Remaining
Range of Exercise Options Outstanding Contractual Life Weighted Average Options Exercisable Weighted Average
Prices At Year End (Years) Exercise Price at Year End Exercise Price
- ------------------- ------------------- -------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.25 - $4.75 50 4.2 $4.40 10 $3.25
$ 5.375 - $5.50 142 3.4 5.47 30 5.50
$ 5.75 - $6.00 30 1.5 5.92 30 5.92
--- --- ----- -- -----
$ 3.25 - $6.00 222 3.3 $5.29 70 $5.36
=== === ===== == =====
</TABLE>
55
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1996
---- ----
<S> <C> <C>
Expected option life - years 1.70 3.00
Risk-free interest rate 5.31% 6.29%
Dividend yield 0% 0%
Volatility 28.35% 20.70%
</TABLE>
No options were granted during 1997.
(14) SUBSEQUENT EVENTS
In December 1998, the Company acquired working interests in 16 producing
natural gas wells and associated leaseholds in the Wayne-Rosedale Field, located
in Alberta, Canada, effective September 1, 1998 for $2.3 million. The assets,
liabilities, revenues and expenses for the period September through November
1998 have not been recorded as of November 30, 1998 because the closing did not
take place until after year end.
In December 1998, the Company secured a financing commitment. The initial
commitment is a $2.5 million revolving production loan. The revolving phase of
the loan will expire on April 30, 1999 and may be renewed by the bank. The
interest rate on outstanding borrowings is the CIBC Prime Rate plus 3/4 of 1%.
56
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
<S> <C>
CEC RESOURCES LTD.
-------------------------------------------------
(Registrant)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Date: February 26, 1999 By: s/Patrick R. McDonald
---------------------------- -----------------------------------------
Patrick R. McDonald
President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive Officer
s/Patrick R. McDonald President and Chief Executive Officer 2/26/99
- ------------------------------------ -------------------------
Patrick R. McDonald
Principal Accounting and Financial Officer
s/Kevin D. Struzeski Treasurer 2/26/99
- ------------------------------------ -------------------------
Kevin D. Struzeski
Majority of Board of Directors
s/James C. Crawford Director 2/26/99
- ------------------------------------ -------------------------
James C. Crawford
s/Loyola G. Keough Director 2/26/99
- ------------------------------------ -------------------------
Loyola G. Keough
s/Patrick R. McDonald Director 2/26/99
- ------------------------------------ -------------------------
Patrick R. McDonald
s/Harry A. Trueblood, Jr. Director 2/26/99
- ------------------------------------ -------------------------
Harry A. Trueblood, Jr.
</TABLE>
57
<PAGE>
[LETTERHEAD APPEARS HERE] EXHIBIT 10(j)
FINANCING COMMITMENT
FOR
CEC RESOURCES LTD.
November 25, 1998
BORROWER: CEC Resources Ltd. (the "Borrower")
- ---------
LENDER: Canadian Imperial Bank of Commerce ("CIBC")
- -------
CONFIDENTIALITY: This Financing Commitment will be treated in confidence
- --------------- by the Borrower And CIBC unless disclosure is required
by law.
AMOUNT: Cdn. $2,500,000 as a revolving production loan (the
- ------ "Revolving Loan")
and
US $1,000,000 as a swap facility (the "Swap
Facility")
(collectively the "Facility").
PURPOSE: Revolving Loan
- -------- --------------
For normal operating requirements and to assist the
Borrower in the exploration, development and acquisition
of oil and gas reserves in Western Canada.
Swap Facility
-------------
To accommodate contingent risk exposure as a result of
Interest Rate Swaps, Commodity Swaps, Forward Rate
Agreements and Forward Exchange Contracts.
BORROWING BASE: This Financing Commitment, subject to Conditions of
- --------------- Funding, permits draws of up to Cdn. $2,500,000 under
the Revolving Loan (the "Borrowing Base") and, subject
to adjustment as herein provided, will remain in effect
until notified by CIBC.
CIBC will undertake, annually or semi-annually if CIBC
so chooses, a review of the Borrower's oil and gas
properties evaluated in an independently prepared
economic engineering evaluation for purposes of
redetermining the Borrowing Base applicable to the
Revolving Loan. To assist in such redetermination, the
Borrower will provide to CIBC operating statements and
such other technical information with respect to the
properties being reviewed as CIBC may request.
1
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
CIBC reserves the right to request an independent economic
engineering evaluation prepared annually by an engineering
firm chosen by the Borrower and acceptable to CIBC.
Should CIBC determine at any time that there is a Borrowing
Base Shortfall, the Borrower will, within 60 days, use
whatever means necessary to reduce its indebtedness under
this Financing Commitment by that amount stipulated by CIBC,
or alternatively pledge additional security to CIBC
sufficient to cover, in CIBC's opinion, such deficiency.
While a Borrowing Base Shortfall exists, the Borrower shall:
* not request new Availments except for the rollover or
conversion of a then maturing Availment;
* provide CIBC with information needed to determine the
Borrower's Available Cash Flow;
* dedicate on a monthly basis for repayment of this
Financing Commitment such portion of its Available Cash
Flow as is required to eliminate the Borrowing Base
Shortfall; and
* pay the increased compensation required under the heading
"Rates and Stamping Fees".
AVAILABILITY: Revolving Loan
- ------------- --------------
The Financing Commitment can be advanced by way of any
combination of the following Availments:
* overdraft borrowings;
* letters of credit, letters of guarantee, cheque credits,
bid cheques for out of Province land sales, or corporate
visa, (collectively the "Sundry Options").
Swap Facility
-------------
At the Borrower's request and subject to market availability,
CIBC will provide quotes for (I) interest rate swaps and
forward rate agreements to provide fixed or floating rate
funding for part or all of the Production Loan (II) commodity
swaps covering a portion of the Borrower's oil and gas
production, and (III) forward exchange contracts, subject to
the following:
a. Interest Rate Swaps and Forward Rate Agreements - terms
shall not exceed the lesser of four years and the date
of expiry or termination of the Term Phase, with
aggregate amounts hedged not to exceed 75% of the
average Principal Indebtedness outstanding during the
Borrower's previous fiscal quarter;
2
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
b. Commodity Swaps - terms shall not exceed the lesser
of three years (unless otherwise agreed) and the
date of expiry or termination of the Term Phase,
with aggregate production volumes hedged from all
sources, for both gas and oil, not to exceed 60% of
the Borrower's average production as forecast by
CIBC;
C. Forward Exchange Contracts - terms shall not exceed
the lesser of four years and the date of expiry or
termination of the Term Phase, with aggregate
amounts hedged not to exceed 75% of the Borrower's
applicable foreign revenue;
provided that in all instances, the Borrower's contingent
liability to CIBC under the Swap Facility shall rank pari
passu with the Principal Indebtedness.
