<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended May 31, 1999
----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ -----------------------
Commission File Number: 1-13630
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CEC RESOURCES LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Alberta Canada 98-0018241
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605, 700 6th Ave. S.W., Calgary, Alberta, Canada T2P 0T8
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(403) 265-7605
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(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 12, 1999
- ----------------------------------- ---------------------------------------
Common stock, stated value $.20 1,521,400
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEC RESOURCES LTD.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
May 31, November 30,
1999 1998
--------------- ----------------
(unaudited)
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 1,666
Accounts receivable:
Oil and gas sales 496 466
Crown royalty refund and other 436 333
Joint interest partners 9 8
Income tax receivable 58 -
------------ -------------
Total current assets 999 2,473
------------ -------------
Property and equipment:
Oil and gas assets, full cost method 21,870 16,192
Liquid extraction plant 1,477 1,477
Other property and equipment 177 108
------------ -------------
23,524 17,777
Less: Accumulated depreciation, depletion, amortization
and valuation allowance (9,957) (9,015)
------------ -------------
Net property and equipment 13,567 8,762
------------ -------------
Other assets 55 -
------------ -------------
$ 14,621 $ 11,235
============ =============
</TABLE>
(continued)
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2
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
May 31, November 30,
1999 1998
--------------- ---------------
(unaudited)
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 323 $ 237
Income tax payable - 3
Undistributed oil and gas production receipts 290 113
------------ ------------
Total current liabilities 613 353
------------ ------------
Future site restoration costs (Note 5) 202 165
Deferred income taxes (Note 3) 1,908 1,995
Long-term debt 3,554 -
Stockholders' equity:
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;
1,521,400 shares issued in 1999 and 1,544,400 in 1998 1,512 1,534
Retained earnings 6,832 7,188
------------ ------------
Total stockholders' equity 8,344 8,722
------------ ------------
$ 14,621 $ 11,235
============ ============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended May 31, Three Months Ended May 31,
-------------------------- ---------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
(in Canadian dollars)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 2,276 $ 1,653 $ 1,284 $ 842
Royalties (453) (327) (269) (133)
Alberta royalty tax credit 275 166 164 64
Field services 56 121 14 70
Other 2 15 1 7
---------- ----------- ----------- -----------
Total revenues 2,156 1,628 1,194 850
---------- ----------- ----------- -----------
Costs and expenses:
Lease operating expenses 354 376 194 205
Field services 40 78 7 57
General and administrative 1,056 359 595 167
Depreciation, depletion and amortization 979 474 534 230
---------- ----------- ----------- -----------
Total costs and expenses 2,429 1,287 1,330 659
---------- ----------- ----------- -----------
Operating income (273) 341 (136) 191
---------- ----------- ----------- -----------
Interest expense and other 59 7 52 4
---------- ----------- ----------- -----------
Earnings before income taxes (332) 334 (188) 187
Provision for income taxes (Note 3) (108) 120 (108) 64
---------- ----------- ---------- ----------
Net earnings $ (224) $ 214 $ (80) $ 123
========== =========== ========== ==========
Earnings per share:
Basic $ (0.15) $ 0.14 $ (0.05) $ 0.08
========== =========== ========== ==========
Fully diluted $ (0.15) $ 0.14 $ (0.05) $ 0.08
========== =========== ========== ==========
Average number of common shares outstanding:
Basic 1,534 1,543 1,530 1,515
========== =========== ========== ==========
Fully diluted 1,534 1,547 1,530 1,518
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CEC RESOURCES LTD.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended May 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Retained
Shares Amount Earnings
-------- ---------- ----------
(in Canadian dollars)
(in thousands, except share data)
<S> <C> <C> <C>
Balances, November 30, 1998 1,544,400 $ 1,534 $ 7,188
Purchase and cancellation of shares (23,000) (22) (132)
Net earnings - - (224)
----------- ------------ ------------
Balances, May 31, 1999 1,521,400 $ 1,512 $ 6,832
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF CASH FLOW (Note 2)
(Unaudited)
Six Months Ended May 31,
------------------------
1999 1998
-------- -------
(in Canadian dollars)
(in thousands)
Net earnings $ (224) $ 214
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation, depletion and amortization 979 474
Future income taxes (93) 97
Other (55) -
Net change in operating assets and liabilities 94 86
-------- -------
Net cash provided by operating activities 701 871
-------- -------
Cash flows from investing activities:
Additions to oil and gas properties (5,698) 451
Additions to other assets (69) -
-------- -------
Net cash used in investing activities (5,767) (451)
Cash flows from financing activities:
Proceeds from long-term debt 3,554 -
Purchase of common stock (154) (592)
-------- -------
Net cash provided by (used in) financing activities 3,400 (592)
Net increase (decrease) in cash and cash equivalents (1,666) (172)
Cash and cash equivalents at beginning of period 1,666 1,073
-------- -------
Cash and cash equivalents at end of period $ - $ 901
======== =======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes, net of refunds $ 40 $ -
======== =======
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying financial statements are for CEC Resources Ltd.
