<PAGE>
As filed with the Securities and Exchange Commission on October 27, 1999
Registration No. [ ]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
CARBON ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 1311 84-1515097
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, CO 80290-1101
(303) 860-1575
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Patrick R. McDonald
President and Chief Executive Officer
Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, CO 80290-1101
(303) 860-1575
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
COPIES TO:
Mark R. Levy, Esq. Holland & Hart LLP 555 17th Street, Suite 3200 Denver,
Colorado 80202 (303) 295-8000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
---------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of each class of
securities to be Amount to be Proposed maximum offering Proposed maximum Amount of
registered registered(1) price per share aggregate offering price(2) registration fee(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value. 1,765,900 N/A $8,388,025 $2,332
</TABLE>
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(1) The estimated maximum number of shares of Carbon Energy Corporation common
stock issuable upon consummation of the exchange offer for shares of CEC
Resources Ltd.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act, based on the market
value of the securities to be received by the Registrant in the
transaction as established by the price of the common shares of CEC
Resources Ltd. as reported on the American Stock Exchange on October 20,
1999.
(3) Calculated pursuant to Section 6(b) of the Securities Act as .000278 of
$8,388,025.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
Subject to Completion, dated October 27, 1999
CARBON ENERGY CORPORATION
OFFER TO EXCHANGE
Shares of Common Stock of Carbon Energy Corporation for any and all Shares of
Common Stock of CEC Resources Ltd.
Our offer will expire at 5:00 P.M., Denver, Colorado time on ,
1999, unless extended.
Carbon Energy Corporation is offering to exchange one share of our common
stock for each share of common stock of CEC Resources Ltd. If all CEC's
shareholders accept our offer, in the aggregate we will issue approximately
1,521,400 shares of our common stock. CEC's Board of Directors has approved
this transaction.
CEC's common shares are traded on the American Stock Exchange under the
symbol "CGS." On , 1999, the closing price for CEC's common shares was
$ . Carbon's common stock is not currently traded on a national securities
exchange or other public trading market. Carbon's common stock has been
approved for listing on the American Stock Exchange, upon issuance of the
shares after the exchange offer, under the symbol " ."
You have until 5:00 p.m., Denver, Colorado time, on , 1999 to accept
our offer, unless extended. At that time, our offer and your withdrawal rights
will expire. This prospectus and the enclosed letter of transmittal describe
how to accept our offer. Directors and executive officers of CEC who hold in
the aggregate shares of CEC's common shares, representing approximately
40% of CEC's voting power, have stated their intention to accept our offer.
After the exchange offer, CEC will be a subsidiary of Carbon.
The Carbon common stock we are offering involves a high degree of risk. See
"Risk Factors" beginning on page 12 of this prospectus for a discussion of the
risks you should consider in connection with our offer and an investment in
Carbon's common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued in the
exchange offer or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The date of this prospectus is , 1999.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
CARBON ENERGY CORPORATION
PROSPECTUS
Introduction
Please read this prospectus carefully. It describes our and CEC's
businesses and finances. We have prepared this prospectus so that you will
have the information necessary to make a decision on the exchange offer.
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to exchange shares of common
stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of common stock.
Table of Contents
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.......................................................... 3
RISK FACTORS................................................................ 12
SOURCES OF INFORMATION ABOUT CARBON AND CEC................................. 18
FORWARD-LOOKING STATEMENTS.................................................. 18
THE EXCHANGE OFFER.......................................................... 19
General.................................................................... 19
Background Of The Exchange Offer/Exchange Agreement........................ 19
CEC's Reasons For Recommending The Exchange Offer.......................... 21
Our Reasons For The Exchange Offer......................................... 22
Intentions Of The Directors And Officers Of CEC............................ 22
Interests Of Certain Persons In The Exchange Offer......................... 22
Description of Exchange Agreement.......................................... 24
Expiration Date............................................................ 25
Exchange Of CEC Stock For Carbon Common Stock.............................. 25
Exchange Agent............................................................. 26
Guaranteed Delivery Procedures............................................. 27
Conditions To The Exchange................................................. 27
Termination Of The Exchange Offer.......................................... 27
Withdrawal Rights.......................................................... 27
Fees And Expenses.......................................................... 28
Regulatory Matters......................................................... 28
Accounting Treatment....................................................... 28
Possible Effects of the Exchange Offer..................................... 29
Second Step Merger......................................................... 29
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES............................... 30
Scope and Limitation Advice................................................ 30
Taxation of U.S. Shareholders.............................................. 30
Basic Treatment of Exchange Transaction for U.S. Shareholders.............. 30
Passive Foreign Investment Company Considerations for U.S. Shareholders.... 32
Taxation of Non-U.S. Shareholders.......................................... 32
Estate Tax for Non-U.S. Shareholders....................................... 33
Information Reporting and Backup Withholding............................... 33
CANADIAN FEDERAL INCOME TAX CONSEQUENCES.................................... 34
Holders Resident in Canada................................................. 35
Holders Not Resident in Canada............................................. 36
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
UNAUDITED PRO FORMA FINANCIAL INFORMATION.................................. 37
INFORMATION ABOUT CEC...................................................... 41
Overview of Business...................................................... 41
CEC Selected Financial Data............................................... 42
CEC Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 42
Properties................................................................ 50
Legal Proceedings......................................................... 56
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 56
Quantitative and Qualitative Disclosures about Market Risk................ 56
INFORMATION ABOUT CARBON................................................... 57
Business.................................................................. 57
Carbon Selected Financial Data............................................ 58
Our Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 58
Properties................................................................ 63
Legal Proceedings......................................................... 69
Charges in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 69
Quantitative and Qualitative Disclosures about Market Risk................ 69
OUR MANAGEMENT............................................................. 70
Executive Directors and Officers.......................................... 70
Committees of the Board of Directors...................................... 71
Executive Compensation.................................................... 71
Stock Option Grants and Exercises......................................... 72
1999 Stock Option and Restricted Stock Plans.............................. 73
Directors' Compensation................................................... 74
Indemnification and Limitation of Liability............................... 74
Employment Agreement...................................................... 74
PRINCIPAL SHAREHOLDERS OF OUR COMPANY...................................... 75
PRINCIPAL SHAREHOLDERS OF CEC.............................................. 76
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 77
DESCRIPTION OF OUR CAPITAL STOCK........................................... 77
Common Stock.............................................................. 77
Preferred Stock........................................................... 77
Certain Effects of Authorized but Unissued Stock.......................... 77
American Stock Exchange Listing........................................... 78
Transfer Agent............................................................ 78
COMPARISON OF SHAREHOLDERS' RIGHTS......................................... 79
LEGAL MATTERS.............................................................. 89
EXPERTS.................................................................... 89
WHERE YOU CAN FIND MORE INFORMATION........................................ 89
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
This Summary highlights selected information that we present more fully in
other sections of this prospectus. To understand this exchange offer, you
should read the entire prospectus carefully, including the "Risk Factors" and
the financial statements of Carbon Energy Corporation and its predecessor
Bonneville Fuels Corporation and the financial statements of CEC Resources Ltd.
included in this prospectus.
Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, Colorado 80290-1101
(303) 860-1575
We are an independent oil and gas company engaged in the exploration,
development and production of natural gas and crude oil, principally in the
states of Colorado, Kansas, New Mexico, Texas, and Utah. Our business and
assets are presently comprised of the assets and property of Bonneville Fuels
Corporation ("BFC") which we acquired on October 29, 1999 with the concurrence
of CEC. Yorktown Energy Partners III, L.P. ("Yorktown") formed Carbon for the
purpose of acquiring BFC and making this exchange offer.
CEC Resources Ltd.
1700 Broadway, Suite 1150
Denver, Colorado 80290-1101
(303) 860-1575
CEC is an independent oil and gas company engaged in the exploration,
development and production of natural gas and crude oil and the acquisition and
development of interests in oil and gas properties in the provinces of Alberta
and Saskatchewan, Canada. CEC also owns an interest in one natural gas liquids
extraction plant and several gas gathering and compression systems in Alberta.
Summary of Exchange Offer
Terms of Our Offer
We are offering to exchange one share of our common stock for each share of
CEC common stock held by you.
All shares of CEC common stock properly tendered and not withdrawn will be
exchanged at the one-for-one exchange rate, on the terms and subject to the
conditions of the exchange offer. We will promptly return any shares of CEC
common stock if the conditions of the exchange offer are not met.
Expiration Date
You have until 5:00 p.m., Denver time, on , 1999 to accept our
offer, unless extended. At that time, our offer will expire. If we extend the
expiration date, we will publicly announce the extension as soon as practicable
after we make the extension and in any event no later than 9:00 a.m. Denver
time on the next business day after the previously scheduled expiration date.
Withdrawal Rights
You may withdraw tenders of your shares of CEC common stock at any time
before the exchange offer expires. If you change your mind again, you may
retender your shares of CEC common stock by following the exchange offer
procedures again prior to the expiration of the exchange offer.
3
<PAGE>
Our offer may be terminated if any court or governmental authority issues an
order restraining, enjoining or otherwise prohibiting consummation of the
exchange offer.
Procedures For Tendering Your Shares Of CEC Common Stock
If you hold certificates for shares of CEC common stock, you must complete
and sign the letter of transmittal designating the number of CEC shares you
wish to tender and return the letter with your stock certificates and any other
documents required by the letter of transmittal, by registered mail, return
receipt requested, so that it is received by the exchange agent at one of the
addresses listed in "The Exchange Offer--The Exchange Agent" before the
expiration of the exchange offer on , 1999.
If you hold shares of CEC common stock through a broker, you should receive
instructions from your broker on how to participate. In this situation, you do
not need to complete the letter of transmittal. Please contact your broker
directly if you have not yet received instructions. Some financial institutions
may also effect tenders by book-entry transfer through The Depository Trust
Company.
If you hold certificates for shares of CEC common stock or if you hold CEC
shares through a broker, you may also comply with the procedures for guaranteed
delivery.
Guaranteed Delivery Procedures
Holders of CEC common stock who wish to tender their shares and whose shares
are not immediately available or who cannot deliver their certificates for CEC
common stock, the letter of transmittal or any other documentation required by
the letter of transmittal to the exchange agent prior to the expiration date
must tender their shares of CEC common stock according to the guaranteed
delivery procedures described in "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of CEC Common Stock and Delivery of Carbon Common Stock
Subject to the satisfaction or waiver of the conditions to the exchange
offer, we will accept for exchange any and all shares of CEC common stock that
are properly tendered in the exchange offer and not withdrawn prior to the
expiration date. The Carbon common stock to be delivered in exchange for your
shares of CEC common stock will be delivered promptly following the expiration
of our offer.
No Dissenters' Rights
No dissenters' rights are available to shareholders of CEC in connection
with the exchange offer.
Exchange Agent
Harris Trust and Savings Bank is serving as the exchange agent in connection
with our exchange offer.
Possible Effects of the Exchange Offer
The exchange of shares of CEC common stock in the exchange offer will reduce
the number of holders of CEC common stock and the number of shares of CEC
common stock that might otherwise trade publicly. Depending on the number of
shares of CEC common stock exchanged, the liquidity and market value of the
remaining shares of CEC common stock could be adversely affected. CEC's common
stock is listed on the American Stock Exchange ("AMEX"). Depending on the
number of shares of CEC common stock exchanged pursuant to the exchange offer,
CEC common stock may no longer meet the requirements of the AMEX for continued
listing. Because holders of approximately 40% of the outstanding shares of CEC
have stated their
4
<PAGE>
intentions to accept the exchange offer, we anticipate that CEC common stock
will be delisted from the AMEX. If the shares of CEC common stock were to be
delisted from the AMEX, the market for such shares could be adversely affected.
It is possible that such shares might be traded on other securities markets.
The extent of the public market for the shares of CEC common stock would,
however, depend upon the number of holders and/or the aggregate market value of
such shares remaining at that time, the interest in maintaining a market in
such shares on the part of securities firms and the possible termination of
registration of CEC common stock under the Securities Exchange Act of 1934
("Exchange Act").
CEC's common stock is currently registered under the Exchange Act. Such
registration may be terminated by CEC upon application to the Securities and
Exchange Commission ("SEC") if the outstanding shares of CEC common stock are
not listed upon a national securities exchange and if there are fewer than 300
holders of record of such shares. Termination of registration of the CEC common
stock under the Exchange Act would reduce the information required to be
furnished by CEC to its shareholders and to the SEC and would make certain
provisions of the Exchange Act, such as the filing of periodic SEC reports, the
requirement of furnishing a proxy statement pursuant to Section 14(a), and the
short-swing profit recovery provisions of Section 16(b), no longer applicable
to CEC shares.
Background of the Exchange Offer/Exchange and Financing Agreement
The information in this section regarding the deliberations of CEC's Board
of Directors and the actions of CEC's management and legal and financial
advisors is based on information furnished by CEC.
CEC and Carbon believe there are attractive opportunities available for
acquisitions of oil and gas properties and exploration and production in both
the United States and Canada as a result of improving oil and gas prices, lower
exploration and production costs, the divestiture of non-core properties by
major oil companies and large independent oil companies and consolidation
within the oil and gas industry. CEC's position as a small independent public
oil and gas company limits its potential for growth unless steps are taken to
increase its size and the value of its oil and gas reserves.
In early May, 1999, CEC learned that Bonneville Pacific Corporation ("BPC")
would be selling the stock of its Denver based 100% owned subsidiary, BFC.
During May, June, July and early August, 1999, CEC participated in a sale
process conducted by BPC for the sale of BFC. During that period, CEC conducted
due diligence concerning BFC and its properties, submitted various offers for
BFC and submitted comments on the form of the stock purchase agreement for the
acquisition of BFC prepared by BPC.
During this period, CEC also conducted discussions with Yorktown Partners
LLC (an energy investment firm which is the manager of Yorktown Energy Partners
III, L.P.) relating to the financing of the acquisition of BFC by Yorktown.
These discussions resulted in a determination that Yorktown would provide
equity financing through a United States corporation. As a result, Carbon was
formed in September, 1999.
On August 11, 1999, CEC and BPC signed the BFC stock purchase agreement.
Under the BFC stock purchase agreement, CEC agreed to purchase all BFC
outstanding stock from BPC at a price of $23,857,951 in cash, subject to
certain adjustments, with debt less working capital of approximately $6,500,000
remaining at BFC (referred to as "net debt"). On October 14, 1999, Carbon, CEC
and Yorktown signed the exchange and financing agreement providing for an
assignment of the BFC stock purchase agreement to Carbon, the purchase of
common stock of Carbon by Yorktown for $24,750,000, and the exchange offer made
by this prospectus. This purchase of Carbon stock by Yorktown was at a price of
$5.50 per share. On October 29, 1999, Carbon completed the purchase of BFC.
The exchange offer gives each shareholder of CEC the opportunity to become a
shareholder in Carbon which will be a substantially larger oil and gas company
than CEC alone. Carbon owns BFC, and, it is anticipated
5
<PAGE>
Carbon will own more than a majority of CEC. The formation of Carbon results
from Yorktown's desire for making its investment in a United States corporation
and unfavorable tax consequences that would have resulted by reincorporating
CEC from an Alberta corporation with Canadian assets into a U.S. corporation
with both Canadian and U.S. assets. For a more complete description of the
background surrounding the purchase of BFC, the formation of Carbon and the
making of the exchange offer, see "The Exchange Offer--Background of the
Exchange Offer/Exchange Agreement".
Recommendation of the Board of Directors of CEC
CEC's Board of Directors believes that the terms of the exchange offer are
fair to and in the best interest of CEC and its shareholders. In reaching its
decision, CEC's Board considered a number of factors, including the following:
. The acquisition of BFC and the exchange offer would result in Carbon
being led by a highly regarded management team with a strong track
record in the oil and gas industry.
. The structure of the transaction with CEC's current shareholders having
the opportunity to participate in the future value of both BFC and CEC
as part of Carbon by accepting the exchange offer.
. Reasons for the acquisition of BFC, including potential growth, the
nature of BFC's properties and cost savings that may be realized in the
operation of BFC by Carbon.
. The terms of the BFC stock purchase agreement, including the parties'
representations, warranties and covenants and the conditions to their
respective obligations.
. United States and Canadian tax consequences of the transaction.
. The requirement of Yorktown that its equity financing be made through a
United States corporation.
. The valuation of CEC involved in the equity financing made by Yorktown;
alternatives to Yorktown's proposal that had been considered or sought
in the past; a previous search by CEC for a buyer, which was conducted
prior to Patrick R. McDonald's becoming a significant shareholder, and
resulted in no offers.
. Valuation methods applicable to CEC, including discounted cash flow,
multiple of cash flow and public stock market values.
. Current financial market conditions and historical market prices,
volatility and trading information with respect to CEC's common stock.
. The likelihood of continuing consolidation in the energy industry and
increased competition from larger, well-financed companies.
. The reports from CEC's management as to the results of its due diligence
investigation of BFC and its business.
Intentions of the Board of Directors of CEC
Directors and executive officers of CEC who hold, in the aggregate, 580,346
shares of outstanding CEC common stock, representing approximately 38.1% of
CEC's outstanding shares, have stated their intention to accept our stock in
the exchange offer.
United States Federal Income Tax Consequences
Subject to a number of qualifications and conditions, and to the accuracy of
certain factual representations made by Carbon and CEC, Holland & Hart LLP, tax
counsel to CEC, has rendered an opinion, that for U.S. federal income tax
purposes, (1) the transactions contemplated by the exchange offer should
constitute a tax-free B reorganization, assuming that Carbon acquires at least
80% of the outstanding stock of CEC pursuant to the
6
<PAGE>
exchange offer, and (2) the transactions contemplated by the exchange offer
likely constitute part of a tax-free Section 351 transaction even if the
transactions contemplated by the exchange offer do not qualify as a B
reorganization. See "United States Federal Income Tax Consequences." Tax
counsel's opinion is not a substitute for each individual CEC shareholder's
review of the tax consequences of the exchange by its own advisor. See "Risk
Factors." Non-U.S. shareholders who receive Carbon stock in the exchange may be
subject to U.S. tax with respect to their investment in Carbon common stock or
may otherwise be affected by U.S. tax law. The summary of U.S. federal income
tax consequences of the exchange set forth in "United States Federal Income Tax
Consequences" does not cover all U.S. federal income tax aspects of the
exchange and may not be applicable to every CEC shareholder exchanging shares.
For these reasons, each CEC shareholder participating in the exchange is urged
and expected to consult with and rely on its tax advisor regarding the U.S.
federal income tax aspects of the exchange.
Canadian Federal Income Tax Consequences
Subject to the specific exceptions referred to under "Canadian Federal
Income Tax Consequences" below, the exchange of CEC common stock for Carbon
common stock will generally be tax-free to non-Canadian holders of CEC common
stock for Canadian federal income tax purposes.
Canadian holders of CEC common stock will not benefit from tax-free
treatment for Canadian federal income tax purposes and will have to recognize a
gain or loss equal to the difference between the fair market value of the
Carbon common stock and the aggregate of the adjusted cost base of the CEC
common stock and any reasonable costs of disposition.
The tax considerations to you resulting from your individual position and
the exchange may be complex. Carbon recommends that you read carefully the
discussion under "Canadian Federal Income Tax Consequences" and consult with
your own advisors as to the Canadian federal, provincial or territorial tax
consequences.
An opinion on these Canadian tax matters has been rendered by Bennett Jones,
counsel to CEC. Their opinion is subject to the assumptions and qualifications
set forth under "Canadian Federal Income Tax Consequences."
Accounting Treatment
We will account for the exchange offer as a purchase of CEC in accordance
with generally accepted accounting principles. For a discussion of the
application of purchase accounting to this transaction, see "The Exchange
Offer--Accounting Treatment."
Comparison of Shareholders' Rights
CEC shareholders who accept our exchange offer will become shareholders of
Carbon and be governed by our articles of incorporation and bylaws and the
Colorado Business Corporation Act. There are a number of differences between
our articles of incorporation and bylaws and the Colorado Business Corporation
Act and the articles of association and bylaws of CEC and the Alberta Business
Corporations Act. These differences are discussed under "Comparison Of
Shareholders' Rights."
Interests of Certain Persons in the Exchange Offer
In considering whether to accept our offer, you should consider the
interests various executive officers and directors have in the exchange offer.
Patrick R. McDonald, President of CEC, and Kevin Struzeski, Chief Financial
Officer-Treasurer of CEC, have entered into employment agreements with Carbon.
In addition, Mr. McDonald and Mr. Struzeski have been granted restricted stock
of Carbon and stock options to acquire shares of
7
<PAGE>
its common stock. Mr. McDonald, Mr. Struzeski and other officers of CEC are to
receive bonuses from CEC upon completion of the exchange offer if 50% or more
of the CEC shares are exchanged for Carbon shares. The employment agreements
replace employment agreements with CEC and were negotiated on an arms'-length
basis with Yorktown. For a description of these interests, see "The Exchange
Offer--Interests of Certain Persons in the Exchange Offer."
Second Step Merger
After the exchange offer, we may merge CEC with a wholly-owned Canadian
subsidiary of Carbon. In such a merger, shareholders of CEC may receive cash,
shares of our stock, other securities or a combination of some or all of the
foregoing. If CEC common stock is listed on the AMEX on the record date for
determining shareholders entitled to vote on the merger, no dissenters' rights
will be available to CEC's shareholders in connection with the merger. In
contrast, if CEC common stock is not listed on the AMEX on such record date,
CEC shareholders will be entitled to dissenters' rights in connection with the
merger. The continued listing of CEC common stock will depend upon the effect
of the exchange offer on the shares of CEC held by persons other than Carbon,
and it is currently contemplated that the CEC shares will be delisted from
AMEX.
We do not intend to do a second step merger if it would result in adverse
United States income tax consequences to CEC shareholders who accepted our
exchange offer. We will not engage in a second step merger without informing,
and receiving approval from, our tax counsel.
Summary Selected Financial Data of Carbon
The following table summarizes financial data for our business. The data is
derived from the financial statements of our predecessor, BFC, included
elsewhere in this prospectus. In addition to this information, please read our
financial statements and the financial statements of Bonneville Fuels
Corporation starting on page F-7 and "Information About Carbon--Our
Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 58.
<TABLE>
<CAPTION>
As of or for
the
Six Months As of or for the Year
Ended June 30, Ended December 31,
---------------- -------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue............... $14,728 $ 8,026 $21,092 $16,539 $15,067 $12,675 $14,956
Net income (loss)..... 150 596 (1,941) 732 4,060 172 (2,950)
Cash Flow Data:
Cash provided by (used
in) operating
activities........... $(1,529) $ 2,092 $ 4,696 $ 3,193 $ 4,136 $ 3,016 $ 3,091
Cash used in investing
activities........... (3,619) (2,396) (5,948) (4,442) (1,025) (859) (1,181)
Cash provided by (used
in) financing
activities........... 2,850 600 3,450 1,019 (2,760) (2,090) (2,046)
Balance Sheet Data:
Total assets.......... $20,924 $16,642 $22,840 $16,054 $14,524 $13,177 $16,321
Working capital....... 1,488 1,246 812 1,491 1,725 628 405
Long term debt........ 8,700 3,000 5,850 2,400 1,700 4,760 6,850
Stockholder's
equity(1)............ 9,464 10,196 9,313 9,591 8,859 6,774 6,552
</TABLE>
- --------
(1) Includes debt to parent company (BPC) of $3,787 in 1995 and $3,737 in 1994,
which was converted to equity in 1996.
8
<PAGE>
Summary Selected Financial Data of CEC
The following table summarizes financial data for CEC's business. The data
is derived from the financial statements of CEC included elsewhere in this
prospectus which were prepared in accordance with Canadian generally accepted
accounting principles. In addition to this information, please read the
financial statements of CEC starting on page F-27 and "Information About CEC--
CEC Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 42.
<TABLE>
<CAPTION>
As of or for
the
Nine Months
Ended August As of or for the
31, Year Ended November 30,
---------------- -------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- -------
(in Canadian dollars)
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues.............. $ 3,463 $ 2,364 $ 3,253 $ 3,309 $ 3,212 $ 3,794 $ 3,673
Net income (loss)..... (188) 268 240 605 526 870 1,033
Cash Flow Data:
Cash provided by
operating activities
..................... $ 1,389 $ 1,218 $ 1,366 $ 1,724 $ 1,656 $ 1,933 $ 2,145
Cash used in investing
activities .......... (7,751) (489) (564) (1,265) (2,333) (2,064) (1,989)
Cash provided by (used
in) financing
activities........... 4,696 (79) (209) (98) 604 -- --
Balance Sheet Data:
Total assets.......... $15,981 $11,444 $11,235 $11,378 $10,166 $ 8,729 $ 7,852
Working capital....... 182 2,039 2,120 1,149 981 937 684
Long term debt........ 4,850 -- -- -- -- -- --
Stockholders' equity.. 8,380 8,880 8,722 8,691 $ 8,184 $ 7,054 $ 6,184
</TABLE>
Summary Pro Forma Consolidated Condensed Financial Information
The following is summary pro forma consolidated financial information of
Carbon and is derived from the historical financial statements of BFC and CEC.
This information assumes that the acquisition of BFC and the exchange offer of
Carbon shares for CEC shares were consummated at the beginning of relevant
periods. This information should be read in connection with the financial
statements of Carbon and CEC, beginning on page F-1 of this prospectus and the
unaudited pro forma consolidated financial information beginning on page 37 of
this prospectus.
<TABLE>
<CAPTION>
As of or for the As of or for the
Year Ended Six Months Ended
December 31, 1998 June 30, 1999
----------------- ----------------
(In thousands)
<S> <C> <C>
Operating Data:
Revenues............................. $24,332 $16,273
Net loss............................. (928) (449)
Balance Sheet Data:
Total assets......................... $47,917
Working capital...................... 2,251
Long term debt....................... 11,106
Stockholders' equity................. 31,348
</TABLE>
9
<PAGE>
Comparative Per Share Data
The table below sets forth, for the periods indicated, the following:
. the pro forma basic and diluted net income (loss) and book value per share
of Carbon common stock after giving effect to the closing of the exchange
offer and assuming all shareholders of CEC accept our offer; and
. the historical basic and diluted net income (loss) and book value per share
of CEC common stock which is the same as the equivalent pro forma per share
data because the exchange offer is on a one-to-one basis.
Neither we nor CEC have declared or paid any cash dividends on our common
stock. We currently expect to retain any future earnings for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. The information presented in this table
should be read in conjunction with the pro forma consolidated condensed
financial information and the separate financial statements of Carbon and CEC
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of or for the As of or for the
six months year ended
ended June 30, 1999(1) December 31, 1998(2)
---------------------- --------------------
<S> <C> <C>
Unaudited Carbon pro forma data:
Net income (loss) per common
share--basic.................... $(.07) $(.15)
Net income (loss) per common
share--diluted.................. $(.07) $(.15)
Cash dividends paid per common
share........................... -- --
Book value per common share...... $5.19 $5.18
</TABLE>
- --------
(1) Net income (loss) per common share data assumes that the acquisition of BFC
was consummated on January 1, 1999 and the exchange offer of Carbon shares
for CEC shares was consummated on December 1, 1998. The book value per
common share data assumes that the acquisition of BFC was consummated on
June 30, 1999 and the exchange offer of Carbon shares for CEC shares was
consummated on May 31, 1999.
(2) Net income (loss) per common share data assumes that the acquisition of BFC
was consummated on January 1, 1998 and the exchange offer of Carbon shares
for CEC shares was consummated on December 1, 1997. The book value per
common share data assumes that the acquisition of BFC was consummated on
December 31, 1998 and the exchange offer of Carbon shares for CEC shares
was consummated on November 30, 1998.
<TABLE>
<CAPTION>
As of or for the As of or for the
six months year ended
ended May 31, 1999 November 30, 1998
------------------ -----------------
<S> <C> <C>
CEC historical equivalent pro forma data
(translated to US$):
Net income (loss) per common share--
basic................................. $(.10) $ .11
Net income (loss) per common share--
diluted............................... $(.10) $ .11
Cash dividends paid per common share... -- --
Book value per common share............ $ 3.71 $3.71
</TABLE>
10
<PAGE>
CEC Per Share Market Information
The common stock of CEC 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 Energy Corp. to its shareholders by
a rights offering. The reported high and low sales prices in U.S. dollars for
the periods ending below were as follows:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1999:
First quarter.......................................... $4.7500 $4.1250
Second quarter......................................... 4.8125 4.1250
Third quarter.......................................... 5.1250 4.1250
Fourth quarter (through October , 1999)
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
</TABLE>
As of August 11, 1999, the day prior to announcement of the proposed
acquisition of BFC stock under the BFC stock purchase agreement, the closing
sales price of CEC common stock was $4.375.
As of , 1999 the most recently reported closing sales price of CEC
common stock was $ per share.
As of August 31, 1999, there were approximately 57 holders of record of CEC
common stock and an estimated 430 or more beneficial owners who hold their
shares in brokerage accounts.
11
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before you decide to accept or reject
the exchange offer. The risks and uncertainties we describe below are not the
only risks we face. You should consider all of these risk factors along with
the other information contained in the documents to which we have referred
you.
If any of the adverse events described in the following risk factors
actually occur or we do not accomplish necessary events described in the risk
factors, our business, financial condition and operating results could be
materially and adversely affected, the trading price of our common stock could
decline and you could lose all or part of your investment.
There are a number of risks associated with the purchase of BFC and the
exchange offer:
We may not be able to successfully integrate BFC and CEC.
Carbon acquired BFC in October, 1999. The integration and consolidation of
the assets and operations of Carbon, BFC and CEC after the exchange offer will
present significant management challenges for Carbon. Carbon cannot assure you
that it will be able to successfully integrate the Carbon, BFC and CEC
business operations or that the combined company will realize any of the
anticipated benefits of the transactions.
You or Carbon could incur United States income taxes.
As described in the section of this prospectus entitled "United States
Federal Income Tax Consequences," no ruling will be requested from the IRS
regarding the United States income tax aspects of the exchange. Although
Holland and Hart LLP, tax counsel for Carbon, has rendered the opinion set
forth in the section of this prospectus entitled "United States Federal Income
Tax Consequences," the opinion is limited in scope, is subject to a number of
qualifications, limitations and conditions and is subject to the accuracy of
certain factual representations made by Carbon. As discussed in "United States
Federal Income Tax Consequences," holders of more than 80% of CEC shares must
participate in the exchange in order for the exchange to constitute a tax-free
B reorganization. If holders of less than 80% of the CEC shares accept the
exchange offer, tax-free treatment is less certain, although it will still be
likely that the exchange will qualify as a tax-free transaction. Moreover, an
opinion of counsel is not binding on the IRS, and the IRS may successfully
take a position contrary to tax counsel's opinion. For these reasons, each CEC
shareholder participating in the exchange is urged and expected to consult
with and rely on its tax advisor regarding the exchange.
Shareholders of CEC who reside in Canada may incur Canadian income taxes by
accepting the exchange offer.
Canadian holders of CEC common stock will not benefit from tax-free
treatment for Canadian federal income tax purposes and will have to recognize
a gain or loss equal to the difference between the fair market value of the
Carbon common stock and the aggregate of the adjusted cost base of the CEC
common stock and any reasonable costs of disposition.
The tax considerations to you resulting from your individual position and
the exchange may be complex. You should read carefully the discussion under
"Canadian Federal Income Tax Consequences" and consult with your own advisors
as to the Canadian federal, provincial or territorial tax consequences.
Yorktown is Carbon's controlling stockholder.
After the exchange offer, Yorktown will own 74% of Carbon's common stock or
more if some of CEC's shareholders do not accept the exchange offer.
Accordingly, Yorktown will be able to determine virtually all matters
submitted for shareholder approval. The nomination and election of Carbon's
directors are subject to the terms of the exchange and financing agreement
among Carbon, CEC and Yorktown. Upon termination of the
12
<PAGE>
provisions of the exchange and financing agreement relating to the nomination
and election of directors, Yorktown will be able to control the election of
directors and to determine the corporate and management policies of Carbon.
See "The Exchange Offer--Description of Exchange Agreement."
No prior market for Carbon shares exists, and the market price for Carbon
shares may decrease after the exchange offer.
Prior to the exchange offer, there has been no public market for our
shares. CEC shares have been traded on the AMEX, but the market was very thin
and little trading occurred. There can be no assurance that an active trading
market for our common stock will develop or be sustained. There is also
uncertainty as to the prices at which our shares will trade. The possibility
exists that the trading price for our shares may be lower than the prior
market prices for CEC shares. Also, the price of CEC shares may decrease after
the exchange offer if holders with a relatively large number of shares decide
to sell the shares immediately or shortly after the exchange offer.