TERM: The Revolving Phase of the Revolving Loan will expire on
- ----- April 30, 1999 but at the request of the Borrower the
Revolving Loan may be renewed upon such terms and for such,
period (not to exceed in any event 364 days) as CIBC may in
its discretion agree to (a "Revolving Period").
REPAYMENT: Revolving Phase
- ---------- ---------------
The Revolving Loan will revolve and fluctuate at the
Borrower's option until April 30, 1999 with interest payments
to be made monthly in arrears. While the Revolving Loan is in
the Revolving Phase, the Borrower may, at least 60 days prior
to the termination of the Revolving Phase, request an
extension of the Revolving Phase provided:
* the extension is for 364 days or less;
* the extension will not result in the then current
Revolving Period extending beyond 364 days; and
* CIBC, in its unrestricted discretion, consents to the
extension.
An extension of the Revolving Phase will create a new and
separate Revolving Period which, in turn can only be extended
as provided above.
Upon the expiration or termination of the Revolving Phase,
any amount undrawn under the Revolving Loan will be
permanently cancelled.
Term Phase
----------
During the Term Phase, the Revolving Loan will be permanently
reduced by way of consecutive monthly principal payments over
an amortization period consistent with the Borrower's cash
flow profile, as determined by CIBC, by applying its usual
practice for similar type loans in comparable circumstances,
provided that such amortization period shall not exceed 48
months.
3
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
Where used herein, the term "Term Phase" means the period
commencing after the end of the Revolving Phase until
repayment of the Revolving Loan in full.
PREPAYMENT AND
CANCELLATION: The Borrower may permanently prepay the Facility in hole or
- ------------- in part, subject to the following:
* all prepayments will be made in inverse order of maturity;
* Availments by way of commodity swaps, interest rate swaps,
forward rate agreements and forward exchange contracts may
be prepaid only at maturity except where the Borrower
agrees to pay CIBC's breaking costs due to early
redemption of offsetting positions or otherwise, including
all costs associated with reversing positions, provided
such early redemption is possible;
* prepayment sourced through another financial institution
will be subject to a prepayment penalty of 1% of the
amount prepaid; and
* the Borrower may at any time, upon giving CIBC two Banking
Days prior notice, cancel any unused part of the Facility
and any cancelled portion will not be reinstated.
INTEREST RATES
AND FEES: CIBC Prime Rate in effect from time to time plus 3/4% of 1%
- -------------- per annum.
Standby Fee
-----------
1/4 of 1% per annum calculated on the undrawn portion of the
available and unused Revolving Loan is payable by the
Borrower monthly in arrears.
Sundry Options
--------------
Fees on Sundry Options are subject to change without notice
and are payable by the Borrower as follows:
Letters of Credit/ - 1.3% per annum or portion thereof
Letters of Guarantee in advance with a minimum of $150
Corporate Visa - CIBC standard rates
Bid Cheques - 2.0% per annum plus $10.00 per
cheque
CIBC's costs, including legal and the cost to prepare any
environmental assessments, in connection with the
preparation, establishment, operation or enforcement of this
Financing Commitment, including the Security, are for the
account of the Borrower.
A Cdn. $7,500 structure fee is payable upon the Borrower's
acceptance of the terms and conditions hereof.
4
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
Term Phase
----------
During the Term Phase, the interest rates then applicable to
CIBC Prime Rate loans shall each increase by 1 % per annum.
Borrowing Base Shortfall or Event of Default
--------------------------------------------
Effective on the 30th day following receipt by the Borrower
of a notice of a Borrowing Base Shortfall or an Event of
Default (the "Effective Date"), the interest rates then
applicable to CIBC Prime Rate loans shall increase by 1 % per
annum and such increase shall remain in effect for as long as
a Borrowing Base Shortfall or Event of Default subsists.
SECURITY: The Borrower will provide to CIBC and maintain the
- --------- following as security for all obligations of the Borrower
arising under this Financing Commitment, including any
liability or exposure of CIBC under the Sundry Options and
the Swap Facility.
* Demand Debenture in the amount of Cdn. $10,000,000
conveying first floating charge over all of the Borrower's
property and assets, both present and future acquired,
registered in all jurisdictions in which the Borrower
carries on business;
* Negative pledge and undertaking to provide fixed charge
security;
* General Security Agreement providing a first priority
security interest in all present and after-acquired
personal property of the Borrower;
* Standard CIBC agreement respecting hydrocarbons;
* Officers certificate confirming ownership of the
Borrower's oil and gas properties and interests as
evaluated by CIBC;
* Standard CIBC agreement and documentation relative to
Sundry Options;
* Standard ISDA form agreement relative to swap
transactions; and
* Standard CIBC overdraft lending agreement.
(collectively the "Security").
In the event of any conflict between this Financing
Commitment and the Security, this Financing Commitment shall
govern.
5
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
CONDITIONS
OF FUNDING: Conditions Precedent to Drawdown. CIBC's obligation to
- ----------- --------------------------------
provide Availments shall be subject to the following
conditions precedent being met, unless waived in writing by
CIBC:
* receipt by CIBC of the Financing Commitment and the
Security, all duly authorized, executed and delivered,
together with appropriate opinion letters from legal
counsel to the Borrower and to CIBC;
* satisfactory review of the Borrower's environmental
management policies and practices, and Year 2000
readiness;
* no Event of Default shall have occurred nor any event
which, after notice or lapse of time or both, would become
an Event of Default;
* CIBC's review of title opinions in respect of the oil and
gas properties to be acquired by the Borrower, and CIBC's
being satisfied as to the title to such interests being so
acquired;
Additional Condition. In addition to the conditions set
--------------------
forth above, CIBC's obligation to provide Availments other
than rollovers or conversions of a then maturing advance,
shall be suspended for as long as there exists a Borrowing
Base Shortfall.
Corporate Acquisitions. The Borrower shall not utilize,
----------------------
whether directly or indirectly, Availments to facilitate,
assist or participate in a Corporate acquisition without the
prior consent of CIBC.
REPORTING
REQUIREMENTS: The Borrower will provide to CIBC:
- -------------
* audited financial statements within 120 days of the
Borrower's fiscal year end;
* unaudited quarterly financial statements within 90 days of
the end of the first three fiscal quarters of each fiscal
year;
* an independently prepared economic engineering evaluation
covering the Borrower's oil and gas properties along with
annual cash flow projections and capital expenditure
budgets within 120 days of the end of each fiscal year;
* Quarterly production revenue statements within 60 days of
each quarter end, such statements indicating the gross oil
and gas production, net production, total revenues,
royalties and other burdens, operating expenses and net
revenues, in a format acceptable to CIBC;
* such other documentation and information as CIBC may
reasonably request, including any internally or
independently prepared environmental assessment reports.