("Resources" or "Company"). Resources was a wholly-owned subsidiary of Columbus
Energy Corp. ("Parent") from 1984 until February 24, 1995 when 100% of
Resources' shares were sold by its Parent to its shareholders or the public in a
rights offering.
These financial statements are prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and require the use of
management's estimates. These statements contain all adjustments (consisting
only of normal recurring accruals) which, in the opinion of management, are
necessary to present fairly the financial position of the Company as of May 31,
1999 and November 30, 1998, and the results of its operations and of its cash
flows for the periods presented. The results of operations for such interim
periods are not necessarily indicative of results to be expected for the full
year.
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 flow, 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 flow.
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.
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
7
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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 expenses 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 services is expensed
and shown as "field services" cost.
8
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
Earnings Per Share
- ------------------
Basic earnings per share are calculated using the weighted average number
of shares of common stock outstanding during the period. Fully diluted earnings
per share are calculated assuming the exercise of outstanding options which are
dilutive.
(2) STATEMENTS OF CASH FLOW
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 flow 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 Net Cash Provided by
Operating Activities (Used In) Investing Activities
----------------------- --------------------------------
(In Canadian Dollars) (In Canadian Dollars)
(In Thousands) (In Thousands)
Six Months Ended May 31, 1998
- ------------------------------------
<S> <C> <C>
As previously reported $ 488 $ (68)
Restatement 383 (383)
------------ ------------
As Restated $ 871 $ (451)
============ ============
</TABLE>
9
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
(3) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Six Months Ended May 31, Three Months Ended May 31,
-------------------------- ----------------------------
1999 1998 1999 1998
------ ------ ------ ------
Current:
Federal $ (21) $ 23 $ (15) $ 16
Alberta - - - -
--------- --------- --------- ---------
(21) 23 (15) 16
--------- --------- --------- ---------
Future:
Federal (77) 55 (83) 26
Alberta (10) 42 (10) 22
--------- --------- --------- ---------
(87) 97 (93) 48
--------- --------- --------- ---------
Total income tax
expense $ (108) $ 120 $ (108) $ 64
========= ========= ========= =========
10
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CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
Total tax provision has resulted in effective tax rates which differ
from statutory Federal income tax rates. The reasons for these differences are
illustrated by the following table:
Percent of Pretax Earnings
Six Months Ended May 31,
------------------------------
1999 1998
-------- --------
Federal Canadian and provincial statuory rates 45 % 45 %
Resource allowance (39) (24)
Crown royalties, net of credits 26 14
Statutory rate change
Adjustments of prior year amounts and other 1 1
-------- --------
Effective rate 33 % 36 %
======== ========
11
<PAGE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities and charges were as follows (in thousands):
Current Year
Dec. 1, 1998 Activity May 31, 1999
-------------- -------------- --------------
Deferred tax liabilities:
Temporary differences,
principally oil and
gas properties $ 1,995 $ (87) $ 1,908
=========== ========== ===========
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.