CEC shareholders will not have a readily available market for CEC shares after
the exchange offer.
We anticipate that most CEC shareholders will tender their shares in
exchange for Carbon shares. We therefore contemplate that CEC shares will be
delisted from the AMEX and may not be traded or quoted on any public market.
We depend heavily on our key personnel.
We depend to a substantial extent on the expertise and services of our
senior management personnel and upon the expertise and services of Patrick R.
McDonald, who is our President and Chief Executive Officer and one of our
directors. The loss of Mr. McDonald's or of any of our other senior management
personnel's services could have a material adverse effect on us. We do not
maintain key-man life insurance on any of our personnel.
We may be unable to obtain additional financing.
Due to our plans for active acquisition, development and exploration
programs, we expect to experience substantial capital needs. We expect to be
able to finance our planned acquisition, development and exploration programs
for the next twelve months from cash generated by our operations and from bank
financing. We cannot assure you as to the availability or terms of any
additional financing that may be required or whether financing will continue
to be available under existing or new credit facilities. If sufficient capital
resources are not available to Carbon, its drilling and other activities may
be curtailed.
There are a number of risks related to our business:
Risks relating to the acquisition of oil and gas properties may affect our
future success.
CEC has made several recent acquisitions, and Carbon plans to engage in
future acquisitions of oil and gas properties. The successful acquisition of
producing properties requires an assessment of recoverable reserves, future
oil and gas prices, operating costs, potential environmental and other
liabilities and other factors. Such assessments are necessarily inexact and
their accuracy inherently uncertain. In connection with such an assessment, we
perform a review of the subject properties that we believe to be generally
consistent with industry practices. This usually includes on-site inspections
and the review of reports filed with various regulatory entities. Such a
review, however, will not reveal all existing or potential problems, nor will
it permit a buyer to become sufficiently familiar with the properties to fully
assess their deficiencies and capabilities. Inspections may not always be
performed on every well, and geological, mechanical and environmental problems
are not necessarily observable even when an inspection is undertaken. Although
we perform a review of acquired properties that we believe is consistent with
industry practices, existing or potential environmental problems with
properties may not be discovered until after an acquisition has been
completed. Even when problems are identified, the seller
13
<PAGE>
maybe unwilling or unable to provide effective contractual protection against
all or part of these problems. We cannot assure you that any of our
acquisitions of property interests will be successful and, if an acquisition
is unsuccessful, that the failure will not have an adverse effect on our
future results of operations and financial condition.
Carbon's technology systems may not be ready for the Year 2000.
Carbon has not completed a comprehensive analysis of the operational
problems and costs that would be reasonably likely to result from any failure
of the technology systems of Carbon or of other third parties with which
Carbon has significant relationships to be Year 2000 compliant by January 1,
2000. Carbon has made inquiries of the suppliers and manufacturers of its
computer systems, including equipment supplied by third parties, and it has
been advised that these systems are Year 2000 compliant except in the case of
its property management software, which is currently under review regarding
Year 2000 compliance. We cannot assure you that the Year 2000 issue will not
have a material adverse effect on Carbon's financial condition, results of
operations or cash flows.
Examination of titles is limited prior to drilling.
Carbon and CEC hold title to their properties pursuant to leases from third
parties or, in the case of CEC, the Crown. We believe that Carbon and CEC have
satisfactory title to their properties. Oil and gas interests are subject to
customary interests and burdens, including overriding royalties and operating
agreements. Their 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, Carbon and CEC do
not regularly investigate title to oil and gas leases acquired as undeveloped
acreage. Rather, Carbon and CEC typically examine title before any drilling or
development is undertaken. Our management believes the methods of title
examination Carbon and CEC have adopted are reasonably calculated to insure
that production from our properties, if obtained, will be readily salable for
our account. Our management is not aware of any material pending or threatened
claims affecting title to Carbon's or CEC's proved acreage. Carbon's and CEC's
producing and non-producing properties are subject to customary royalty
interests, liens for current taxes, and other burdens, none of which, in our
management's opinion, materially interferes with the use of or adversely
affects the value of such properties.
Operating hazards are inherent in the oil and gas industry.
The oil and gas business involves a variety of operating risks including
the following risks:
. fire;
. explosion;
. blow-out;
. pipe failure;
. casing collapse;
. abnormally pressured formations; and
. environmental hazards such as oil spills, gas leaks, ruptures and
discharge of toxic substances.
If any of these events were to occur, we could incur substantial losses 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;
14
<PAGE>
. regulatory investigation and penalties; and
. suspension of operations.
We maintain insurance against some, but not all, potential risks; however,
there can be no assurance that any insurance we obtain will be adequate to
cover all losses or exposure for liability. Furthermore, we cannot predict
whether insurance will continue to be available at premium levels that justify
its purchase. Generally, we have elected not to obtain blow-out insurance when
drilling a well because we have not operated in areas with abnormally high
pressures or with known severe lost circulation problems.
We may not be able to replace existing oil and gas reserves with new oil and
gas reserves.
In general, the rate of production from oil and natural gas properties
decline as reserves are depleted. The rate of decline depends on reservoir
characteristics. Except to the extent that we conduct successful exploration
and development activities or acquire properties containing proved reserves,
or both, our proved reserves will decline as reserves are produced. Our future
oil and natural gas production is highly dependent upon our ability to
economically find, develop or acquire reserves in commercial quantities. The
business of exploring for or developing reserves is capital intensive. To the
extent cash flow from operations is reduced and external sources of capital
become limited or unavailable, our ability to make the necessary capital
investment to maintain or expand our asset base of oil and natural gas
reserves would be impaired. In addition, there can be no assurance that our
future exploration and development activities will result in additional proved
reserves or that we will be able to drill economical and productive wells.
Furthermore, although our revenues could increase if prevailing prices for oil
and natural gas increase significantly, our finding and development costs
could increase.
We face strong competition in the oil and gas industry.
We operate in the highly competitive area of oil and natural gas
exploration, acquisition and production. In seeking to acquire desirable
producing properties or new leases for future exploration and in marketing our
oil and natural gas production, as well as in seeking to acquire the equipment
and expertise necessary to operate and develop those properties, we face
intense competition from a large number of independent, technology-driven
companies as well as both major and other independent oil and natural gas
companies. Many of these competitors have financial and other resources
substantially in excess of those available to us. Competitors may be able to
pay more for exploratory prospects and productive oil and natural gas
properties and may be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than our financial or human resources
permit.
Governmental regulation and environmental matters generally affect our
business.
Oil and natural gas operations are subject to various federal, state and
local government laws and regulations, which may be changed from time to time
in response to economic or political conditions. Matters subject to regulation
include discharge permits for drilling operations, drilling bonds, reports
concerning operations, spacing of wells, utilization and pooling of
properties, environmental protection and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production
by restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of oil and natural gas. We
are also subject to changing and extensive tax laws, the effects of which
cannot be predicted. The development, production, handling, storage,
transportation and disposal of oil and natural gas, by-products thereof and
other substances and materials produced or used in connection with oil and
natural gas operations are subject to laws and regulations primarily relating
to protection of human health and the environment. The discharge of oil,
natural gas or pollutants into the air, soil or water may give rise to
significant liabilities on our part to governments and third parties and may
result in the assessment of civil or criminal penalties or require us to incur
substantial costs of remediation. Legal requirements frequently are changed
and subject to interpretation. We are unable to predict the ultimate cost of
compliance with these requirements or the effect of these requirements on our
operations. Existing laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations could materially
adversely affect our business, results of operations and its financial
condition.
15
<PAGE>
When CEC becomes a subsidiary of Carbon, our Canadian operations will be
subject to Canadian government and environmental regulations.
The petroleum and natural gas industry operates in Canada under federal and
provincial legislation and regulations governing land tenure, royalties,
production rates, environmental protection, exports and other matters.
Canadian federal authorities do not regulate the price of oil and gas in
export trade, but instead rely on market forces to establish these prices. The
quantities of oil and gas which may be removed from the provinces or exported
from Canada is governed by legislation. 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. CEC elected to use the
Gas Reference Price, which Carbon will continue to use. 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 formula to a sliding scale, based on oil and gas prices. In
Alberta, certain, smaller, producers of oil or natural gas are entitled to a
credit against the royalties payable to the Crown by virtue of the ARTC
(Alberta Royalty Tax Credit) program. The ARTC program is based on a price-
sensitive formula, and the ARTC rate varies between 75 percent and 25 percent,
depending on commodity prices. The ARTC rate is applied to a maximum of
$2,000,000 of Alberta Crown royalties payable. Crown royalties on production
from producing properties acquired from corporations claiming maximum
entitlement to ARTC will generally not be eligible for ARTC. The ARTC rate is
established quarterly based on the average "par price," as determined by the
Alberta Department of Energy for the previous quarterly period. On December
22, 1997, the Government of Alberta gave notice that they intended to review
the ARTC program with expected changes to take effect prior to 2001. Although
industry consultation has not yet occurred, among the major proposed changes
will be a 10 year limitation on the ability to claim ARTC entitlements from
production from any applicable well.
The oil and gas 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 any of these 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. We believe that CEC 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 our capital expenditures, or our
competitive position in the industry. Consequently, we do not anticipate the
need for any material capital expenditures for environmental control
facilities for the current year. We believe 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.
Uncertainty of estimates of oil and gas reserves.
Estimates of our proved oil and gas reserves and the estimated future net
revenues from them are based upon our own estimates or on third party reserve
reports that rely upon various assumptions, including assumptions about oil
and natural gas prices, drilling and operating expenses, capital expenditures,
taxes and availability of funds. The process of estimating oil and natural gas
reserves is complex, requiring significant
16
<PAGE>
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result,
estimates are inherently imprecise. Actual future production, oil and natural
gas prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and natural gas reserves may vary substantially
from our estimates or from estimates reflected in the reserve reports of third
parties. Any significant variance in these assumptions could materially affect
the estimated quantity and value of reserves.
Our properties also may be susceptible to hydrocarbon drainage from
production by other operators on adjacent properties. In addition, our proved
reserves may be subject to downward or upward revision based upon production
history, results of future exploration and development, prevailing oil and
natural gas prices, mechanical difficulties, government regulation and other
factors, many of which are beyond our control.
Actual production, revenues, taxes, development expenditures and operating
expenses with respect to our reserves likely will vary from the estimates
used, and such variances may be material. The value of future net revenues as
reflected in this prospectus, based on the SEC's required assumptions, should
not be construed as the current market value of the estimated oil and natural
gas reserves attributable to our properties.
The estimated discounted future net cash flows from proved reserves
generally are based on prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher or lower.
Actual future net cash flows also will be affected by increases in consumption
by oil and natural gas purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows from proved reserves, and
thus their actual present value, will be affected by the timing of both
production and expenditures in connection with the development and production
of oil and natural gas properties.
Our production may not be marketable.
The marketability of our production depends in part upon the availability,
proximity and capacity of natural gas gathering systems, pipelines and
processing facilities. We deliver nearly 100% of the natural gas we produce
through gas gathering systems and gas pipelines that we do not own. Federal
and state regulation of oil and natural gas production and transportation, tax
and energy policies, changes in supply and demand and general economic
conditions all could adversely affect our ability to produce and market our
oil and natural gas. Any dramatic change in market factors could have a
material adverse effect on our business, financial condition and results of
operations.
Our success might be adversely affected by the volatility of oil and gas
prices.
Our revenues, profitability, future growth and ability to borrow funds or
obtain additional capital, as well as the carrying value of our properties,
will be substantially dependent upon prevailing prices of oil and gas.
Historically, the markets for oil and gas have been volatile, and they are
likely to continue to be volatile in the future. Prices for oil and gas may
fluctuate widely in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
that are beyond our control.
It is impossible to predict future oil and gas price movements with
certainty. Declines in oil and gas prices may materially adversely affect our
financial condition, liquidity, ability to finance planned capital
expenditures and results of operations. Lower oil and gas prices also may
reduce the amount of oil and gas that we can produce economically.
Oil and gas price hedging and financial hedging arrangements may expose Carbon
to financial loss in some circumstances.
In order to reduce our exposure to short-term fluctuations in the prices of
oil and gas, we periodically have entered into hedging arrangements. The
hedging arrangements apply to only a portion of our production and provide
only partial price protection against declines in oil and gas prices. These
hedging arrangements will
17
<PAGE>
remain in place following the transactions and may expose us to risk of
financial loss in some circumstances, including instances where production is
less than expected or where the other party to any hedging arrangement fails
to perform. In addition, the hedging arrangements may limit the benefit to
Carbon of increases in the prices of oil or gas.
There are numerous risks relating to drilling activities.
Our success will be materially dependent upon the continued success of our
drilling program. Oil and gas drilling involves numerous risks, including the
risk that no commercially productive oil or gas reservoirs will be
encountered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors, including:
. unexpected drilling conditions,
. pressure or irregularities in formations,
. equipment failures or accidents,
. adverse weather conditions,
. compliance with governmental requirements, and
. shortages or delays in the availability of drilling rigs and the
delivery of equipment.
Our future drilling activities may not be successful and, if drilling
activities are unsuccessful, such failure will have an adverse effect on our
future results of operations and financial condition. Although we have
identified numerous drilling prospects, we cannot assure you that those
prospects will be drilled or that oil or gas will be produced from them.
Technological changes in the industry could reduce our competitiveness.
The oil and gas industry experiences rapid and significant technological
advancements and introduction of new products and services using new
technologies. As others use or develop new technologies, we may be placed at a
competitive disadvantage, and competitive pressures may force us to implement
new technologies at substantial costs. In addition, our competitors may have
greater financial, technical and personnel resources that allow them to enjoy
technological advantages and may in the future allow them to implement new
technologies sooner than us. There can be no assurance that we will be able to
respond to such competitive pressures and implement such technologies on a
timely basis or at an acceptable cost. One or more of the technologies we
currently utilize may become obsolete in the future. In such cases, our
business, financial condition and results of operations could be materially
adversely affected. If we are unable to use the most advanced commercially
available technology, our business, financial condition and results of
operations could be materially and adversely affected.
SOURCES OF INFORMATION ABOUT CARBON AND CEC
Our business now consists only of BFC's business. Because BFC was acquired
in October, 1999, much of the information in this prospectus with respect to
BFC is derived from data and records prepared or developed under the prior
management of BFC. The current management of Carbon cannot be certain about
the accuracy of all such information.
Information and data in this prospectus with respect to CEC has been
developed or derived from CEC data and records.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "estimates," "anticipates,"
"intends," "plans" and similar expressions. Our actual results could differ
materially from those anticipated in the forward-looking statements as a
result of various factors, including all the risks discussed in "Risk Factors"
and elsewhere in this prospectus.
18
<PAGE>
THE EXCHANGE OFFER
General
We are offering to exchange one share of our common stock for each share of
CEC common stock. If all CEC shareholders accept our offer, in the aggregate
we will issue approximately 1,521,400 shares of our common stock. Our common
stock has been approved for listing on the AMEX, upon issuance of the shares
after the exchange offer, under the symbol " ." CEC's Board of Directors
has approved this exchange offer.
The exchange offer is open to all holders of CEC common stock. We are
sending this prospectus and related exchange offer documents to persons who
held CEC common stock at the close of business on , 1999. On
that date, there were shares of CEC common stock outstanding, which
were held of record by approximately shareholders. We will also
furnish this prospectus and related exchange offer documents to brokers, banks
and similar persons whose names or the names of whose nominees appear on CEC's
shareholder list or, if applicable, who are listed as participants in a
clearing agency's security position listing for subsequent transmittal to
beneficial owners of CEC common stock.
Background Of The Exchange Offer/Exchange Agreement
The information in this section regarding the deliberations of CEC's Board
of Directors and the actions of CEC's management and legal and financial
advisors is based on information furnished by CEC.
As part of a strategy of increasing its natural gas and oil reserves
through acquisitions and exploration and development, CEC has evaluated
property and corporate acquisition opportunities in Alberta, Canada and the
Rocky Mountain region of the United States.
CEC believes there are attractive opportunities available for acquisitions
and exploration and production in both the United States and Canada as a
result of improving oil and gas prices, lower exploration and production
costs, the divestiture of non-core properties in the industry generally and
consolidation within the oil and gas industry. CEC's position as a small
independent public oil and gas company limits its potential for growth unless
steps are taken to increase its size and the value of its oil and gas
reserves.
In July, 1998, Patrick R. McDonald purchased shares of CEC and became
President, Chief Executive Officer and a member of the Board of Directors. Mr.
McDonald hired a team of professional oil and gas managers and began to
develop CEC's Canadian natural gas properties through the acquisition of
additional interests in the Carbon Gas Field in Alberta, Canada. Since July,
1998, CEC has completed five transactions resulting in an increase in CEC's
proved natural gas and oil reserves in Canada.
CEC's growth strategy included the acquisition and exploration and
development of oil and gas properties in the United States. During 1998 and
1999, CEC management reviewed and evaluated oil and gas acquisition
opportunities in the Rocky Mountain region of the United States. In early May,
1999, CEC learned that BPC planned to sell the stock of its Denver based 100%
owned subsidiary, BFC. On May 10, 1999, CEC executed a confidentiality letter
and received information relating to the oil and gas wells and reserves owned
by BFC. In accordance with the schedule established by BPC, CEC submitted an
initial non-binding expression of interest in purchasing BFC for a total of
$24,500,000 in cash, plus net debt remaining at BFC equal to approximately
$6,500,000. BPC advised CEC that several other parties had also submitted
offers and that BFC would conduct a sale process designed to result in a
transaction with the most preferred buyer. Contemporaneously, the management
of Yorktown was also apprised of CEC's interest in BFC and was asked to
consider providing the financing for the transaction. The Board of CEC was
advised of and reviewed each of these actions.
On May 21, 1999, CEC was notified that it should conduct additional due
diligence and on May 27 and 28, 1999, CEC met with management of BFC and
reviewed the business and operations of BFC.
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On June 9, 1999, based on the results of due diligence, CEC advised BPC
that, if BPC would negotiate on an exclusive basis, CEC would be willing to
discuss a transaction to acquire BFC in the range of $28,500,000 in cash plus
$6,500,000 in net debt remaining with BFC. Based on discussions with Yorktown,
the offer was not subject to a financing contingency. BPC informed CEC that it
would not accept CEC's offer to negotiate exclusively and requested that CEC
continue to participate in the sale process.
On June 18, 1999, BPC advised CEC that a final offer for BFC would be due
June 28, 1999. On June 28, 1999, CEC submitted an offer to BPC in the amount
of $20,000,000 in cash for the assets of BFC plus the assumption of $6,500,000
in net debt outstanding at March 31, 1999.
CEC was informed in early July that BPC had elected to negotiate a stock
purchase agreement with another party. In mid July, CEC inquired as to whether
BPC's position had changed and whether BPC would be willing to discuss further
CEC's June 28, 1999 offer. BPC indicated that it would consider that offer if
CEC would submit for review comments on the form of the stock purchase
agreement prepared by BPC and increase the price it was willing to pay for
BFC.
On July 22, 1999, the Board of Directors of CEC met at a regularly
scheduled Board meeting. Among items discussed was the status of the BFC
transaction, the status of the financing for the transaction to be provided by
Yorktown and the reasons for CEC's interest in an acquisition of BFC. CEC's
Board directed Mr. McDonald to continue discussions with BPC and Yorktown and
to report back to the Board as to the results of those discussions.
On July 27, 1999, CEC submitted comments on the form of the stock purchase
agreement to BPC for review. During the period July 28 to July 30, BPC and CEC
conducted additional negotiations relating to the terms of the proposed stock
purchase agreement and the price to be paid for the stock of BFC. BPC advised
that CEC's June 28 offer would not be sufficient to ensure the purchase of
BFC. Based on discussions with the Board of CEC and Yorktown, on July 30, 1999
CEC agreed to increase its offer for BFC to $24,000,000 in cash for the stock
of BFC plus $6,500,000 of net debt remaining with BFC. On July 31, 1999, CEC
and BPC executed a Letter of Intent proposing to accept CEC's offer to
purchase BFC and agreeing to negotiate a definitive stock purchase agreement.
On August 11, 1999, CEC conducted a special Board of Directors meeting
during which the status of the BFC transaction and the Yorktown financing was
discussed and the purchase of BFC was approved. The Board of CEC reviewed the
position of CEC within the oil and gas industry, its growth prospects in the
United States and Canada, the present valuation of CEC as a small independent
oil and gas company and its access to future capital to provide growth. The
Board discussed the terms of the BFC stock purchase agreement, including the
price, the representation and warranties of BPC, the requirement for
additional due diligence and obligations of CEC. The Board also considered the
financing as proposed generally by Yorktown, the valuation of CEC and other
factors described in "--CEC's Reasons For Recommending The Exchange Offer."
As indicated above, the Board reviewed the valuation of CEC and BFC by
Yorktown based on what would be the economic equivalent of paying $5.50 per
share of CEC. The Board believed that this price was fair and consistent with
valuation of independent oil and gas companies of similar size based on the
experience of the Board, the current market price for the stock of CEC and by
various industry measures of value including discounted cash flow and multiple
cash flow methods.
The structure of the proposed transaction with BFC and Yorktown was
reviewed and approved by the Board of CEC. Yorktown required that its
investment be in a United States corporation. Because CEC would face
unfavorable tax consequences if it became a U.S. corporation, it was decided
to form Carbon as a Colorado corporation. With commitment for a financing and
an understanding that an exchange offer by the new United States corporation
controlled by Yorktown would be made for shares of CEC common stock; on August
11, 1999, CEC and BPC signed the BFC stock purchase agreement. CEC issued a
press release on August 12, 1999, announcing execution of that agreement,
describing the terms of the financing to be provided by Yorktown and
describing the overall structures of the transactions.
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On October 14, 1999, Carbon, CEC and Yorktown signed the exchange and
financing agreement ("Exchange Agreement"). Under the Exchange Agreement,
Yorktown agreed to acquire 4,500,000 shares of Carbon common stock at a
purchase price of $24,750,000 in cash, which is $5.50 per share. Carbon agreed
to use the proceeds for the purchase of BFC shares under the BFC stock
purchase agreement and to add any remaining proceeds to the working capital of
Carbon. CEC agreed to assign to Carbon its rights and obligations under the
BFC stock purchase agreement for BFC stock, and Carbon agreed to assume the
obligations and terms of CEC under the BFC stock purchase agreement. Also,
Carbon, CEC and Yorktown agreed that Carbon would make an offer to all holders
of shares of CEC to exchange one share of common stock of Carbon for each
outstanding share of CEC, subject only to a few conditions. CEC and its Board
of Directors approved this exchange offer. The Exchange Agreement also
provided for the adoption of a stock option and restricted stock plan of
Carbon, employment agreements with Mr. McDonald and Kevin D. Struzeski,
Carbon's Treasurer and Chief Financial Officer.
The Exchange Agreement further contained provisions regarding the
composition of Board of Directors of Carbon. These provisions are described
under "--Description of Exchange Agreement" below.
On October , 1999, CEC assigned the BFC stock purchase agreement to
Carbon. On October 29, 1999, Carbon completed the purchase of BFC for
$ in cash.
CEC's Reasons For Recommending The Exchange Offer
CEC's Board of Directors believe that the terms of the exchange offer are
fair to and in the best interests of CEC and its shareholders. In reaching its
conclusion to approve the BFC stock purchase agreement, the exchange and
financing agreement and the exchange offer, CEC's Board consulted with
management, as well as its legal advisors, and considered the following
factors:
. The acquisition of BFC and the exchange offer would result in Carbon
being led by a highly regarded management team with a strong track
record in the oil and gas industry.
. The structure of the transaction with CEC's current shareholders having
the opportunity to participate in the future value of both BFC and CEC
as part of Carbon by accepting the exchange offer.
. Reasons for the acquisition of BFC, including potential growth, the
nature of BFC's properties and cost savings that may be realized in the
operation of BFC by Carbon.
. The terms of the BFC stock purchase agreement, including the parties'
representations, warranties and covenants and the conditions to their
respective obligations.
. United States and Canadian tax consequences of the transaction.
. The requirement of Yorktown that its equity financing be made through a
United States corporation.
. The valuation of CEC involved in the equity financing made by Yorktown;
alternatives to Yorktown's proposal that had been considered or sought
in the past; a previous search by CEC for a buyer, which was conducted
prior to Patrick R. McDonald's becoming a significant shareholder, and
resulted in no offers.
. Valuation methods applicable to CEC, including discounted cash flow,
multiple of cash flow and public stock market values.
. Current financial market conditions and historical market prices,
volatility and trading information with respect to CEC's common stock.
. The likelihood of continuing consolidation in the energy industry and
increased competition from larger, well-financed companies.
. The reports from CEC's management as to the results of its due diligence
investigation of BFC and its business.
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The foregoing discussion of the information and factors considered by CEC's
Board of Directors is not intended to be exhaustive but is believed to include
all material factors considered by CEC's Board. In reaching its determination
to approve the stock purchase agreement, the exchange and financing agreement
and the exchange offer, the CEC Board concluded that the potential benefits of
the purchase of BFC stock and exchange offer outweighed the potential risks,
but did not, in view of the wide variety of information and factors
considered, assign any relative or specific weights to the foregoing factors,
and individual directors may have given differing weights to different
factors. Although directors, executive officers and other personnel of CEC
have interests in the exchange offer, as described under "Interests of Certain
Persons in the Exchange Offer," CEC's Board did not consider the potential
benefits to be received by these individuals as a factor in reaching its
decision to approve the BFC stock purchase agreement, the Exchange Agreement
and the exchange offer.
Our Reasons For The Exchange Offer
As part of the Exchange Agreement in which Carbon obtained the right to
purchase BFC stock from CEC, Carbon agreed to make the exchange offer. In
approving the Exchange Agreement and the making of the exchange offer,
Carbon's Board of Directors concluded that the purchase of the BFC stock and
the acquisition of control of CEC pursuant to the exchange offer would result
in Carbon being a more significant independent oil and gas company and having
a management team with a strong track record in the oil and gas industry.
Intentions Of The Directors And Officers Of CEC
The directors and executive officers of CEC who own, in the aggregate,
580,346 shares of outstanding CEC common stock, representing approximately
38.1% of CEC's outstanding shares, have stated they intend to accept our
offer.
Interests Of Certain Persons In The Exchange Offer
In considering whether to accept the exchange offer, you should be aware of
the interests various executive officers and a director of CEC may have in the
exchange offer. In this regard, you should consider, among other things, the
employment agreements, stock options, restricted stock grants and bonuses
described below.
On , 1999, Patrick R. McDonald and Carbon entered into a three-
year employment agreement, which provides for Mr. McDonald to be the President
and Chief Executive Officer of Carbon at a base salary of not less than
US$200,000 per year, to be adjusted on each July 1 for cost of living
increases in the U.S. consumer price index. Carbon is to provide Mr. McDonald
benefits that he currently receives as an executive of CEC, and is to maintain
for his benefit a life insurance policy in the amount of $1 million and a
disability insurance policy with terms mutually agreeable to us and Mr.
McDonald. According to the employment agreement, Carbon is also to nominate
and endorse Mr. McDonald as a director on Carbon's Board of Directors so long
as he is an officer of Carbon.
Either Carbon or Mr. McDonald may terminate the agreement if there is a
change in control of Carbon. A change in control includes (1) the acquisition
by a third party or a group of 50% or more of the combined voting power for
election of Carbon's directors (excluding those owned by Yorktown or entities
controlled by
Yorktown), or (2) the acquisition of Carbon by merger after which Carbon
shareholders do not own more than 2/3
of the outstanding voting securities of the surviving corporation in
substantially the same proportion as they owned
Carbon prior to the merger, or any sale or exchange or other disposition of
all or substantially all of our assets, (3) or the sale or other disposition
of more than 50% in fair market value of our assets other than in the ordinary
course of business, whether in a single transaction or related transactions,
or (4) there is a change in more than a majority of our Board of Directors as
a result of a proxy contest waged by a third party unaffiliated with the
officer who is the party to the employment agreement and not endorsed by that
officer. In the event of a change in control not supported by a majority of
our then-existing Board of Directors, Mr. McDonald is to be paid 400% of his
compensation upon termination of the employment agreement. In the event of a
change in control supported by our then-existing Board of Directors, Mr.
McDonald is to be paid 300% of his compensation upon
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termination of the employment agreement by us or 200% of his compensation upon
termination of his employment by him. For this purpose, the term compensation
means the average of Mr. McDonald's annual base salary and incentive
compensation for the three years prior to the termination date (or such lesser
period as he has been employed), taking his base salary and incentive
compensation into account at their full annualized rates for any partial year
or years. In addition, upon a change in control, any restrictions on
outstanding incentive awards (including restricted stock and performance
shares) granted to Mr. McDonald will lapse and such incentive awards will
become 100% vested. Further, in the event of a change in control, any stock
options and stock appreciation rights held by Mr. McDonald will become
immediately exercisable and 100% vested.
If Mr. McDonald's employment is terminated by us for any reason other than
"cause" (as defined below) or upon the death or disability of Mr. McDonald or
if Mr. McDonald terminates his employment because of a material breach of the
employment agreement by Carbon or because of a change in the position of Mr.
McDonald with Carbon, then Mr. McDonald is to be paid a lump sum payment equal
to 300% of his compensation as defined above. Also, in that event, all his
options and restricted stock become 100% vested. "Cause" means (1) repeated
refusal to obey written directions of our Board or a superior officer, (2)
repeated acts of substance abuse which are materially injurious to Carbon, (3)
fraud or dishonesty which is materially injurious to Carbon, (4) breach of any
material obligation of nondisclosure or confidentiality owed to Carbon, (5)
commission of a criminal offense involving our money or property, or (6)
commission of a criminal offense that constitutes a felony.
If a payment to Mr. McDonald is subject to an excise tax under the Internal
Revenue Code, we will pay to Mr. McDonald an additional amount to cover the
excise tax on an after-tax basis.
As required by his employment agreement, Carbon has granted under its 1999
stock option plan to Mr. McDonald an option to acquire 70,000 shares of our
common stock at $5.50 per share. Carbon has also granted to Mr. McDonald
30,000 shares of restricted common stock under its 1999 restricted stock plan.
The shares subject to the option and the restricted stock vest over three
years, with one-third of the stock vested on October 14, 2000 (which is one
year from the date of grant) and one-third of the stock vested on each of the
second and third anniversaries of the date of grant.
On , 1999, we entered into a two-year employment agreement
with Mr. Struzeski, which provides for Mr. Struzeski to be the Chief Financial
Officer of Carbon at a base salary of US$100,000 per year, together with all
benefits offered by us to our employees generally. The employment agreement
with Mr. Struzeski provides that either Carbon or Mr. Struzeski may terminate
the contract if there is a change in control of Carbon. Change in control is
defined in the same manner under this contract as our employment agreement
with Mr. McDonald. In the event of a change in control not supported by a
majority of our then-existing Board of Directors, Mr. Struzeski is to be paid
300% of his compensation upon termination of the employment agreement. In the
event of a change in control supported by our then-existing Board of
Directors, Mr. Struzeski is to be paid 200% of his compensation upon
termination of his employment agreement by us or 100% of his compensation upon
termination of his employment by him. For this purpose, compensation means the
average of Mr. Struzeski's annual base salary and incentive compensation for
the two years prior to the date of termination, (or, if he has been employed
for less than two years, such lesser number of calendar years during any part
of which he has been employed, with his base salary and incentive compensation
taken into account at their full annualized rates for any partial year or
years), prorated to be a monthly amount and multiplied by the remaining months
of the term of his agreement (but not less than 12 months). Also, in the event
of a change in control, the restrictions on any outstanding incentive awards
(including restricted stock and performance shares) granted to Mr. Struzeski
will lapse and such awards and all stock options and stock appreciation rights
granted to him will become immediately exercisable and will become 100%
vested.
If Mr. Struzeski's employment is terminated by us for any reason other than
"cause" (defined the same as in Mr. McDonald's employment agreement) or upon
the death or disability of Mr. Struzeski or if Mr. Struzeski terminates his
employment because of a change in the position of Mr. Struzeski with Carbon,
Carbon is pay Mr. Struzeski an amount equal to his compensation (pro rated on
a monthly basis) multiplied by the remaining months of his employment
agreement. Also, in that event, all his options and restricted stock become
100% vested.