6
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
DISPOSITION
LIMIT: In addition to the Borrower's covenants found in Schedule
- ------ A, the Borrower will not sell, convey or otherwise dispose of
any of its Proved Producing Reserves or related facilities,
other than in the normal course of business and on arm's
length terms, provided that, if cumulative proceeds of all
dispositions to be received by the Borrower exceed $250,000
such proceeds will be used to permanently repay the Principal
Indebtedness, unless other arrangements are made with CIBC;
INDEMNITY: The Borrower agrees to indemnify and hold CIBC and its
- ---------- officers, directors, employees and agents harmless against
any and all liabilities and costs associated with or as a
result of any breach or non-compliance of any legislation,
order, directive or judgement by the Borrower for the
protection of the environment. This indemnity will survive
the repayment, cancellation or termination of this Financing
Commitment.
NOTICES: Any notice or communication to be given hereunder and under
- -------- the Security may be effectively given by delivering the same
at the addresses hereinafter set forth or by telecopy or by
sending the same by prepaid registered mail to the parties at
such addresses. Any notice so mailed will be deemed to have
been given upon actual receipt thereof. The mailing address
of the parties are:
CEC Resources Ltd.
Suite 1150,1700 Broadway
Denver, Colorado
80290
Attention: Patrick R. McDonald, President
Telecopy: 303-860-9128
Canadian Imperial Bank of Commerce
Oil & Gas Group
10th Floor Bankers Hall
855 - 2nd Street S.W.
Calgary, Alberta
T2P 2P2
Attention: Vice President, Oil & Gas
Telecopy: 403-221-5779
Either party may from time to time notify the other, in
accordance with the provisions hereof, of any change of
address or addressee, which thereafter, until changed by like
notice, will be the address of such party for all purposes of
this Financing Commitment and the Security.
7
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
GENERAL TERMS
AND CONDITIONS: Schedule "A" contains general definitions, covenants, events
- --------------- of default, terms and conditions which form part of this
Financing Commitment.
OUR FINANCING COMMITMENT IS OPEN TO ACCEPTANCE BY YOU ON
OR PRIOR TO DECEMBER 4,1998.
CANADIAN IMPERIAL BANK OF COMMERCE
Per: /s/ Darel J. Ellert
_____________________
Name: Darel J. Ellert
Title: Manager, Commercial Banking
Per: /s/ Peter G. Fortune
_____________________
Name: Peter G. Fortune
Title: Risk Manager
THE ABOVE TERMS AND CONDITIONS AND THOSE CONTAINED IN THE
ATTACHED SCHEDULE "A" ARE AGREED TO BE EFFECTIVE THE 26TH DAY
OF NOVEMBER, 1998.
CEC RESOURCES LTD.
Per:__________________________
Name: Patrick R. McDonald
Title: President
Per:__________________________
Name:
Title:
8
<PAGE>
[CIBC LETTERHEAD APPEARS HERE]
THIS IS SCHEDULE A TO THE FINANCING COMMITMENT OF
CANADIAN IMPERIAL BANK OF COMMERCE IN FAVOUR OF
CEC RESOURCES LTD. DATED NOVEMBER 25,1998
ARTICLE I
DEFINITIONS
1.1 Definitions Capitalized words and phrases used in the Financing Commitment
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and in all notices and communications expressed to be made pursuant thereto
shall have the meanings set out below, unless otherwise defined in this
Financing Commitment.
"Available Cash Flow' means, in respect of the Borrower for any period, its
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revenue from operations (including net proceeds of a Property Disposition) for
such period, less:
(a) royalties and other contractual obligations necessary to preserve and
maintain title to its oil and gas properties for such period;
(b) interest or other fees pursuant to this Financing Commitment;
(C) its reasonable general, administrative and operating expenses for such
period;
(d) taxes applicable to such period;
(e) reasonable abandonment and reclamation costs consistent with industry
standards; and
(f) any other amounts that CIBC may allow in writing.
"Availment" means an availment by the Borrower permitted under this Financing
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Commitment.
"Banking Day" means any day, other than a Saturday or Sunday, on which Canadian
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chartered banks are open for domestic business in Calgary, Alberta.
"Borrowing Base Shortfall" means that amount expressed in Canadian Dollars by
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which the Principal Indebtedness under the Facility at any time exceeds the then
existing Borrowing Base applicable to the Facility.
"Cdn. Dollars" means such currency of Canada which, as at the time of payment or
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determination, is legal tender in Canada for the payment of public or private
debts.
"CIBC Prime Rate" means the variable rate of interest quoted by CIBC from time
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to time as the reference rate of interest which it employs to determine the
interest rate it will charge for demand loans in Canadian Dollars to its
customers in Canada and which it designates as its prime rate.
"Distribution" means any:
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(a) payment of any dividend on or in respect of any shares of any class in the
capital of the Borrower (including any shares thereof acquired through the
exercise of warrants or rights of conversion, exchange or purchase);
(b) redemption, retraction, purchase or other acquisition or retirement, in
whole or in part, of shares of any class in the capital of the Borrower
(including any shares thereof acquired through the exercise of warrants or
rights of conversion, exchange or purchase); or
(c) payment of principal, interest or other amounts in whole or in part, of any
indebtedness of the Borrower for borrowed money (including without
limitation, any indebtedness incurred or assumed by the Borrower pursuant
to a capital lease or operating lease);
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to (in the case of (a) and (c)) or by or from (in the case of (b)) any
shareholder or any affiliate of a shareholder of the Borrower, whether made or
paid in or for cash, property or both, or the transfer of any property for
consideration of less than fair market value to any shareholder any affiliate of
a shareholder of the Borrower.
Event of Default" means an Event of Default as set out in Section 5.1 of this
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Schedule A.
"Full Life Net Present Worth" means, at any time, the discounted net present
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value, as determined by CIBC, of the Borrower's forecasted cash flow, based on
CIBC's estimate of the present and future production derived from those Proved
Producing Reserves as are considered by CIBC in determining the Borrowing Base,
and as adjusted by CIBC using the discount rates, inflation rates and pricing
forecast as applied by CIBC based on its then current lending practice for loans
of a similar nature to the Facility and with respect to similar type property,
"Material Adverse Change" means a material adverse change in:
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(a) the financial condition of the Borrower;
(b) the Borrower's ability to perform its obligations under this Financing
Commitment;
(c) the property, business, operations or liabilities of the Borrower; or
(d) the lending value of the Borrower's oil and gas properties.
"Material Adverse Effect" means a material adverse effect on:
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(a) the financial condition of the Borrower;
(b) the Borrower's ability to perform its obligations under this Financing
Commitment;
(c) the property, business, operations or liabilities of the Borrower; or
(d) the lending value of the Borrower's oil and gas properties.
