<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 February 28, 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
-------
CEC RESOURCES LTD.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Alberta Canada 98-0018241
- -------------------------------------------------------------------------------
(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
- -------------------------------------------------------------------------------
(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 April 10, 1999
- -------------------------------------------------------------------------------
Common stock, stated value $.20 1,532,400
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEC RESOURCES LTD.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
February 28, 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 315 466
Crown royalty refund and other 287 333
Joint interest partners 32 8
Income tax receivable 28 -
----------------- ------------------
Total current assets 662 2,473
----------------- ------------------
Property and equipment:
Oil and gas assets, full cost method 18,488 16,192
Liquid extraction plant 1,477 1,477
Other property and equipment 141 108
----------------- ------------------
20,106 17,777
Less: Accumulated depreciation, depletion, amortization
and valuation allowance (9,439) (9,015)
----------------- ------------------
Net property and equipment 10,667 8,762
----------------- ------------------
$ 11,329 $ 11,235
================= ==================
</TABLE>
(continued)
2
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
February 28, November 30,
1999 1998
---------------- ----------------
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 182 $ 237
Income tax payable - 3
Undistributed oil and gas production receipts 208 113
---------------- ----------------
Total current liabilities 390 353
---------------- ----------------
Future site restoration costs (Note 5) 185 165
Deferred income taxes (Note 3) 2,001 1,995
Long-term debt 255 -
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; 1,532,400 shares issued in 1999 and
1,544,400 in 1998 1,523 1,534
Retained earnings 6,975 7,188
---------------- ----------------
Total stockholders' equity 8,498 8,722
---------------- ----------------
$ 11,329 $ 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>
Three Months Ended February 28,
---------------------------------------------
1999 1998
--------------- -----------------
(in Canadian dollars)
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Oil and gas sales $ 992 $ 811
Royalties (184) (194)
Alberta royalty tax credit 111 102
Field services 42 51
Other 1 8
--------------- -----------------
Total revenues 962 778
--------------- -----------------
Costs and expenses:
Lease operating expenses 160 171
Field services 33 21
General and administrative 461 192
Depreciation, depletion and amortization 445 244
--------------- -----------------
Total costs and expenses 1,099 628
--------------- -----------------
Operating income (137) 150
--------------- -----------------
Other expense 7 3
--------------- -----------------
Earnings before income taxes (144) 147
Provision for income taxes (Note 3) - 56
--------------- -----------------
Net earnings $ (144) $ 91
=============== =================
Earnings per share:
Basic $ (0.09) $ 0.06
=============== =================
Fully diluted $ (0.09) $ 0.06
=============== =================
Average number of common shares outstanding:
Basic 1,537 1,573
=============== =================
Fully diluted 1,541 1,576
=============== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CEC RESOURCES LTD.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 28, 1999
(Unaudited)
<TABLE>
<CAPTION>
Retained
Shares Amount Earnings Shares Amount
--------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Balances, November 30, 1998 1,544,400 $ 1,534 $ 7,188 - $ -
Purchase and cancellation of shares (12,000) (11) (69) - -
Net earnings - - (144) - -
--------- ------- -------- ------ ------
Balances, February 28, 1999 1,532,400 $ 1,523 $ 6,975 - $ -
========= ======= ======== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF CHANGES IN CASH FLOW (Note 2)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended February 28,
-------------------------------
1999 1998
---- ----
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Net earnings $ (144) $ 91
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation, depletion and amortization 445 244
Future income taxes - 49
Other - -
Net change in operating assets and liabilities 207 397
------ ------
Net cash provided by operating activities 508 781
------ ------
Cash flows from investing activities:
Additions to oil and gas properties (2,315) (424)
Additions to other assets (33) -
------ ------
Net cash used in investing activities (2,348) (424)
Cash flows from financing activities:
Proceeds from long-term debt 255 -
Purchase of common stock (81) (252)
------ ------
Net cash provided by (used in) financing activities 174 (252)
Net increase (decrease) in cash and cash equivalents (1,666) 105
Cash and cash equivalents at beginning of period 1,666 1,073
------ ------
Cash and cash equivalents at end of period $ - $1,178
====== ======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes, net of refunds $ 25 $ -
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(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 February
28, 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 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 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 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 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.
(2) 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 Net Cash Provided by
Operating Activities (Used In) Investing Activities
--------------------- ------------------------------
(In Canadian Dollars) (In Canadian Dollars)
Three Months Ended February 28, 1998 (In Thousands) (In Thousands)
- ------------------------------------
<S> <C> <C>
As previously reported $ 398 $ (41)
Restatement 383 (383)
--------------------- ------------------------------
As Restated $ 781 $ (424)
===================== ==============================
</TABLE>
<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):
<TABLE>
<CAPTION>
Three Months Ended February 28,
-------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Current:
Federal $ (6) $ 7
Alberta - -
--------------- --------------
(6) 7
--------------- --------------
Future:
Federal 6 29
Alberta - 20
--------------- --------------
6 49
--------------- --------------
Total income tax expense $ - $ 56
=============== ==============
</TABLE>
10
<PAGE>
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:
<TABLE>
<CAPTION>
Percent of Pretax Earnings
Three Months Ended February 28,
---------------------------------
1999 1998
------ -------
<S> <C> <C>
Federal Canadian and provincial statutory rates 45 % 45 %
Resource allowance (92) (28)
Crown royalties, net of credits 46 20
Statutory rate change
Adjustments of prior year amounts and other 1 1
------ -------
Effective rate 0 % 38 %
====== =======
</TABLE>
11
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
The tax effect of significant temporary differences representing
deferred tax assets and liabilities and charges were as follows (in thousands):
<TABLE>
<CAPTION>
Current Year
Dec. 1, 1998 Activity Feb. 28, 1999
----------------- ---------------- ------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Temporary differences, principally oil
and gas properties $ 1,995 $ 6 $ 2,001
================= ================ ==================
</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.