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Carbon has also granted to Mr. Struzeski an option to acquire 25,000 shares
of common stock at $5.50 per share under its 1999 stock option plan and 10,000
shares of restricted common stock under its 1999 restricted stock plan. The
shares subject to the options and the restricted stock vest over three years,
with one-third of the stock vested on October 14, 2000 (which is one year from
the date of grant) and one-third of the stock vested on each of the second and
third anniversaries of the date of grant.
In recognition of Mr. McDonald's role in the purchase of BFC by Carbon and
the exchange offer, the Board of Directors of CEC has determined that CEC will
pay to Mr. McDonald a bonus of $200,000 Canadian (approximately $134,000 U.S.)
when 50% or more of CEC shares are exchanged for Carbon shares. Similarly,
other officers of CEC, including Mr. Struzeski, are to receive bonuses from
CEC at the same time. Mr. Struzeski's bonus will be $ Canadian
(approximately $ U.S.).
Description of Exchange Agreement
Under the Exchange Agreement, Yorktown agreed to acquire 4,500,000 shares
of Carbon common stock at a purchase price of $24,750,000 in cash, or $5.50
per share. Carbon agreed to use these proceeds for the purchase of BFC shares
under the BFC stock purchase agreement with any remaining proceeds to be added
to its working capital. CEC agreed to assign to Carbon its rights and
obligations under the BFC stock purchase agreement and Carbon agreed to assume
those rights and obligations. Carbon, CEC and Yorktown agreed that Carbon
would make the exchange offer to all CEC shareholders. CEC agreed that its
Board would recommend acceptance of the exchange offer. The Exchange Agreement
also provided for the adoption of our 1999 stock option plan and our 1999
restricted stock plan, and employment agreements with Mr. McDonald and Mr.
Struzeski.
Carbon, CEC and Yorktown agreed that the Board of Directors of Carbon would
consist of five directors. Carbon, CEC and Yorktown agreed that the five
directors initially would be David H. Kennedy, Lambros J. Lambros, Bryan H.
Lawrence, Peter A. Leidel and Patrick R. McDonald. Upon completion of the
exchange offer, if Harry A. Trueblood accepts the exchange offer for all CEC
common stock owned beneficially by him, the number of Carbon directors will be
six and Mr. Trueblood will be the sixth director. As long as Yorktown
beneficially owns shares with 50% or more of the outstanding votes in the
election of directors of Carbon, Yorktown has the right to designate for
nomination two directors. If Yorktown owns beneficially shares with 25% or
more but less than 50% of the outstanding votes in the election of directors
of Carbon, then Yorktown has the right to designate for nomination one
director. Yorktown has no right to designate directors for nomination under
the Exchange Agreement if Yorktown owns beneficially shares with less than 25%
of the outstanding votes in the election of directors of Carbon. So long as
Mr. McDonald is an officer of Carbon, he is to be designated for nomination as
a director of Carbon.
Under the Exchange Agreement, a nominating committee of our Board was
established. The nominating committee consists of one Yorktown designated
director, Mr. McDonald so long as he is a director of Carbon, and two
independent directors. The nominating committee is responsible for determining
nominees for the positions of directors of Carbon or persons to be elected by
the Board of Directors or shareholders of Carbon to fill any vacancy in the
Board of Directors. The nominating committee is required to nominate for
director each Yorktown director which Yorktown has the right to designate and
has designated. The nominating committee is required to nominate Mr. McDonald
if he is entitled to be nominated. The nominating committee will then nominate
the remaining directors; at least two of the persons nominated will be
independent directors. If the size of the Board is changed and there are not
sufficient positions for the election of two independent directors after
taking into account the directors designated by Yorktown and Mr. McDonald,
then the nominating committee is not required to nominate two independent
directors. If there is a vacancy in the position relating to a Yorktown
director, the remaining Yorktown director has the right to designate any
replacement to fill the vacancy. The nominating committee has the right to
designate any replacement to fill any other vacancy. The Exchange Agreement
requires that any change in the size or composition of the Board of Directors
or the nominating committee be approved by a supermajority vote of the Board
consisting of a majority of the entire Board which includes a majority of all
Yorktown directors and at least one independent director. Yorktown and Mr.
McDonald agreed to take such actions as shareholders of Carbon as necessary to
effectuate the election of directors
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nominated pursuant to the foregoing provisions. The provisions relating to
election of directors cease to be effective on October 29, 2009 or, if
earlier, when Yorktown owns beneficially shares with less than 25% of the
outstanding votes in the election of directors and Mr. McDonald is no longer
an officer of Carbon.
We agreed to grant under our stock option plan substitute options for each
option outstanding under the CEC stock option plan. Any option granted by us
in substitution for an option granted under the CEC stock option plan will
provide that it is being granted in full satisfaction of, and in substitution
for, any and all options for CEC stock previously granted under the CEC stock
option plan. The material terms and conditions will be the same as those
relating to the specific options granted under the terms of CEC stock option
plan.
Expiration Date
You have until 5:00 p.m., Denver time, on , 1999 to accept
our offer, unless extended. At that time, our offer will expire. If we extend
the expiration date, we will publicly announce the extension as soon as
practicable after we make the extension, and in any event no later than 9:00
a.m. Denver time on the next business day after the previously scheduled
expiration date. Without limiting the manner in which we may choose to make a
public announcement, we will not have any obligation to publish or communicate
the public announcement other than by making a release to the Dow Jones News
Services.
Exchange Of CEC Stock For Carbon Common Stock
If you deliver a properly completed and executed letter of transmittal,
which you received along with this prospectus, and stock certificates
representing your shares of CEC common stock prior to the expiration date to
the exchange agent at its address, then you will have accepted the exchange
offer as to the number of shares reflected on the stock certificates
delivered.
Except as provided below, all signatures on a letter of transmittal must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934, which is a member of one of the recognized
signature guarantee programs identified in the letter of transmittal (each
such institution is referred to in this prospectus as an "eligible
institution"). Signatures on a letter of transmittal need not be guaranteed
if:
. the letter of transmittal is signed by the registered holder of the
shares of the CEC common stock tendered therewith and the registered
holder has not completed the box entitled "Special Exchange
Instructions" on the letter of transmittal, or
. the shares of the CEC common stock tendered therewith are for the
account of an eligible institution.
You must choose how to deliver the letter of transmittal, stock
certificates and other necessary documents to the exchange agent, and you bear
the risk of how you make this delivery. We recommend that you use an overnight
or hand delivery service rather than a mail service. In all cases, you should
allow sufficient time to assure timely delivery. You should send the letter of
transmittal, stock certificates and other necessary documents to the exchange
agent at the address provided in this prospectus and the letter of
transmittal.
If you want us to issue the Carbon common stock in a name other than the
name in which your CEC stock certificates are registered, you must properly
endorse or otherwise place in proper form for transfer your stock certificates
so surrendered. The person requesting this exchange must pay to Carbon or the
exchange agent any applicable transfer or other taxes required due to the
issuance of this certificate. If your CEC certificates are registered in the
name of your broker, dealer, commercial bank, trust company, or other nominee
and you wish to tender your shares, you should contact the registered holder
promptly and instruct the registered holder to tender on your behalf. If your
stock certificates are registered in the name of the registered holder and you
wish
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to tender on your own behalf, you must, before completing and executing the
letter of transmittal and delivering the letter of transmittal, stock
certificates, and other necessary documents, either arrange to register your
shares in your name or obtain a properly completed stock power from the
registered holder.
If the letter of transmittal is signed by a person other than the
registered holder of any of the CEC common stock listed therein, the stock
certificates reflecting ownership of this CEC common stock must be endorsed or
accompanied by appropriate stock powers that authorize this person to tender
the CEC common stock on behalf of the registered holder, in either case signed
as the name of the registered holder or holders appears on these stock
certificates.
If the letter of transmittal, any stock certificates representing the CEC
common stock tendered, or any stock powers are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of a corporation or
others acting in a fiduciary or representative capacity, these persons should
so indicate when signing and, unless waived by us, submit with the letter of
transmittal evidence satisfactory to us of their authority to so act.
After the expiration date the exchange agent will send us written notice of
the amount of the outstanding CEC common stock validly tendered in the
exchange offer. Promptly after we receive this notice, if all the conditions
to the offer are satisfied or waived, then we will exchange each validly
tendered share of CEC common stock for shares of Carbon common stock at the
exchange rate described above. We then will deliver by registered mail Carbon
common stock representing the CEC common stock that has been tendered.
All questions as to the validity, form, eligibility, acceptance and
withdrawal of the tendered shares of the CEC common stock will be determined
by us in our sole discretion, and our determination will be final and binding.
We reserve the absolute right to reject any and all shares of the CEC common
stock not properly tendered or any shares of the CEC common stock our
acceptance of which would, in the opinion of our counsel, be unlawful. We
reserve the absolute right to waive any irregularities or conditions of
tenders as to particular shares of the CEC common stock. Unless waived by us,
any defects or irregularities in connection with tenders of shares of the CEC
common stock must be cured within the time we determine. Neither we, the
exchange agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of shares of
the CEC common stock or withdrawal of shares nor shall any of them incur any
liability for failure to give any notification. Tenders of shares of the CEC
common stock will not be deemed to have been made until such defects or
irregularities have been cured or waived. As soon as practicable following the
expiration date, the exchange agent will return without cost any stock
certificates representing the CEC common stock that were not properly tendered
and as to which defects or irregularities have not been cured or waived to the
tendering holder of these stock certificates, unless otherwise provided in the
letter of transmittal.
If any of the stock certificates representing your CEC common stock have
been mutilated, lost, stolen or destroyed, you should contact the exchange
agent at the address below for further instruction.
Exchange Agent
Harris Trust and Savings Bank has been appointed as exchange agent of the
exchange offer. Questions and requests for assistance, requests for additional
copies of this prospectus or of the letter of transmittal and requests for
notice of guaranteed delivery (see below) should be directed to the exchange
agent addressed as follows:
By Registered or By Hand Delivery: By Overnight Delivery:
Certified Mail:
Harris Trust and Savings Harris Trust and Savings
Harris Trust and Savings Bank Bank
Bank Corporate Trust Corporate Trust
P.O. Box 830 Operations Operations
Chicago, IL 60606-0830 311 West Monroe Street 311 West Monroe Street
11th Floor 11th Floor
Chicago, IL 60606 Chicago, IL 60606
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Guaranteed Delivery Procedures
CEC's shareholders who wish to tender their shares of the CEC common stock
and whose stock certificates representing the CEC common stock are not
immediately available or who cannot deliver the letter of transmittal, their
stock certificates, or any other required documents to the exchange agent
prior to the expiration date, may effect a tender if:
. the tender is made through an eligible institution, and
. prior to the expiration date, the exchange agent receives from this
eligible institution a properly completed and duly executed notice of
guaranteed delivery, which you received along with this prospectus, that
sets forth the name and address of the holder of the CEC common stock,
the certificate number or numbers of the CEC common stock, and the
number of shares of the CEC common stock tendered thereby, and
. states that the tender is being made thereby, and
. guarantees that, within three business days after the expiration date,
the letter of transmittal, the stock certificates representing the CEC
common stock to be tendered in proper form for transfer, and any other
necessary documents will be deposited by the eligible institution with
the exchange agent, and
. a properly completed and executed letter of transmittal, together with
the stock certificates representing all the tendered CEC common stock in
proper form for transfer, and all other necessary documents are received
by the exchange agent within three business days after the expiration
date.
Conditions To The Exchange
We will be under no obligation to accept shares of CEC common stock
tendered if prior to the expiration date any court or other governmental
entity shall have issued an order restraining, enjoining or otherwise
prohibiting consummation of the exchange offer.
Termination Of The Exchange Offer
Our exchange offer, as well as the Exchange Agreement may be terminated at
any time prior to the expiration date if:
. the parties to the Exchange Agreement agree to the termination, or
. by any party if any court or governmental authority of competent
jurisdiction shall have issued a final order restraining, enjoining or
otherwise prohibiting consummation of the transactions contemplated by
the Exchange Agreement.
If the exchange offer is terminated without our acceptance of any shares of
the CEC common stock tendered, we will promptly return all shares tendered to
the appropriate CEC shareholders.
Withdrawal Rights
You may withdraw tenders of your shares of the CEC common stock at any time
before the exchange offer expires. If you change your mind again, you may
retender your shares of the CEC common stock by following the exchange offer
procedures again prior to the expiration of the exchange offer.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of its addresses set forth in the
section of this prospectus titled "--The Exchange Agent." The notice of
withdrawal must:
. specify the name of the person having tendered the shares of the CEC
common stock to be withdrawn,
. identify the number of shares of the CEC common stock to be withdrawn,
and
. specify the name in which physical share certificates representing the
CEC common stock are registered, if different from that of the
withdrawing holder.
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If certificates for the CEC common stock have been delivered or otherwise
identified to the exchange agent, then, before the release of such
certificates, the withdrawing holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an eligible institution unless such holder is an
eligible institution.
Any shares of the CEC common stock withdrawn will be deemed not to have
been validly tendered for exchange for purposes of our offer. Any shares which
have been tendered for exchange but which are not exchanged for any reason
will be promptly returned to the holder who tendered the shares. Properly
withdrawn shares may be retendered by following one of the procedures
described in this prospectus and the letter of transmittal.
Except as otherwise provided above, any tender of shares of the CEC common
stock made under the exchange offer is irrevocable.
Fees And Expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, additional solicitation may be made by
telegraph, telephone or in person by our officers and regular employees and
the officers and regular employees of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable out-of-pocket expenses in connection therewith.
We will pay the cash expenses to be incurred in connection with the
exchange offer, which are estimated in the aggregate to be approximately
. Such expenses include registration fees, fees and expenses of the
exchange agent for our offer and, accounting and legal fees and printing
costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of
Carbon common stock for the CEC common stock in the exchange offer. If,
however, a transfer tax is imposed for any reason other than the exchange of
Carbon common stock for CEC common stock in the exchange offer, then the
amount of any transfer taxes will be payable by the tendering shareholder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of such transfer taxes
will be billed directly to the CEC stockholder.
Regulatory Matters
We believe that the exchange offer may be made without notification being
given or information being furnished to the Federal Trade Commission or the
Antitrust Division of the Department of Justice under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and that no waiting period
requirements under the Hart-Scott-Rodino Act are applicable to our offer.
Accounting Treatment
For accounting purposes, neither Carbon nor CEC will recognize a gain or
loss as a result of the exchange offer. The exchange offer of Carbon shares
for CEC shares and the purchase of BFC by Carbon will be accounted for by
Carbon as a purchase in accordance with generally accepted accounting
principles. The purchase method requires that the cost of the acquisition
(i.e., cash, stock and net liabilities assumed), plus deferred taxes related
thereto, be allocated among the assets and liabilities acquired based upon
their fair value. The purchase method, when applied to oil and gas exploration
and production companies, prohibits the allocation of the purchase price to
goodwill. Any resulting excess in the book value of the oil and gas properties
will be written off in accordance with the ceiling test followed in the full
cost method of accounting. The assets and liabilities and results of
operations of CEC will be consolidated into the assets and liabilities and
results of operations of Carbon after consummation of the exchange offer.
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Possible Effects of the Exchange Offer
The exchange of shares of CEC common stock in the exchange offer will
reduce the number of holders of CEC common stock and the number of shares of
CEC common stock that might otherwise trade publicly. Depending on the number
of shares of CEC common stock exchanged, the liquidity and market value of the
remaining shares of CEC common stock could be adversely affected. CEC's common
stock is listed on the AMEX. Depending on the number of shares of CEC common
stock exchanged pursuant to the exchange offer, the CEC common stock may no
longer meet the requirements of the AMEX for continued listing. Currently,
AMEX will normally consider suspending trading in shares of an issuer when any
one or more of the following conditions exist:
. the number of shares publicly held exclusive of holdings of officers,
directors and controlling shareholders such as Yorktown (or other family
or concentrated holdings) is less than 200,000; or
. the total number of public shareholders is less than 300; or
. the aggregate market value of shares publicly held is less than
$1,000,000
Upon completion of the exchange offer, it is likely that the CEC common stock
will be delisted from the AMEX.
If the shares of CEC common stock are delisted from the AMEX, the market
for such shares could be adversely affected. It is possible that such shares
might not be traded on other public securities exchanges. The extent of any
public market for the shares of CEC common stock would, however, depend upon
the number of holders and/or the aggregate market value of such shares
remaining at that time, the interest in maintaining a market in such shares on
the part of securities firms and the possible termination of registration of
CEC common stock under the Exchange Act. The trading in CEC common stock prior
to the exchange offer was thin and inactive; it can be expected that there
will be no public market for CEC common stock after the exchange offer.
CEC's common stock is currently registered under the Exchange Act. Such
registration may be terminated by CEC upon application to the SEC if the
outstanding shares of CEC common stock are not listed upon a national
securities exchange and if there are fewer than 300 holders of record of such
shares. Termination of registration of the CEC common stock under the Exchange
Act would reduce the information required to be furnished by CEC to its
shareholders and to the SEC and would make certain provisions of the Exchange
Act, such as the short-swing recovery provisions of Section 16(b) and the
requirement of furnishing a proxy statement pursuant to Section 14(a), no
longer applicable to such shares.
Second Step Merger
After the exchange, we may merge CEC with a wholly-owned Canadian
subsidiary of Carbon. In such a merger, shareholders of CEC may receive cash,
shares of our stock, other securities or a combination of some or all of the
foregoing. Whether we decide to proceed with a merger depends upon a number of
factors which cannot be ascertained at the present time. These factors include
the number of shares which are tendered in our offer, the relative
attractiveness of completing the merger compared to investing our resources in
other investments, the availability of financing to fund the cash portion of
the consideration required to effect the merger, and the U.S. and Canadian tax
consequences of the merger. The more CEC shares tendered in the exchange
offer, the more likely it is that we will effect the merger as less cash will
be required to pay for the remaining shares. The merger will have no effect on
CEC shareholders who accept our current exchange offer. It will affect,
however, CEC shareholders who do not accept our offer. If we proceed with a
merger, we may give those shareholders cash for their shares of CEC common
stock.
We do not intend to do a second step merger if it would result in adverse
United States income tax consequences to CEC shareholders who accepted our
exchange offer. We will not engage in a second step merger without informing,
and receiving approval from, our tax counsel.
If CEC common stock is listed on the AMEX on the record date for
determining shareholders entitled to vote on the merger, no dissenters' rights
will be available to CEC's shareholders in connection with the merger. In
contrast, if CEC's common stock is not listed on the AMEX on such record date,
CEC's shareholders will be entitled to dissenters' rights in connection with
the merger.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Scope and Limitation Advice.
In the opinion of Holland & Hart, LLP, tax counsel to CEC, the following
are the material United States federal income tax considerations arising from
and relating to the exchange of CEC common stock for Carbon common stock that
are generally applicable to you if you are a "U.S. Shareholder" and, in some
cases, if you are a "non-U.S. Shareholder." You are a U.S. Shareholder if you
are a United States citizen or resident, domestic corporation, domestic
partnership, estate subject to United States federal income tax on its income
regardless of source, or trust, but only if a court within the United States
is able to exercise primary supervision over the administration of the trust
and one or more United States fiduciaries have the authority to control all
the substantial decisions of the trust. You are a non-U.S. Shareholder if you
are not a U.S. Shareholder.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to you, particularly if you are subject to
special treatment under United States federal income tax laws. For example,
this discussion does not address the potential application of the alternative
minimum tax; or the tax consequences to certain types of investors subject to
special treatment under U.S. federal income tax laws, such as: banks, life
insurance companies, tax-exempt organizations, broker-dealers or holders of
Carbon common or CEC common stock who received such stock as compensation.
In addition, this discussion does not address any aspect of state, local or
foreign tax laws.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed regulations, IRS rulings and
pronouncements, reports of congressional committees, judicial decisions and
current administrative rulings and practice, all as of October 20, 1999, which
are subject to change. Any such change could be retroactive and change the tax
consequences discussed below. No advance ruling from the Internal Revenue
Service with respect to these matters has been requested.
The following does not address all aspects of federal income taxation that
may be relevant to you in light of your individual circumstances and tax
situation. You are urged and expected to consult your own tax advisors as to
the particular tax consequences to you.
Taxation of U.S. Shareholders.
The following discussion applies to you if you are a U.S. Shareholder and:
. you hold CEC common shares and/or will hold Carbon common stock as
"capital assets," defined below, within the meaning of Section 1221 of
the Code;
. your ownership, receipt or disposition of CEC common shares and/or
Carbon common stock is not attributable to a permanent establishment in
a country other than the United States for purposes of an income tax
treaty to which the United States is a party; and
. you are not a resident of a country other than the United States for
purposes of an income tax treaty to which the United States is a party.
If you are a U.S. Shareholder and do not meet all of the foregoing
criteria, you should consult your tax advisors regarding your particular U.S.
federal income tax consequences.
Basic Treatment of Exchange Transaction for U.S. Shareholders.
For U.S. federal income tax purposes, the tax-free nature of the exchange
of CEC common shares for Carbon common stock can be established in two
separate ways.
First, the exchange may, if certain requirements are satisfied, qualify as
a so-called "B Reorganization" under relevant U.S. federal income tax law. A
transaction generally constitutes a B Reorganization if, among other things,
an acquiring corporation (Carbon) has "control" of a target corporation (CEC)
immediately
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following an exchange of the target corporation's shares for the acquiring
corporation's shares, but only if stock representing "control" of the target
corporation (CEC) was acquired solely for voting stock. For this purpose,
"control" means at least 80% of the total combined voting power of all classes
of stock entitled to vote and at least 80% of the total number of shares of
all other classes of stock of the corporation. Assuming that Carbon acquires
at least 80% of the outstanding stock of CEC solely in exchange for the stock
of Carbon, and that the representations made by Carbon and CEC to tax counsel
are accurate, tax counsel is of the opinion that the exchange should qualify
for tax-free treatment as a B Reorganization.
Even if the exchange does not satisfy the requirements for a tax-free B
Reorganization, there nevertheless may be a second means of characterizing the
exchange as tax-free. Specifically, if certain requirements are satisfied, it
is likely that the exchange may qualify as a tax-free transaction under
Section 351 of the Code. Under Section 351 of the Code, persons transferring
property to a corporation in exchange for stock of the corporation generally
do not recognize gain or loss on the transfer of their property to the
corporation. However, this favorable treatment applies only if, among other
things, immediately following the exchange, the persons transferring property
to the corporation hold at least 80% of the total combined voting power of all
classes of stock entitled to vote and at least 80% of the total number of
shares of all other classes of stock of the corporation. In addition, in order
for multiple transferors to be taken into account in computing this 80%
control test, the transferors must transfer property to the corporation as
part of the same plan or arrangement.
Although the matter is not free from doubt, tax counsel believes that
Yorktown's contribution of cash to Carbon and CEC shareholders' subsequent
exchange of CEC common stock for Carbon common stock likely constitute
transfers pursuant to the same plan or arrangement for purposes of Section 351
of the Code. Accordingly, and based upon the representations of Carbon and
CEC, in tax counsel's opinion, the exchange of CEC common stock for Carbon
common stock likely constitutes part of a tax-free Section 351 transaction. It
is possible that the IRS would view Yorktown's contribution of cash to Carbon
and the subsequent exchange as separate, unrelated events, in which case tax-
free treatment would be unavailable under Section 351 of the Code.
Neither CEC nor Carbon has requested, nor will request, a ruling by the
Internal Revenue Service that the exchange of shares will be treated as tax
free. No assurance can be given that the Internal Revenue Service will not
challenge the tax-free nature of the exchange for U.S. federal income tax
purposes. If such a challenge were sustained by a court, each U.S. Shareholder
of CEC would recognize a capital gain or loss, assuming CEC is not a "passive
foreign investment company" (described below) to the extent of the difference
between the fair market value of the Carbon shares received by such
shareholder and such shareholder's tax basis of the CEC shares surrendered
therefor.
If the exchange is tax-free as a B Reorganization or a Section 351
transaction, the following should be the material United States federal income
tax consequences of the exchange of CEC common shares for Carbon common
shares:
. You should not recognize gain or loss on the exchange of CEC common
shares solely for Carbon common stock;
. The tax basis of the Carbon common stock received should be the same as
the basis of the CEC common shares constructively surrendered in
exchange therefor;
. The holding period for the shares of Carbon common stock should include
the holding period of CEC common shares surrendered in exchange
therefor; and
Under Code Section 367(b) and the regulations thereunder, U.S. Shareholders
participating in the exchange are required to file an "exchange notice" with
the IRS. This exchange notice must be filed on or before the last date for
filing a federal income tax return (taking into account any extensions of time
for such filing) for the U.S. Shareholder's taxable year in which the exchange
takes place. The exchange notice must be filed with the IRS office with which
the U.S. Shareholder would be required to file a federal income tax return for
the year. This filing requirement will apply whether the exchange is treated
as tax-free B reorganization or a tax-free Section 351 transaction. You should
consult your tax advisors regarding the Section 367(b) exchange notice and its
required content.
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Passive Foreign Investment Company Considerations for U.S. Shareholders.
For U.S. federal income tax purposes, CEC generally would be classified as
a Passive Foreign Investment company, or PFIC, for any taxable year during
which either: (1) 75 percent or more of its gross income is passive income, as
defined for U.S. federal income tax purposes; or (2) on average for such
taxable year, 50 percent or more of its assets by value produce or are held
for the production of passive income. The classification of CEC as a PFIC
could have adverse tax consequences with respect to the exchange that may be
substantial for U.S. Shareholders. However, CEC has represented that the
factual conditions that give rise to PFIC status have not existed with respect
to CEC during any taxable year ending at or prior to consummation of the
exchange. Therefore, based on this factual representation, the PFIC rules will
not affect U.S. Shareholders who participate in the exchange.
Taxation of Non-U.S. Shareholders.
The following discussion applies to you if you are a non-U.S. Shareholder:
. who holds CEC common shares or will hold Carbon common stock as capital
assets within the meaning of Section 1221 of the Code;
. who does not actually or constructively own, nor at any time in the
preceding five-year period actually or constructively owned, five
percent or more of the stock of CEC;
. whose ownership, receipt or disposition of CEC common shares and/or
Carbon common stock is not attributable either to the conduct of a trade
or business in the United States or to a permanent establishment in the
United States; and
. who are not residents of the United States for purposes of United States
federal income tax law or an income tax treaty to which the United
States is a party.
If you are a non-U.S. Shareholder who does not meet one or more of the
foregoing criteria, you are urged and expected to consult your own tax
advisors regarding your particular U.S. federal income tax consequences.
Generally, you will not be subject to U.S. federal income tax on gain
recognized, if any, upon the exchange of the shares of CEC common shares for
the shares of Carbon common stock, unless:
. the gain is effectively connected with the conduct of a trade or
business within the United States by you;
. the gain is attributable to a permanent establishment in the United
States;
. if you are a nonresident alien and hold CEC common shares as a capital
asset, you are present in the United States for 183 or more days in the
taxable year and certain other circumstances are present; or
. you are subject to tax pursuant to the provisions of the Code applicable
to some United States expatriates.
Generally, dividends received by you with respect to Carbon common stock
will be subject to United States withholding tax at a rate of 30 percent,
which rate may be subject to reduction by an applicable income tax treaty. For
example, 15 percent is the applicable rate with respect to dividends paid to
residents of Canada who qualify for the benefits of the income tax treaty
between the U.S. and Canada. If the dividends you receive are effectively
connected with the conduct of a U.S. trade or business or are attributable to
a permanent establishment in the U.S. of yours, they will be taxed at the
graduated rates that are applicable to U.S. citizens, resident aliens and
domestic corporations and will not be subject to United States withholding tax
if you give an appropriate statement to the withholding agent in advance of
the dividend payment. A non-U.S. Shareholder that is a corporation may be
subject to an additional branch profits tax on effectively connected
dividends.
Generally, foreign persons are not subject to U.S. federal income tax on
gain recognized, if any, upon the sale of shares of U.S. companies. However,
the gain on such sales can be taxable, including gain on the sale of Carbon
common stock, if:
. the gain is effectively connected with conduct of a trade or business
within the United States;
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. you are a nonresident alien individual and hold the Carbon common stock
as a capital asset, you are present in the United States for 183 or more
days in the taxable year and other specific circumstances are present;
. you are subject to tax pursuant to the provisions of the Code applicable
to U.S. expatriates; or
. Carbon likely is or will be a "United States real property holding
corporation," a "USRPHC," for federal income tax purposes, as such term
is defined by Section 897(c) of the Code. If Carbon is a USRPHC, then
the gain from the disposition of its stock by a non-U.S. shareholder can
be taxable in the United States. However, if Carbon's common stock is
regularly traded on an established securities market, within the meaning
of Section 897(c)(3) of the Code, an exception to this gain recognition
rule is available. Carbon believes that as of the date of the exchange,
Carbon common stock will be treated as being traded on an established
exchange. However, this exception is available to non-U.S. shareholders
only if the non-U.S. shareholder has not owned, directly or indirectly,
pursuant to attribution rules, more than 5% of the Carbon stock at any
time during the five-year period ending on the date of the disposition.
Estate Tax for Non-U.S. Shareholders.
Carbon common stock owned, or treated as such, by an individual may be
includible in his or her gross estate for United States federal estate tax
purposes and thus if you are an individual you may be subject to United States
federal estate tax, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding.
Carbon must report annually to the IRS and to you and all other
shareholders the amount of dividends paid that year, and the tax withheld with
respect to such dividends, if any. These information reporting requirements
apply regardless of whether withholding tax is reduced by an applicable income
tax treaty. Copies of these information returns reporting such dividends and
withholding are made available to the tax authorities in the country in which
a non-U.S. Shareholder resides under the provisions of an applicable income
tax treaty or other agreement with the tax authorities in that country.
In general, information reporting requirements may apply to dividend
distributions on Carbon common stock, or the proceeds of a sale, exchange,
retraction or redemption of Carbon common stock. A 31% backup withholding tax
may apply to these payments unless you are a corporation, non-U.S. Shareholder
or come within specific exempt categories and, when required, demonstrate your
exemption or provide a correct taxpayer identification number, certify as to
no loss of exemption from backup withholding and otherwise comply with
applicable requirements of the backup withholding rules. If you are required
to provide your correct taxpayer identification number and fail to do so, you
may be subject to penalties imposed by the IRS.
United States backup withholding tax generally will not apply to dividends
paid on Carbon common stock that are subject to the 30% or reduced treaty rate
of withholding previously discussed if the beneficial owner certifies its non-
U.S. status under penalties of perjury, otherwise establishes an exemption or,
with respect to payments made after December 31, 1999, satisfies certain
documentary evidence requirements for establishing that it is a non-U.S.
holder. Under current law, dividends paid on Carbon common stock to you at an
address outside the United States are generally exempt from backup withholding
tax, but not from 30% withholding tax, as discussed above.
On October 14, 1997 the IRS issued final regulations which affect your
United States taxation. Under these regulations, for dividends paid after
December 31, 1999, a non-United States person must generally provide proper
documents indicating their status to a withholding agent in order to avoid
backup withholding tax. However, dividends paid to exempt recipients, not
including individuals, will not be subject to backup withholding even if such
documentation is not provided, if the withholding agent is allowed to rely on
certain presumptions concerning the recipient's non-United States status (i.e.
payment to an address outside the United States).
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If you are a non-U.S. Shareholder, payments of proceeds from the sale of
Carbon common shares by you made to or through a non-United States office of a
broker generally will not be subject to information reporting or backup
withholding. However, payments made to or through a non-United States office
of a United States broker or a non-United States office of a non-United States
broker that has certain specified connections with the United States, are
generally subject to information reporting, but not backup withholding unless
you certify your non-United States status under penalties of perjury or
otherwise establish your entitlement to an exemption. Payments of proceeds
from the sale of Carbon common stock by you made to or through a U.S. office
of a broker are generally subject to both information reporting and backup
withholding at a rate of 31% unless you certify your non-United States status
under penalties of perjury or otherwise establish your entitlement to an
exemption.
Any amounts withheld under the backup withholding rules from a payment to
you will be allowed as a credit against your United States federal income tax,
provided that the required information is furnished to the IRS.
Under Code Section 367(b) and the regulations thereunder, non-U.S.