"Permitted Encumbrances" means:
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(a) undetermined or inchoate liens arising in the ordinary course of and
incidental to construction or current operations which have not been filed
pursuant to law against the Borrower or in respect of which no steps or
proceedings to enforce such lien have been initiated or which relate to
obligations which are not due or delinquent or if due or delinquent, any
lien which the Borrower will be contesting in good faith if such contest
will involve, in the opinion of CIBC, no risk of loss of any material part
of the property of the Borrower;
(b) liens incurred or created in the Borrower's ordinary course of business and
in accordance with sound industry practice in respect of the joint
operation of oil and gas properties or related production or processing
facilities as security in favour of a person conducting the development or
operation of the property to which such liens relate, for the Borrower's
portion of the costs and expenses of such development or operation,
provided that such costs or expenses are not due or delinquent or if due or
delinquent, any lien which the Borrower will be contesting in good faith if
such contest will involve, in the opinion of CIBC, no risk of loss of any
material part of the property of he Borrower;
(c) to the extent a security interest is constituted or created thereby, a sale
or disposition of oil and gas properties resulting from any pooling or unit
agreement entered into in the ordinary course of business when, in the
Borrower's reasonable judgement, it is necessary to do so to facilitate the
orderly exploration, development or operation of such properties, provided
that the Borrower's resulting pooled or unitized interest is proportional
to the interest contributed by it and is not materially less than the
Borrower's interest in such oil and gas properties prior to such pooling or
unitization, and its obligations in respect thereof, are not greater than
its proportional share based on the interest acquired by it;
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(d) to the extent a security interest is constituted or created thereby,
farmouts or overriding royalty interests, net profit interests,
reversionary interests and carried interests in respect of the Borrower's
oil and gas properties that are entered into with or granted to arm's
length third parties in the ordinary course of business and in accordance
with sound industry practice;
(e) liens for penalties arising under non-participation provisions of operating
agreements in respect of the Borrower's oil and gas properties, if such
liens do not, in the opinion of CIBC, materially detract from the value of
any material part of the property of the Borrower;
(f) easements, rights-of-way, servitudes, zoning or other similar rights, or
restrictions in respect of land owned by the Borrower (including, without
limitation, rights-of-way and servitudes for railways, sewers, drains, pipe
lines, gas and water mains, electric light and, power and telephone or
telegraph or cable television conduits, poles, wires and cables) which,
either alone or in the aggregate, do not, in the opinion of CIBC,
materially detract from the value of such land or materially impair its use
in the operation of the business of the Borrower;
(g) any lien or trust arising in connection with worker's compensation,
unemployment insurance, pension and employment laws or regulations;
(h) the right reserved to or vested in any municipality or governmental or
other public authority by the terms of any lease, license, franchise, grant
or permit acquired by the Borrower, or by any statutory provision to
terminate any such lease, license, franchise, grant or permit or to require
annual or other periodic payments as a condition of the continuance
thereof;
(i) all reservations in the original grant from the Crown of any lands and
premises or any interests therein and all statutory exceptions,
qualifications and reservations in respect of title;
(j) to the extent a security interest is constituted or created thereby, any
right of first refusal in favour of any person granted in the ordinary
course of business with respect to the oil and gas properties of the
Borrower;
(k) any claim or encumbrance from time to time disclosed by the Borrower to
CIBC and which is consented to in writing by CIBC;
(l) to the extent a security interest is constituted or created thereby, sales
of production made in the ordinary course of business, sale and leaseback
transactions and purchase money security interests on property other than
property used by CIBC to establish the then applicable Borrowing Base; and
(m) public and statutory liens not yet due arising by operation of law.
"Permitted Indebtedness" means:
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(a) all trade payables and other similar indebtedness of the Borrower not past
due by more than 60 days (other than indebtedness for borrowed money)
incurred in the normal course of business, provided each such indebtedness
is classified as a current liability on the Borrowers' financial statements
and based on generally accepted accounting principles in Canada;
(b) all indebtedness of the Borrower to CIBC under this Financing Commitment;
(C) all indebtedness arising from the sale and leaseback by the Borrower of
personal property to be used in its ongoing oil and gas operations,
provided such indebtedness does not in the aggregate exceed at any one time
5% of the then applicable Borrowing Base; and
(d) any other indebtedness of the Borrower consented to in writing by CIBC.
"Principal Indebtedness" means at anytime the outstanding principal indebtedness
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owed by the Borrower to CIBC under this Financing Commitment, including any
contingent obligations or exposure of CIBC arising from any availment of the
Sundry Options.
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"Property Disposition" means any sale, transfer or swap of, grant of a security
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interest in or loss, destruction or any other disposition whatsoever, whether
voluntary or involuntary, of any of the Borrower's oil and gas properties used
in the determination of the Borrowing Base.
"Proved Producing Reserves" means those oil and gas reserves estimated as
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recoverable under current technology and existing economic conditions from that
portion of a reservoir which can be reasonably evaluated as economically
productive on the basis of analysis of drilling, geological, geophysical and
engineering data, including reserves to be obtained by enhanced recovery
processes demonstrated to be economic and technically successful in the subject
reservoir and which are actually on production.
"Quarter" means a 3 Month period commencing on the first day of each and every
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January, April, July and October.
1.2 Number. Wherever the context of this Financing Commitment so requires,
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a term used herein importing the singular shall also include the plural and vice
versa.
7.6 Monetary References. Whenever an amount of money is referred to in any
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of the Documents, such amount shall, unless otherwise expressly stated, be in
Canadian dollars.
7.7 Time. Time shall be of the essence in this Financing Commitment.
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1.5 Governing Law. This Financing Commitment shall be governed by and
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construed in accordance with the Laws in force in the Province of Alberta from
time to time.
1.6 Enurement. This Financing Commitment shall be binding upon and shall
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enure to the benefit of the Borrower and its respective successors and permitted
assigns.
1.7. Amendments. This Financing Commitment may only be amended by an
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instrument in writing signed by the parties.
1.8. No Waiver
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(a) No waiver by a party of any provision or of the breach of any provision of
any of this Financing Commitment shall be effective unless it is contained
in a written instrument duly executed by an authorized officer or
representative of such party. Such written waiver shall affect only the
matter specifically identified in the instrument granting the waiver and
shall not extend to any other matter, provision or breach.
(b) The failure of a party to take any steps in exercising any right in respect
of the breach or nonfulfillment of any provision of any of this Financing
Commitment shall not operate as a waiver of that right, breach or
provision, nor shall any single or partial exercise of any right preclude
any other or future exercise of that right or that right or the exercise of
any other right, whether in law or otherwise.
1.9 Severability. If the whole or any portion of this Financing Commitment
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or the application thereof to any circumstance shall be held invalid or
unenforceable to an extent that does not affect the operation of this Financing
Commitment in a fundamental way, the remainder of the provision in question, or
its application to any circumstance other than that to which it has been held
invalid or unenforceable, and the remainder of this Financing Commitment, shall
not be affected thereby and shall be valid and enforceable to the fullest extent
permitted by law.
1.10 Accounting Terms and Principles. Except as otherwise expressly provided,
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all accounting terms, principles and calculations applicable to this Financing
Commitment, including the financial statements of the Borrower shall, be
interpreted, applied and calculated, as the case may be, in accordance with
Canadian generally accepted accounting principles. The basis of accounting
shall be applied and made on a consistent basis and shall not be changed unless
agreed to by CIBC in writing, such consent not to be unreasonably withheld.