(4) RELATED PARTY TRANSACTIONS
Resources incurred certain direct and indirect general and administrative
costs for services provided by its former Parent in lieu of expanding the number
of its own full-time employees. These costs were primarily for labor, related
benefits and other overhead costs as provided by an agreement between the
parties. These costs were $54,000 and $180,000 for the six months of 1999 and
1998, respectively. Effective March 31, 1999, this management agreement was
terminated.
12
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
(5) COMMITMENTS
The majority of the Company's natural gas is contracted to gas
marketing companies on a deliverability basis and sold at published index prices
less applicable transportation and marketing charges. The Company has
temporarily assigned its firm transportation agreements through October 1999 and
has retained the option to obtain additional firm transportation service. At May
31, 1999, the Company had five forward priced hedge contracts. These contracts
allow the Company to receive fixed prices for a percentage of its production.
The terms of these transactions are as follows:
Daily Quantity Contract Quantity Fixed Price/
Period GigaJoules GigaJoules GigaJoule
- ----------------- ---------------- ------------------- -------------
Apr 99 - Oct 99 1,055 226,000 $2.39
Dec 98 - Oct 01 1,055 1,125,000 $2.57
Apr 99 - Oct 99 1,000 214,000 $2.31
Apr 99 - Oct 99 500 107,000 $2.22
Nov 99 - Oct 00 1,000 366,000 $2.72
The unrecognized loss on these contracts totaled $429,000 based on May
31, 1999 market values.
The Company estimates that future costs of site abandonment and
restoration of well sites, gas processing plants and other facilities will be
$454,000 as of May 31, 1999 in addition to $202,000 already accrued as a
liability. The estimated costs are being recognized on a unit-of-production
basis over the life of the properties.
(6) ACQUISITION OF OIL AND GAS PROPERTIES
In December 1998 and April 1999, Resources purchased producing oil and
gas properties in Alberta, Canada. Revenues and expenses subsequent to the
purchase dates have been included in 1999 operating results. The pro forma
results below are not indicative of the results that would have occurred if the
acquisitions had been in effect for the entire periods presented. The results
are not intended to be a projection of future results. The incremental effect of
the acquired properties summarized financial information is as follows:
<TABLE>
<CAPTION>
Six Months Ending May 31, Three Months Ending May 31,
------------------------- ---------------------------
1999 1998 1999 1998
----------- ---------- ---------- ---------
(in Canadian dollars)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 168 $ 756 $ - $ 390
Direct Operating Expenses 65 328 - 160
Net Income (a) (30) (130) - (50)
Earnings per share (0.02) (0.08) - (0.03)
- -------------------------------------------------------------------------------------
</TABLE>
(a) Net of pro forma income taxes at effective rates in the Statements of
Income.
(7) 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 GAAP in the United States. 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. Canadian GAAP
permits the inclusion of temporary investments with maturities
greater than 90 days in cash. The
13
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
14
<PAGE>
Item 2. 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 Canadian GAAP.
The information below contains several forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
Such 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
Resources has positive working capital, a history of strong cash flow
from operating activities relative to its modest market capitalization, and has
secured a financing commitment with CIBC. See "CIBC Relationship".
Second quarter 1999 net earnings were ($80,000) or ($.05) per share
compared to net earnings of $123,000 or $.08 per share for the second quarter of
1998. At May 31, 1999, Resources' stockholders' equity was $8,344,000. The
principal sources of the Company's funds are cash flows from operating
activities and available borrowings under the Company's financing commitment.
See "CIBC Relationship".
For the first six months of 1999, net cash from operating activities
was $701,000 compared to $871,000 in 1998. This decrease is primarily due to an
increase in general and administrative expenses, which was partially offset by
an increase in oil and gas sales. Cash used in investing activities was
$5,767,000 for the first six months of 1999 compared to $451,000 in 1998. This
increase was primarily due to acquisitions in the East Carbon area. See
"Acquisitions". Net cash provided by financing activities in the first six
months of 1999 was $3,400,000 which was primarily due to the proceeds from
long-term debt, partially offset by the acquisition of 23,000 shares of the
Company's common stock. Net cash used in financing activities in the first six
months of 1998 was $592,000 due to the acquisition of 83,000 shares of the
Company's common stock.