Shareholders participating in the exchange might technically be required to
file an "exchange notice" with the IRS. You should consult your tax advisors
regarding the Section 367(b) exchange notice, its timing, its required
content, and the effect of failure to file such notice.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Subject to the qualifications and assumptions contained herein in the
opinion of Bennett Jones, Canadian counsel to CEC, the following is a general
summary of the material Canadian federal income tax consequences generally
applicable to holders of CEC common stock who dispose of CEC common stock
pursuant to the exchange offer. This summary:
(i) is based on the current provisions of the Income Tax Act (Canada)
(the "Canadian Tax Act"), the regulations thereunder (the "Regulations")
and counsel's understanding of the current administrative practices of
Revenue Canada, Customs, Excise and Taxation. This summary also takes into
account the amendments to the Canadian Tax Act and Regulations publicly
announced by the Canadian Minister of Finance prior to the date hereof (the
"Proposed Amendments") and assumes that all such Proposed Amendments will
be enacted in their present form. However, no assurances can be given that
the Proposed Amendments will be enacted in the form proposed, or at all.
Except for the foregoing, this summary does not take into account or
anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax consequences described herein;
and
(ii) applies only to persons who, within the meaning of the Canadian
Tax Act, acquire, hold and dispose of CEC common stock and Carbon common
stock as capital property, deal at arm's length with CEC and Carbon and are
not "financial institutions" for the purposes of the mark-to-market rules.
CEC common stock and Carbon common stock will generally be considered to be
capital property to a holder thereof provided that the holder does not hold
any such shares in the course of carrying on a business of buying and
selling shares and has not acquired such shares in a transaction considered
to be an adventure in the nature of trade. Certain holders who are resident
in Canada and who might not otherwise be considered to hold CEC common
stock as capital property may be entitled to have such shares treated as
capital property by making the election provided by subsection 39(4) of the
Canadian Tax Act.
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The tax consequences of the exchange will in all likelihood differ from one
holder to the next. Therefore, we urge you to consult your tax advisor
regarding the tax consequences unique to your situation.
Holders Resident in Canada
The following portion of the summary is applicable only to holders of CEC
common stock who are resident or deemed to be resident in Canada for the
purposes of the Canadian Tax Act (a "Canadian Holder").
Disposition of CEC Common Stock
On the exchange of CEC common stock for Carbon common stock, a Canadian
Holder will be considered to have disposed of the CEC common stock for
proceeds of disposition equal to the fair market value at the time of the
exchange of the Carbon common stock received by the holder. A Canadian Holder
will realize a capital gain or capital loss, as appropriate, equal to the
amount by which such proceeds of disposition, net of any reasonable costs
associated with the disposition, exceed or are less than, as appropriate, the
holder's adjusted cost base of the CEC common stock. The cost to the Canadian
Holder of the Carbon common stock received by such holder will be equal to the
fair market value of such shares at the time of the exchange. The computation
of the adjusted cost base of Carbon common stock is discussed below in this
section under the heading "Disposition of Carbon Common Stock." The general
tax treatment of capital gains and losses is discussed in this section under
the heading "Capital Gains and Losses."
Disposition of Carbon Common Stock
A disposition or deemed disposition by a Canadian Holder of Carbon common
stock will generally give rise to a capital gain or capital loss, as
appropriate, equal to the amount by which the proceeds of disposition of the
Carbon common stock, net of any reasonable costs associated with the
disposition, exceed or are less than, as appropriate, the holder's adjusted
cost base of the Carbon common stock. In that regard, the cost to the holder
of the Carbon common stock acquired on the exchange will be averaged with the
adjusted cost base of any other Carbon common stock then owned by such holder
as capital property for the purposes of determining the adjusted cost base of
such Carbon common stock. The general tax treatment of capital gains and
losses is discussed below in this section under the heading "Capital Gains and
Losses".
Capital Gains and Losses
A Canadian Holder's taxable capital gain or allowable capital loss from the
disposition of CEC common stock or Carbon common stock will be equal to three-
quarters of the amount of the holder's capital gain or capital loss, as
appropriate, in respect of such disposition. A Canadian Holder must include
any such taxable capital gain in income for the taxation year of disposition,
and may, subject to the detailed provisions of the Canadian Tax Act, deduct
any such allowable capital loss from taxable capital gains in the year in
which such allowable capital loss is realized. Subject to the detailed rules
contained in the Canadian Tax Act, any remaining allowable capital loss may
generally be applied to reduce net taxable gains realized by the holder in the
three preceding and in all subsequent taxation years.
If a Canadian Holder is a corporation, the amount of any capital loss
arising from a disposition or deemed disposition of CEC common stock or Carbon
common stock may be reduced by the amount of dividends received or deemed to
have been received by it on such shares to the extent and under circumstances
prescribed by the Canadian Tax Act. Similar rules may apply where a
corporation is a member of a partnership or a beneficiary of a trust that owns
CEC common stock or Carbon common stock.
Capital gains realized by a Canadian Holder who is an individual may be
subject to alternative minimum tax under the Canadian Tax Act, depending on
the individual's circumstances.
A Canadian Holder that is a "Canadian-controlled private corporation," as
defined in the Canadian Tax Act, may be liable to pay an additional refundable
tax of 6 2/3% on certain investment income, including amounts in respect of
taxable capital gains.
35
<PAGE>
Eligibility for Investment
The Carbon common stock issued pursuant to the offer, when listed on a
prescribed stock exchange, which includes the American Stock Exchange, will be
qualified investment under the Canadian Tax Act for trusts governed by
registered retirement savings plans, registered retirement income funds and
deferred profit sharing plans. However, such shares will constitute "foreign
property," as defined in the Canadian Tax Act, for the purposes of such plans.
Subsequent Transaction
As described in "The Exchange Offer--Second Step Merger", Carbon may, in
certain circumstances, merge CEC with a wholly-owned Canadian subsidiary of
Carbon (the "Second Step Merger"). The consequences under the Canadian Tax Act
to a holder whose CEC common stock is not exchanged under the exchange offer
and is disposed of in connection with the Second Step Merger will depend upon
the circumstances of the merger including, without limitation, the
consideration received by the holder and the person from whom such
consideration is received.
If a holder receives Carbon common stock or cash in consideration for the
disposition of CEC common stock to Carbon, the holder will realize a capital
gain (or a capital loss) to the extent that the proceeds received for such
common stock, net of any reasonable costs associated with the disposition,
exceed (or are less than) the adjusted cost base of the CEC common stock
disposed of.
If in the course of the Second Step Merger, CEC common stock is acquired by
CEC from an individual holder (including upon the exercise by an individual
holder of certain dissent rights), the individual holder will be deemed to
have received a taxable dividend in the amount by which the amount received
(other than in respect of interest awarded by a Court) exceeds the paid-up
capital of such CEC common stock. This amount will be excluded from the former
individual holder's proceeds of disposition for the purposes of computing any
taxable gain on the disposition. If the former individual holder is a resident
of Canada, the deemed dividend will be treated in the same manner as a regular
taxable dividend received from CEC. Corporations or trusts or partnerships
which have corporations as beneficiaries or partners should consult their own
tax advisors with respect to the income tax consequences where CEC common
stock is acquired by CEC.
Upon the merger of CEC and a wholly-owned Canadian affiliate of Carbon, the
Canadian Tax Act deems the CEC common stock to be disposed of and the shares
of the amalgamated corporation to be acquired for an amount equal to the
adjusted cost base to the former holders of the CEC common stock.
Consequently, no capital gain or capital loss would be realized by the former
holders upon such amalgamation. A subsequent disposition of the shares of the
amalgamated corporation acquired on the amalgamation may give rise to a
capital gain, a capital loss, or if such shares are repurchased by the
amalgamated corporation, a deemed dividend. If on such amalgamation the former
holder receives property other than shares of the amalgamated corporation
(such as Carbon shares or cash) or exercises a dissent right pursuant to the
Alberta Business Corporations Act and receives cash in consideration for his
CEC common stock, such former holder will have a capital gain (or a capital
loss) to the extent that the proceeds received for such CEC common stock
(other than in respect of interest awarded by a Court), net of any reasonable
costs associated with the disposition, exceed (or are less than) the adjusted
cost base of the CEC common stock disposed of by the former holder.
Holders Not Resident in Canada
The following portion of the summary is applicable only to holders of CEC
common stock who are not and will not be resident nor deemed to be resident in
Canada for the purposes of the Canadian Tax Act and any applicable tax treaty
at any time they hold such shares, who do not use or hold and are not deemed
to use or hold their CEC common stock in carrying on a business in Canada, and
in the case of a holder who carries on an insurance business in Canada and
elsewhere, whose shares are not "designated insurance property" and are not
effectively connected with an insurance business carried on in Canada at any
time (a "Non-Resident Holder").
36
<PAGE>
A Non-Resident Holder will not be subject to tax in respect of capital
gains realized on the disposition of CEC common stock provided that the CEC
common stock is not "taxable Canadian property" of the Non-Resident Holder
immediately before the exchange. The CEC common stock will not constitute
"taxable Canadian property" of a Non-Resident Holder provided that such shares
are listed on a prescribed stock exchange (which currently includes the
American Stock Exchange), and the holder, persons with whom such holder does
not deal at arm's length, or the holder together with all such persons, has
not owned (or had under option) 25% or more of the issued shares of any class
or series of the capital stock of CEC at any time within five years preceding
the date of the exchange, and the shares were not acquired in a transaction
which deemed them to be "taxable Canadian property."
The Canadian federal income tax consequences to a Non-Resident Holder who
does not tender to the offer of the transactions described in this summary
under "Subsequent Transaction" may be substantially different than those
described above and may include, without limitation, the recognition of a gain
which is subject to tax in Canada and/or the receipt of deemed dividends
and/or interest which would be subject to Canadian withholding tax. If CEC
common stock ceases at any time to be listed on a prescribed exchange, the
stock will at that time be considered "taxable Canadian property" to the Non-
Resident Holder. Non-Resident Holders who are considering not tendering to the
exchange offer are urged to consult their tax advisors as to the potential
consequences to them of such transactions.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is derived from the
historical financial statements of BFC and CEC. The historical financial
statements are adjusted to reflect the following:
The Carbon Unaudited Pro Forma Condensed Balance Sheet as of June 30, 1999
has been prepared assuming that the acquisition of BFC was consummated on June
30, 1999 and the exchange offer of Carbon shares for CEC shares was
consummated on May 31, 1999. The Carbon Unaudited Pro Forma Statement of
Income for the twelve months ended December 31, 1998 has been prepared
assuming that the acquisition of BFC was consummated on January 1, 1998 and
the exchange offer of Carbon shares for CEC shares was consummated on December
1, 1997. The Carbon Unaudited Pro Forma Statement of Income for the six months
ended June 30, 1999 has been prepared assuming that the acquisition of BFC was
consummated on January 1, 1999 and the exchange offer of Carbon shares for CEC
shares was consummated on December 1, 1998.
The historical financial statements of CEC were prepared in Canadian
dollars in accordance with Canadian generally accepted accounting principles.
CEC's historical balance sheet as of May 31, 1999 and statements of income for
the year ended November 30, 1998 and the six months ended May 31, 1999 have
been adjusted to present the results in accordance with United States
generally accepted principles and have been translated to U.S. dollars.
The Unaudited Pro Forma Balance Sheet reflects the preliminary allocation
of the purchase price of the BFC acquisition to the assets and liabilities of
Carbon. This statement also reflects the preliminary allocation of the
exchange offer of Carbon shares for CEC shares to the assets and liabilities
of Carbon. The valuation of the exchange offer for pro forma purposes was
calculated using the average of the three quoted closing prices for CEC shares
prior and subsequent to the announcement date of the signing of the BFC
purchase and sales agreement. The final allocation of the purchase price for
the BFC acquisition and the CEC exchange and the resulting effect on
depreciation, depletion and amortization expense will differ from the
preliminary estimates because the final allocation will be based on the
purchase price allocation of assets and liabilities based upon adjustments to
the final purchase price.
The Carbon Unaudited Pro Forma Financial Information should be read in
conjunction with the accompanying notes thereto, and the historical financial
statements and notes thereto for Carbon, BFC, and CEC included elsewhere in
this prospectus. The pro forma information presented is not necessarily
indicative of the financial position or results of operations that would have
actually occurred had the acquisition of BFC and the exchange offer of Carbon
shares for CEC shares been consummated on the dates previously assumed. The
pro forma information presented is not intended to be a projection of future
financial position or results of operation.
37
<PAGE>
CARBON ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1999
(in US dollars, in thousands)
<TABLE>
<CAPTION>
BFC CEC Carbon Acquisition Carbon
06/30/99 05/31/99 06/30/99 Adjustments Pro Forma
-------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash.................. $ 444 $ -- $24,860 $(24,058)(a) $ 1,246
Accounts receivable... 2,482 676 -- -- 3,158
Investment margin
accounts............. 1,209 -- -- -- 1,209
Prepaid expenses and
other................ 113 -- -- -- 113
------- ------- ------- -------- -------
Total current
assets............. 4,248 676 24,860 (24,058) 5,726
Property and equipment:
Oil and gas
properties........... 35,968 14,358 -- (9,511)(b)(c)(d)(e) 40,815
Liquids extraction
plant................ -- 1,000 -- (582)(d) 418
Compression/gathering. -- 450 -- (121)(d) 329
Furniture, equipment
and other............ 557 120 -- (356)(c)(d) 321
------- ------- ------- -------- -------
36,525 15,928 -- (10,570) 41,883
Accumulated depletion,
depreciation and
amortization......... (20,155) (6,741) -- 26,896 (c)(d) --
------- ------- ------- -------- -------
Property and
equipment, net..... 16,370 9,187 -- 16,326 41,883
Other assets:
Deposits and other.... 271 37 -- -- 308
Deferred loan costs,
net.................. 35 -- -- (35)(c)
------- ------- ------- -------- -------
Total other assets.. 306 37 -- (35) 308
------- ------- ------- -------- -------
Total assets............ $20,924 $ 9,900 $24,860 $ (7,767) $47,917
======= ======= ======= ======== =======
Current liabilities:
Accounts payable and
accrued exp.......... $ 1,882 $ 219 $ -- $ 300 (b) $ 2,401
Undistributed revenue. 878 196 -- -- 1,074
------- ------- ------- -------- -------
Total current
liabilities........ 2,760 415 -- 300 3,475
Long-term debt.......... 8,700 2,406 -- -- 11,106
Future site restoration
costs.................. -- 137 -- -- 137
Deferred income taxes... -- 1,292 -- 559 (e) 1,851
Stockholders' equity:
Share capital......... -- 1,024 -- (1,024)(c) --
Paid in capital....... 3,475 24,860 3,013 (b)(c)(d)(i) 31,348
Retained earnings..... 5,989 4,626 -- (10,615)(c)(d) --
------- ------- ------- -------- -------
Total stockholders'
equity............. 9,464 5,650 24,860 (8,626) 31,348
------- ------- ------- -------- -------
Total liabilities and
stockholders' equity... $20,924 $ 9,900 $24,860 $ (7,767) $47,917
======= ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
38
<PAGE>
CARBON ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
Six Months Ended June 30, 1999
(in US dollars, in thousands)
<TABLE>
<CAPTION>
CEC
BFC CEC Acquisitions
Six Months Six Months Six Months
Ended Ended Ended(h) Acquisition Carbon
06/30/99 05/31/99 05/31/99 Adjustments Pro Forma
---------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales..... $ 4,560 $1,395 $112 $ -- $ 6,067
Field services........ -- 37 -- -- 37
Gas marketing and
transportation....... 9,950 -- -- -- 9,950
Electricity sales..... -- -- -- -- --
Other................. 218 1 -- -- 219
------- ------ ---- ------ -------
14,728 1,433 112 -- 16,273
Expenses:
Oil and gas production
costs................ 1,930 235 43 -- 2,208
Field services........ -- 27 -- -- 27
Gas marketing and
transportation....... 9,742 -- -- -- 9,742
Costs of electricity.. -- -- -- -- --
DD&A.................. 1,213 651 72 1,128 (f) 3,064
Exploration expense... 638 -- -- (638)(g) --
Impairment expense.... 60 -- -- (60)(g) --
General and
administrative....... 791 702 -- -- 1,493
Interest expense...... 204 39 27 -- 270
------- ------ ---- ------ -------
14,578 1,654 142 430 16,804
Income (loss) before
taxes.................. 150 (221) (30) (430) (531)
Tax expense (benefit):
Current............... -- (14) (2) -- (16)
Deferred.............. -- (58) (8) -- (66)
------- ------ ---- ------ -------
-- (72) (10) -- (82)
------- ------ ---- ------ -------
Net income (loss)....... $ 150 $ (149) $(20) $ (430) $ (449)
======= ====== ==== ====== =======
Earnings per share:
Basic................. $ (.10) $ .03 $ (.07)
Fully diluted......... (.10) .03 (.07)
Average number of common
shares outstanding:
Basic................. 1,534 4,520 6,054
Fully diluted......... 1,534 4,520 6,054
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
CARBON ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED INCOME SHEET
Year Ended December 31, 1998
(in US dollars, in thousands)
<TABLE>
<CAPTION>
CEC
BFC CEC Acquisitions
Year Ended Year Ended Year Ended Acquisition Carbon
12/31/98 11/30/98 11/30/98(h) Adjustments Pro Forma
---------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales..... $ 6,758 $2,007 $1,033 $ -- $ 9,798
Field services........ -- 167 -- -- 167
Gas marketing and
transportation....... 12,610 -- -- -- 12,610
Electricity sales..... 1,331 -- -- -- 1,331
Other................. 393 33 -- -- 426
------- ------ ------ ------- -------
21,092 2,207 1,033 -- 24,332
Expenses:
Oil and gas production
costs................ 3,004 482 433 -- 3,919
Field services........ -- 100 -- -- 100
Gas marketing and
transportation....... 12,674 -- -- -- 12,674
Costs of electricity.. 1,137 -- -- -- 1,137
DD&A.................. 2,086 737 602 1,403 (f) 4,828
Exploration expense... 556 -- -- (556)(g) --
Impairment expense.... 1,858 -- -- (1,858)(g) --
General and
administrative....... 1,655 671 -- -- 2,326
Interest expense...... 238 -- 212 -- 450
------- ------ ------ ------- -------
23,208 1,990 1,247 (1,011) 25,434
Income (loss) before
taxes.................. (2,116) 217 (214) 1,011 (1,102)
Tax expense (benefit):
Current............... (225) 13 (13) -- (225)
Deferred.............. 50 41 (40) -- 51
------- ------ ------ ------- -------
(175) 54 (53) -- (174)
------- ------ ------ ------- -------
Net income (loss)....... $(1,941) $ 163 $ (161) $ 1,011 $ (928)
======= ====== ====== ======= =======
Earnings per share:
Basic................. $ .11 (.26) $ (.15)
Fully diluted......... .11 (.26) (.15)
Average number of common
shares outstanding:
Basic................. 1,545 4,520 6,065
Fully diluted......... 1,549 4,516 6,065
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(a) To reflect the purchase of BFC stock for cash by Carbon.
(b) Adjustment to reflect estimated acquisition and other deal costs of
$300,000 to be incurred by Carbon. Paid in capital reflective of Yorktown's
investment is $24,750,000.
(c) Adjustment to eliminate the historical basis of BFC assets and to
reflect the adjusted basis of the assets acquired resulting from the purchase
method of accounting. The allocated basis of the BFC assets are $30,560,000
for oil and gas properties and $239,000 for furniture, equipment and other.
(d) Adjustment to eliminate the historical basis of CEC assets and to
reflect the adjusted basis of the assets acquired resulting from the purchase
method of accounting. The allocated basis of the CEC assets are $9,955,000 for
oil and gas properties and $82,000 for furniture, equipment and other. Paid in
capital reflective of the CEC exchange is $6,688,000.
(e) Adjustment to reflect the increase in deferred taxes resulting from the
exchange of CEC shares for Carbon shares. The purchase accounting adjustment
resulted in an increase in the difference of book basis over tax basis for the
CEC assets.
(f) Adjustment to reflect the impact on historical depletion attributed to
the acquisition of BFC and the exchange offer to current CEC shareholders. The
depletion amounts were calculated on the units-of-production method based on
estimates of total proved reserves. Separate cost pools were established for
CEC and BFC due to accounting rules that require cost centers be established
on a country-by-country basis. Based on the preliminary purchase price
allocation and the discounted future net cash flows attributable to the CEC
and BFC properties calculated using November 30, 1998 oil and gas prices for
CEC and December 31, 1998 prices for BFC, a ceiling test deficit would exist
on the properties. As a result of improved oil and gas prices subsequent to
year-end, the CEC and BFC properties had a cushion for ceiling test purposes
using May 31, 1999 oil and gas prices for CEC and June 30, 1999 prices for
BFC. Depreciation on the liquids extraction plant and other assets are
calculated using the straight-line method and the underlying assets estimated
useful lives.
(g) To adjust for the capitalization of certain items under the full cost
method of accounting utilized by Carbon as compared to the successful efforts
method utilized by BFC.
(h) Between December 1998 and April 1999, CEC purchased producing oil and
gas properties and natural gas gathering and compression facilities in
Alberta, Canada. These acquisitions were accounted for as purchases and
considered material in the aggregate by management for pro forma disclosure
purposes. The results of operations are presented as though the acquisition
had occurred at the beginning of the period being reported on. Revenues and
expenses subsequent to the purchase dates have been included in the 1999
operating results of CEC and are not included in this column. These results of
operations are not indicative of the results that would have occurred if the
acquisitions had been in effect for the entire periods presented and are not
intended to be a projection of future results.
(i) Adjustment to reflect bonuses of $200,000 related in large part to the
acquisition of BFC and the exchange offer for CEC.
INFORMATION ABOUT CEC
Overview of Business
CEC is an independent oil and natural gas company incorporated on May 31,
1955 under the Business Corporations Act (Alberta) in Canada. CEC was acquired
by the former parent of Columbus Energy Corp. ("Columbus") in 1969 and by
Columbus on July 31, 1984. It remained a wholly-owned subsidiary of Columbus
until spun-off from Columbus by a rights offering in February 1995. CEC
engages in the exploration, development and 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. CEC owns
working interests in 16 oil wells located in Saskatchewan, Canada and 47
natural gas wells located in Alberta, Canada. CEC also has ownership interests
in a natural gas processing plant and several gas gathering and compression
systems in Alberta. Prior to the end of 1998, substantially all of CEC's oil
and gas properties were operated by other industry companies. With certain
acquisitions completed in fiscal 1999, CEC has increased the percent of oil
and gas
41
<PAGE>
properties which it operates. CEC's business strategy is to grow through
exploitation of existing oil and gas properties by development of proved non-
producing and proved undeveloped reserves; acquisitions of complementary
working interests in existing and adjacent properties; and optimization of
gathering, compression and processing facilities. CEC will also conduct oil
and gas exploration activities in its core area of operations. In addition CEC
will evaluate acquisition and merger opportunities in Canada and the United
States.
CEC employs a staff of professional oil and gas engineers, geologists, land
personnel and accountants to direct this effort. CEC's principal office is
located at Suite 1605, 700 6th Avenue S.W., Calgary, Alberta, Canada T2P 0T8.
CEC also has a United States office located at 1700 Broadway, Suite 1150,
Denver, Colorado 80290.
CEC Selected Financial Data
The table below sets forth selected historical financial and operating data
for CEC as of the dates and for the periods indicated. The historical
financial data for the nine months ended August 31, 1999 and August 31, 1998
were derived from CEC's unaudited financial statements. The historical
financial data for each of the years in the five-year period ended November
30, 1998 were derived from CEC's financial statements, which were audited by
PricewaterhouseCoopers LLP and were prepared in accordance with Canadian
generally accepted accounting principles. Currency amounts are in Canadian
dollars unless otherwise stated. The information set forth below should be
read in conjunction with "CEC Management's Discussion and Analysis of
Financial Condition and Results of Operations" and CEC's Financial Statements
and notes thereto, included elsewhere in this document.
<TABLE>
<CAPTION>
As of or for
the Nine Months
Ended As of or for the
August 31, Year Ended November 30,
---------------- -----------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues.............. $ 3,463 $ 2,364 $ 3,253 $ 3,309 $ 3,212 $3,794 $3,673
Net earnings (loss)... (188) 268 240 605 526 870 1,033
Earnings (loss) per
share................ (0.12) 0.17 0.16 0.38 0.35 0.58 0.69
Average common shares
outstanding (3)...... 1,529 1,542 1,545 1,580 1,505 1,500 1,500
Cash Flow Data: (1)(2)
Cash provided by
operating activities. $ 1,389 $ 1,218 $ 1,366 $ 1,724 $ 1,656 $1,933 $2,145
Cash used in investing
activities........... (7,751) (489) (564) (1,265) (2,333) (2,064) (1,989)
Cash provided by (used
in) financing
activities........... 4,696 (79) (209) (98) 604 -- --
Balance sheet data:
Total assets.......... $15,981 $11,235 $11,235 $11,378 $10,166 $8,729 $7,852
Working capital....... 182 2,120 2,120 1,149 981 937 684
Long-term debt,
excluding current
maturities........... 4,850 -- -- -- -- -- --
Stockholders' equity.. 8,380 8,722 8,722 8,691 8,184 7,054 6,184
</TABLE>
- --------
(1) See discussion of cash flows in "CEC Management's Discussion and Analysis
of Financial Condition and Results of Operations" below.
(2) In 1998, CEC elected to adopt Canadian Institute of Chartered Accountants
("CICA") 1540, Cash Flow Statements. Cash flow data for years ended
November 30, 1998, 1997 and 1996 have been restated to reflect
presentation in conformance with CICA 1540.
(3) Restated for a five-to-one stock split on October 27, 1994.
CEC Management's Discussion and Analysis of Financial Condition and Results of
Operations
The discussion below summarizes CEC's financial condition and results of
operations and should be read in conjunction with the financial statements and
related notes. The financial related comments contained in this section are
derived from financial statements prepared in accordance with Canadian GAAP.
42
<PAGE>
Results of Operations--Nine Months Ended August 31, 1999 Compared to the Nine
Months Ended August 31, 1998
Revenues for the nine months ended August 31, 1999 totaled $3,463,000, a
46% increase from the prior year period. The increase was due primarily to
increased natural gas and plant liquid volumes, including production resulting
from CEC's acquisitions and higher natural gas, oil and plant liquid prices.
The net loss in the first nine months of 1999 was $188,000 compared to net
income of $268,000 in the first nine months of 1998. The decrease was
primarily due to increased general and administrative expenses, increased
depletion, depreciation and amortization expenses partially offset by higher
oil, natural gas and plant liquid revenues.
Oil and Gas Revenues. The following table shows comparative revenue, sales
volume, average prices and percentage changes between periods, for natural
gas, oil, and plant liquids for the first nine months of 1999.
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
--------------------
%
1999 1998 Change
------ ------ ------
<S> <C> <C> <C>
Natural gas revenue M$............................... 2,934 1,716 71%
Oil revenue M$....................................... 385 367 5%
Natural gas liquids revenues M$...................... 365 297 23%
Natural gas sales volumes:
Millions of cubic feet............................. 1,115 889 25%
Mcf/day............................................ 4,069 3,244
Oil sales volumes:
Barrels............................................ 18,395 19,797 -7%
Barrels/day........................................ 67 72
Natural gas liquids sales volumes:
Barrels............................................ 23,802 20,206 18%
Barrels/day........................................ 87 74
Average price received:
Natural gas--$/Mcf................................. 2.63 1.93 36%
Oil--$/Bbl......................................... 20.91 18.51 13%
Plant liquids--$/Bbl............................... 15.34 14.69 4%
</TABLE>
Average daily oil and plant liquid production for the first nine months of
1999 were 67 and 87 barrels, respectively. Average daily gas production for
the first nine months of 1999 was 4,069 mcf. This is an increase of 21% on a
barrels of oil equivalent ("boe") basis compared to the same period in 1998.
CEC's continued success with the exploitation of properties acquired during
1999 and current development activity have resulted in increasing production
for three successive quarters. Exploration activities are expected to continue
for the balance of 1999.
Average oil prices increased 13% from $18.51 per barrel in the first 9
months of 1998 to $20.91 in 1999. Average plant liquids prices increased 4%
from $14.69 per barrel for the first nine months of 1998 to $15.34 in 1999.
Average natural gas prices increased 36% from $1.93 per mcf for the first nine
months of 1998 to $2.63 in 1999.
Royalty expense consists primarily of Crown Royalties as well as smaller
amounts of freehold and gross overriding royalties. CEC is eligible for the
Alberta Royalty Tax Credit ("ARTC") which varies inversely with prevailing
prices for oil and gas sales in Alberta. For the first nine months of 1999 and
1998 the net Crown Royalty rate was 6%.
Field Services Business Segments. CEC receives operating service revenue
generated by its share of processing fees at the Carbon field liquid
extraction plant. Because of CEC'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 service revenue for 1999 relative to 1998.
43
<PAGE>
Lease Operating Expense. Lease operating expenses totaled $585,000 or $2.57
per boe for the first nine months of 1999 compared to $563,000 or $2.99 per
boe in the prior year period. This reduction in per boe expense is due to
overall lower 1999 lease operating expenses on CEC's properties, including
acquired properties, and the fact that lease operating expenses for 1998 were
higher due to well workovers at CEC's Hoffer properties.
Field netbacks 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 nine months of 1999 to
$12.28 per boe compared to $8.50 per boe for the first nine months of 1998
primarily due to the positive revenue and lease operating expense variances
previously discussed.
CEC 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. A ratio of 10:1 which historically has more closely approximated price
ratios, is used by nearly all Canadian public companies.
If natural gas volume had been converted to boe using the Canadian practice
of a 10:1 ratio, then reported field netbacks would have been $18.22 and
$12.40 per boe for the first nine months of 1999 and 1998 respectively.
General and Administrative Expenses. General and administrative ("G&A")
expenses, net of third party reimbursements, for the first nine months of 1999
totaled $1,522,000, a $907,000 or 148% increase from the same period in 1998.
The increase in G&A expense was primarily due to the hiring of full time
employees, partially offset by a reduction in charges for management services
provided by Columbus Energy under a management contract which was terminated
March 31, l999.
Depletion, Depreciation and Amortization Expense. Depletion, depreciation
and amortization expense for the nine month period ended August 31, l999
totaled $1,597,000, a increase of $911,000 or 133% from the 1998 level.
Depletion expense increased primarily due to increased gas sales and a
downward adjustment to CEC's 1998 year end developed non-producing and proved
undeveloped natural gas reserves that resulted in an increased depletion rate
per boe in 1999 compared to 1998. For the first nine months of 1999 the
depletion rate was $6.29 per boe, compared to $3.20 per boe for the same
period in 1998.
Interest Expense. Interest and other expenses increased to $136,000 for the
first nine months of 1999, a $159,000 increase from the prior year period.
Interest expense increased as a result of incurring long-term debt in 1999 to
partially fund acquisitions. See "Acquisitions" and "Liquidity and Capital
Resources". CEC's average interest rate for the first nine months of 1999 was
7.25%.
Acquisitions
In December 1998 CEC acquired for $2.3 million working interests in 16
natural gas wells, associated natural gas gathering and compression facilities
and undeveloped lands in the East Carbon Field (Wayne-Rosedale), located in
Alberta, Canada from Neutrino Resources, Ltd. The acquisition was funded with
cash and bank financing. The acquisition increased CEC's working interest
ownership in the East Carbon Field from 33 1/3% to 64%. CEC 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, CEC acquired for $800,000 a 100% working interest in one
natural gas well, associated natural gas gathering facilities and
underdeveloped lands in the East Carbon Field, located in Alberta, Canada from
Westdrum Energy Ltd. and C. & D. Oil and Gas Ltd. The acquisition was funded
with bank financing. CEC 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.
44
<PAGE>
In March 1999, CEC acquired for $2.1 million working interests in 17
natural gas wells, associated natural gas gathering and compression facilities
in the East Carbon Field, located in Alberta, Canada from Cometra Energy
(Canada) Ltd. The acquisition was funded with bank financing. The acquisition
increased CEC's working interest ownership in the East Carbon Field from 64%
to 97%. CEC 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, CEC acquired for $125,000 working interests in 13 natural
gas wells, associated natural gas gathering and compression facilities and
undeveloped lands in the East Carbon Field, located in Alberta, Canada from
Springroad Resources, Inc. The acquisition was funded with bank financing. The
acquisition increased CEC's working interest ownership in the East Carbon
Fields from 97% to approximately 100%. CEC 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.
On August 12, 1999, CEC entered into the BFC Stock Purchase Agreement to
acquire all of the stock of BFC, a company with working interests in
approximately 290 oil and natural gas wells and over 150,000 net acres located
in Colorado, Kansas, New Mexico, Texas and Utah. The purchase price for the
stock of BFC is approximately $24,000,000, subject to adjustments, plus net
debt of approximately $6,500,000 remaining at BFC.
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 $201,000 of
exploration costs were capitalized during the first nine months of 1999
compared to $40,000 in the first nine months of 1998.