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ARTICLE 2
CALCULATION OF INTEREST AND FEES
2.1 Records. CIBC shall maintain records, in written or electronic form,
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evidencing all advances and all other indebtedness owing by the Borrower to CIBC
under this Financing Commitment. CIBC shall enter in such records details of all
amounts from time to time owing, paid or prepaid by the Borrower to it
hereunder. The information entered in such records shall constitute prima facie
evidence of the indebtedness of the Borrower to CIBC under this Financing
Commitment.
2.2 Payment of Interest and Fees
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(a) Interest. Except as expressly stated otherwise herein, all CIBC Prime Rate
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loans from time to time outstanding hereunder shall bear interest, as well
after as before maturity, default and judgment, with interest on overdue
interest, at the applicable rates. Interest payable at a variable rate
shall be adjusted automatically without notice to the Borrower whenever
there is a variation in such rate.
(b) Calculation of Interest. Interest on CIBC Prime Rate loans shall accrue and
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be calculated daily and be payable on such Banking Day as is customary for
CIBC having regard to its then existing practice. Interest on CIBC Prime
Rate loans shall be calculated on the basis of a 365 day year.
(c) Interest Act (Canada). For the purposes of the Interest Act (Canada) and
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all other applicable laws which may hereafter regulate the calculation or
computation of interest in this Financing Commitment, the annual rates of
interest and fees applicable to CIBC Prime Rate loans are the rates as
determined under this Financing Commitment multiplied by the actual number
of days in a period of one year commencing on the first day of the period
for which such interest is payable and divided by 365.
2.3 Waiver of Judgment Interest Act (Alberta). To the extent permitted by
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applicable law, the provisions of the Judgment Interest Act (Alberta) shall not
apply to this Financing Commitment and are hereby expressly waived by the
Borrower.
2.4 Deemed Reinvestment Not Applicable. For the purposes of the Interest Act
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(Canada), the principle of deemed reinvestment of interest shall not apply to
any interest calculation under this Financing Commitment and the rates of
interest stipulated in this Financing Commitment are intended to be nominal
rates and not effective rates or yields.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
3.1 Representations and Warranties The Borrower hereby represents and warrants
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to CIBC as of the date of this Financing Commitment and each time the Borrower
requests an Availment that:
(a) Incorporation, Organization and Power, The Borrower has been duly
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incorporated and is validly existing under the laws of its jurisdiction of
incorporation and is duly registered to carry on business in each
jurisdiction in Canada in which the nature of any material business carried
on by it or the character of any property owned or leased by it makes such
registration necessary, and it has full corporate power and capacity to
enter into and perform its obligations under this Financing Commitment and
to carry on its business as currently conducted.
(b) Authorization and Status of Agreements. This Financing Commitment and the
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Security have been duly authorized, executed and delivered by the Borrower
and does not conflict with or contravene or constitute a default or create
an encumbrance, other than a Permitted Encumbrance, under:
(i) its constating documents or by-laws or any resolution of its
directors or partners, as the case may be:
(ii) any agreement or document to which it is a party or by which any of its
property is bound; or
(iii) any applicable law,
the contravention of which would have a Material Adverse Effect.
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(c) Enforceability. This Financing Commitment and the Security constitutes the
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Borrower's valid and binding obligations and each is enforceable against it
in accordance with its terms, except to the extent that enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, or similar
statutes affecting the enforcement of creditors' rights generally and by
general principles of equity.
(d) Litigation. There are no actions, suits or proceedings at law or before or
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by any administrative body existing or pending, or to the Borrowers
knowledge threatened, or which, to the Borrower's knowledge, it is
threatened to be made a party and the result of which would, if successful
against it, have a Material Adverse Effect or cause a Material Adverse
Change.
(e) Environmental Laws. The Borrower has obtained all material permits,
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licenses and other authorizations which are required under environmental
laws. The Borrower is in full compliance with environmental laws and with
the terms and conditions of all such permits, licenses and authorizations,
except to the extent that failure to so comply would not have a Material
Adverse Effect or cause a Material Adverse Change.
(f) Environmental Condition of Property. The property or any part thereof
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owned, operated or controlled by the Borrower:
(i) is not, to the knowledge of the Borrower, the subject of any outstanding
claim, charge or order from an administrative body alleging violation of
environmental laws or, if subject to any such claim, charge or order,
the Borrower is taking or causing to be taken, with respect to its
subsidiaries all such remedial, corrective or other action required
under the claim, charge or order or is diligently and in good faith
contesting or causing its subsidiaries to contest the validity thereof;
and
(ii) complies, with respect to each of its use and operation, in all material
respects with environmental laws and with the terms and conditions of
all permits, licenses and other authorizations which are required to be
obtained by each of them under applicable environmental laws.
(g) Title to Properties. The Borrower has and shall continue to maintain good,
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beneficial and valid title to its oil and gas properties, subject only to
Permitted Encumbrances, and is entitled to charge its interest in such
properties in favour of CIBC under the Security without the need to obtain
the consent of or release from any other person and such oil and gas
properties are not held in trust for any other person other than as
disclosed in writing to CIBC.
(h) Operation of Properties. To the best of the Borrower's knowledge,
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information and belief, after due enquiry, all oil, gas and other wells
have been and shall continue to be drilled, completed, shut-in, abandoned
(and if required to be so abandoned, abandoned in accordance with
applicable law), and the facilities, plants and equipment in respect
thereof have been and shall continue to be operated and maintained, as the
case may be, in a good and workmanlike manner in accordance with sound
industry practice and in accordance with all applicable laws, except to the
extent that the failure to comply would not have a Material Adverse Affect
or cause a Material Adverse Change.
(i) No Adverse Change. The most recent audited financial statements of the
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Borrower provided to CIBC were prepared in accordance with Canadian
generally accepted accounting principles and such audited financial
statements present fairly in all material respects the Borrower's financial
position as at the date thereof and since that date there has been no
Material Adverse Change.
(j) Information. All factual information heretofore or contemporaneously
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furnished by or on behalf of the Borrower to CIBC in connection with this
Financing Commitment is true and accurate in all material respects and the
Borrower is not aware of any omission of any material fact which renders
such factual information incomplete or misleading in any material way.
(k) No Breach of Orders, Licences or Statutes. The Borrower is not in breach
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of:
(i) any order, approval or mandatory requirement or directive of any
administrative body;
(ii) any governmental licence or permit; or
(iii) any applicable law,
the breach of which would have a Material Adverse Effect.
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(l) No Default. No Event of Default has occurred and no event with the passage
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of time or the giving of notice, or both, has which would become an Event
of Default.
(m) Approval. All material regulatory approvals, permits and licenses
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necessary for the Borrower to carry on its business, as currently carried
on, and all approvals, and consents necessary for it to enter into this
Financing Commitment and the Security and perform its obligations
thereunder have, in each case, been obtained and are in good standing.
(n) Subsidiaries. The Borrower has no director indirect subsidiaries other than
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as disclosed in writing to CIBC.