During the first six months of 1999, Resources has spent $389,000 for
capital expenditures out of 1999's originally budgeted capital program of
$1,550,000 for workovers, recompletions, well tie-ins and developing proved
undeveloped reserves. The Company estimates that total 1999 expenditures for
these items will approximate the $1,550,000 originally budgeted and will be
funded with cash flow from operations.
15
<PAGE>
CIBC Relationship
In December 1998, Resources established a financing commitment with the
Canadian Imperial Bank of Canada ("CIBC"). The primary purpose of the loan is to
provide financing for the acquisition of oil and gas reserves and for normal
operating requirements. The initial commitment was a $2.5 million revolving
production loan. In March 1999, the commitment was increased to $5.0 million.
The revolving phase of the loan will expire on April 30, 2000 and may be renewed
by CIBC. During the term phase, the production loan will be permanently reduced
by way of consecutive monthly principal payments over a period not to exceed 36
months. The loan is secured by all of the Company's assets. These borrowings
will result in increased interest expense during the remainder of 1999 compared
to 1998. The interest rate on outstanding borrowings is the CIBC Prime Rate plus
3/4 of 1%.
Acquisitions
In December 1998 the Company acquired for $2.3 million working
interests in 16 natural gas wells and associated natural gas gathering and
compression facilities in the Wayne-Rosedale Field, located in Alberta, Canada
from Neutrino Resources, Ltd. The acquisition was funded with cash and bank
financing. The acquisition increased the Company's working interest ownership in
the Wayne-Rosedale Field from 33.3% to 64%. The Company estimates that as of
November 30, 1998, the remaining proved reserves before royalty of the acquired
properties are approximately 51,000 barrels of oil and natural gas liquids and
approximately 2.3 billion cubic feet of natural gas.
In March 1999, the Company acquired for $800,000 a 100% working
interest in producing natural gas reserves and associated natural gas gathering
facilities in the Wayne-Rosedale Field, located in Alberta, Canada from Westdrum
Energy Ltd. and C. & D. Oil and Gas Ltd. ("Westdrum"). The acquisition was
funded with bank financing. The Company estimates that as of March 1, 1999, the
remaining proved reserves before royalty of the acquired property are
approximately 19,000 barrels of oil and natural gas liquids and approximately
720,000 Mcf of natural gas.
In March 1999, the Company acquired for $2.1 million working interests
in 17 natural gas wells and associated natural gas gathering and compression
facilities in the Wayne-Rosedale Field, located in Alberta, Canada from Cometra
Energy (Canada) Ltd. The acquisition was funded with bank financing. The
acquisition increased the Company's working interest ownership in the
Wayne-Rosedale Field from 64% to 97%. The Company estimates that as of March 1,
1999, the remaining proved reserves before royalty of the acquired properties
are approximately 48,000 barrels of oil and natural gas liquids and
approximately 2.1 billion cubic feet of natural gas.
In April 1999, the Company acquired for $125,000 working interests in
13 natural gas wells and associated natural gas gathering and compression
facilities in the Wayne-Rosedale Field, located in Alberta, Canada from
Springroad Resources, Inc. The
16
<PAGE>
acquisition was funded with bank financing. The Company estimates that as of
March 1, 1999, the remaining proved reserves before royalty of the acquired
properties are approximately 4,000 barrels of oil and natural gas liquids and
approximately 180,000 Mcf of natural gas.
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 August 1999 for this external review
process to be completed. Based upon this review, a schedule of revisions (if
any) to existing systems as well as requisite contingency plans will be designed
and implemented.
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 August 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 August 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
17
<PAGE>
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.
Results of Operations
Resources total revenues increased by $528,000 and $344,000 for the
first six months and the second quarter of 1999, respectively, compared to 1998
primarily due to increased gas sales and gas prices. The increase in gas sales
is primarily due to sales resulting from the Company's acquisitions that offset
the natural production decline in existing properties. General and
administrative expenses increased by $697,000 and $428,000 for the first six
months and the second quarter of 1999, respectively, compared to 1998 primarily
due to hiring full time employees, that was partially offset by a reduction in
management services formerly provided by Columbus Energy Corp. ("Columbus").