Liquidity and Capital Resources
CEC 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 Canadian Imperial Bank of Commerce
("CIBC").
The principal sources of CEC's funds are cash flows from operating
activities and available borrowings under CEC's financing commitment.
For the first nine months of 1999, net cash from operating activities was
$1,389,000 compared to $1,218,000 for the same period in 1998. The increase is
primarily due to increased oil and gas sales, a positive net change in
operating assets and liabilities, partially offset by increased general and
administrative expenses. Net cash used in investing activities was $7,751,000
for the first nine months of 1999 compared to $489,000 in 1998. This increase
was primarily due to acquisitions in the East Carbon Area and a deposit
related to the BFC acquisition. "See Acquisitions". Net cash provided by
financing activities in the first nine months of 1999 was $4,696,000 which was
primarily due to the proceeds from long-term debt, partially offset by the
acquisition of 23,000 shares of CEC's common stock. Net cash used in financing
activities in the first nine months of 1998 was $79,000 due to the acquisition
of 83,000 shares of CEC's common stock partially offset by the issuance of
70,000 shares of CEC's common stock.
In December 1998, CEC received a financing commitment from CIBC. The
purpose of the loan is to provide financing for the acquisition of oil and gas
reserves and for normal operating requirements. The loan is secured by CEC's
oil and gas assets. The interest rate on outstanding borrowings is the CIBC
Prime Rate plus 3/4%. The initial commitment was a $2.5 million revolving
loan. In March, 1999, the commitment was increased to a $5.0 million revolving
loan. In October 1999, the commitment was increased to a $6.5 million
revolving loan. The commitment will be reduced to $5.75 million upon closing
of the BFC acquisition. "See Acquisitions." The revolving phase of the loan
will expire on April 30, 2000 and may be renewed by CIBC. If
45
<PAGE>
the revolving commitment is not renewed by CIBC, the loan would be converted
into a term loan and will be permanently reduced by way of consecutive monthly
principal payments over a period not to exceed 36 months. This loan is secured
by all of CEC's assets. Borrowings under the loan during 1999 have resulted in
increased interest expense during 1999 compared to 1998.
Income Taxes
In 1997, the Company adopted CICA 3465, Income Taxes. Since 1993, CEC had
paid current taxes to Revenue Canada based on its taxable income after
utilization, to the extent allowed, of its tax pool carry forwards. Currently
payable taxable income for future periods is dependent upon the level and type
of capital expenditures incurred in those future periods as well as percentage
limitations for utilization of existing tax pools. For 1999, the Company
anticipates little or no current income tax liability based upon current and
anticipated 1999 activity. For 1998, federal and provincial taxes were
$41,000.
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>
Nine Months
Ended August
31,
-------------
1999 1998
------ ------
<S> <C> <C>
Rate at end of period....................................... 0.6685 0.6361
Average rate during period.................................. 0.6657 0.6880
High........................................................ 0.6894 0.7105
Low......................................................... 0.6440 0.6343
</TABLE>
On September 30, 1999, the noon buying rate in Canadian dollars was 0.6803
U.S.=$1.00 Canadian.
Year 2000 Issues
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.
CEC 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. The preliminary phase of this review has been
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.
CEC utilizes a service bureau for its accounting processing. The service
bureau has represented that the oil and gas accounting system utilized by the
service bureau is Year 2000 compliant. CEC has selected an accounting system
and is in the process of bringing all accounting services and processing in-
house. The oil and gas accounting system vendor has represented that the
software is Year 2000 compliant. CEC is also dependent upon personal computer
based software programs and files that may not be Year 2000 compliant. CEC has
set a revised deadline of November 1999, to be internally compliant with Year
2000 specifications.
46
<PAGE>
Management expects costs for CEC to become Year 2000 compliant will not be
significant. CEC does not believe that any loss of revenue will occur as a
result of the Year 2000 problem. However, despite CEC's efforts to identify
and remedy Year 2000 problems, there may be related failures that disrupt
CEC's business temporarily. In addition, the timetable for CEC'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 CEC's hardware and software in accordance with
CEC's established schedule. There can be no guarantee that CEC's estimates
will prove accurate, and actual results could differ significantly because of
the non-compliance of third parties of business importance to CEC.
Results of Operations--Year 1998 Compared to 1997 and 1997 Compared to 1996
Oil and Gas Revenues. The following table shows comparative revenues, sales
volumes, average prices and the percentage changes between periods for natural
gas, oil, and plant liquids for 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Year ended November Year ended November
30, 30,
-------------------- --------------------
% %
1998 1997 Change 1997 1996 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Natural gas revenues M$.............. 2,367 2,281 4% 2,281 2,168 5%
Oil Revenues M$...................... 491 591 -17% 591 380 55%
Plant liquids revenues M$............ 377 579 -35% 579 545 7%
Natural gas sales volumes:
Millions of cubic feet............. 1,147 1,244 -8% 1,244 1,502 -17%
Mcf/day............................ 3,142 3,408 3,408 4,115
Oil sales volumes:
Barrels............................ 26,552 22,624 17% 22,624 14,436 57%
Barrels/day........................ 73 62 62 40
Plant liquids sales volumes:
Barrels............................ 25,805 26,301 -2% 26,301 28,223 -7%
Barrels/day........................ 71 72 72 77
Average price received:
Natural gas--$/Mcf................. 2.06 1.83 13% 1.83 1.44 27%
Oil--$/Barrel...................... 18.49 26.10 -29% 26.10 26.34 -1%
Plant liquids--$/Barrel............ 14.61 22.03 -35% 22.03 19.28 14%
</TABLE>
Natural gas revenues in 1998 were 4% higher than in 1997. Natural gas
prices were 13% higher and natural gas sales volumes were 8% lower due to a
gas processing plant and compressor down time and normal well productivity
decline. Revenues from oil were 17% lower in 1998 compared to 1997 because of
a 29% decrease in oil prices, partially offset by a 17% increase in volume.
Natural gas processing plant liquids sales volumes declined slightly from 1997
to 1998 due to lower natural gas production. Revenues were lower due to lower
oil and natural gas liquids prices in 1998 versus 1997.
Natural gas revenues for 1997 were 5% higher than 1996 because of 27%
higher average prices which more than offset 17% lower gas sales volume due to
well productivity decline. Revenues from oil were 55% higher in 1997 compared
to 1996 because of a 57% increase in sales volumes due to a new oil well.
Plant liquids sales volumes decreased 7% and natural gas liquids prices
increased 14% in 1997 compared to 1996.
Royalty expense consists primarily of Crown royalties in addition to
freehold and gross overriding royalties. CEC is eligible for the 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 CEC coupled with a 4% decrease from 1997 to 1998
in the reference price used to calculate Crown royalty expense.
47
<PAGE>
Field Services Business Segment. CEC receives operating service revenue
generated by its share of processing fees at the Carbon area liquid extraction
plant. CEC also processes its own 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 1998
amounted to approximately 37% of the plant's volumes and represents the
majority of field services profit.
CEC also derives revenues and net cash flow from separate gathering and
compression facilities in which it has ownership. Amounts applicable to CEC's
own production have likewise been eliminated from both revenue and expense of
these operations.
Lease Operating Expense. Lease operating expenses for 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 CEC'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
costs allocated to a declining production base.
CEC 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. CEC's share of processing fees charged to its wells have been
deducted from its field services revenues where CEC's one-third Carbon plant
ownership is involved.
Field netbacks which are commonly reported by Canadian energy companies
equate to oil and gas sales less royalties and lease operating expenses. CEC's
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.
General and Administrative Expenses. G&A expenses relate to the direct
costs of CEC which do not originate from either its operation of properties or
the providing of services. Historically CEC had incurred certain direct and
indirect G&A costs for management services provided by Columbus Energy. These
costs were primarily for labor, related benefits and other overhead costs. G&A
costs increased by $223,000 in 1998 compared to 1997 primarily due to the
hiring of full time employees, which was partially offset by a reduction in
Columbus expenses. The management agreement with Columbus was terminated on
March 31, 1999.
Depreciation, Depletion and Amortization Expense. DD&A costs of oil and gas
assets are determined based upon the units of production method. Natural gas
gathering, compression and processing facilities are depreciated on a straight
line method. For 1998, the depletion rate of oil and gas properties was $4.02
per boe for CEC, compared to $3.01 per boe for 1997, and $2.15 per boe for
1996. The 1998 increase in the depletion rate was primarily due to a downward
adjustment to CEC'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.
Interest Expense. Interest expense in 1998 compared and 1997 was minimal
due to the fact that the company maintained significant cash balances and no
borrowings.
Exploration Activities
Under the full cost method of accounting, all exploration costs associated
with continuing efforts to acquire or review prospects and outside geological
and seismic 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
48
<PAGE>
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. Exploration costs capitalized in 1996 were $181,000, primarily in the
Hoffer area of Saskatchewan and for seismic cost in the Carbon field.
Income Taxes
In 1997, CEC adopted CICA 3465, Income Taxes. Since 1993, CEC 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 1998, current income
taxes are estimated to be $19,000. For the 1997 and 1996 fiscal years CEC paid
no current federal tax because additions to deductible property tax pools and
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 inflation has been fairly stable
at relatively low levels. CEC, 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 Canadian 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.
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 CEC's operations both positively and
negatively for the foreseeable future.
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 1998, 1997 and 1996" for information on product price fluctuation
over the past three years. This table depicts the effect of changing prices on
CEC's revenue stream.
Operating expenses have been relatively stable but are a critical component
of profitability 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 active exploration
programs.
Exchange Rate of the Canadian Dollar
All dollar amounts set forth in the CEC 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........................ 0.6563 0.7021 0.7414 0.7362 0.7272
Average rate during period................... 0.6785 0.7251 0.7331 0.7278 0.7347
High......................................... 0.7105 0.7292 0.7515 0.7474 0.7632
Low.......................................... 0.6343 0.7019 0.7215 0.7025 0.7167
</TABLE>
49
<PAGE>
Properties
Estimated Oil and Gas Reserve Quantities and Revenues
The estimated reserve amounts and future net revenues for 1998 were
determined by Sproule Associates Limited, an independent geological and
petroleum engineering firm, and for 1997 and 1996 by Reed Ferrill &
Associates, an independent petroleum engineering firm. CEC owned only Canadian
reserves during the periods.
CEC's reserves are sensitive to natural gas and oil sales prices and their
effect on economic production rates and are based on the spot market price in
effect at year end and the sales prices of long-term contracts in effect prior
to year-end.
Price declines decrease reserve values by lowering the future net revenues
attributable to the reserves and reducing the quantities of reserves that are
recoverable on an economic basis. Price increases have the opposite effect. A
significant decline in prices of oil or natural gas could have a material
adverse effect on CEC's financial condition and results of operations.
Proved developed reserves are proved reserves that are expected to be
recovered from existing wells using existing equipment and operating methods.
Proved undeveloped reserves are proved reserves that are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage for
which the existence and recoverability of such reserves can be estimated with
reasonable certainty, or from existing wells where a relatively major
expenditure is required to establish production.
Future prices received from production and future production costs may
vary, perhaps significantly, from the prices and costs assumed for purposes of
these estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that prices and costs will remain
constant. There can be no assurance that actual production will equal the
estimated amounts used in the preparation of reserve projections.
The present values shown should not be construed as the current market
value of the reserves. The 10% discount factor used to calculate present
value, which is specified by the Securities and Exchange Commission, is not
necessarily the most appropriate discount rate, and present value, no matter
what discount rate is used, is materially affected by assumptions as to timing
of future production, which may prove to be inaccurate. For properties
operated by CEC, expenses exclude CEC's share of overhead charges. In
addition, the calculation of estimated future net revenues does not take into
account the effect of various cash outlays, including among other things
general and administrative costs and interest expense.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. Oil and natural gas reserve engineering must be
recognized as a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact way, and estimates of
other engineers might differ materially from those shown above. The accuracy
of any reserve estimate is a function of the quality of available data and
engineering and geological interpretation and judgment. Results of drilling,
testing and production after the date of the estimate may justify revisions.
Accordingly, reserve estimates are often materially different from the
quantities of oil and natural gas that are ultimately recovered. The
meaningfulness of such estimates depends primarily on the accuracy of the
assumptions upon which they were based. In general, the volume of production
from oil and gas properties CEC owns declines as reserves are depleted. Except
to the extent CEC acquires additional properties containing proved reserves or
conducts successful exploration and development activities or both, the proved
reserves will decline as reserves are produced.
50
<PAGE>
Changes in Proved Oil and Gas Reserves
<TABLE>
<CAPTION>
Natural Gas
Oil and Liquids (Millions
(Thousands of of Cubic
Barrels) Feet)
--------------- -----------
<S> <C> <C>
Proved Reserves:
November 30, 1995................................. 363 23,115
Revision to previous estimates.................. (9) (2,664)
Extensions, discoveries, and other additions.... 366 414
Sales and abandonments.......................... 0 (217)
Production...................................... (40) (1,468)
---- ------
November 30, 1996................................. 680 19,180
Revision to previous estimates.................. (271) (2,020)
Extensions, discoveries, and other additions.... 7 331
Production...................................... (46) (1,217)
---- ------
November 30, 1997................................. 370 16,274
Revision to previous estimates.................. (56) (9,510)
Extensions, discoveries, and other additions.... 57 400
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
At November 30, 1998, CEC had approximately 3.9 billion cubic feet of
proved developed producing gas reserves which represents 65% of CEC's total
proved gas reserves. CEC also has approximately 144,000 barrels of oil and
81,000 barrels of natural gas liquids catagorized as proved developed
producing reserves which together represent 70% of CEC's total proved oil
reserves.
Proved Developed Non-Producing Reserves
At November 30, 1998, CEC had approximately 500 million cubic feet of
proved developed non-producing gas reserves representing 9% of its total
proved gas reserves. CEC's 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 year end, provided such pipeline
connection does not require significant investment.
Proved Undeveloped Reserves
At November 30, 1998, CEC's proved undeveloped reserves total approximately
1.6 billion cubic feet of gas, or 26% of its total proved natural gas
reserves, and approximately 38,000 barrels of oil and liquids, or 11% of its
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.
51
<PAGE>
Probable Reserves
At November 30, 1998, CEC's probable natural gas reserves are approximately
600 million cubic feet. CEC's oil and natural 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 performed in the 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").
Comparison of Proved Reserves
The following table compares CEC's estimated proved reserves at November
30, 1997 and 1998.
<TABLE>
<CAPTION>
Oil and Natural
Liquids Gas
(Thousands (Millions
of of Cubic
Barrels) Feet)
---------- ---------
<S> <C> <C>
Proved Reserves:
November 30, 1997
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 due to 1998 production. The majority of the decrease in proved
developed non-producing and proved undeveloped reserves is due 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 formerly 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 Securities and Exchange Commission 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 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 Future Net Revenues have been calculated using the spot
market sales price in effect at year end and the sales prices of long-term
contracts in effect prior to year end.
52
<PAGE>
The prices utilized in this calculation for Future Net Revenues at November
30, 1998 are summarized as follows:
<TABLE>
<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/barrel
Oil........................ $16.94/barrel
</TABLE>
The standardized measure is intended to provide a standard of comparable
measurement of CEC'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.
Standardized Measure of Discounted Future Net Cash Flows
Relating to Estimated Proved Oil and Gas Reserves
(thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Future oil and gas revenue.......................... $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 CEC'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 CEC remains an
active operating company.
53
<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
</TABLE>
<TABLE>
<S> <C> <C> <C>
Sale of oil and gas net of production 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............................... -- 0 (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
CEC's net oil and gas production for each of the past three years is shown
on the following table:
<TABLE>
<CAPTION>
Year ended November
30,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Oil--barrel.......................................... 25,000 22,000 15,000
Ngl--barrel.......................................... 24,000 24,000 25,000
Gas--Mmcf............................................ 1,124 1,217 1,468
</TABLE>
Average price and cost per unit of production for the past three years are
as follows (gas prices include net hedging gains and losses):
<TABLE>
<CAPTION>
Year Ended November
30,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Average sales price per barrel 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 barrel of Ngl............... 14.61 22.03 19.28
Average production cost per 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 barrel of oil. Production costs include only lease operating expenses.
Gas sales are generally made pursuant to gas purchase contracts with
unrelated third parties. Our gas sales are subject to price adjustment
provisions of the gas purchase contracts as well as general economic and
political conditions affecting the production and price of natural gas.
Developed Properties and Acreage
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>
Wells..................................................... 16 47 5 19
=== === === ===
Acres..................................................... 18,876 6,993
====== =====
</TABLE>
54
<PAGE>
Undeveloped Acreage
The following table sets forth CEC's ownership in undeveloped acreage 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 Acreage....................... 17,200 7,952
====== =====
</TABLE>
Drilling Activities
CEC engages in exploratory and development drilling on its own and in
association with other oil and gas companies. The table below sets forth
information regarding CEC's drilling activity for the last three years. The
net interest shown is CEC's working interest.
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------
1998 1997 1996
--------- ---------- ----------
Gross Net Gross Net Gross Net
----- --- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY
Wells Drilled:
Oil........................................... -- -- -- -- 3 1.50
Gas........................................... -- -- 1 0.60 2 0.67
Dry........................................... -- -- -- -- 1 0.20
DEVELOPMENT
Wells Drilled:
Oil........................................... -- -- 1 0.50 -- --
Gas........................................... -- -- 1 1.00 6 2.83
Dry........................................... -- -- -- -- -- --
TOTAL
Wells Drilled:
Oil........................................... -- -- 1 0.50 3 1.50
Gas........................................... -- -- 2 1.60 8 3.50
Dry........................................... -- -- -- -- 1 0.20
--- --- --- ---- --- ----
-- -- 3 2.10 12 5.20
=== === === ==== === ====
</TABLE>
Current Operations Activity
CEC engages in the exploration, development and 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. CEC owns
working interests in 16 oil wells located in Saskatchewan, Canada and 47
natural gas wells located in Alberta, Canada. CEC also has ownership interests
in a natural gas processing plant and several gas gathering and compression
systems in Alberta. Prior to the end of 1998, substantially all of CEC's oil
and gas properties were operated by other industry companies. With certain
acquisitions completed in fiscal 1999, CEC has increased the percent of oil
and gas properties which it operates. CEC's business strategy is to grow
through exploitation of existing oil and gas properties by development of
proved non-producing and proved undeveloped reserves; acquisitions of
complementary working interests in existing and adjacent properties; and
optimization of gathering, compression and processing facilities. CEC will
also conduct oil and gas exploration activities in its core area of
operations. In addition CEC will evaluate acquisition and merger opportunities
in Canada and the United States.
Acquisition Activities. See "CEC Management's Discussion and Analysis of
Financial Condition and Results of Operations"--"Acquisitions."
55
<PAGE>
Legal Proceedings
There are no material legal proceedings pending or, to our knowledge,
threatened against CEC.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
PricewaterhouseCoopers LLP were engaged as CEC's independent auditors for
the 1998 fiscal year. On April 16, 1999, CEC, upon approval of its Board of
Directors, determined that the appointment of PricewaterhouseCoopersLLP should
not be renewed and that Arthur Andersen LLP should be proposed to CEC's
shareholders as its independent auditors for the 1999 fiscal year. The
President and Chief Executive Officer of CEC, as well as the Chief Financial
Officer, both of whom joined CEC during the last half of 1998, have a previous
relationship with Arthur Andersen LLP as a result of work at another oil and
gas company. In addition for fiscal 1999, Arthur Andersen LLP proposed a fee
structure for the year end audit, quarterly reviews and accounting
consultation that was economically beneficial to CEC.
During CEC's two most recent fiscal years and subsequent interim period
preceding this determination, there were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure. The auditors' report
during CEC's two most recent fiscal years preceding this determination did not
contain an adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
In 1999, CEC established a $6.5 million credit facility with a Canadian
bank as described in "CIBC Relationship" under "CEC Management's Discussion
and Analysis of Financial Condition and Results of Operations". The interest
rate for borrowings under this facility are variable.
Foreign Currency Risk
CEC's operations, except for certain administration functions performed in
its Denver, Colorado office, are conducted in Canada. CEC 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 "CEC Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Commodity Price Risk
CEC uses certain financial instruments in an attempt to manage commodity
price risk. CEC attempts to manage these risks by minimizing its commodity
price exposure through the use of derivative contracts as described in Note 9
to the November 30, 1998 Financial Statements of CEC and Note 5 to the August
31, 1999 Financial Statements of CEC. Gains 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.
Oil and gas commodity markets are influenced by global as well as regional
supply and demand. Worldwide political events can also impact commodity
prices. Management's policy is to mitigate its exposure to fluctuations in
sales prices received for natural gas production through the use of various
hedging tools. These tools include, but are not limited to: commodity futures
and option contracts; fixed-price swaps; basis swaps; and term sales
contracts. Contract terms generally range from one month to three years. While
we mitigate our exposure to declining natural gas sales prices, we may be
subject to lost opportunity costs resulting from increasing natural gas prices
in excess of those committed. Should production from existing facilities under
existing operating conditions not fulfill committed contracts, we may be
required to acquire natural gas in the open market, while volumes produced in
excess of those contracted are sold at market prices.
56
<PAGE>
INFORMATION ABOUT CARBON
Business
Carbon was incorporated on September 14, 1999 under the Colorado Business
Corporation Act and has its principal executive offices in Denver, Colorado.
Our business is currently comprised of the assets and properties of BFC, which
were acquired on October 29, 1999 in a stock purchase. On August 11, 1999, CEC
entered into a stock purchase agreement with BPC which provided for the
purchase by CEC from BPC of all outstanding shares of BFC for $23,857,951 in
cash, subject to certain adjustments.
The purchase of BFC stock under the stock purchase agreement was completed
by Carbon rather than CEC. Rights and obligations of CEC under the stock
purchase agreement were assigned to Carbon. Yorktown purchased 4,500,000
shares of Carbon for $24,750,000. The funds from this purchase were used to
acquire the BFC shares under the stock purchase agreement and pay expenses
incurred in connection with the purchase and related transactions.
As described above, we now own all of the stock of BFC. As the parent
company of BFC, we provide management and other services to BFC. Carbon itself
has not engaged in other activities, except for the acquisition of BFC and
preparations for the exchange offer made by this prospectus. BFC was an
independent oil and gas company engaged in the exploration, development, and
production of natural gas and crude oil. All of the properties and activities
described below were acquired or conducted by the prior management of BFC.
Through our acquisition of BFC, our activities are currently concentrated in
the Piceance and Uintah Basins in northwestern Colorado and eastern Utah, the
San Juan Basin in northwest New Mexico, the Permian Basin in southeast New
Mexico and western Texas, and southwestern Kansas. BFC owns working interests
in approximately 292 oil and gas wells, of which, approximately 190 wells are
operated by BFC. BFC employs a staff of oil and gas professionals to manage
its operations.
Our oil and gas properties are located in the western United States and are
principally natural gas properties as discussed below and in "Properties."
Piceance and Uintah Basins
The Piceance and Uintah Basins have been core production areas since BFC's
inception. The productive formations are the Morrison, Dakota, Mancos, Castle
Gate, Mesa Verde and Wasatch formations. All of these formations produce
natural gas; however, in some areas, the Castle Gate sands formations are
known to contain oil reserves. We operate 132 wells and own working interests
in 146 wells in the Piceance Basin in Colorado and the Uintah Basin in Utah.
Carbon has not drilled any wells in these basins during 1999, however,
additional drilling locations have been identified for further analysis and
possible future drilling. We have leasehold rights in approximately 164,000
gross and 122,500 net acres of which approximately 41,500 gross and 37,500 net
acres are undeveloped.
San Juan Basin
Production in the San Juan Basin of northwest New Mexico is predominantly
natural gas. The primary productive formations on our acreage is the Dakota,
Gallup, Pictured Cliffs, and Fruitland (Coal Sands). We operate 41 wells and
own working interests in 42 wells in the San Juan Basin. We have lease rights
in approximately 5,200 gross and 2,600 net acres, all of which are developed.
Permian Basin
Our well interests in the Permian Basin are both operated and non-operated
in nature. We own working interests in 76 wells in the Permian Basin and
operate 11 of these wells. During 1999 we have participated in the drilling of
five wells, all of which were completed or are in the process of being
completed as producing gas wells. Additional wells are scheduled for drilling
during the balance of 1999. We have lease rights in approximately 23,500 gross
and 11,500 net acres, of which 1,400 gross and 1,000 net acres are
undeveloped.
57
<PAGE>
Southwestern Kansas
The main exploratory efforts of the company are concentrated in
southwestern Kansas. We own working interests in 28 wells and operate 4 wells
in this area. We are conducting regional geologic and geophysical work to
identify additional drilling prospects. We are also currently conducting
leasing to acquire acreage covering the most attractive prospects. We have
lease rights in approximately 33,000 gross and 25,500 net acres of which
30,000 gross and 24,500 net acres are undeveloped.
Carbon Selected Financial Data
The table below sets forth our selected historical financial and operating
data as of the dates and for the periods indicated. All the historical
financial data in the table is that of our predecessor, BFC. The historical
financial data for the six months ended June 30, 1998 and June 30, 1999 were
derived from BFC's unaudited financial statements. The historical financial
data for each of the years in the five-year period ended December 31, 1998
were derived from BFC's financial statements, which were audited by Hein +
Associates LLP. Currency amounts are in U.S. dollars unless otherwise stated.
The information set forth below should be read in conjunction with "Our
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and BFC's Financial Statements and notes thereto, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of or for the
Six Months Ended As of or for the
June 30, Year Ended December 31,
------------------ ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues............... $ 14,728 $ 8,026 $21,092 $16,539 $15,067 $12,675 $14,956
Net earnings (loss).... 150 596 (1,941) 732 4,060 172 (2,950)
Cash Flow Data:
Cash provided by (used
in) operating
activities............ $(1,529) $ 2,092 $ 4,696 $ 3,193 $ 4,136 $ 3,016 $ 3,091
Cash used in investing
activities............ (3,619) (2,396) (5,948) (4,442) (1,025) (859) (1,181)
Cash provided by (used
in) financing
activities............ 2,850 600 3,450 1,019 (2,760) (2,090) (2,046)
Balance Sheet Data:
Total assets........... $20,924 $16,642 $22,840 $16,054 $14,524 $13,177 $16,321
Working capital........ 1,488 1,246 812 1,491 1,725 628 405
Long-term debt,
excluding current
maturities............ 8,700 3,000 5,850 2,400 1,700 4,760 6,850
Stockholder's
equity(1)............. 9,464 10,196 9,313 9,591 8,859 6,774(1) 6,552(1)
</TABLE>
- --------
(1) Includes debt to parent company (BPC) of $3,787 in 1995 and $3,737 in
1994, which was converted to equity in 1996.
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations
Our financial statements and related notes included in this prospectus are
those of our predecessor, BFC. The discussion below summarizes our financial
condition and results of operations and should be read in connection with the
financial statements and related notes of BFC.
Results of Operations--Six Months Ended June 30, 1999 Compared to the Six
Months Ended June 30, 1998
The period-to-period comparisons set forth below are based upon the results
of operation of BFC under its prior management. As a result of that and the
anticipated acquisition of CEC through the exchange offer, we believe that the
period-to-period comparisons set forth below may not be indicative of our
future results of operation.
Revenues for the first six months of 1999 totaled $14,728,000, a $6,702,000
or 84% increase from the prior year period amount of $8,026,000. The increase
was due primarily to higher natural gas production from existing wells and
newly drilled wells, from higher natural gas prices and increased marketing
service activity. Net income in the first six months of 1999 was $150,000
compared to net income of $596,000 in the first six
58
<PAGE>
months of 1998. The decrease in net income is primarily due to increased lease
operations expense, increased general and administrative expense and increased
exploration expense, partially offset by increased gas sales and increased
margins on marketing service activity.
Oil and Gas Revenues. The following table shows comparative revenues, sales
volumes, average prices and percentage changes between periods, for natural
gas and oil for the first six months of 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended June
30,
----------------------
1999 1998 % Change
------ ------ --------
<S> <C> <C> <C>
Natural gas revenues M$........................... 4,111 2,938 40%
Oil revenues M$................................... 449 530 -15%
Natural gas sales volumes:
Millions of cubic feet.......................... 2,121 1,607 32%
MCF/day......................................... 11,718 8,878
Oil sales volumes:
Barrels......................................... 33,700 37,200 -9%
Barrels/day..................................... 186 206
Average price received:
Natural gas--$/Mcf.............................. 1.94 1.76 10%
Oil--$/Barrel................................... 13.33 14.25 -6%
</TABLE>
Natural gas revenues for the first six months of 1999 increased 40% over
the first six months of 1998 because of a 10% price increase and a 32%
increase in sales volumes. The increase in sales volumes were primarily due to
successful drilling and recompletion results in various basins, particularly
in western Kansas and in the Permian Basin of New Mexico, partially offset by
production declines on existing properties. Oil revenues were 15% lower for
the first six months of 1999 compared to the first six months of 1998 because
of a 6% price decrease and a 9% decline in sales volumes.
Average daily oil and gas production for the first six months of 1999
totaled 186 barrels of oil per day and 11,718 mcf of gas per day, an increase
of 27% on an barrel of oil equivalent basis (6:1) from the same period in
1998.
Carbon's current drilling activity and continued success with the
exploitation of properties has resulted in increasing production for the first
six months of 1999. Exploitation and drilling activities are expected to
continue for the balance of 1999.
Average oil prices decreased 6% from $14.25 per barrel in the first six
months of 1998 to $13.33 in 1999. Average natural gas prices increased 10%
from $1.76 per mcf for the first six months of 1998 to $1.94 per mcf in 1999.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and severance taxes. Oil and gas production costs for the
first six months of 1999 were 42% as a percentage of oil and gas sales
compared to 39% for the first six months of 1998. Oil and gas productions
costs for the first six months of 1999 and 1998 were $4.98 and $4.47
respectively, per boe. The primary reason for the overall increase was the
accrual of natural gas gathering system well connect fees of $250,000 in 1999.
The fees are a result of a 1997 agreement which contained a contingency clause
whereby certain costs would be reimbursed to the party providing the well
connections if various production levels were not attained. These levels will
not be attained.
Gas and Electrical Marketing. Gas and electrical marketing revenue
increased 127.5% in the first six months of 1999 compared to the first six
months of 1998. Gas and electrical marketing related expenses increased 120.9%
in the first six months of 1999 compared to the first six months of 1998. The
primary reason for the increase is a management contract in place during the
first quarter of 1999 for the purchase and sale of a high volume of natural
gas. The contract was not in place in the first quarter of 1998, and was
terminated on April 30, 1999.
59
<PAGE>
General and Administrative Expenses. G&A expenses related to the direct
costs of BFC which do not originate from either its operation of properties or
the providing of services and are presented net of amounts billed to unrelated
third parties. G&A expenses increased by $520,000 for the first six months of
1999, compared to 1998. The primary reason for the increase is due to
increased staffing related to new capital programs.
Depreciation, Depletion, Amortization and Impairment Expense. 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.
For the first six months of 1999 the depletion rate was $3.42 per boe (6:1)
compared to $3.54 per boe for the first six months of 1998.
For the first six months of 1999 impairment losses were $60,000, relating
to a property drilled in Oklahoma in 1998. There were no impairment losses
recorded for the first six months of 1998.
Interest Expense. For the first six months of 1999, interest expense was
$251,000 compared to $85,000 for the first six months of 1998. The increase is
primarily due to higher levels of borrowing to finance drilling activity. BFC
capitalized $20,000 of interest in the first six months of 1999 which related
to calendar year 1998 interest charges and $44,000 of interest in the first
six months of 1999 related to drilling activity.
Exploration Expense. Exploration expense was recorded under the successful
efforts method of accounting and primarily consists of unsuccessful drilling
costs and Geological and Geophysical ("G&G") costs.
For the first six months of 1999 exploration expense was $638,000 compared
to $183,000 for the first six months of 1998. Unsuccessful drilling costs
amounted to $199,000 for the first six months of 1999 compared to $25,000 for
the first six months of 1998.
Liquidity and Capital Resources
Management considers our liquidity to be favorable compared to other oil
and gas companies based on the fact BFC has positive working capital and a
credit facility with U.S. Bank.
The purpose of the loan is to provide financing for the acquisition of oil
and gas reserves and for normal operating requirements. The facility is
collateralized by certain oil and gas properties of the Company and is
scheduled to convert to a term note July 1, 2001. This term loan is scheduled
to have a maturity of either the economic half life of BFC's remaining
reserves on the date of the conversion, or July 1, 2006, whichever is earlier.