3.2 Acknowledgement. The Borrower acknowledges that CIBC is relying
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upon the representations and warranties in this Article 3 in making this
Financing Commitment available to the Borrower and that the representations and
warranties herein shall be deemed to be restated in every respect effective on
the date each and every Availment is made under this Financing Commitment.
ARTICLE 4
COVENANTS OF THE BORROWER
4.1 Affirmative Covenants. While any indebtedness under this Financing
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Commitment and the Security is outstanding or any of the Availments remains
available to the Borrower and except with the written consent of CIBC, the
Borrower covenants with CIBC that:
(a) Punctual Payment. The Borrower shall pay or cause to be paid all
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indebtedness and other amounts payable under this Financing Commitment and
the Security punctually when due.
(b) Corporate Existence. The Borrower shall do or shall cause to be done all
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things necessary to preserve and keep in full force and effect its
corporate existence in good standing as a corporation under the laws of its
jurisdiction of incorporation.
(c) Inspection by CIBC. The Borrower shall allow and do all things necessary
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to enable CIBC, acting reasonably, from time to time to inspect all of the
Borrower's corporate and financial records located at its plants and sites
including where the Borrower may otherwise carry on business.
(d) Notice of Event of Default. The Borrower shall notify CIBC of the
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occurrence of any Event of Default, or of any event which with the passage
of time or the giving of notice, or both, would become an Event of Default,
forthwith upon becoming aware thereof and specify in such notice the nature
of the event and the steps taken or proposed to be taken to remedy the
same.
(e) Notice of Environmental Damage. The Borrower shall, promptly upon acquiring
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knowledge thereof, notify CIBC of the discovery of any contaminant or of
any release of a contaminant into the environment from or upon the land or
property owned, operated or controlled by the Borrower which could
reasonably be expected to have a Material Adverse Effect.
(f) Environmental Certificates. The Borrower shall provide an environmental
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certificate in CIBC's standard form to CIBC at the same time as the
delivery of its annual financial statements.
(g) Additional Environmental Information. The Borrower shall upon the
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request of CIBC make available for discussion with CIBC and its nominee at
all reasonable times the individuals who were involved in the preparation
of any environmental certificate given hereunder.
(h) Operation of Properties. The Borrower shall operate its property or, if it
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is not the operator, use reasonable efforts to ensure that such property is
operated, in accordance with sound industry practice and in accordance with
all applicable laws.
(i) Performance of Leases. The Borrower shall perform or cause to be
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performed all obligations under all leases relating to its oil and gas
properties, including payment of rentals, royalties, taxes or other charges
in respect thereof which are necessary to maintain all such leases in good
standing in all material respects, provided that this covenant shall not
restrict their right to surrender leases which are uneconomic to maintain.
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(j) Insurance. The Borrower shall maintain or cause to be maintained adequate
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insurance in respect of its property, including all wellhead equipment and
other plant and equipment according to prudent industry standards, and
shall provide CIBC with copies of all insurance policies relating thereto
if so requested.
(k) Material Adverse Claims. The Borrower shall, except for Permitted
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Encumbrances, defend its property from all material adverse claims where
the failure to do so may have a Material Adverse Effect.
(l) Protection of Security. The Borrower shall do all things reasonably
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requested by CIBC to protect and maintain the Security and the priority
thereof in relation to other persons.
(m) Environmental Audit. If CIBC, acting reasonably, determines that the
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Borrower's obligations or other liabilities in respect of matters dealing
with the protection or contamination of the environment or the maintenance
of health and safety standards, whether contingent or actual, may have a
Material Adverse Effect then, at the request of CIBC, the Borrower shall
assist CIBC in conducting an environmental audit of the property which is
the subject matter of such contingent or actual obligations or liabilities,
by an independent consultant selected by CIBC. The cost of such audit shall
be for the account of the Borrower, provided that, CIBC shall carry out
such audit in consultation with the Borrower to expedite its completion in
a cost effective manner. Should the result of such audit indicate that the
Borrower is in breach, or with the passage of time is likely to be in
breach, of any environment law and such breach or potential breach has or
may have, in the opinion of CIBC, acting reasonably, a Material Adverse
Effect, and without in any way prejudicing or suspending any of the rights
and remedies of CIBC under this Financing Commitment, the Borrower shall
forthwith commence and diligently proceed to rectify or cause to be
rectified such breach or potential breach, as the case may be, and shall
keep CIBC fully advised of the actions it intends to take and has taken to
rectify such breach or potential breach and the progress it is making in
rectifying same. CIBC shall be permitted to retain, for the account of the
Borrower, the services of a consultant to monitor the Borrower's compliance
with this Section 4.1 (m).
(n) Other Information. The Borrower shall provide to CIBC, at the request of
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CIBC acting reasonably, such other documentation and information concerning
the Borrower and its business as CIBC may require.
(o) Security, The Security shall be in such form or forms as shall be required
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by CIBC acting reasonably, and shall be registered in such offices in
Canada or any Province thereof as CIBC may from time to time require to
protect the security interests created thereby. Should CIBC determine at
any time and from time to time that the form and nature of the then
existing Security is deficient in any way or does not fully provide CIBC
with the security interests and priority to which CIBC is entitled
hereunder, the Borrower shall forthwith execute and deliver or cause to be
executed and delivered to CIBC, at the Borrower's expense, such amendments
to the Security or provide such new security as CIBC may reasonably
request.
(p) Fixed Charge Security. If CIBC determines in its sole discretion that there
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has been a Material Adverse Change (including the occurrence of a Borrowing
Base Shortfall) and CIBC considers it necessary for its adequate
protection, the Borrower, at the request of CIBC, shall forthwith grant or
cause to be granted to CIBC, a fixed charge and security interest (subject
only to Permitted Encumbrances which under applicable law rank in priority
thereto) in such of the Borrowers property as CIBC shall, in its sole
discretion, determine as security for all then present and future
indebtedness of the Borrower to CIBC under this Financing Commitment. In
this connection, the Borrower shall:
(i) provide CIBC with such information as is reasonably required by CIBC to
identify the property to be so charged;
(ii) do all such things as are reasonably required to grant in favour of
CIBC, a fixed charge and security interest (subject only to Permitted
Encumbrances which under applicable law rank in priority thereto) in
respect of such property to be so charged;
(iii) provide CIBC with all corporate resolutions and other action, as
reasonably required for the Borrower, to grant to CIBC a fixed charge
and security interest (subject only to Permitted Encumbrances which
under applicable law rank in priority thereto) in their respective
property identified by CIBC to be so charged;
(iv) provide CIBC with such security instruments and other documents which
CIBC, acting reasonably, deems are necessary to give full force and
effect to the provisions of this Section 4.1(p);
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(v) assist CIBC in the registration or recording of such agreements and
instruments in such public registry offices in Canada or any Province
thereof as CIBC, acting reasonably, deems necessary to give full force
and effect to these provisions; and
(vi) pay all reasonable costs and expenses incurred by CIBC in connection
with the preparation, execution and registration of all agreements,
documents and instruments, including any amendments to the Security,
made in connection herewith.