Depreciation, depletion and amortization ("DD&A") increased by $505,000 and
$304,000 for the first six months and the second quarter of 1999, respectively,
compared to 1998 primarily due to increased gas sales and a downward adjustment
to the Company's 1998 year end developed non-producing and proved undeveloped
natural gas reserves that resulted in an increased depletion rate per barrel of
oil equivalent ("BOE") in 1999 compared to 1998.
18
<PAGE>
Oil and Gas Revenues and Operating Costs
The following table shows comparative revenues, sales volumes, average
prices and percentage changes between periods, for natural gas, oil and plant
liquids for the first six months of 1999 and 1998 and the second quarters of
1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended May 31, Three Months Ended May 31,
-------------------------------- --------------------------------
1999 1998 % Change 1999 1998 % Change
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Natural gas revenues M$ 1,834 1,179 56% 1,002 625 60%
Oil revenues M$ 233 250 -7% 138 118 17%
Plant liquid revenues M$ 209 224 -7% 144 99 45%
Natural gas sales volumes:
Millions of cubic feet 704 618 14% 386 299 29%
MCF/day 3,866 3,395 4,195 3,253
Oil sales volumes:
Barrels 12,526 12,913 -3% 6,120 6,407 -4%
Barrels/day 69 71 67 70
Plant liquids sales volumes:
Barrels 15,513 14,007 11% 9,026 7,117 27%
Barrels/day 85 77 98 77
Average price received:
Natural gas - $/MCF 2.61 1.91 37% 2.60 2.09 24%
Oil - $/BBL 18.62 19.34 -4% 22.59 18.45 22%
Plant liquids - $/BBL 13.47 15.99 -16% 15.92 13.82 15%
</TABLE>
Natural gas revenues for the first six months of 1999 increased 56%
over the first six months of 1998 because of a 37% price increase and a 14%
increase in sales volumes. The increase in sales volumes were primarily due to
the Company's acquisitions, "See Acquisitions", which more than offset the
natural production decline in existing properties. Oil revenues were 7% lower
for the first six months of 1999 compared to the first six months of 1998
because of a 4% price decrease and a 3% decline in sales volumes. Plant liquid
revenues were 7% lower for the first six months of 1999 compared to the first
six months of 1998 because of a 16% price decrease, partially offset by a 11%
increase in sales volumes.
Natural gas revenues in the second quarter of 1999 were up 60% over
second quarter of 1998 because of a 24% price increase and a 29% increase in
sales volumes. The increase in sales volumes resulted from the Company's
acquisitions which more than offset the natural production decline in existing
properties. Oil revenues were 17% higher in the second quarter of 1999 than last
year because of a 22% price increase, partially offset by a 4% decline in sales
volumes. Plant liquid revenues in the second
19
<PAGE>
quarter of 1999 increased 45% over the second quarter of 1998 because of a 15%
price increase and a 27% increase in sales volumes.
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 the first six months of 1999 the net Crown Royalty
rate was 6% compared to 7% in 1998.
Lease operating expenses for the first six months of 1999 were 16% as a
percentage of oil and gas sales compared to 23% for the first six months of
1998. Lease operating expenses for the first six months of 1999 and 1998 were
$2.44 and $2.90, respectively, per BOE. Lease operating expenses for the second
quarter of 1999 were 15% as a percentage of oil and gas sales compared to 24%
for the second quarter of 1998. Lease operating expenses for the 1999 and 1998
second quarters were $2.44 and $3.24, respectively, per BOE. This reduction is
due to well workovers in the Company's Hoffer area in 1998, partially offset by
increases in the Company's East Carbon area due to the Company's acquisitions in
1999. 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 10:1 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 1999 as
Resources is now the operator as a result of the Neutrino, Cometra and Westdrum
acquisitions.