The borrowing base is based upon the lender's evaluation of BFC's proved oil
and gas reserves, generally determined semi-annually. The future minimum
principal payment under the term note will be dependent upon the bank's
evaluation of BFC's reserves at that time. The borrowing base was $16.9
million at June 30, 1999 with interest at a variable rate that approximated
6.70% at June 30, 1999. BFC has issued letters of credits totaling $2.5
million which further reduce the amount available for borrowing under the
base.
In October, 1999, we sold 4,500,000 shares of our common stock to Yorktown
for $24,750,000 of which $23,857,951 was used to purchase the stock of BFC on
October 29, 1999 and the remaining proceeds have been added to our working
capital.
For the six months ended June 30, 1999, net cash used in operating
activities was $1,529,000 compared to net cash provided by operating
activities of $2,092,000 for the same period in 1998. This decrease is
primarily due to changes in operating assets and liabilities. Cash used in
investing activities was $3,619,000 for the six months ended June 30, 1999
compared to $2,396,000 for the same period in 1998. This increase was
primarily due to additions of oil and gas properties. Net cash provided by
financing activities for the six months ended June 30, 1999 was $2,850,000 due
to an increase in net bank borrowings used to fund capital expenditures.
60
<PAGE>
Income Taxes. Carbon accounts for income taxes under the liability method
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. BFC's
operations were formerly included in BPC's consolidated tax return. Income
taxes were allocated to BFC as if BFC was a separate taxpayer.
BFC has not accrued an estimate for income taxes for the six months ended
June 30, 1999 as it is anticipated that estimates of taxes due for the period
are offset by intangible drilling costs.
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.
Our company has made inquiries of the suppliers and manufacturers of its
computer systems, including equipment supplied by third parties, and has been
advised that such systems are Year 2000 compliant except for our property
management software that is currently under review regarding Year 2000
compliance.
Management expects costs for Carbon to become Year 2000 compliant will not
be significant. However, despite Carbon's efforts to identify and remedy Year
2000 problems, there may be related failures that disrupt Carbon's business
temporarily. In addition, the timetable for Carbon's planned completion of its
own Year 2000 modifications and the estimated costs to accomplish this are
management's best estimates. These assessments include many assumptions
concerning future events including the continued availability of certain
resources, particularly personnel able to locate, reprogram or replace, and
test Carbon's hardware and software in accordance with Carbon's established
schedule. There can be no guarantee that Carbon's estimates will prove
accurate, and actual results could differ significantly because of the non-
compliance of third parties of business importance to Carbon.
Results of Operations--1998 Compared to 1997 and 1997 Compared to 1996
Oil and Gas Revenues. The following table shows comparative revenue, sales
volumes, average prices and the percentage change between periods for natural
gas and oil for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year ended December Year ended December
31, 31,
--------------------- ---------------------
1998 1997 %Change 1997 1996 %Change
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Natural gas revenues M$(1).......... 5,896 5,202 13% 5,202 4,038 29%
Oil Revenues M$..................... 862 1,227 -30% 1,227 1,224 0%
Natural gas sales volumes:
Millions of cubic feet(1)......... 3,272 2,908 13% 2,908 2,435 19%
MCF/day........................... 8,964 7,967 7,967 6,671
Oil sales volumes:
Barrels........................... 65,000 63,000 3% 63,000 58,000 9%
Barrels/day....................... 178 173 173 159
Average price received:
Natural gas--$/Mcf(1)............. 1.78 1.79 -1% 1.79 1.64 9%
Oil--$/Barrel..................... 13.26 19.48 -32% 19.48 21.10 -8%
</TABLE>
61
<PAGE>
- --------
(1) Exclusive of a production payment used to pay down a related note. Volumes
attributed to this activity were 238,313 mcf in 1997 and 308,580 mcf in
1996.
Natural gas revenues for 1998 increased 13% compared to 1997 primarily due
to a 13% increase in sales volumes. Oil revenue for 1998 decreased 30%
compared to 1997 primarily due to a 32% decrease in sales prices. The
increases to sales volumes were primarily due to successful drilling and
recompletion activity, partially offset by production declines on previously
existing properties.
Natural gas revenue for 1997 increased 29% compared to 1996 primarily due
to a 19% increase in sales volumes and a 9% price increase. Oil revenue for
1997 was essentially flat compared to 1996 as a 9% increase in sales volumes
was offset by 8% price decline. The increases in sales volumes were primarily
due to successful drilling and recompletion activity, partially offset by
production declines on previously existing properties.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and severance taxes. Oil and gas production costs for 1998
were 44% as a percentage of oil and gas sales compared to 43% for 1997 and 40%
for 1996. Oil and gas production costs for 1998, 1997 and 1996 were $4.92,
$5.16 and $4.92 respectively, per boe. The increase in 1997 from 1996 was
largely the result of increased spending for environmental remediation
purposes. In addition, severance taxes increased 40% in 1997 compared to 1996.
Gas and Electrical Marketing. Gas and electrical marketing revenue
increased 45% in 1998 compared to 1997 while gas and electrical marketing
expenses increased 53% in 1998 compared to 1997. Certain high margin contracts
expired early in 1997. The related margins were not present during most of
1997, nor in 1998.
Gas and electrical marketing revenue increased 1% in 1997 compared to 1996
while related expenses increased 31% in 1997 compared to 1996. Certain high
margin contracts which were in effect in 1996, expired early in 1997. The
related margins were not present during most of 1997.
General and Administrative Expenses. G&A expenses relate to the direct
costs of BFC which do not originate from either its operation of properties or
the providing of services and are presented net of amounts billed to unrelated
third parties. G&A expenses increased by $1,065,000 in 1998 compared to 1997.
In 1998 a court approved retention compensation accrual of $425,000 was
recorded. The remainder of the increase is primarily due to costs associated
with additional staffing related to anticipated increases in drilling
activity.
G&A expenses increased by $118,000 in 1997 compared to 1996.
DD&A Depreciation, Depletion, Amortization and Imparment Expense.
Depreciation, Depletion, Amortization and Impairment ("DD&A") of oil and gas
assets are determined based upon the units of production method. This expense
is primarily dependent upon historical capitalized cost incurred to find,
develop and recover oil and gas reserves.
For 1998 the depletion rate was $3.42 per boe compared to $3.24 per boe in
1997 and $2.40 per boe in 1996. The increase in 1997 compared to 1996 was
primarily due to increased production from high DD&A properties and from an
additional $200,000 recorded in 1997 for future plugging and abandonment
charges.
Impairment losses were $1,858,000 in 1998 compared to $312,000 in 1997. The
increase is primarily due to a decline in the estimated value of producing
properties due to oil and gas prices that were substantially lower at year end
1998 compared to year end 1997, and from downward revisions of previous oil
and gas reserve estimates. There were no recorded impairment losses in 1996.
Interest Expense. Interest expense was $238,000 in 1998 compared to $83,000
in 1997 and $272,000 in 1996. The increase in 1998 is primarily due to
increased borrowings for drilling and development activity and because of
lower prices received from oil and gas sales. The decrease in interest expense
from 1997 compared to 1996 is primarily due to lower borrowings for drilling
and development activities.
62
<PAGE>
Exploration Expense. Exploration expense was recorded under the successful
efforts method of accounting and consists primarily of unsuccessful drilling
costs and G&G costs. Exploration expense in 1998 was $556,000 compared to
$772,000 in 1997 and $419,000 in 1996. The amount related to unsuccessful
drilling was lower in 1998 compared to 1997, while G&G costs increased in 1998
compared to 1997 because of increased exploration activities. The amount
related to unsuccessful drilling was higher in 1997 compared to 1996, and G&G
costs increased in 1997 compared to 1996 because of increased exploration
activities.
Income Taxes. BFC accounts for income taxes under the liability method
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. BFC's
operations were formerly included in BPC's consolidated tax return. Income
taxes were allocated to BFC as if BFC was a separate taxpayer.
Effects of Changing Prices
The U.S. economy experienced considerable inflation during the late 1970's
and early 1980's but in recent years inflation has been fairly stable at
relatively low levels. BFC, 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.
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 BFC's operations both positively and
negatively for the foreseeable future.
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 depicts the effect of
changing prices on BFC's revenue stream.
Operating expenses have been relatively stable but are a critical component
of profitability 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 active exploration
programs.
Properties
We have approximately 234,000 gross acres and 152,000 net acres of land in
inventory. The majority of our proved reserves are concentrated in four
areas--the Piceance/Uintah Basins, the Permian Basin, the San Juan Basin and
Southwestern Kansas. All wells and acreage are located in the continental
United States.
Estimated Oil and Gas Reserve Quantities and Revenues
The estimated reserve amounts and future net revenues were determined by
Ryder Scott, an independent petroleum engineering firm, for 1998, 1997 and
1996.
63
<PAGE>
BFC's reserves are sensitive to natural gas and oil prices and their effect
on future net revenues and the quantities of reserves that are recoverable at
economic producing rates are based on fixed price contracts or on the spot
market price in effect on December 31, 1998, 1997 and 1996.
Price declines decrease reserve values by lowering the future net revenues
attributable to the reserves and reducing the quantities of reserves that are
recoverable on an economic basis. Price increases have the opposite effect. A
significant decline in prices of oil or natural gas could have a material
adverse effect on the company's financial condition and results of operations.
Proved developed reserves are proved reserves that are expected to be
recovered from existing wells using existing equipment and operating methods.
Proved undeveloped reserves are proved reserves that are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage for
which the existence and recoverability of such reserves can be estimated with
reasonable certainty, or from existing wells where a relatively major
expenditure is required to establish production.
Future prices received from production and future production costs may
vary, perhaps significantly, from the prices and costs assumed for purposes of
these estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that prices and costs will remain
constant. There can be no assurance that actual production will equal the
estimated amounts used in the preparation of reserve projections.
The present values shown should not be construed as the current market
value of the reserves. The 10% discount factor used to calculate present
value, which is specified by the Securities and Exchange Commission, is not
necessarily the most appropriate discount rate, and present value, no matter
what discount rate is used, is materially affected by assumptions as to timing
of future production, which may prove to be inaccurate. For properties
operated by BFC, expenses exclude BFC's share of overhead charges. In
addition, the calculation of estimated future net revenues does not take into
account the effect of various cash outlays, including among other things
general and administrative costs and interest expense.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. Oil and natural gas reserve engineering must be
recognized as a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact way, and estimates of
other engineers might differ materially from those shown above. The accuracy
of any reserve estimate is a function of the quality of available data and
engineering and geological interpretation and judgment. Results of drilling,
testing and production after the date of the estimate may justify revisions.
Accordingly, reserve estimates are often materially different from the
quantities of oil and natural gas that are ultimately recovered. The
meaningfulness of such estimates depends primarily on the accuracy of the
assumptions upon which they were based. In general, the volume of production
from oil and gas properties we own declines as reserves are depleted. Except
to the extent we acquire additional properties containing proved reserves or
conduct successful exploration and development activities or both, the proved
reserves will decline as reserves are produced.
64
<PAGE>
Changes in Proved Oil and Gas Reserves
<TABLE>
<CAPTION>
Oil Natural
(Thousands Gas (Millions
of Barrels) of Cubic Feet)
----------- --------------
<S> <C> <C>
Proved Reserves:
December 31, 1995.................................. 207 19,807
Revision to previous estimates................... 34 8,008
Extensions, discoveries, and other additions..... 44 1,441
Production....................................... (58) (2,744)
---- ------
December 31, 1996.................................. 227 26,512
Revision to previous estimates................... 3 (1,569)
Extensions, discoveries, and other additions..... 131 1,343
Production....................................... (63) (3,146)
---- ------
December 31, 1997.................................. 298 23,140
Revision to previous estimates................... (101) 976
Extensions, discoveries, and other additions..... 34 5,011
Production....................................... (65) (3,272)
---- ------
December 31, 1998.................................. 166 25,855
==== ======
Proved developed reserves (producing and non-
producing):
December 31, 1996.................................. 188 25,483
December 31, 1997.................................. 298 22,623
December 31, 1998.................................. 166 25,855
</TABLE>
Proved Developed Producing Reserves
At December 31, 1998, BFC had approximately 16.8 billion cubic feet of
proved developed producing gas reserves which represents 65% of BFC's total
proved gas reserves. BFC also had approximately 162,000 barrels of oil and
natural gas liquids of proved developed producing reserves which together
represent 98% of BFC's total proved oil reserves.
Proved Developed Non-Producing Reserves
At December 31, 1998, BFC had approximately 8.6 billion cubic feet of
proved developed non-producing gas reserves representing 33% of its total
proved gas reserves. BFC's oil and liquids reserves in this category are
approximately 3,800 barrels or 2% of its total proved oil reserves.
The reserves in this category are primarily reserves for wells which have
been completed and were awaiting connection to a gas pipeline as of year end,
provided such pipeline connection does not require significant investment.
Also included are reserves behind the casing in existing wells and
recompletion of those zones will be reqired to place them on production.
Proved Undeveloped Reserves
At December 31, 1998, BFC's proved undeveloped reserves total approximately
517 million cubic feet of gas, or 2% of its total proved natural gas reserves,
and no barrels of oil and liquids.
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 various fields.
Probable Reserves
At December 31, 1998, BFC's probable natural gas reserves are approximately
948 million cubic feet. BFC's oil and gas liquids reserves in this category
are approximately 6,400 barrels.
65
<PAGE>
The reserves in this category are primarily reserves which may reasonably
be assumed to exist because of geophysical or geological indications and
drilling performed in the 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").
Comparison in Proved Reserves
The following table compares BFC's estimated proved reserves as of December
31, 1997 and 1998.
<TABLE>
<CAPTION>
Oil and Liquids
(Thousands of Natural Gas
barrels) (Millions of cubic feet)
--------------- ------------------------
<S> <C> <C>
Proved Reserves:
December 31, 1997
Proved developed producing........... 298 16,998
Proved developed non-producing....... -- 5,625
Proved undeveloped................... -- 517
--- ------
Total.............................. 298 23,140
=== ======
December 31, 1998
Proved developed producing........... 162 16,775
Proved developed non-producing....... 4 8,563
Proved undeveloped................... 0 517
--- ------
Total.............................. 166 25,855
=== ======
</TABLE>
The decrease in proved developed producing reserves from 1997 to 1998 is
primarily due to 1998 production.
Standardized Measure
The Standardized Measure schedule is presented below pursuant to the
disclosure requirements of the Securities and Exchange Commission 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 shown below must be calculated
using prices that were in effect on December 31 of each year and are projected
forward based on existing contracts or the spot market price on that date.
Accordingly, the Future Net Revenues have been calculated using the
appropriate sales price in effect on December 31, 1998, 1997 and 1996.
Oil and gas prices at December 31, 1998, 1997, and 1996 of $10.69, $16.91,
and $25.60, respectively, per barrel of oil and $1.84, $1.81, and $3.17
respectively, per mcf of gas were used in the estimation of BFC's reserves and
future net cash flows.
The standardized measure is intended to provide a standard of comparable
measurement of BFC's estimated proved oil and gas reserves based on economic
and operating conditions existing as of December 31, 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 December
31 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 and earned depletion carryforwards as
of that date 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.
66
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows Relating to
Estimated Proved Oil and Gas Reserves
(thousands of dollars)
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Future oil and gas revenue................. $ 49,428 $ 46,859 $ 89,985
Future production and development costs.... (18,507) (18,155) (26,608)
-------- -------- --------
Future net cash flows...................... 30,921 28,704 63,377
Discount at 10%............................ (10,426) (9,075) (23,366)
-------- -------- --------
Standardized measure of discounted future
net cash flows............................ $ 20,495 $ 19,629 $ 40,011
======== ======== ========
</TABLE>
As required by SFAS 69, the tax computation does not consider BFC'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 BFC remains an
active operating company.
Change in Standardized Measure of Discounted Future
Net Cash Flows from Estimated Proved Oil and Gas Reserves
for the Three Years Ended December 31, 1998
(thousands of dollars)
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Standardized measure-beginning of year........ $19,629 $40,011 $10,233
Sales and transfers of oil and gas produced,
net of production costs...................... (3,754) (3,650) (2,977)
Net changes in prices and production costs.... (999) (20,485) 19,056
Extensions, discoveries and other additions
recovery, less related costs................. 4,699 756 3,226
Purchases of reserves in place................ 147 1,610 436
Revisions of future development costs......... 87 1,069 (1,200)
Revisions of previous quantity estimates...... 279 (1,098) 12,475
Accretion of discount......................... 1,963 4,001 1,023
Other......................................... (1,556) (2,585) (2,261)
------- ------- -------
Net increase (decrease)....................... 866 (20,382) 29,778
------- ------- -------
Standardized measure-end of year.............. $20,495 $19,629 $40,011
======= ======= =======
</TABLE>
Production
The following table sets forth annual net production for each of the three
years ended December 31, 1998. Net production includes volumes related to a
production payment used to pay a related note. Volumes attributable to this
activity were 238,312 mcf in 1997 and 308,580 mcf in 1996.
<TABLE>
<CAPTION>
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Oil--Barrels......................................... 65,000 63,000 58,000
Gas--Mmcf............................................ 3,272 3,146 2,744
</TABLE>
67
<PAGE>
Average price and cost per unit of production for the past three years are
as follows (gas prices are exclusive of hedging results):
<TABLE>
<CAPTION>
Year Ended November
30,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Average sales price per barrel of oil............... $13.26 $19.48 $21.10
Average sales price per mcf of gas.................. $ 1.76 $ 1.99 $ 1.64
Average production cost per boe..................... $ 4.92 $ 5.16 $ 4.92
</TABLE>
Natural gas is converted to oil at the ratio of six mcf of natural gas to
one barrel of oil. Production costs include only lease operating expenses and
severance taxes.
We operate most of the wells in which we own interests and also hold
working interests in some wells operated by third parties. Gas sales are
generally made pursuant to gas purchase contracts with unrelated third
parties. Our gas sales are subject to price adjustment provisions of the gas
purchase contracts as well as general economic and political conditions
affecting the production and price of natural gas.
Developed Properties and Acreage
The following tables set forth the total gross and net productive oil and
gas wells and gross and net developed acres as of December 31,1998. All wells
and acreage are located in the continental United States.
<TABLE>
<CAPTION>
Gross Net
------- -------
Oil Gas Oil Gas
--- --- --- ---
<S> <C> <C> <C> <C>
Wells..................................................... 28 258 10 167
=== === === ===
Acres..................................................... 116,000 85,000
======= =======
</TABLE>
Undeveloped Acreage
The following table sets forth the gross and net undeveloped acres as of
December 31, 1998. All undeveloped acreage is located in the continental
United States.
<TABLE>
<CAPTION>
Gross Acres Net Acres
----------- ---------
<S> <C> <C> <C>
84,000 61,000
</TABLE>
Drilling Activities
BFC engages in exploratory and development drilling on its own and in
association with other oil and gas companies. The table below sets forth
information regarding BFC's drilling activity for the last three fiscal years.
The net interest shown is BFC's working interest.
<TABLE>
<CAPTION>
Year Ended
December 31
--------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
EXPLORATORY
Wells Drilled:
Productive............................................... 5 -- --
Dry...................................................... 2 8 2
DEVELOPMENT
Wells Drilled:
Productive............................................... 6 2 4
Dry...................................................... 3 1 --
TOTAL
Wells Drilled:
Productive............................................... 11 2 4
Dry...................................................... 5 9 2
--- --- ---
16 11 6
</TABLE>
68
<PAGE>
Current Operations Activity
See "Information Concerning Our Company--Business" for a description of
present activities.
Legal Proceedings
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Hein + Associates, LLP audited BFC's consolidated financial statements for
the years ending December 31, 1992--1998. Management expects to engage Hein +
Associates to audit BFC's financial statements for the ten months ending
October 31, 1999. Carbon's new Board of Directors has appointed Arthur
Andersen LLP to be Carbon's accountants for the two month period ended
December 31, 1999.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our long-term debt obligations. See Notes 3 and 10 to the December 31, 1998
Financial Statements of BFC.
Foreign Currency Risk
To date our cash flows have been in U.S. dollars only, negating the need to
hedge against any foreign currency risks.
Commodity Price Risk
BFC uses certain financial instruments in an attempt to manage commodity
price risk. BFC attempts to manage these risks by minimizing its commodity
price exposure through the use of derivative contracts as described in Note 6
to the December 31, 1998 Financial Statements of BFC. Gains 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.
Oil and gas commodity markets are influenced by global as well as regional
supply and demand. Worldwide political events can also impact commodity
prices. Management's policy is to mitigate its exposure to fluctuations in
sales prices received for natural gas production through the use of various
hedging tools. These tools include, but are not limited to: commodity futures
and option contracts; fixed-price swaps; basis swaps; and term sales
contracts. Contract terms generally range from one month to three years. While
we mitigate our exposure to declining natural gas sales prices, we may be
subject to lost opportunity costs resulting from increasing natural gas prices
in excess of those committed. Should production from existing facilities under
existing operating conditions not fulfill committed contracts, we may be
required to acquire natural gas in the open market, while volumes produced in
excess of those contracted are sold at market prices.
69
<PAGE>
OUR MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- -------------------------------------
<S> <C> <C>
Patrick R. McDonald................... 42 President and Director
Kevin D. Struzeski.................... 40 Treasurer and Chief Financial Officer
David H. Kennedy...................... 50 Director
Lambros J. Lambros.................... 64 Director
Bryan H. Lawrence..................... 57 Director
Peter A. Leidel....................... 43 Director
Harry A. Trueblood, Jr................ 74 Director(1)
</TABLE>
- --------
(1) Mr. Trueblood will become a director upon completion of the exchange
offer.
Each current director has served since his appointment on September 14,
1999.
Brief descriptions of the background and business experience of our
executive officers and directors are set forth below.
Patrick R. McDonald. Mr. McDonald became our President on September 14,
1999. He has been President and Chief Executive Officer of CEC 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.
Kevin D. Struzeski. Mr. Struzeski became our Treasurer and Chief Financial
Officer on September 14, 1999. He has been Chief Financial Officer-Treasurer
for CEC 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.
David H. Kennedy. Mr. Kennedy has served as a director of Carbon since
September 14, 1999. From March, 1981 through December 31, 1998, Mr. Kennedy
was a managing director of First Reserve Corp. and was responsible for
investing and monitoring part of its portfolio of energy investments. Since
January 1, 1999, Mr. Kennedy has acted as a consultant to and investor in the
energy industry. He serves as a director of Maverick Tube Corporation, whose
common stock is traded on the Nasdaq market, and as a director of Berkley
Petroleum Corp. and Pursuit Resources Corp., oil and gas companies whose
stocks are listed on the Toronto Stock Exchange.
Lambros J. Lambros. Mr. Lambros has served as a director of Carbon since
September 14, 1999. Mr. Lambros has been involved in private investments since
January 1, 1994. He has served as a director of M&T Bank from 1984 to present.
Bryan H. Lawrence. Mr. Lawrence is a founder and a senior manager of
Yorktown Partners LLC which was established in September, 1997, and manages
investment partnerships formerly affiliated with Dillon, Read & Co. Inc. Mr.
Lawrence had been employed at Dillon, Read & Co. Inc. since 1966, serving as a
Managing Director until the merger of Dillon Read with SBC Warburg in
September, 1997. Mr. Lawrence also serves as a Director of D&K Healthcare
Services, Inc., Hallador Petroleum Company, TransMontaigne Inc., and Vintage
Petroleum, Inc. (each a United States public company) and certain non-public
companies in the energy industry in which Yorktown partnerships hold equity
interests.
Peter A. Leidel. Mr. Leidel is a co-founder and manager of Yorktown
Partners LLC which was established in September, 1997, and manages investment
partnerships affiliated with Dillon, Read & Co. Inc. Yorktown
70
<PAGE>
Partners LLC is the manager of four private equity partnerships that invest in
the energy industry, with aggregate committed capital of approximately $700
million. Previously, he was a partner of Dillon, Read & Co. Inc.'s venture
capital fund and has invested in a variety of private companies with a
particular focus on energy investments since 1983. He was previously in
corporate treasury positions at Mobil Corporation and worked for KPMG Peat
Marwick and the U.S. Patent and Trademark Office. Mr. Leidel is a director of
Cornell Corrections, (ASE-CRN), Willbros Group (NYSE-WG), Fintube, Meenan Oil
Co., Roemer-Swanson Energy, Athanor Resources, Inc., Tanglewood Companies, and
Metal Supermarkets.
Harry A. Trueblood, Jr. Mr. Trueblood has served as the President and Chief
Executive Officer of CEC from 1972 until July 1, 1998. Mr. Trueblood has
served as Chairman and CEO of Columbus Energy Corp., the former parent of CEC,
since 1982 and was a founder and former President and/or Chairman and CEO of
Consolidated Oil & Gas, Inc., the former parent of both Columbus Energy and
CEC from 1958 to 1998.
Messrs. Lawrence and Leidel were designated as nominees for directors by
Yorktown pursuant to the Exchange Agreement. Mr. McDonald was also designated
as a director pursuant to that agreement. See "The Exchange Offer--Description
of Exchange Agreement."
Committees of the Board of Directors
Our Board of Directors has established a compensation committee, an audit
committee and a nominating committee.
Members of the compensation committee are Messrs. Leidel (Chairman),
Kennedy and Lambros. Mr. Trueblood will become a member of the Compensation
Committee upon completion of the exchange offer. The compensation committee
reviews and approves our compensation and benefits for our executive officers
and makes recommendations to the Board of Directors regarding these matters.
Members of the audit committee are Messrs. Kennedy (Chairman) and Lambros.
The functions of the audit committee are:
. Review the scope of the audit procedures utilized by our independent
auditors;
. Review with the independent auditors our accounting practices and
policies;
. Consult with our independent auditors during the year; and
. Report to our Board of Directors with respect to these matters and
to recommend the selection of independent auditors.
The nominating committee is responsible for determining, on behalf of the
Board of Directors of Carbon, nominees for the position of director of Carbon,
or persons to be elected by the Board of Directors or shareholders to fill any
vacancy in the Board of Directors of Carbon. The existence of the nominating
committee is required by the Exchange Agreement among Carbon, CEC and
Yorktown. The Exchange Agreement requires that the nominating committee be
comprised of one Yorktown director, Mr. McDonald, so long as he is a director
of Carbon, and two independent directors. The Yorktown directors who serve on
the nominating committee are selected by a majority vote of the Yorktown
directors. A majority of the independent directors are to designate the
independent directors to serve on the nominating committee. Mr. Lawrence
(Chairman) is the Yorktown director on the nominating committee, Mr. McDonald
serves on the committee, and the two independent directors on the committee
are Messrs. Kennedy and Lambros.
Executive Compensation
The following table depicts information regarding the annual and long-term
compensation paid during each of the last three years by CEC to the President
and Chief Executive Officer, who is the only executive officer of Carbon to
earn in excess of U.S. $100,000 in salary and bonus in fiscal 1998 from either
CEC or BFC.
71
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Number of
Securities
Underlying
Fiscal Salary Bonus Options
Name and Principal Position Year (U.S.$) (U.S.$) Granted
- --------------------------- ------ ------- ------- ------------
<S> <C> <C> <C> <C>
Patrick R. McDonald, President........... 1998 $50,000(1) 0 78,000
</TABLE>
- --------
(1) Appointed July 1, 1998
We currently pay to Patrick R. McDonald, our President, an annual salary of
US $200,000.
Stock Option Grants And Exercises
The following table sets forth information concerning individual grants of
stock options made by CEC during fiscal 1998 to CEC's President and Chief
Executive Officer. The stock options were granted at the market price on the
date of grant.
Option Grants In Fiscal 1998
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Number of % of Total Price
Securities Options Appreciation for
Underlying Granted to Option Term (2)
Options Employees -----------------
Granted in Fiscal Exercise Price Expiration 5% 10%
Name (1) 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 7/1/03 $145,902 $331,000
</TABLE>
- --------
(1) Options were originally granted to acquire CEC common stock at the closing
price of CEC's common stock on the date of the grant. These options are
being replaced with Carbon options on the same terms.
(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 CEC'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 our 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.
No options were exercised by CEC's President and Chief Executive Officer
during fiscal 1998. The following table summarizes information with respect to
the value of that officer's unexercised stock options at November 30, 1998:
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities In-the-Money
Underlying Unexercised Value of Unexercised
Options at Year End Options at Year End (2)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Patrick R. McDonald......... 0 78,000(1) 0 0
</TABLE>
- --------
(1) Options were granted by CEC to acquire its common stock. These options are
replaced with options to acquire our stock.
(2) The in-the-money value of unexercised options is equal to the excess of
the per share market price of CEC's stock at November 30, 1998 over the
per share exercise price multiplied by the number of unexercised options.
However, the per share exercise price was higher than the market price of
CEC's stock at fiscal year end.
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<PAGE>
1999 Stock Option and Restricted Stock Plans
Our 1999 Stock Option Plan was adopted by the directors as of October 14,
1999. Under the 1999 plan, we may grant options to purchase up to 700,000
shares of our common stock. Grants under the Stock Option Plan may consist of
(1) options intended to qualify as incentive stock options under the Internal
Revenue Code and (2) non-qualified stock options that are not intended to so
qualify. Persons eligible to receive incentive stock options under the plans
are only our employees; non-qualified stock options may be granted to
employees, directors and consultants. The Stock Option Plan terminates on
September 1, 2009.
We also have a 1999 Restricted Stock Plan which was adopted by our Board of
Directors on October 14, 1999. The Restricted Stock Plan has 300,000 shares of
our common stock available for grants. Under the Restricted Stock Plan, the
administrator may issue shares of our common stock to the grantee, and those
shares are subject to restrictions and forfeiture in accordance with the terms
of a stock restriction agreement. Under the current form of agreement, the
restricted stock may be subject to vesting requirements and forfeiture of
unvested shares if the grantee ceases to be an employee or a member of the
Board of Directors, except as may be provided in an employment agreement.
Grants under the Restricted Stock Plan may be made to an employee, director or
consultant of our company or any subsidiary. The Restricted Stock Plan
terminates on September 1, 2009.
Each plan is administered by the Board of Directors or a committee
appointed by the Board consisting of two or more non-employee directors and
our President. The Board or administrating committee determines the persons to
be granted options, the exercise price per share for each option, the
expiration date of each option and other terms which may be set forth in an
option agreement. Likewise, the Board or administrating committee determines
the persons to be granted restricted stock and nature of any forfeitures and
related restrictions regarding that stock. The Board of Directors currently
administers both plans.
The exercise price of an incentive stock option granted under to the plans
cannot be less than 100% of the fair market value of the common stock on the
date of the grant. The Board determines the exercise price of a non-qualified
stock option; in the case of the 1999 plan, the exercise price of a non-
qualified stock option cannot be less than 85% of the fair market value of the
common stock on the date of grant. The term of any stock option cannot exceed
ten years. However, the exercise price of an incentive stock option granted to
any person who at the time of grant owns stock representing more than 10% of
the total combined voting power of all classes of our capital stock or any of
our affiliates must be at least 110% of the fair market value of our common
stock on the date of grant and the term of such an incentive stock option
cannot exceed five years. Options granted under the plans vest at the rate
specified in any option agreement. The exercise price may be paid in cash or
other shares of our common stock, as determined by the Board of Directors or
the administering committee.
In the event of a proposed sale of all or substantially all our assets, or
the merger of Carbon with another corporation, or any other capital
reorganization in which persons who were stockholders of our company
immediately before the capital reorganization owned less than two-thirds of
the outstanding voting securities of the surviving company following the
capital reorganization, the plan administrator is to make appropriate
provisions for the protection of outstanding options by the substitution of
appropriate stock of our company or any surviving corporation or,
alternatively, our Board of Directors may terminate an outstanding option by
permitting the option to be exercisable as to all shares subject to the
option, whether or not previously vested, for a period of thirty days (or not
less than 10 days in the case of the 1999 plan) after a notice to the option
holder.
All outstanding options under the 1999 plan become immediately exercisable
and full, whether or not there were vesting requirements, upon the occurrence
of a change in control. All restricted stock outstanding under the 1999
Restricted Stock Plan also become fully vested upon a change of control. For
this purpose, a change in control occurs (1) at the time a third person or
group becomes the beneficial owner of shares with 50% or more of the total
number of votes cast for the election of our directors; (2) on the date our
shareholders approve a merger or consolidation (unless our shareholders
continue to own after the merger or consolidation more than two-thirds of the
voting securities of the resulting corporation in substantially the same
proportion as their
73
<PAGE>
ownership of our voting securities before the merger or consolidation) or any
sale or other disposition of all or substantially all of our assets, or (3) a
sale or other disposition of more than 50% in fair market value of our assets
outside the ordinary course of business, or (4) if at the time there is a
change in more than a majority of our Board of Directors as a result of a
proxy contest (unless any option holder or the holder of restricted stock, as
the case may be, or the person's affiliate has waged the proxy contest or
endorsed the change in our Board). In determining whether clause (1) of this
definition has been satisfied, Yorktown and entities controlled by Yorktown
Partners LLC (the managing general partner of Yorktown) are excluded.