(4) RELATED PARTY TRANSACTIONS
Resources incurs 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 are primarily for labor, related
benefits and other overhead costs as provided by an agreement between the
parties. These costs were $37,000 and $98,000 for the three months of 1999 and
1998, respectively. Effective March 31, 1999, this management agreement has
been 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
February 28, 1999, the Company had three forward priced hedge contracts all of
which were entered into during the fourth quarter of 1998. These contracts
allow the Company to receive fixed prices for a percentage of their production.
The terms of these transactions are as follows:
<TABLE>
<CAPTION>
Daily Quantity Contract Quantity Fixed 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 $94,000 based on February
28, 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 $386,000 as of
February 28, 1999 in addition to $185,000 already accrued as a liability. The
estimated costs are being recognized on a unit-of-production basis over the life
of the properties.
(6) 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 differences in measurement had no impact on
classification in the balance sheets.
13
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
(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.
(7) SUBSEQUENT EVENTS
In March 1999, the Company acquired for $800,000 a working interest in
producing 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. The acquisition was funded with bank financing.
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.
In March 1999, the Company amended their financing commitment, reflecting
an increase in the loan to $5.0 million. The revolving phase of the loan will
expire on April 30, 2000 and may be renewed by the Canadian Imperial Bank of
Canada.
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
14
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
performance of Resources to be materially different from predicted financial
performance.
Liquidity and Capital Resources
Management considers Resources' liquidity to be superior to most other
small Canadian oil and gas companies based on the fact it has positive working
capital, a history of excellent cash flow relative to its modest market
capitalization, and has secured a financing commitment with CIBC. See "CIBC
Relationship".
First quarter 1999 net earnings were ($144,000) or ($.09) per share
compared to net earnings of $91,000 or $.06 per share for the first quarter of
1998. At February 28, 1999, Resources' stockholders' equity was $8,498,000.
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 quarter of 1999, net cash from operating activities was
$508,000 compared to $781,000 in 1998. This decrease is primarily due to a
decrease in the net change of operating assets and liabilities and 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 $2,348,000
in the first quarter of 1999 compared to $424,000 in 1998. This increase was
primarily due to the Neutrino acquisition. See "Acquisitions". Net cash
provided by financing activities in the first quarter of 1999 was $174,000 which
was primarily due to the proceeds from long-term debt, partially offset by the
acquisition of 12,000 shares of the Company's common stock. Net cash used in
financing activities in the first quarter of 1998 was $252,000 due to the
acquisition of 36,000 shares of the Company's common stock.
During the first quarter of 1999, Resources has accrued $14,000 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. These expenditures are expected to be incurred primarily during the
third and fourth quarter.
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,
15
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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. Subsequent to the Company's acquisitions, the
amount available under the loan was approximately $1.8 million. 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. 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.
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
16
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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. 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 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.
17
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
Results of Operations
Resources' total revenues increased by $184,000 in the first quarter of
1999 compared to the first quarter of 1998, primarily due to increased gas
prices. Natural gas sales volumes remained constant in the first quarter of 1999
compared to 1998 as sales relating to the Neutrino acquisition offset the
natural production decline in existing properties. General and administrative
expenses increased by $269,000 in the first quarter of 1999 compared to the
first quarter of 1998. The majority of the increase is due to hiring full time
employees, which was partially offset by a reduction in management services
formally provided by Columbus Energy Corp. ("Columbus"). Depreciation, depletion
and amortization increased by $201,000 in the first quarter of 1999 compared to
the first quarter of 1998 primarily due to a downward adjustment to the
Company's 1998 year end developed non-producing and proved undeveloped natural
gas reserves. The major factors determining the results of operations are
discussed in detail in the section that follows.
18
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
Oil and Gas Revenues and Operating Costs
The following table shows comparative revenues, sales volumes, average
prices and percentage changes between periods, for natural gas, oil and plant
liquids for the first quarters of 1999 and 1998 and the first quarter of 1999
versus the fourth quarter of 1998.