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 increased significantly for the first six
months of 1999 to $12.00 per BOE compared to $8.59 for the first six months of
1998 primarily due to the positive revenue and lease operating expense variances
previously discussed in this section. If natural gas had been converted to BOE
using the Canadian practice of a 10:1 ratio, then reported field netbacks would
have been $17.72 and $12.58 per BOE for the first six months of 1999 and 1998
respectively.
Field Services Business Segment
The Company receives operating service revenue generated by its share
of processing fees at the Carbon field liquid extraction plant. However, because
it also processes Resources' own gas, that portion of the processing fee revenue
attributable to that source is not reported by this segment but instead offsets
an identical amount of process expense otherwise chargeable to its lease
operations. The Carbon plant also processes gas of unrelated third parties which
for the first six months of 1999 amounted
20
<PAGE>
to approximately 30% of the plant's volumes and represents the majority of field
services profit. Because of the Company's acquisitions in the East Carbon area,
the amount of unrelated third party gas processed through the plant has
declined, resulting in a decline in field services revenue for 1999 relative to
1998.
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
General and administrative expenses relate to the direct costs of
Resources which do not originate from either its operation of properties or the
providing of services. General and administrative expenses increased by $697,000
and $428,000 for the first six months and second quarter of 1999, respectively,
compared to 1998. The majority of the increase is due to hiring full time
employees, which was partially offset by a reduction in charges for management
services provided by Columbus. These charges were primarily for labor, related
benefits and other overhead costs billed by Columbus as allocated by its
employees. This management agreement was terminated on March 31, 1999.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") of oil and gas assets
are determined based upon the units of production method. This expense is
primarily dependent upon the historical capitalized costs incurred to find,
develop and recover oil and gas reserves. The liquid extraction plant and other
gathering and compression facilities are amortized on a straight-line method.
For the first six months of 1999 the depletion rate was $6.19 per BOE,
compared to $3.21 per BOE for the first six months of 1998 and $4.02 per BOE for
all of 1998. This increased rate was primarily due to a downward adjustment to
the Company's fiscal 1998 year end proved developed non-producing and proved
undeveloped natural gas reserves. Capitalized costs, including tangible
production equipment, are depleted using the unit of production method based on
proved reserves. As the Company's year-end 1998 reserves were adjusted downward,
the capitalized costs per unit of proved reserves increased, resulting in an
increase to the depletion rate per BOE. For the first six months of 1999 and
1998, DD&A expense for estimated future site restoration costs were $37,000 and
$19,000, respectively.
Exploration Activities
Under the full cost method of accounting, all exploration costs
associated with continuing efforts to acquire or review prospects including
outside geological and seismic consultants are capitalized. A total of $172,000
of exploration costs were capitalized during the first six months of 1999
compared to $23,000 in the first six months of 1998.
21
<PAGE>
Income Taxes
In 1997, the Company adopted CICA 3465, Income Taxes. Since 1993,
Resources had 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 those periods as well as
percentage limitations for utilization of existing tax pools. For fiscal 1999,
the Company anticipates that no current income tax will be due because of
additions to deductible property tax pools and carryforward balances. For fiscal
1998 current income taxes are estimated to be $19,000. For the 1997 fiscal year,
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.
Exchange Rate of the Canadian Dollar
All dollar amounts 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:
Six Months Ended May 31,
-----------------------------------
1999 1998
------------ ------------
Rate at end of period 0.6770 0.6863
Average rate during period 0.6648 0.6983
High 0.6894 0.7105
Low 0.6440 0.6831
On May 31, 1999, the noon buying rate in Canadian dollars was $.6770
U.S.= $1.00 Canadian.