4.2 Negative Covenants. While any indebtedness under this Financing
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Commitment and the Security is outstanding or any of the Availments remain
available to the Borrower, and except with the prior written consent of CIBC,
such consent not to be unreasonably withheld, the Borrower shall not:
(a) incur indebtedness except for Permitted Indebtedness;
(b) provide or permit a security interest or lien over its property,
except for Permitted Encumbrances;
(c) make any Distribution;
(d) merge, amalgamate or consolidate with another person;
(e) make any material change in the nature of its business as now carried
on;
(f) make material investments or enter into ventures of a material nature
which are outside the scope of their normal course of business;
(g) grant a security interest or lien over any shares it owns, either
directly or indirectly, in any of its subsidiaries, if any, other than
pursuant to the Security; and
(h) make any sale or disposition of its property, other than in the
ordinary course of business.
ARTICLE 5
EVENTS OF DEFAULT
5.1 Events of Default. Each of the following events shall constitute an
-----------------
Event of Default under this Financing Commitment:
(a) Incorrect Representations. If any representation or warranty made to CIBC
--------------------------
by the Borrower shall prove to have been incorrect in any material respect
when so made or deemed to have been repeated as herein provided and, as a
result of such incorrect representation or warranty, there has been a
Material Adverse Change or such correct representation or warranty has a
Material Adverse Effect.
(b) Failure to Pay. If the Borrower makes default in the due and punctual
---------------
payment of any principal, interest, fees or other amounts owing under or
pursuant to this Financing Commitment as and when the same becomes due and
payable, whether at maturity or otherwise and such default continues for a
period of 3 days after notice of such default is given by CIBC to the
Borrower.
(c) Breach of Covenants. Except for an Event of Default set out in the above
-------------------
paragraph, if the Borrower defaults in the performance or observance of any
covenant, obligation or condition to be observed or performed by it under
or pursuant to this Financing Commitment or any other agreement now or
hereafter made by the Borrower with CIBC, and such default continues for a
period of 30 days after notice is given to the Borrower by CIBC.
<PAGE>
[CIBC LETTERHEAD APPEARS HERE] -10-
(d) Insolvency. If a judgment, decree or order of a court of competent
----------
jurisdiction is entered against the Borrower, (i) adjudging it bankrupt or
insolvent, or approving a petition seeking its reorganization or winding-up
under the Bankruptcy and Insolvency Act (Canada), the Companies' Creditors
Arrangement Act (Canada) or any other bankruptcy, insolvency or analogous
Law, or (ii) appointing a receiver, trustee, liquidator, or other person
with like powers, over all, or substantially all, of its property or (iii)
ordering the involuntary winding up or liquidation of affairs or (iv),if
any receiver or other person with like powers is appointed over all, or
substantially all, of its property, unless such appointment is stayed and
of no effect against the Security and the rights of CIBC thereunder.
(e) Winding-Up. If (i) an order or a resolution is passed for the dissolution,
-----------
winding-up, reorganization or liquidation of the Borrower, pursuant to
applicable laws, including the Business Corporations Act (Alberta), or (ii)
the Borrower institutes proceedings to be adjudicated bankrupt or
insolvent, or consents to the institution of bankruptcy or insolvency
proceedings against it under the Bankruptcy and Insolvency Act (Canada),
the Companies' Creditors Arrangement Act (Canada) or any other bankruptcy,
insolvency or analogous law, or (iii) the Borrower consents to the filing
of any petition under any such law or to the appointment of a receiver, or
other person with like, powers, over all, or substantially all, of such
party's property, or (iv) the Borrower makes a general assignment for the
benefit of creditors, or becomes unable to pay its debts generally as they
become due, or (v) the Borrower takes or consents to any action in
furtherance of any of the aforesaid purposes.
(f) Other Indebtedness. The Borrower fails to make any payment of principal or
------------------
interest in regard to any indebtedness whatsoever owed by it after the
expiry of any applicable grace period and demand therefor, whether incurred
before or after the date hereof, to any person other than CIBC, where the
outstanding principal amount of such indebtedness is more than $50,000.
(g) Other Defaults. The Borrower defaults in the observance or performance of
---------------
any non-monetary obligation, covenant or condition to be observed or
performed by it pursuant to any agreement to which it is a party or by
which any of its property is bound, where such default would have a
Material Adverse Effect and it fails to remedy such default within a period
of 30 days after notice of such default.
(h) Adverse Proceedings. The occurrence of any action, suit or proceeding
--------------------
against or affecting the Borrower before any court or before any
administrative body which, if successful, would, constitute a Material
Adverse Change, unless the action, suit, or proceedings shall be contested
diligently and in good faith and, in circumstances where a lower court or
tribunal has rendered a decision adverse to such party, such party is
appealing such decision, and has provided CIBC with a reserve in respect
thereof, adequate in the opinion of CIBC.
(i) Cessation of Business. The Borrower ceases or proposes to cease
---------------------
carrying on business, or a substantial part thereof, or makes or threatens
to make a bulk sale of its property.
(j) Material Adverse Change. Any Material Adverse Change occurs, as
-----------------------
determined by CIBC acting reasonably, and the Borrower fails to remedy such
Material Adverse Change within a period of 30 days after notice thereof
from CIBC.
5.2 Remedies. Upon the occurrence of an Event of Default, CIBC may
--------
forthwith terminate any further obligation to provide Availments, make advances
or to grant any further credits to the Borrower and may declare the Principal
Indebtedness together with unpaid accrued interest thereon and any other amounts
owing under or pursuant to this Financing Commitment, contingent or otherwise,
to be immediately due and payable, whereupon the Borrower shall be obligated
without any further grace period to forthwith pay such amounts to CIBC and CIBC
may exercise any and all rights, remedies, powers and privileges afforded by
applicable law or under any and all other instruments, documents and agreements
made to secure or assure payment and performance of the obligations of the
Borrower under this Financing, Commitment, including, without limitation, the
Security.
5.3 Waivers. An Event of Default may only be waived in writing, by CIBC.
-------
ARTICLE 6
ASSIGNMENT
6.1 Assignment of Interests. The rights and obligations of the Borrower
-----------------------
under this financing Commitment shall not be assignable, in whole or in part,
without the prior written consent of CIBC.
<PAGE>
[CIBC LETTERHEAD APPEARS HERE] -11-
ARTICLE 7
MISCELLANEOUS
7.1 Telephone Instructions. Any verbal instructions given by the Borrower
----------------------
in relation to this Financing Commitment shall be at the risk of the Borrower,
and CIBC shall have no liability for any error or omission in such verbal
instructions or in the interpretation or execution thereof by CIBC provided CIBC
acted without gross negligence in the circumstances.