<TABLE>
<CAPTION>
Fourth
First Quarter Quarter
-------------------- % ------- %
1999 1998 Change 1998 Change
---- ----- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Natural gas revenues M$ $ 831 $ 554 50% $ 651 28%
Oil revenues M$ 95 131 -28% 125 -24%
Plant liquids revenues M$ 65 126 -48% 80 -18%
Natural gas sales volumes:
Millions of cubic feet 318 319 0% 258 23%
MCF/day 3,529 3,548 2,836
Oil sales volumes:
Barrels 6,406 6,506 -2% 6,755 -5%
Barrels/day 71 72 74
Plant liquids sales volumes:
Barrels 6,487 6,890 -6% 5,599 16%
Barrels/day 72 77 62
Average price received:
Natural gas - $/MCF 2.62 1.74 51% 2.52 4%
Oil - $/BBL 14.83 20.22 -27% 18.44 -20%
Plant liquids - $/BBL 10.07 18.24 -45% 14.31 -30%
</TABLE>
Natural gas revenues in the first quarter of 1999 were up 50% over first
quarter of 1998 because of a 51% price increase. Natural gas sales volumes in
the first quarter of 1999 remained constant compared to the first quarter of
1998 as sales relating to the Neutrino acquisition offset the natural production
decline in existing properties. Oil revenues were 28% lower in the first quarter
of 1999 than last year because of a 27% price decrease and a 2% decline in sales
volumes. Plant liquids revenues in the first quarter of 1999 were down 48% over
the first quarter of 1998 because of a 45% price decrease and a 6% decline in
sales volumes.
19
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
Natural gas revenues in the first quarter of 1999 were up 28% over the
fourth quarter of 1998 due to an increase in sale volumes of 23% as a result of
the Neutrino acquisition and a 4% increase in sales prices. Oil revenues were
24% lower in the first quarter of 1999 compared to the fourth quarter of 1998
because of a 20% price decrease and a 5% decline in sales volumes. Plant liquid
revenues in the first quarter of 1999 were down 18% over the fourth quarter 1998
because of a 30% decline in prices, partially offset by a 16% 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 three months of 1999 the net
Crown Royalty rate was 5% compared to 8% in 1998.
Lease operating expenses for the first quarter of 1999 were 16% as a
percentage of oil and gas sales compared to 21% for the first quarter of 1998.
Lease operating expenses for the 1999 and 1998 first quarters were $2.44 and
$2.57, respectively per barrel of oil equivalent ("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 Neutrino acquisition 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 acquisition.
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 in the first quarter of
1999 to $11.53 per BOE compared to $8.24 in first quarter of 1998 primarily due
to increased gas prices. If natural gas had been converted to BOE using the
Canadian practice of a 10:1 ratio, then reported field netbacks would have been
$17.00 and $12.11 per BOE for first quarter 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
20
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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 in the first
quarter of 1999 amounted to approximately 38% 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
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 for the first quarter of 1999
were $461,000 in 1999 compared to $192,000 in 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 are 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 quarter of 1999 the depletion rate was $5.97 per barrel of
oil equivalent (6:1) for the Company, compared to $4.02 per BOE for all of
fiscal 1998 and $3.01 per BOE for fiscal 1997. 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 in the first quarter of 1999. First quarter DD&A expense includes $21,000
in 1999 and $10,000 in 1998 for estimated future site restoration costs.
21
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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 ($2,000) of
exploration costs were capitalized during the first quarter of 1999 compared to
$13,000 in the first quarter of 1998.
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 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:
<TABLE>
<CAPTION>
Three Months Ended February 28,
---------------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Rate at end of period 0.6634 0.7318
Average rate during period 0.6581 0.7379
High 0.6725 0.7489
Low 0.6440 0.7279
</TABLE>
On February 28, 1999, the noon buying rate in Canadian dollars was
$.6634 U.S. = $1.00 Canadian.
22
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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 Condition and Results
of Operations" and in Note 7 to the Financial Statements of the Company. 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.
23
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(Unaudited)
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) Reports on Form 8-K
Report dated December 18, 1998, Item 2, regarding the
acquisition of working interest in 16 natural gas wells and
associated leaseholds in the Wayne-Rosedale Field, located in
Alberta, Canada from Neutrino Resources, Inc.
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: April 14, 1999 /s/ Patrick R. McDonald
-------------- ----------------------------------
President and
Chief Executive Officer
(a duly authorized officer)
DATE: April 14, 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>
Three Months Ended February 28,
Basic: 1999 1998
------- -------
<S> <C> <C>
Weighted average shares outstanding: 1,537 1,573
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 1,541 1,576
Net earnings $ (144) $ 91
======= ======
Earnings per share:
Basic earnings per share $ (0.09) $ 0.06
======= ======
Diluted earnings per share $ (0.09) $ 0.06
======= ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF FEBRUARY 28, 1999 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED FEBRUARY 28, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> .6634
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 662
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 662
<PP&E> 20,106
<DEPRECIATION> 9,439
<TOTAL-ASSETS> 11,329
<CURRENT-LIABILITIES> 390
<BONDS> 0
0
0
<COMMON> 1,523
<OTHER-SE> 6,975
<TOTAL-LIABILITY-AND-EQUITY> 11,329
<SALES> 962
<TOTAL-REVENUES> 962
<CGS> 193
<TOTAL-COSTS> 1,099
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (144)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