Directors' Compensation
Each of our directors who is neither an officer nor an employee will be
paid a director's fee of $1,500 per quarter.
Also, in consideration of their joining our Board of Directors, David
Kennedy and Lambros J. Lambros, who are considered to be independent
directors, each were granted on October 14, 1999, granted a nonqualified stock
option to purchase 10,000 shares of our common stock at $5.50 per share.
Shares subject to these options vest one-half on the first anniversary and
one-half on the second anniversary of the date of grant, and these options
have a ten-year term.
Indemnification and Limitation of Liability
Our Bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to
the fullest extent permitted by Colorado law. We have also entered into
indemnification agreements with each of our directors and executive officers.
All indemnification agreements are identical. These agreements provide, among
other things, for indemnification and advancement of expenses to the fullest
extent permitted by law in connection with any legal proceeding in which the
person was made a party because the person was a director or executive officer
of Carbon, place the burden of proof on us in regard to whether an individual
has met the required standard of conduct for indemnification, cover procedural
matters such as the hiring of counsel and require us to pay the expenses of
the director or executive officer in enforcing any required indemnification or
advancement of expenses.
In addition, our Articles of Incorporation provide that to the fullest
extent permitted by Colorado law, our directors will not have personal
liability to us or our stockholders for monetary damages for any breach of
fiduciary duties as a director. This does not eliminate the duties themselves,
and in appropriate circumstances, equitable remedies such as injunction or
other forms of nonmonetary relief remain available under Colorado law. This
provision does not eliminate the liability of a director for (1) any breach of
the director's duty of loyalty to us or our stockholders; (2) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (3) unlawful dividends, stock repurchases or
redemptions; or (4) any transaction from which the director derived an
improper personal benefit. This does not affect a director's responsibilities
under other laws such as the federal or state securities laws.
There is no pending litigation or proceeding involving a director or
officer as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions or otherwise, we
have been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
Employment Agreement
On October 31, 1999, we entered into a three-year employment contract with
Mr. McDonald. The employment agreement with Mr. McDonald is described under
"The Exchange Offer--Interests of Certain Persons in the Exchange Offer."
74
<PAGE>
PRINCIPAL SHAREHOLDERS OF OUR COMPANY
The following table contains information regarding ownership of our common
stock (the only class of stock outstanding) as of November 1, 1999 by (1) each
director, (2) our President, (3) all of our directors and executive officers
as a group, and (4) each shareholder who, to our knowledge, was the beneficial
owner of five percent or more of the outstanding shares. The table also shows
the ownership of our common stock by these persons as adjusted to reflect the
exchange offer, assuming that CEC shareholders accept the exchange offer for
all outstanding CEC shares. All information is based on information provided
by such persons to us. Unless otherwise indicated, their addresses are the
same as our address and 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>
Amount and
Amount and Nature of
Nature of Beneficial
Beneficial Percent Ownership
Name and Address Ownership Prior After Percent
of Beneficial Owner Prior to Offer to Offer Offer After Offer
- ------------------- -------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Yorktown Energy Partners
III, L.P................. 4,500,000 98.7% 4,500,000 74.0%
410 Park Avenue, Suite
1900
New York, NY 10025
Patrick R. McDonald and
McDonald Energy, LLC..... 30,000(4) (1) 315,100(4)(5) 5.1%
1700 Broadway, Suite 1150
Denver, CO 80290
Harry A. Trueblood, Jr.... -- -- 308,696(5) 5.1%
1660 Lincoln Street
Suite 2400
Denver, CO 80264
David H. Kennedy.......... 10,000 (1) 10,000 (1)
18 Pasture Lane
Darien, CT 06820
Lambros J. Lambros........ 10,000 (1) 10,000 (1)
131 Gosmen Road
Norfolk, CT 06058
Bryan H. Lawrence......... 4,500,000(2) 98.7% 4,500,000(2) 74.0%
410 Park Avenue, Suite
1900
New York, NY 10025
Peter A. Leidel........... 4,500,000(3) 98.7% 4,500,000(3) 74.0%
410 Park Avenue, Suite
1900
New York, NY 10025
All directors and execu-
tive officers as a group
(7 persons including the
above)................... 4,560,000 100% 5,173,796(6) 83.4%
</TABLE>
- --------
(1) Less than 1%.
(2) These shares owned by Yorktown Energy Partners III, L.P. As a member of
Yorktown Partners LLC, the manager of Yorktown Energy Partners III, L.P.,
Mr. Lawrence may be deemed to be a beneficial owner of these shares. Mr.
Lawrence disclaims beneficial ownership of these shares.
(3) These shares owned by Yorktown Energy Partners III, L.P. As a member of
Yorktown Partners LLC, the manager of Yorktown Energy Partners III, L.P.,
Mr. Leidel may be deemed to be a beneficial owner of these shares. Mr.
Leidel disclaims beneficial ownership of these shares.
(4) Includes 30,000 shares of restricted stock, one-half of which vests in
October, 2000 and one-half of which vests in October, 2001.
(5) See "Principal Shareholders of CEC" for information on ownership of CEC
shares which may be exchanged for Carbon shares in the exchange offer. We
will substitute Carbon stock options for outstanding CEC stock options.
(6) Includes 121,000 shares underlying exercisable options to be issued by us
in substitution of CEC stock options.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF CEC
The table below provides information regarding ownership of CEC common
stock (which is CEC's only class of outstanding stock) as of November 1, 1999
by (1) each director of CEC, (2) CEC's President and Chief Executive Officer,
(3) all CEC's directors and executive officers as a group, and (4) each
shareholder who, to our knowledge, was the beneficial owner of five percent or
more of the common stock of CEC. All information is taken from or based on
filings made by such persons with the SEC or provided by such persons to CEC.
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>
Amount and
Nature of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
- ------------------- ---------- --------
<S> <C> <C>
Patrick R. McDonald and McDonald Energy, LLC............. 285,100(1) 17.6%
Harry A. Trueblood, Jr................................... 308,696(2) 20.1%
Carl Seaman.............................................. 217,209(3) 14.3%
63 Hunting Ridge Road
Greenwich, CT 06831
James C. Crawford........................................ 21,500(4) 1.4%
Loyola G. Keough......................................... 15,000(5) (6)
Craig W. Sandahl......................................... 115,050(4) 7.5%
13875 Virginia Foothills Drive
Reno, NV 89511
Peter N. T. Widdrington.................................. 22,000(4) 1.4%
All directors and executive officers as a group (8
persons including the above)............................ 812,346(7) 46.3%
</TABLE>
- --------
(1) Patrick R. McDonald is the sole member of McDonald Energy, LLC. Includes
117,100 shares owned by CEC Resources Holdings, LLC of which McDonald
Energy, LLC has 58.3% interest.
(2) Does not include 33,911 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 140,000
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. Also includes
11,000 shares underlying exercisable stock options.
(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 21,000 shares underlying exercisable stock options.
(5) Includes 15,000 shares underlying exercisable stock options.
(6) Less than 1%.
(7) Includes 232,000 shares underlying exercisable stock options.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In October 1999, Yorktown purchased an aggregate of 4,500,000 shares of our
common stock for $24,750,000 in cash. Also, in October, 1999, each of our two
independent directors, Messrs. Kennedy and Lambros, purchased 10,000 shares
from us at a cash price of $5.50 per share.
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of common stock,
no par value, and 10,000,000 shares of preferred stock, no par value.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of Carbon, holders of
the common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
preferred stock. Holders of common stock have no preemptive rights and no right
to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of the exchange offer will be, fully paid and
nonassessable.
A quorum for purposes of a meeting of shareholders consists of a majority of
the shares entitled to vote at the meeting. After a quorum has been
established, a matter is approved by the shareholders if votes cast favoring
the matter exceed the votes cast against the matter. Directors are elected by a
plurality vote, with the nominees having the highest number of votes cast in
favor of their election being elected to the Board of Directors. As a result, a
majority of the outstanding shares has the ability to elect all of our
directors.
Under Colorado law, the affirmative vote of a majority of the shares
entitled to vote is required to approve:
. A sale, lease, exchange or other disposition of all or substantially all
of our property and assets, with or without our good will, other than in
the usual and regular course of our business.
. A plan of merger of Carbon with or into another entity, or a share
exchange for which shareholder approval is required.
. Dissolution of Carbon.
At November 1, 1999, there were 4,560,000 shares of our common stock
outstanding.
Preferred Stock
The Board of Directors has the authority, without further vote or action by
the shareholders, to issue up to 10,000,000 shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series. The issuance
of preferred stock could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of Carbon. There are no shares of preferred
stock issued, and we have no present plans to issue any shares of preferred
stock.
Certain Effects Of Authorized But Unissued Stock
Under our Articles of Incorporation and, upon completion of the exchange
offer and assuming 100% acceptance of the exchange offer, there will be
approximately 13,978,600 shares of common stock and
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<PAGE>
approximately 10,000,000 shares of preferred stock available for future
issuance without stockholder approval (except that as part of the criteria for
maintaining a listing on the Amex, we are required to obtain stockholder
approval of certain issuances of stock). These additional shares may be
utilized for a variety of corporate purposes including future public offerings
to raise additional capital or to facilitate corporate acquisitions.
One of the effects of the existence of unissued and unreserved common stock
and preferred stock may be to enable the Board of Directors to issue shares to
persons friendly to current management which could render more difficult or
discourage an attempt to obtain control of Carbon by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of our
management. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of Carbon.
The Board of Directors is authorized without any further action by the
shareholders to determine the rights, preferences, privileges and restrictions
of the unissued Preferred Stock. The purpose of authorizing the Board of
Directors to determine such rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The Board of
Directors may issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common stock, and
which could, among other things, have the effect of delaying, deferring or
preventing a change in control of Carbon.
We do not currently have any plans to issue additional shares of common
stock or preferred stock other than shares of common stock which may be issued
upon the exercise of options which have been granted or which may be granted
in the future to our employees.
American Stock Exchange Listing
Our common stock has been approved for quotation on the AMEX under the
symbol .
Transfer Agent
We have appointed Harris Trust and Savings Bank, Chicago, Illinois, as the
transfer agent and registrar for our common stock.
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<PAGE>
COMPARISON OF SHAREHOLDERS' RIGHTS
Shareholders of CEC who tender their shares in the exchange offer will
become shareholders of Carbon. CEC is a corporation organized under and
governed by Alberta, Canada law. Carbon is a corporation organized under and
governed by Colorado law. The principal attributes of Carbon common stock and
CEC common stock are comparable, but there are material differences in
shareholder rights. The following is a summary of these material differences
which arise from the differences between the Colorado Business Corporation
Act, the "CBCA," and the Alberta Business Corporations Act, the "ABCA," and
between the Articles of Incorporation and Bylaws of Carbon and the Articles of
Association and Bylaws of CEC.
This summary is qualified in its entirety by the terms of the Articles of
Association and Bylaws of CEC and the Articles of Incorporation and Bylaws of
Carbon.
CEC CARBON
Capitalization
Authorized Capital Stock. The Authorized Capital Stock. The
authorized capital stock of CEC authorized capital stock of Carbon
consists of an unlimited number of consists of 20,000,000 shares of
Common Shares and an unlimited common stock and 10,000,000 shares
number of Class A Preferred Shares. of preferred stock.
Restrictions On Ownership
There are no restrictions on There are no restrictions on
ownership of CEC shares. ownership of Carbon shares.
Shareholder Voting Rights Generally
Rights of Common Shareholders. CEC's Rights of Common
Articles of Amendment provide that Shareholders. Carbon's Articles of
the holders of Common Shares: Incorporation provide that the
common stock has exclusive voting
rights on all matters requiring the
vote of shareholders, except as
otherwise specifically provided by
the CBCA or by the terms of any
outstanding preferred stock. Holders
of common stock are also entitled to
receive dividends and distribution
of assets upon any dissolution of
Carbon, subject to the preferential
rights of any preferred stock.
. are entitled to receive notice of
and to attend and to vote at any
meeting (one vote per share);
. are entitled to receive dividends
subject to dividends attached to
other classes of shares which rank
ahead in priority;
. are entitled to distribution of
assets on any dissolution or
winding up of the Corporation
subject to the preferential right
of other classes of shares which
rank ahead in priority.
Rights of Preferred
Shareholders. The Carbon Board of
Directors has the exclusive
authority to issue the preferred
stock in one or more series and to
determine the preferences,
limitations and relative rights,
including voting rights, of any
preferred stock.
Rights of Preferred
Shareholders. CEC's Board of
Directors have the authority with
regard to the Class A Preferred
Shares:
. to issue in one or more series
from time to time;
. to change the rights restriction
and privileges and conditions from
time to time.
The Class A Preferred Shares rank on
parity with all other series of
preferred shares and ahead of the
Common Shares with respect to
dividends and dissolution or winding
up. The Class A Preferred
shareholders are not entitled to
receive notice of, attend or vote at
any meetings of shareholders.
79
<PAGE>
CEC CARBON
No Preemptive Rights. No shareholder No Preemptive Rights. No shareholder
is entitled as of right to subscribe is entitled to acquire unissued
for, purchase or receive any part of shares of the corporation or
any new or additional issue of securities convertible into shares
shares of any class, or any bonds, or carrying a right to subscribe for
debentures or other securities or to acquire such shares.
convertible into shares of any
class.
Quorum. A majority of the votes to Quorum. A majority of the votes
be cast at any meeting of entitled to be cast on a matter by a
shareholders of a quorum which is voting group constitute a quorum of
constituted by two persons person that voting group for action on that
present(or their proxies) entitled matter at any meeting of the
to vote at the meeting and together shareholders.
holding not less than ten percent of
the outstanding shares entitled to
vote at a meeting.
Voting. At any meeting of Voting. Except as otherwise provided
shareholders every question shall, in the CBCA, action by a voting
unless required by the ABCA, be group on a matter other than the
determined by the majority of the election of directors is approved if
votes cast on the question. a quorum exists and if the votes
cast within the voting group
favoring the action exceed the votes
cast within the voting group
opposing the action. While only
common stock is outstanding, the
common stock as a class is the sole
voting group of Carbon.
Proxy. A shareholder may appoint a Proxy. A shareholder may appoint a
proxy by signing and transmitting an proxy by signing and transmitting an
appointment form. A proxy is only appointment form, which is effective
valid at the meeting in respect of when received by the corporation.
which it is given or any adjournment Proxy appointments are effective for
of that meeting. 11 months unless otherwise specified
and are revocable except as may be
permitted or provided by law.
No Cumulative Voting No Cumulative Voting
Rights. Cumulative voting rights are Rights. Cumulative voting rights are
not permitted in the election of not permitted in the election of
directors. directors.
Shareholder Voting by Written Consent
Written Consent. CEC shareholders Written Consent. Carbon shareholders
may act by unanimous written consent may act by unanimous written consent
in lieu of a meeting of the in lieu of a meeting of the
shareholders. shareholders.
Annual Shareholder Meeting
Annual Meeting. A meeting of the Annual Meeting. A meeting of the
shareholders is held annually to shareholders is held annually to
consider the financial statements elect directors to succeed those
and reports, electing directors, directors whose terms expire and for
appointing auditors and for the the transaction of other business.
transacting of business properly
brought before the meeting.
Special Shareholders Meetings
Initiation of Special Meetings. The Initiation of Special Meetings. The
CEC bylaws provide that special Carbon bylaws provide that special
shareholders' meetings may be called shareholders meetings may be called
by the Board of Directors, the by the President or by the Board of
Chairman of the Board, the Managing Directors and shall be called by the
Director or the President at any President or Secretary upon written,
time. signed and dated demand of holders
of shares representing not less than
10% of all votes entitled to be cast
on any issue proposed to be
considered at the meeting.
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<PAGE>
CEC CARBON
Scope of Special Meeting. Business Scope of Special Meetings. Business
transacted at any special transacted at any special
shareholders' meeting is limited to shareholders meeting is limited to
the purposes stated in the notice of the purposes stated in the notice of
the meeting. the meeting.
Notice. Notice of any annual or Notice. Pursuant to the Carbon
special meeting shall be sent not bylaws, notice of any annual or
less than 21 days and not more than special meeting of the shareholders
50 days before the meeting. will be given to each shareholder
entitled to vote at the meeting not
less than 10 nor more than 60 days
prior to the meeting.
Inspection Rights
General Inspection Rights. The General Inspection Rights. Any
directors and shareholders of CEC, Carbon shareholder who has been a
their agents and legal shareholder for at least three
representatives may examine the months, or who holds at least 5% of
following records during the usual the outstanding shares of any class,
business hours of CEC free of may inspect and copy the following
charge: records of Carbon upon delivery of a
written demand made in good faith
and for a proper purpose and given
to Carbon at least five business
days prior to the inspection:
. the articles and by-laws and all
amendments;
. any USA and any amendments;
. excerpts from Board minutes or
. any USA and any amendments; records of actions taken by the
Board;
. minutes of meetings and
resolutions of shareholders;
. accounting records; and
. copies of all notices . the names and addresses of
shareholders.
. the securities register
The requesting shareholder must
. copies of the financial describe with reasonable
statements, particularity the purpose and the
records which the shareholder
desires to inspect. The records must
be directly connected with the
described purpose.
. reports and information
. a register of disclosures in
relation to material contracts
In addition, any shareholder may
inspect or copy the following
records of Carbon upon written
demand at least five business days
before the inspection:
. its Articles of Incorporation;
. its Bylaws;
. the minutes of all shareholder
meetings and records of all
actions taken by shareholders
without a meeting, for the past
three years;
. all written communications to all
or any class of shareholders as a
group within the past three years;
. a list of names and business
addresses of Carbon's directors
and officers;
. a copy of the most recent
corporate report delivered to the
Secretary of State; and
. the financial statements described
below.
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<PAGE>
CEC CARBON
Financial Statements: See above. Financial Statements. The CBCA
requires Carbon, upon written
request of any shareholder, to mail
to that shareholder its most recent
annual financial statements, if any,
and its most recent published
financial statements, if any,
reasonably detailing its assets and
liabilities and results of
operations.
Liability of Shareholders
Limited Liability. Shareholders are Limited Liability. Shareholders are
generally not personally liable for generally not personally liable for
the acts or debts of CEC. the acts or debts of Carbon.
No Capital Assessment: A shareholder No Capital Assessment. A shareholder
is required to pay the consideration is required to pay the consideration
stated by the Board of Directors for stated by the Board of Directors for
shares issued to that person. A shares issued to that person. (In
shareholder of CEC is not liable to the case of the exchange offer, the
CEC or its creditors for capital consideration for each Carbon share
assessments or calls. is one CEC share.) A shareholder of
Carbon is not liable to Carbon or
its creditors for capital
assessments or calls.
Number and Election of Directors
Number: The CEC Articles of Number. The Carbon Articles of
Incorporation require a minimum of Incorporation name five initial
three and a maximum of nine directors. However, the number of
directors. However, the number of directors can be changed by a Board
directors can be changed by the of Directors resolution, so long as
shareholders amending the Articles, such a resolution does not have the
but no decrease shall shorten the effect of shortening the term of any
term of the incumbent director. incumbent director.
Election. Shareholders shall, by Election. The Board of Directors is
ordinary resolution at each annual elected at the annual shareholders'
meeting, elect the Board of meeting. At each annual meeting, the
Directors. number of candidates equaling the
number of directors to be elected
receiving the highest number of
votes are elected to the Board of
Directors.
Residence of Directors
Residence. At least half of the Residence. There are no requirements
directors must be resident as to the place of residence of
Canadians. directors of Carbon.
Removal of Directors
Removal. The shareholders may by Removal. Any director can be removed
ordinary resolution passed at a from office, either with or without
special meeting remove any director cause, at a meeting of shareholders
from office. If a director is when the votes cast in favor of
elected by any class of removal exceeds the votes against
shareholders, only that class of removal. If a director is elected by
shareholders may participate in a a voting group of shareholders, only
vote for removal. that voting group may participate in
a vote for removal.
82
<PAGE>
CEC CARBON
Vacancies on the Board of Directors
Expiration of Terms. The ABCA Expiration of Terms. The Carbon
provides that if directors are not bylaws and CBCA provide that even
elected at a meeting of after the expiration of a director's
shareholders, the incumbent term, he or she continues to serve
directors continue in office until until his or her successor is
their successors are elected. elected and qualifies.
Vacancies in General. Any vacancies
Vacancies in General. Any vacancies on the Board of Directors are filled
on the Board of Directors are filled by:
by:
. the shareholders; or
. the Board of Directors, if a
quorum is present, by a simple . the Board of Directors, or a
majority. simple majority vote of the
remaining directors if their
number is insufficient to
constitute quorum.
. a vote of the shareholders.
Any vacant directorship held by a
director elected by a particular Any vacant directorship held by a
class of shareholders may be filled director elected by a particular
by either: shareholder voting group may be
filled by either:
. the shareholders of that
particular class if there are no . shareholders of that voting group
remaining directors of that class; entitled to vote; or
or
. a simple majority of any one or
. the directors elected by that more remaining directors elected
class. by that same voting group.
Standard of Conduct
General Standard of General Standards of Conduct for
Conduct. Directors and officers are Directors and Officers. Directors
required to discharge their and officers are required to
respective duties: discharge their respective duties:
. in good faith with a view to the . in good faith;
best interests of the Corporation;
and
. with the care an ordinary person
in a like position would exercise
under similar circumstances; and
. exercise the care, diligence and
skill that a reasonably prudent
person would exercise in
comparable circumstances.
. in a manner that he or she
reasonably believes is in the best
interests of the corporation.
Conflicting Interest Conflicting Interest
Transactions. Under the ABCA, if a Transactions. Under the CBCA, no
material contract is made between loan, guaranty, contract or
the Corporation and one or more of transaction between Carbon and a
its directors or officers, or director or between Carbon and any
between a corporation and another entity in which a Carbon director is
person of which a director of a director or officer or has a
officer of the corporation is a financial interest is void or
director or officer or in which he voidable, can be enjoined or gives
has a material interest, the rise to an award of damages solely
contract is neither void or voidable because of the conflicting interest
by reason only of that relationship of the director if:
and a director is not liable to
account to the corporation for that
profit if:
. after disclosure of material facts
of the relationship or interest in
the transaction, the transaction
is approved by the affirmative
vote of disinterested directors;
or
. the director or officer disclosed
his interest;
. the contract was approved by the
directors or shareholders; and
. after disclosure of material facts
of the relationship or interest in
the transaction, the transaction
is approved a vote of
shareholders; or
. it was reasonable and fair to the
Corporation at the time it was
approved.
. the conflicting interest
transaction is fair to Carbon.
83
<PAGE>
CEC CARBON
Limitation of Liability of Directors and Officers
Limitation on Personal Liability of Limitation on Personal Liability of
Directors. Pursuant to the CEC Arti- Directors. The CBCA permits Colorado
cles of Incorporation, CEC directors corporations to limit or eliminate
are not liable to the Corporation or personal liability of the a director
its shareholders for anything except to the corporation or to its share-
as set out in the ABCA. Those in- holders for monetary damages for a
stances where directors in any event breach of fiduciary duty as a direc-
remain liable to the Corporation or tor, except for certain specified
its shareholders for monetary dam- instances. Those instances where di-
ages are: rectors in any event remain liable
to the corporation or its sharehold-
. any breach of a directors' duty to ers for monetary damages are:
act honestly and in good faith
with a view to the best interests . any breach of the director's duty
of the Corporation; of loyalty to the corporation or
its shareholders,
. any breach where a director did
not exercise the care, diligence . acts or omissions not in good
and skill that a reasonably pru- faith or which involve intentional
dent person would exercise in com- misconduct or a knowing violation
parable circumstances; of the law
. unlawful dividends or other dis-
. the unlawful purchase, redemption tributions; or
or other acquisitions of shares; . any transaction from which the di-
rector directly or indirectly de-
. the unlawful commission on the rived an improper personal bene-
sale of shares; fit.
. the unlawful payment of any divi- Pursuant to the Carbon Articles of
dends; Incorporation, Carbon directors are
not personally liable to the corpo-
. any unlawful financial assistance; ration or its shareholders, either
directly or indirectly, for monetary
. any unlawful payment of an indem- damages for the breach or breaches
nity to a director or officer of of fiduciary duty as a director to
the Corporation; the full extent permitted by law.
. any unlawful payment to a share-
holder; and
. up to six months wages for non-
payment of wages to employees.
Indemnification of Directors and Officers
ABCA Provisions. Pursuant to the CBCA Provisions. Pursuant to the
ABCA, CEC must indemnify a director CBCA, Carbon must indemnify a person
or officer in respect of all costs, who was wholly successful, on the
charges and expenses reasonably in- merits or otherwise, in the defense
curred in his defense of any civil, of any proceeding to which the per-
criminal or administrative action or son was a party because the person
proceeding if: is or was a director or officer,
against reasonable expenses incurred
. he was substantially successful on by him or her in connection with the
the merits; proceeding. The CBCA also permits
Carbon to indemnify and advance ex-
. he acted honestly and in good penses to a director or officer, who
faith and had reasonable grounds was made a party to a proceeding be-
for believing his conduct was law- cause that person is a director or
ful; and officer, against liability incurred
in the proceeding if:
. he is fairly and reasonably enti-
tled to indemnity.
The Court may grant approval to . the person conducted himself or
grant indemnity for a derivative ac- herself in good faith;
tion if he acted honestly and in
good faith and had reasonable . the person reasonably believed
grounds for believing his conduct that his or her conduct was in
was lawful. Carbon's best interest or not op-
posed to Carbon's best interest;
and
. in the case of any criminal pro-
ceeding, the person had no reason-
able cause to believe his or her
conduct was unlawful.
The CBCA will not allow Carbon to
indemnify a director or officer for
liability to the corporation in an
action brought by a shareholder on
behalf of Carbon or for liability to
the corporation for deriving an im-
proper personal benefit.
84
<PAGE>
CEC CARBON
Carbon Bylaws and Indemnification A court may nevertheless order
Agreement. CEC's bylaws permit indemnification as the court deems
indemnification subject to the above proper, except that indemnification
as set out in the ABCA. is limited to reasonable expenses of
a proceeding where the director or
officer has been held liable in an
action brought by a shareholder or
for deriving an improper personal
benefit.
Carbon Bylaws and Indemnification
Agreements. Carbon's bylaws and
indemnification agreements with each
director and officer mandate that
Carbon indemnify and advance
expenses to the director or officer
to the full extent permitted by law.
Exclusiveness. See above Exclusiveness. Carbon may provide,
by shareholder or Board of Directors
resolution or by way of contract,
for indemnification or advancement
of expenses not expressly provided
for in the CBCA, if not inconsistent
with public policy.
Appraisal Rights
Right to Dissent. Under the ABCA, a Right to Dissent. Under the CBCA, a
CEC shareholder, whether or not Carbon shareholder, whether or not
entitled to vote, is entitled to entitled to vote, is entitled to
dissent and obtain payment of the dissent and obtain payment of the
fair value of their shares if the fair value of their shares in the
Corporation resolves to: event of the consummation of a:
. amend its articles changing the . plan of merger requiring approval
share structure; by the shareholders, or a short-
form merger of a corporation with
its parent corporation; or
. amend its articles to remove or
change any business restrictions;
. share exchange, by operation of
. amalgamate with another law, with an acquiring
corporation; corporation; or
. be continued into another . sale, lease, exchange or other
jurisdiction; or disposition of substantially all
of the corporation's property
requiring shareholder approval; or
. sell, lease or exchange all or
substantially all its property.
. reverse stock-split that reduces
the number of shares owned by the
shareholder to a fraction of a
share for which the corporation
pays cash.
No Right to Dissent. There is no No Right to Dissent. Under the CBCA,
comparable section under the ABCA. except in the case of a reverse
stock split described above, a
Carbon shareholder may not dissent
and obtain payment for their shares
if the securities are: (1) listed on
a national securities exchange, such
as the American Stock Exchange, or a
national market system of the
National Association of Securities
Dealers automated quotation system
or (2) held of record by more than
2,000 shareholders.
85
<PAGE>
CEC CARBON
Vote Required in Extraordinary Transactions
Merger or Share Exchange. The Board Merger or Share Exchange. The Board
of Directors submits a plan of of Directors submits a plan of
merger or share exchange to the merger or share exchange to the
shareholders for approval. The plan shareholders for approval. The plan
must be approved by special must be approved by a majority of
resolution ( 2/3) of the outstanding the outstanding votes entitled to be
votes entitled to be cast within cast within each voting group
each voting group entitled to vote entitled to vote separately on the
separately on the plan. plan. Separate voting by a class or
series of shares as a voting group
is required:
. on a plan of merger, if the plan
contains a provision that would
require approval by the class or
series as a separate voting group
if the provision was contained in
an amendment to the corporation's
Articles of Incorporation (see
below for information on the vote
to amend the Articles of
Incorporation); or
. on a plan of share exchange, by
each class or series of shares
included in the share exchange.
There is no comparable section with However, approval of the
regard to any "surviving shareholders of any surviving
corporation" in the ABCA. corporation in a merger is not
required if:
. the Articles of Incorporation of
the surviving corporation prior to
the merger will not be changed
after the merger;
. shareholders with shares prior to
the merger will hold the same
number of shares after the merger,
with the same designations,
preferences, limitations and
relative rights;
. the number of voting shares
outstanding immediately after the
merger plus the number issuable as
a result of the merger does not
exceed by more than 20% the total
number of voting shares of the
surviving corporation prior to the
merger; and
. the number of participating shares
outstanding immediately after the
merger plus the number issuable as
a result of the merger, does not
exceed by more than 20% the total
number of participating shares
outstanding prior to the merger.
Merger of Parent and Wholly-Owned Merger of Parent and 90% Held
Subsidiary. The directors of a Subsidiary. No shareholder approval
holding corporation and one or more of the parent company is required if
of its wholly-owned subsidiaries may a parent corporation owning at least
approve an amalgamation of the 90% of a subsidiary corporation
resolutions provided that: merges the subsidiary into itself.
. shares of each subsidiary will be
cancelled;
. the articles of amalgamation will
be the same as the holding
company; and
. no securities shall be issued by
the amalgamated corporation in
connection with the amalgamation
86
<PAGE>
CEC CARBON
Sale of Assets. Under the ABCA, the Sale of Assets. Under the CBCA, the
sale, lease or exchange of all or sale, lease, exchange or other
substantially all the property of a disposition of all, or substantially
corporation other than in the all, of Carbon's property (which may
ordinary course of business requires include goodwill) other than in the
approval by special resolution ( ordinary course of business requires
2/3) of the outstanding votes approval of a majority of the
entitled to be cast within each outstanding votes entitled to be
voting group entitled to vote cast within each voting group
separately on the plan. entitled to vote separately on the
plan.
Dissolution. The Board of Directors Dissolution. The Board of Directors
recommends to the CEC shareholders recommends to the Carbon
approval of any proposal for shareholders approval of any
voluntary dissolution of the proposal for voluntary dissolution
Corporation, and by special of the corporation, and the plan
resolutions of each shareholder must be approved by a majority of
class, the plan must be approved by the outstanding votes entitled to be
2/3 of the outstanding votes cast within each voting group
entitled to be cast within each entitled to vote separately on the
voting group entitled to vote plan.
separately on the plan.
Change in Control Under Colorado/Alberta Law
The ABCA contains no special voting The CBCA contains no special voting
or other requirements that result or other requirements that result
from a change in control. from a change in control.
Oppression Remedy
Under the ABCA, a complainant may The CBCA does not provide for any
apply to the Court for an order in statutory oppression remedy.
respect of a corporation or any of However, shareholders have legal and
its affiliates: equitable remedies for improper acts
or omissions by directors or
officers.
. any act or omission of the
Corporation or any of its
affiliates effects a result;
. the business or affairs of the
Corporation or its affiliates have
been conducted in a manner; or
. the powers of the directors of the
Corporation of any of its
affiliates have been exercised in
a manner that is oppressive or
unfairly prejudicial to or
unfairly disregards the interests
of any securityholder, creditor,
director or officer, the Court may
make an order to rectify the
matter complained of.