7.2 No Partnership, Joint Venture or Agency. The Borrower agrees that
---------------------------------------
nothing contained in this Financing Commitment nor the conduct of any party
shall in any manner whatsoever constitute or be intended to constitute any party
as the agent or representative or fiduciary of the other, constitute or be
intended to constitute a partnership or joint venture between CIBC and the
Borrower.
7.3 Further Assurances. The Borrower shall, from time to time forthwith at
------------------
CIBC's request and at the Borrower's own cost and expense, do, make, execute and
deliver, or cause to be done, made. executed and delivered, all such further
documents, financing statements, assignments, acts, matters and things which may
be reasonably required by CIBC with respect to this Financing Commitment, the
Security or any part thereof and to give effect to any provision thereof.
7.4 Waiver of Laws. To the extent legally permitted, the Borrower hereby
--------------
irrevocably and absolutely waives the provisions of any applicable law which may
be inconsistent at any time with, or which may delay or limit in any way, the
enforcement of this Financing Commitment and the Security in accordance with
their terms.
7.5 Attornment. The Borrower does hereby irrevocably submit and afforn to
the non-exclusive jurisdiction of the courts of the Province of Alberta for all
matters arising out of or relating to this Financing Commitment and the Security
or any of the transactions contemplated thereby.
7.6 Interest on Payments in Arrears. Except as otherwise provided in this
-------------------------------
Financing Commitment, interest shall be paid by the Borrower as follows:
(a) on amounts for which CIBC has actually incurred an out-of-pocket
expense and for which CIBC has an obligation under this Financing
Commitment to reimburse such amounts to any third party incurring the
expenses, interest shall be payable on such amount at the CIBC Prime
Rate plus 2% from and including the day on which the amount was
incurred to but excluding the day on which the amount is reimbursed;
and
(b) on amounts payable by the Borrower to CIBC under this Financing
Commitment where such payment is in default but the non-payment of
such amount has not required an actual out-of-pocket expense by CIBC,
at the CIBC Prime Rate plus 2% from and including the day on which the
payment was due, but excluding the day on which the payment is made
whether before or after judgment.
7.7 Payments Due on Banking Day. Whenever any payment hereunder shall be
---------------------------
due on a day other than a Banking Day, such payment shall be made on the next
succeeding Banking Day and such extension of time shall in such in the
computation of payment of interest thereunder.
7.8 Application of Proceeds. Except as otherwise agreed to by CIBC in its
-----------------------
sole discretion and as otherwise expressly provided hereunder, all payments made
by or on behalf of the Borrower under this Financing Commitment, after
acceleration of the Principal Indebtedness, shall be applied by CIBIC in the
following order:
(a) in payment of any amounts due and payable by way of recoverable
expenses;
<PAGE>
[CIBC LETTERHEAD APPEARS HERE] -12-
(b) in payment of any amounts byway of any fees (other than standby fees);
(c) in payment of any amounts due and payable as and by way of interest or
standby fees, including any interest on overdue amounts;
(d) in payment of the Principal Indebtedness; and
(e) in payment of the Principal Indebtedness under this Financing Commitment or
the Security
7.9 Counterparts. This Financing Commitment may be executed in
------------
counterpart, each of which when so executed shall be deemed to be an original
and both of which taken together shall constitute one and the same instrument.
7.10 Whole Agreement. This Financing Commitment constitutes the whole and
---------------
entire agreement between the Borrower and CIBC and cancels and supersedes any
prior agreements, undertakings, declarations, representations and warranties,
written or verbal among all the parties in respect of the subject matter of this
Financing Commitment.
<PAGE>
EXHIBIT 11
CEC RESOURCES LTD.
Statement of Computation of Per Share Earnings
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic:
Weighted average shares outstanding: 1,545 1,580 1,505
Incremental shares attributable to dilutive
stock options and warrants outstanding based
on average market prices during the period
calculated using the treasury stock method 4 4 6
------ ------ ------
Diluted common and common equivalent shares 1,549 1,584 1,511
====== ====== ======
Net earnings $ 240 $ 605 $ 526
====== ====== ======
Earnings per share:
Basic earnings per share $ 0.16 $ 0.38 $ 0.35
====== ====== ======
Diluted earnings per share $ 0.16 $ 0.38 $ 0.35
====== ====== ======
</TABLE>
<PAGE>
EXHIBIT 23(a)
CONSENT OF AUDITORS
We consent to the incorporation by reference in the registration statement
of CEC Resources Ltd. on Form S-8 (File No. 33-98954) of our report dated
February 16, 1999, on our audits of the financial statements of CEC Resources
Ltd. as of November 30, 1998 and 1997, and for the years ended November 30,
1998, 1997, and 1996, which report is included in this Annual Report on Form
10-K.
PricewaterhouseCoopers LLP
Chartered Accountants
Calgary, Canada
February 16, 1999
<PAGE>
EXHIBIT 23(b)
(REED W. FERRILL AND ASSOCIATES, INC. LETTERHEAD)
February 26, 1999
CEC Resources, Ltd.
1700 Broadway, Suite 1150
Denver, CO 80290
Reed W. Ferrill and Associates, Inc. consents to the use of its name and
its reports dated February 7, 1997 entitled "CEC Resources Ltd. Reserve and
Revenue Forecast as of November 30, 1997 Constant Prices and Costs" in whole or
in part, by CEC Resources, Ltd. in Resources' Form 10-K Report to the Securities
and Exchange Commission for the fiscal year ended November 30, 1998.
For and on behalf of
Reed W. Ferrill and Associates, Inc.
s/Reed W. Ferrill
Reed W. Ferrill
<PAGE>
EXHIBIT 23(c)
(SPROULE ASSOCIATES LIMITED LETTERHEAD)
February 26, 1999
CEC Resources, Ltd.
1700 Broadway, Suite 1150
Denver, CO 80290
Sproule Associates Limited consents to the use of its name and its reports
dated February 10, 1999 entitled "Evaluation of the P&NG Reserves of CEC
Resources Ltd. (As of November 30, 1998) Constant (SEC) Price Case" in whole or
in part, by CEC Resources Ltd. in Resources' Form 10-K Report to the Securities
and Exchange Commission for the fiscal year ended November 30, 1998.
For and on behalf of
Sproule Associates Limited
s/Paul B. Jung
Paul B. Jung
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF NOVEMBER 30, 1998 AND THE STATEMENT OF INCOME FOR THE YEAR ENDED
NOVEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> .6563
<CASH> 1,666
<SECURITIES> 0
<RECEIVABLES> 807
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,473
<PP&E> 17,777
<DEPRECIATION> 9,015
<TOTAL-ASSETS> 11,235
<CURRENT-LIABILITIES> 353
<BONDS> 0
0
0
<COMMON> 1,534
<OTHER-SE> 7,188
<TOTAL-LIABILITY-AND-EQUITY> 11,235
<SALES> 3,235
<TOTAL-REVENUES> 3,253
<CGS> 858
<TOTAL-COSTS> 2,929
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 320
<INCOME-TAX> 80
<INCOME-CONTINUING> 240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 240
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