22
<PAGE>
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operation or cash flow of the Company due to adverse
changes in financial and commodity market prices and rates. In regard to
interest rate risk, the Company has established a $5.0 million credit facility
with a Canadian bank as described in "Liquidity and Capital Resources" under
Item 2 "Management's Discussion of Analysis of Financial Conditions and Results
of Operations". The interest rate for borrowings under this facility is
variable. In regard to foreign currency risk, the Company's operations are
primarily 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
2 "Management's Discussion and Analysis of Financial Condition and Results of
Operations". In regard to commodity price risk, the Company does use financial
instruments in an attempt to manage this risk as described in Note 5 to the
Financial Statements of the Company.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 1999, the Company held its 1999 Annual Meeting of
Shareholders. At this meeting, the six existing directors were nominated and
re-elected as directors of the Company. These six persons constitute all members
of the Board of Directors of the Company. These directors and the votes for and
withheld for each of them were as follows:
For Withheld
------------------- -----------------------
James C. Crawford 1,307,625 727
Loyola G. Keough 1,307,625 727
Patrick R. McDonald 1,307,625 727
Craig W. Sandahl 1,307,625 727
Harry A. Trueblood, Jr. 1,307,625 727
Peter N.T. Widdrington 1,307,625 727
In addition, the Company's shareholders approved the appointment of
Arthur Andersen LLP as auditors of the Company for the 1999 fiscal year and
authorized the Board of Directors to fix the remuneration of the auditors. The
votes at the Annual meeting with respect to these auditor matters were as
follows:
For Against Abstain
---------------- --------------- -----------------
1,307,522 27 803
23
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Computation of per share earnings
27 - Financial Data Schedule
(b) Report dated March 31, 1999, Item 2, regarding the acquisition of
working interests in 17 natural gas wells and associated natural gas
gathering and compression facilities in the Wayne-Rosedale Field,
located in Alberta, Canada from Cometra Energy (Canada) Ltd.
Report dated March 31, 1999, Amendment #1, Item 2, regarding
the acquisition of working interests in 17 natural gas wells and
associated natural gas gathering and compression facilities in the
Wayne-Rosedale Field, located in Alberta, Canada from Cometra Energy
(Canada) Ltd. After review, CEC Resources has determined that
financial statements regarding the acquisition of working interests
from Cometra Energy (Canada) Ltd. are not required under Regulation
S-X.
Report dated April 6, 1999, Item 4, regarding the Board of
Directors of CEC Resources Ltd. ("the Company") proposal that the
independent auditors for the fiscal year ended November 30, 1999 be
Arthur Andersen LLP.
24
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEC RESOURCES LTD.
Registrant
DATE: July 15, 1999 /s/ Patrick R. McDonald
----------------------------- ---------------------------------
President and
Chief Executive Officer
(a duly authorized officer)
DATE: July 15, 1999 /s/ Kevin D. Struzeski
----------------------------- ---------------------------------
Treasurer
(Chief Financial Officer)
25
<PAGE>
EXHIBIT 11
CEC RESOURCES LTD.
Statement of Computation of Per Share Earnings
(Unaudited)
(In Thousand Except Per Share Data)
<TABLE>
<CAPTION>
Six Months Ended May 31, Three Months Ended May 31,
---------------------------- ------------------------------
Basic: 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding: 1,534 1,543 1,530 1,515
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 3
---------- ---------- ---------- ----------
Diluted common and common equivalent shares 1,534 1,547 1,530 1,518
========== ========== ========== ==========
Net earnings $ (224) $ 214 $ (80) $ 123
========== ========== ========== ==========
Earnings per share:
Basic earnings per share $ (0.15) $ 0.14 $ (0.05) $ 0.08
========== ========== ========== ==========
Diluted earnings per share $ (0.15) $ 0.14 $ (0.05) $ 0.08
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MAY 31, 1999 AND THE STATEMENT OF INCOME FOR THE SIX MONTHS ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> .6770
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 999
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 999
<PP&E> 23,524
<DEPRECIATION> 9,957
<TOTAL-ASSETS> 14,621
<CURRENT-LIABILITIES> 613
<BONDS> 0
0
0
<COMMON> 1,512
<OTHER-SE> 6,832
<TOTAL-LIABILITY-AND-EQUITY> 14,621
<SALES> 2,156
<TOTAL-REVENUES> 2,156
<CGS> 394
<TOTAL-COSTS> 2,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (332)
<INCOME-TAX> (108)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