Amendment to Governing Documents
Amendment to Articles. CEC Amendment to Articles. Carbon
shareholders can approve amendments shareholders can approve amendments
to the Articles of Incorporation at to the Articles of Incorporation at
a meeting by 2/3 of the votes cast a meeting by a majority of the votes
with respect to the amendment. Such cast on the amendment. A class or
items would include: series of shares are entitled to
vote as a separate voting group on
an amendment if the amendment would,
among other things:
. a name change;
. changing or removing the business
restrictions; . increase or decrease the aggregate
number of authorized shares of the
class or series;
. increase or decrease the aggregate
number of shares that CEC is
authorized to issue;
. exchange or reclassify all or part
of the shares of the class or
series;
. changing share structure or
creating a new class of shares;
. change the preferences,
. increasing or decreasing the limitations or relative rights of
number of directors. the shares of the class or series;
87
<PAGE>
CEC CARBON
. change the shares into a different
number of shares of the same class
or series; or
. create a new class of shares
having rights or preferences with
respect to distributions or
dissolution that are superior or
equal to the shares of the class
or series.
Amendment to Bylaws. Either the Amendment to Bylaws. Either the
Board of Directors or the Board of Directors or the
shareholders may make a proposal to shareholders may adopt amendments to
adopt amendments to the by-laws. The the Bylaws of Carbon. Shareholder
directors shall submit a by-law, or approval of such an amendment at a
an amendment or a repeal of a by-law meeting requires a majority of the
to the shareholders at the next votes cast on the subject.
meeting of shareholders, and the
shareholders, may by ordinary
resolution, confirm, reject or amend
the by-law, amendment or repeal.
88
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock being offered
hereby will be passed upon for us by Holland & Hart LLP, Denver, Colorado.
Holland and & Hart LLP has rendered an opinion as to the material United
States federal income tax considerations relating to the exchange offer and
Bennett Jones has rendered an opinion as to the material Canadian federal
income tax consequences of the exchange offer. These opinions have been filed
as exhibits to the registration statement of which this prospectus is a part.
EXPERTS
The financial statements of Carbon Energy Corporation as of October 20,
1999 and for the period from inception (September 14, 1999) through October
20, 1999, included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said report. BFC's audited financial statements included in this
prospectus and elsewhere in the registration statement have been audited by
Hein + Associates LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firms as experts in giving said reports. The financial
statements of CEC Resources Ltd. as of November 30, 1998 and 1997 and for each
of the three years in the period ended November 30, 1998 included in this
Prospectus have been so included in the reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-4 under the Securities Act of 1933 with respect to the
common stock offered by this prospectus. This prospectus does not contain all
of the information in the registration statement and the exhibits and
schedules. For further information about us and our common stock, please refer
to the registration statement and the exhibits and schedules filed. Statements
contained in this prospectus as to the contents of any contract or document
filed as an exhibit to the registration statement are qualified by reference
to such exhibit as filed.
A copy of the registration statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the SEC.
Information regarding the operation of the public reference room may be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Website
that contains registration statements, reports, proxy and other information
regarding registrants that file electronically with the SEC. The address of
this Website is sec.gov.
89
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Carbon Energy Corporation
Report of Independent Public Accountants.................................. F-2
Balance Sheet as of October 20, 1999...................................... F-3
Statement of Stockholder's Equity......................................... F-4
Statement of Cash Flow for period from inception (September 14, 1999)
through October 20, 1999................................................. F-5
Notes to the Financial Statements......................................... F-6
Bonneville Fuels Corporation (predecessor to Carbon Energy Corporation)
Independent Auditor's Report.............................................. F-7
Consolidated Balance Sheets at December 31, 1998 and 1997................. F-8
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996...................................................... F-9
Consolidated Statement of Stockholders' Equity for the period from January
1, 1996 through December 31, 1998........................................ F-10
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996...................................................... F-11
Notes to Consolidated Financial Statements................................ F-12
Consolidated Balance Sheets at June 30, 1999 and 1998 (unaudited)......... F-17
Consolidated Statement of Operations for the six months ended June 30,
1998 and 1998 (unaudited)................................................ F-19
Consolidated Statements of Cash Flows for the six months ended June 30,
1999 (unaudited)......................................................... F-20
Consolidated Statement of Stockholders' Equity and Retained Earnings for
the six months ended June 30, 1999 (unaudited)........................... F-21
Notes to Consolidated Financial Statements................................ F-22
CEC Resources Ltd.
Auditors' Report.......................................................... F-27
Balance Sheets at November 30, 1998 and 1997.............................. F-28
Statements of Income for the years ended November 30, 1998, 1997 and 1996. F-30
Statements of Stockholders' Equity for the years ended November 30, 1998,
1997 and 1996............................................................ F-31
Statements of Cash Flows for the years ended November 30, 1998, 1997 and
1996..................................................................... F-32
Notes to the Financial Statements......................................... F-33
Balance Sheets at August 31, 1999 (unaudited) and November 30, 1998....... F-44
Statements of Income for nine months ended August 31, 1999 and 1998
(unaudited).............................................................. F-45
Statement of Stockholders' Equity for the nine months ended August 31,
1999 (unaudited)......................................................... F-46
Statements of Cash Flow for the nine months ended August 31, 1999 and
August 31, 1998 (unaudited).............................................. F-47
Notes to Financial Statements............................................. F-48
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Carbon Energy Corporation:
We have audited the accompanying balance sheet of CARBON ENERGY
CORPORATION (a Colorado corporation) as of October 20, 1999, and the related
statements of stockholder's equity and cash flow for the period from inception
(September 14, 1999) to October 20, 1999. 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 audit.
We conducted our audit 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. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Carbon Energy
Corporation as of October 20, 1999, and its cash flow for the period from
inception (September 14, 1999) to October 20, 1999, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado
October 21, 1999
F-2
<PAGE>
CARBON ENERGY CORPORATION
BALANCE SHEET
As of October 20, 1999
ASSETS
<TABLE>
<S> <C>
Cash....................................................................... $550
----
Total assets............................................................... $550
====
STOCKHOLDER'S EQUITY
Preferred stock, no par value:
10,000,000 shares authorized, none outstanding........................... $--
Common stock, no par value:
20,000,000 shares authorized, 100 outstanding............................ 550
----
Total stockholder's equity................................................. $550
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CARBON ENERGY CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
For the Period From Inception (September 14, 1999) Through October 20, 1999
<TABLE>
<CAPTION>
Common Stock
-------------
Shares Value Total
------ ------ -----
<S> <C> <C> <C>
Balances, September 14, 1999................................ -- $-- $--
Shares issued (note 2)...................................... 100 550 550
--- ---- ----
Balances, October 20, 1999.................................. 100 $550 $550
=== ==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CARBON ENERGY CORPORATION
STATEMENT OF CASH FLOW
For the Period From Inception (September 14, 1999) Through October 20, 1999
<TABLE>
<S> <C>
Cash flow from financing activities:
Issuance of common stock................................................ $550
----
550
----
Net increase in cash...................................................... 550
Cash at the beginning of the period....................................... --
----
Cash at the end of the period............................................. $550
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CARBON ENERGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(1) Nature of Business
Carbon Energy Corporation ("Carbon") was incorporated under the laws of the
State of Colorado on September 14, 1999. Carbon is an independent oil and gas
company engaged in the exploration, development and production of natural gas
and crude oil. Carbon has been formed for the purpose of acquiring Bonneville
Fuels Corporation ("BFC"), a wholly owned subsidiary of Bonneville Pacific
Corporation ("BPC"). BFC is an oil and gas company incorporated in Colorado.
Carbon was also formed for the purpose of exchanging Carbon shares for shares
of CEC Resources Ltd. ("CEC"), an independent oil and gas company,
incorporated in Alberta, Canada.
(2) Capital Stock
During October 1999, Carbon issued 100 shares of common stock at U.S. $5.50
to Yorktown Energy Partners III, L.P. ("Yorktown"). This has been the only
activity to date since the inception of Carbon.
(3) Acquisitions
On August 11, 1999, CEC and BPC signed a stock purchase agreement, whereby
CEC agreed to purchase all of the outstanding BFC stock from BPC at a price of
$23,857,951 in cash, subject to certain adjustments, with debt less working
capital of approximately $6,500,000 remaining at BFC. On October 14, 1999,
Carbon, CEC and Yorktown signed an exchange and financing agreement providing
for an assignment of the BFC stock purchase agreement to Carbon, the purchase
of Carbon common stock by Yorktown for $24,750,000 and an exchange offer
whereby Carbon will exchange one share of Carbon common stock for one share of
CEC common stock.
F-6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Bonneville Fuels Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Bonneville
Fuels Corporation (a wholly-owned subsidiary of Bonneville Pacific
Corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 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. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bonneville
Fuels Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Hein + Associates LLP
Denver, Colorado
February 26, 1999
F-7
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash............................................... $ 2,742,000 $ 544,000
Accounts receivable, trade......................... 4,972,000 2,818,000
Investment margin accounts......................... 534,000 63,000
Prepaid expenses and other......................... 241,000 241,000
------------ ------------
Total current assets........................... 8,489,000 3,666,000
------------ ------------
Property and Equipment, at cost:
Oil and gas properties, using the successful
efforts method:
Unproved properties.............................. 2,745,000 1,953,000
Proved properties................................ 29,679,000 26,624,000
Furniture and equipment............................ 497,000 293,000
------------ ------------
32,921,000 28,870,000
Less accumulated depreciation, depletion and
amortization.................................... (18,891,000) (16,863,000)
------------ ------------
Property and equipment, net.................... 14,030,000 12,007,000
------------ ------------
Other Assets:
Deposits and other................................. 276,000 317,000
Deferred loan costs, net........................... 45,000 64,000
------------ ------------
Total other assets............................. 321,000 381,000
------------ ------------
Total Assets......................................... $ 22,840,000 $ 16,054,000
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses.............. $ 6,866,000 $ 1,470,000
Accrued production taxes payable................... 335,000 257,000
Undistributed revenue.............................. 476,000 448,000
------------ ------------
Total current liabilities...................... 7,677,000 2,175,000
------------ ------------
Long-term Debt....................................... 5,850,000 2,400,000
Taxes Payable to BPC................................. -- 1,888,000
Commitments and Contingencies (Notes 2, 4, and 6)
Stockholder's Equity:
Common stock, $.01 par value; 1,000 shares
authorized, issued and outstanding................ -- --
Additional paid in capital......................... 3,475,000 1,812,000
Retained earnings.................................. 5,838,000 7,779,000
------------ ------------
Total stockholder's equity..................... 9,313,000 9,591,000
------------ ------------
Total Liabilities and Stockholder's Equity........... $ 22,840,000 $ 16,054,000
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-8
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Oil and gas sales....................... $ 6,758,000 $ 6,429,000 $ 5,262,000
Gas marketing and transportation........ 12,610,000 9,135,000 9,550,000
Electricity sales....................... 1,331,000 506,000 --
Other................................... 393,000 469,000 255,000
----------- ----------- -----------
21,092,000 16,539,000 15,067,000
----------- ----------- -----------
Expenses:
Oil and gas production costs............ 3,004,000 2,779,000 2,095,000
Gas marketing and transportation........ 12,674,000 8,553,000 6,910,000
Cost of electricity..................... 1,137,000 497,000 --
Depreciation, depletion and amortization
expense................................ 2,086,000 1,942,000 1,205,000
Exploration expense..................... 556,000 772,000 419,000
Impairment expense...................... 1,858,000 312,000 --
General and administrative expense...... 1,655,000 590,000 472,000
Interest expense........................ 238,000 83,000 272,000
----------- ----------- -----------
23,208,000 15,528,000 11,373,000
----------- ----------- -----------
Income (Loss) Before Extraordinary Items
and Taxes.............................. (2,116,000) 1,011,000 3,694,000
Extraordinary Gain on Extinguishment of
Debt Owed to Parent Company, net of taxes
of zero.................................. -- -- 1,788,000
----------- ----------- -----------
Income (Loss) Before Taxes................ (2,116,000) 1,011,000 5,482,000
Tax Expense (Benefit):
Current................................. (225,000) 279,000 1,422,000
Deferred................................ 50,000 -- --
----------- ----------- -----------
Net Income (Loss)......................... $(1,941,000) $ 732,000 $ 4,060,000
=========== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-9
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the Period from January 1, 1996 Through December 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional
---------------- Paid-in Retained
Shares Par Value Capital Earnings Total
------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1,
1996.................... 1,000 $-- $ -- $ 2,987,000 $ 2,987,000
Intercompany payables
converted to equity by
Parent................ -- -- 1,812,000 -- 1,812,000
Net income............. -- -- -- 4,060,000 4,060,000
----- ---- ---------- ----------- -----------
Balances, December 31,
1996.................... 1,000 -- 1,812,000 7,047,000 8,859,000
Net income............. -- -- -- 732,000 732,000
----- ---- ---------- ----------- -----------
Balances, December 31,
1997.................... 1,000 -- 1,812,000 7,779,000 9,591,000
Intercompany payables
converted to equity by
Parent................ -- -- 1,663,000 -- 1,663,000
Net loss............... -- -- -- (1,941,000) (1,941,000)
----- ---- ---------- ----------- -----------
Balances, December 31,
1998.................... 1,000 $-- $3,475,000 $ 5,838,000 $ 9,313,000
===== ==== ========== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-10
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................... $(1,941,000) $ 732,000 $ 4,060,000
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Deferred taxes..................... 50,000 -- --
Gain on debt extinguishment........ -- -- (1,788,000)
Depreciation, depletion and
amortization expense.............. 2,067,000 1,942,000 1,205,000
Impairment of property and
equipment......................... 1,858,000 312,000 --
Amortization of loan costs......... 19,000 19,000 20,000
Changes in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable, trade..... (2,154,000) (21,000) (1,440,000)
Investment margin account...... (471,000) 152,000 (61,000)
Prepaid expenses and other..... (50,000) (36,000) (32,000)
Other assets................... 41,000 (26,000) 37,000
Increase (decrease in):
Accounts payable and accrued
expenses...................... 5,396,000 59,000 609,000
Accrued production taxes
payable....................... 78,000 (77,000) (30,000)
Undistributed revenues......... 28,000 (194,000) 204,000
Deferred gain and other
liabilities................... -- 52,000 (74,000)
Taxes payable to Parent........ (225,000) 279,000 1,426,000
----------- ----------- ------------
Net cash provided by operating
activities........................ 4,696,000 3,193,000 4,136,000
----------- ----------- ------------
Cash Flows from Investing Activities:
Capital expenditures for oil and gas
properties.......................... (5,948,000) (4,442,000) (1,025,000)
----------- ----------- ------------
Net cash used in investing
activities........................ (5,948,000) (4,442,000) (1,025,000)
Cash Flows from Financing Activities:
Proceeds from note payable........... 4,650,000 3,600,000 400,000
Payments on note payable............. (1,200,000) (2,900,000) (3,460,000)
Production payment received.......... -- 319,000 300,000
----------- ----------- ------------
Net cash provided by (used in)
financing activities.............. 3,450,000 1,019,000 (2,760,000)
----------- ----------- ------------
Net Increase (Decrease) in Cash and
Equivalents........................... 2,198,000 (230,000) 351,000
Cash, beginning of year................ 544,000 774,000 423,000
----------- ----------- ------------
Cash, end of year...................... $ 2,742,000 $ 544,000 $ 774,000
=========== =========== ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest............... $ 236,000 $ 83,000 $ 303,000
=========== =========== ============
Noncash investing and financing
activities--Intercompany payable
contributed to capital by Parent.... $ 1,663,000 $ -- $ 1,812,000
=========== =========== ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-11
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations and Significant Accounting Policies:
Nature of Operation--Bonneville Fuels Corporation (BFC), a wholly-owned
subsidiary of Bonneville Pacific Corporation (BPC), was incorporated in the
State of Colorado in April 1987 and began doing business in June 1987. The
Company owns four subsidiaries, Bonneville Fuels Marketing Corporation (BFMC),
Bonneville Fuels Management Corporation (BFM Corp.), Bonneville Fuels
Operating Corporation (BFO), and Colorado Gathering Corporation (CGC).
Collectively, these entities are referred to as the Company. The Company's
principal operations include exploration for and production of oil and gas
reserves, marketing of natural gas, and gathering of natural gas. The Company
from time to time also purchases and resells electricity.
Principles of Consolidation--The consolidated financial statements include
the accounts of BFC and its four wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in the
accompanying consolidated financial statements.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Gas Marketing--The Company's marketing contracts are generally month-to-
month or up to eighteen months, and provide that the Company will sell gas to
end users which is produced from the Company's properties and acquired from
third parties.
Investment Margin Account--This account generally represents net cash
margin deposits held by a brokerage firm for the Company's trading accounts.
Oil and Gas Producing Activities--The Company follows the "successful
efforts" method of accounting for its oil and gas properties, all of which are
located in the continental United States. Under this method of accounting, all
property acquisition costs and costs of exploratory and development wells are
capitalized when incurred, pending determination of whether the well has found
proved reserves. If an exploratory well has not found proved reserves, the
costs of drilling the well are charged to expense. The costs of development
wells are capitalized whether productive or nonproductive.
Geological and geophysical costs and the costs of carrying and retaining
undeveloped properties are expensed as incurred. Depreciation and depletion of
capitalized costs for producing oil and gas properties is computed using the
units-of-production method based upon proved reserves for each field.
In 1997, the Company began to accrue for future plugging, abandonment, and
remediation using the negative salvage value method whereby costs are expensed
through additional depletion expense over the remaining economic lives of the
wells. Management's estimate of the total future costs to plug, abandon, and
remediate the Company's share of all existing wells, including those currently
shut in is approximately $3,500,000, net of salvage values. The total amount
expensed for this liability was $206,000 and $200,000, for the years ended
December 31, 1998 and 1997, respectively.
The Company follows Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for Impairment of Long-Lived Assets. This statement limits net
capitalized costs of proved and unproved oil and gas properties to the
aggregate undiscounted future net revenues related to each field. If the net
capitalized costs exceed the limitation, impairment is provided to reduce the
carrying value of the properties in the field to estimated actual value. The
impairment is included as a reduction of gross oil and gas properties in the
accompanying balance sheets. In 1998, 1997, and 1996, the Company recorded
impairments of $1,858,000, $312,000, and $-0-, respectively. Factors causing
the impairment of oil and gas properties in 1998 were the
F-12
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
decline in oil prices worldwide and the re-estimation of reserve values on
certain producing properties. The primary factor causing the impairments in
1997 was the reevaluation of certain undeveloped leases.
Gains and losses are generally recognized upon the sale of interests in
proved oil and gas properties based on the portion of the property sold. For
sales of partial interests in unproved properties, the Company treats the
proceeds as a recovery of costs with no gain recognized until all costs have
been recovered.
Energy Marketing Arrangements--In 1998, BFC entered into an agreement to
manage certain natural gas contracts of an unrelated entity. For some
contracts, BFC takes title to the gas purchased to service these contracts
prior to the sale under the contracts. For these contracts, BFC consolidates
all revenue, expenses, receivables and payables associated with the contracts.
In contracts where title is not taken, BFC only records the margin associated
with the transaction.
Other Property and Equipment--Depreciation of other property and equipment
is calculated using the straight-line method over the estimated useful lives
(ranging from 3 to 25 years) of the respective assets. The cost of normal
maintenance and repairs is charged to operating expenses as incurred. Material
expenditures which increase the life of an asset are capitalized and
depreciated over the estimated remaining useful life of the asset. The cost of
properties sold, or otherwise disposed of, and the related accumulated
depreciation or amortization are removed from the accounts, and any gains or
losses are reflected in current operations.
Deferred Loan Costs--Costs associated with the Company's note payable have
been deferred and are being amortized using the effective interest method over
the original term of the note.
Gas Balancing--The Company uses the sales method of accounting for amounts
received from natural gas sales resulting from production credited to the
Company in excess of its revenue interest share. Under this method, all
proceeds from production credited to the Company are recorded as revenue until
such time as the Company has produced its share of related estimated remaining
reserves. Thereafter, additional amounts received are recorded as a liability.
Income Taxes--The Company accounts for income taxes under the liability
method which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. BPC
includes the Company's operations in its consolidated tax return. Income taxes
are allocated by BPC as if the Company were a separate taxpayer.
Accounting for Hedged Transactions--The Company periodically enters into
futures, forwards, and swap contracts as hedges of commodity prices associated
with the production of oil and gas and with the purchase and sale of natural
gas in order to mitigate the risk of market price fluctuations. Changes in the
market value of futures, forwards, and swap contracts are not recognized until
the related production occurs or until the related gas purchase or sale takes
place. Realized losses from any positions which were closed early are deferred
and recorded as an asset or liability in the accompanying balance sheet, until
the related production, purchase or sale takes place. Gains and losses
incurred on these contracts are included in oil and gas revenue or in gas
marketing costs in the accompanying statements of operations.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these financial
statements and the accompanying notes. The actual results could differ from
those estimates.
F-13
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications--Certain reclassifications have been made to conform the
1997 and 1996 financial statements to the presentation in 1998. These
reclassifications had no effect on net income.
Parent Company Bankruptcy and Related Transactions:
In 1991, BPC filed a petition for re-organization under Chapter 11 of the
U.S. Bankruptcy Code and in June 1992, a Trustee was appointed for the case.
As a result of BPC's bankruptcy, the Company established, prior to 1994, an
allowance for doubtful accounts from BPC equal to the receivable. In 1995,
claims filed against the estate of BPC were amended to total $1,788,000 to
reflect additional amounts due related to pre-petition transactions.
As a condition of granting a loan in 1991, the lender required that BPC
convert intercompany debt of $3,600,000 to equity. In Board meetings at both
the Company and BPC, the officers of each company were authorized and directed
to complete this financing. In their respective internal financial statements,
both the Company and BPC treated the intercompany debt as converted to equity.
In 1993, it was discovered that the BPC Board resolution to ratify the
conversion had not been duly executed. The Company, therefore, continued to
disclose the intercompany debt as a liability.
On December 20, 1996, the Bankruptcy Court authorized the Trustee to offset
the mutual debts of the Company and BPC. After the offset, the Company was to
convert any remaining intercompany debt to equity. The Company had
established, prior to 1994, an allowance for doubtful accounts from BPC equal
to the receivable. The amount of the offset equal to the allowance was
recorded as an extraordinary gain on extinguishment of debt, with the
remainder being recorded as a contribution of capital.
In 1998, BPC approved the conversion of $1,663,000 in taxes payable to
equity. Also in 1998, BPC emerged from bankruptcy.
Long-Term Debt:
The Company has an asset-based line-of-credit with a bank which provides
for borrowing up to the borrowing base (as defined). The borrowing base was
$13,200,000 at December 31, 1998. At December 31, 1998, outstanding borrowings
amounted to $5,150,000, with interest at a variable rate that approximated 7%
at December 31, 1998. The Company has issued letters of credit totaling
$3,100,000 which further reduces the amount available for borrowing under the
base. This facility is collateralized by certain oil and gas properties of the
Company and is scheduled to convert to a term note on July 1, 2001. This term
loan is scheduled to have a maturity of either the economic half life of the
Company's remaining reserves on the date of conversion, or July 1, 2006,
whichever is earlier. The borrowing base is based upon the lender's evaluation
of BFC's proved oil and gas reserves, generally determined semi-annually. The
future minimum principal payments under the term note will be dependent upon
the bank's evaluation of the Company's reserves at that time.
The Company also has an accounts receivable-based credit facility which
includes a revolving line-of-credit with the bank which provides for
borrowings up to $1,500,000. Outstanding borrowings under this facility at
December 31, 1998 amounted to $700,000. This facility bears interest at prime
(7.75% at December 31, 1998). This facility is collateralized by certain trade
receivables of BFC and has a maturity date of July 1, 1999.
The credit agreement contains various covenants which prohibit or limit the
subsidiary's ability to pay dividends, purchase treasury shares, incur
indebtedness, repay debt to the Parent, sell properties or merge with another
entity. Additionally, the Company is required to maintain certain financial
ratios.
F-14
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments:
Office Lease--The Company leases office space under a noncancellable
operating lease. Total rental expense was approximately $139,000, $58,000, and
$58,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
Beginning in 1998, the Company has a new lease agreement which provides for
total minimum rental commitments of:
<TABLE>
<S> <C>
1999............................................................. $147,000
2000............................................................. 153,000
2001............................................................. 159,000
2002............................................................. 166,000
--------
$625,000
========
</TABLE>
Income Taxes:
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
As of December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Excess of tax basis over book basis of oil and
gas properties............................... $ 1,873,000 $ 1,439,000
----------- -----------
Deferred tax assets........................... 1,873,000 1,439,000
Less valuation allowance...................... (1,873,000) (1,389,000)
----------- -----------
Net deferred tax assets....................... $ -- $ 50,000
=========== ===========
</TABLE>
The effective tax rate of the Company differed from the Federal statutory
rate primarily due to changes in the valuation allowance on the deferred tax
assets.
Concentrations of Credit Risk and Price Risk Management:
Concentrations of Credit Risk--Substantially all of the Company's accounts
receivable at December 31, 1998 result from crude oil and natural gas sales
and/or joint interest billings to companies in the oil and gas industry. This
concentration of customers and joint interest owners may impact the Company's
overall credit risk, either positively or negatively, since these entities may
be similarly affected by changes in economic or other conditions. In
determining whether or not to require collateral from a customer or joint
interest owner, the Company analyzes the entity's net worth, cash flows,
earnings, and credit ratings. Receivables are generally not collateralized.
Historical credit losses incurred on trade receivables by the Company have
been insignificant.
The Company's revenues are predominantly derived from the sale of natural
gas and management estimates that over 85% of the value of the Company's
properties is derived from natural gas reserves.
Energy Financial Instruments--BFC uses energy financial instruments and
long-term user contracts to minimize its risk of price changes in the spot and
fixed price natural gas and crude oil markets. Energy risk management products
used include commodity futures and options contracts, fixed-price swaps, and
basis swaps. Pursuant to company guidelines BFC is to engage in these
activities only as a hedging mechanism against price volatility associated
with pre-existing or anticipated gas or crude oil sales in order to protect
profit margins. As of December 31, 1998, BFC has financial and physical
contracts which hedge 6 bcf (billion cubic feet) of production through
December 2001.
F-15
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the current market value of the hedging contracts
and the original market value of the hedging contracts was a favorable
$701,000 and an unfavorable $60,000 as of December 31, 1998 and 1997,
respectively. These amounts are not reflected in the accompanying financial
statements. In the event energy financial instruments do not qualify for hedge
accounting, the difference between the current market value and the original
contract value would be currently recognized in the statement of operations.
In the event that the energy financial instruments are terminated prior to the
delivery of the item being hedged, the gains and losses at the time of the
termination are deferred until the period of physical delivery. Such deferrals
were immaterial in all periods presented.
Financial Instruments:
SFAS Nos. 107 and 127 requires certain entities to disclose the fair value
of certain financial instruments in their financial statements. Accordingly,
management's best estimate is that the carrying amount of cash, receivables,
notes payable, accounts payable, undistributed revenue, and accrued expenses
approximates fair value of these instruments. See Note 6 for a discussion
regarding the fair value of energy financial instruments.
Management Retention Bonuses and Employment Contracts:
The Company has accrued bonuses as of December 31, 1998 of $164,000 in
accordance with a management retention program approved by the bankruptcy
court. The Company has also entered into certain employment contracts with key
employees that provide for certain benefits to the employees upon termination
without cause.
Subsequent Event:
Subsequent to year-end, BPC engaged a financial advisor to pursue various
strategic opportunities. BPC is considering all options including the
continued operation of all its subsidiaries or the sale of the entire company
or any part thereof. No adjustment to the financial statements has been made
to reflect this uncertainty.
F-16
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30
--------------------------
ASSETS 1999 1998
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash
Unrestricted................................... $ 444,244 $ 840,165
Restricted..................................... 1,208,687 120,688
------------ ------------
Total cash................................... 1,652,931 960,853
Accounts receivable
Gas marketing.................................. 804,314 515,190
Oil and gas sales.............................. 1,425,002 972,559
Joint interest, net of allowance for doubtful
accounts...................................... 246,564 185,017
Other.......................................... 6,393 1,156
------------ ------------
Total accounts receivable.................... 2,482,273 1,673,922
Prepaid expenses, inventories and other.......... 113,452 169,872
------------ ------------
Total current assets......................... 4,248,656 2,804,647
Property and Equipment, at cost
Oil and gas properties........................... 35,968,225 30,905,211
Notes receivable--oil and gas.................... 0 0
Gas gathering system............................. 0 0
Furniture and equipment.......................... 556,468 405,000
Less depreciation, depletion and amortization.... (20,155,003) (17,802,953)
------------ ------------
Total property and equipment................. 16,369,690 13,507,258
------------ ------------
Other Assets:
Deposits and other............................... 270,528 275,914
Deferred loan cost, net.......................... 35,394 54,595
------------ ------------
Total other assets........................... 305,922 330,509
------------ ------------
Total Assets....................................... $ 20,924,268 $ 16,642,414
============ ============
</TABLE>
See accompanying notes to these financial statements.
F-17
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30
-----------------------
LIABILITIES AND STOCKHOLDER EQUITY 1999 1998
---------------------------------- ----------- -----------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses................... $ 1,882,536 $ 1,186,259
Undistributed revenue and other......................... 878,046 372,179
----------- -----------
Total current liabilities........................... 2,760,582 1,558,438
----------- -----------
Long Term Liabilities:
Long term debt.......................................... 8,700,000 3,000,000
Accrued income taxes due parent......................... 0 1,888,430
----------- -----------
Total long term liabilities......................... 8,700,000 4,888,430
----------- -----------
Stockholder's Equity:
Common stock............................................ 10 10
Additional paid in capital.............................. 3,475,038 1,812,207
Retained earnings....................................... 5,988,638 8,383,329
----------- -----------
Total stockholder's equity.......................... 9,463,686 10,195,546
----------- -----------
Total Liabilities and Stockholder's Equity.......... $20,924,268 $16,642,414
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-18
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30
(Unaudited)
<TABLE>
<CAPTION>
June 30
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Operating Revenue
Sales:
Oil and gas.......................................... $ 4,559,639 $3,468,321
Marketing services................................... 9,950,108 4,375,930
Other................................................ 218,481 181,302
----------- ----------
Total operating income............................. 14,728,228 8,025,553
----------- ----------
Operating Expenses
Lease operations..................................... 1,574,391 1,080,016
Severance taxes...................................... 355,136 283,460
Marketing service cost............................... 9,742,051 4,409,099
DD & A............................................... 1,213,215 951,474
Impairment of proved and unproved properties......... 60,213 0
General and administrative........................... 1,414,801 895,429
(net recoveries)..................................... (624,445) (429,117)
Provision for uncollectibles......................... 1,175 0
Exploration expense.................................. 638,350 183,478
----------- ----------
Total operating expenses........................... 14,374,887 7,373,839
----------- ----------
Net Income Before Interest and Other................... 353,341 651,714
Interest:
Income............................................... 48,289 29,204
(Expense)............................................ (251,454) (84,991)
----------- ----------
Net Income Before Income Taxes......................... 150,176 595,927
Provision for income taxes............................. 0 0
----------- ----------
Net Income............................................. $ 150,176 $ 595,927
=========== ==========
</TABLE>
See accompanying notes to these financial statements.
F-19
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A wholly-owned subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income......................................... $ 150,176 $ 595,926
Adjustment to reconcile net income to cash provided
by operating activities:
Depreciation, depletion and amortization......... 1,263,828 941,874
Gain on debt extinguishment......................
Amortization of loan cost........................ 9,600 9,600
Other............................................ 0 0
Changes in operating assets and liabilities:
(Increase) decrease in:
Investment Margin Account........................ (674,309) (58,183)
Accounts receivable.............................. 2,490,127 1,146,627
Prepaid expenses, inventories and other.......... 83,263 67,905
Increase (decrease) in:..........................
Accounts payable--trade.......................... (5,253,704) (536,156)
Contingent liabilities........................... 0 0
Undistributed revenue............................ 402,507 (75,592)
----------- -----------
Net cash provided by operations.................. (1,528,512) 2,092,001
Cash Flows from Investing Activities:
Additions to oil and gas properties................ (3,544,203) (2,328,249)
Other net property and equipment...................
(additions) disposals.............................. (59,130) (112,032)
(Increases) decreases in other assets.............. (15,975) 43,870
----------- -----------
Net cash used in investing activities.............. (3,619,308) (2,396,411)
Cash Flows from Financing Activities:
Net bank borrowings (payments)..................... 2,850,000 600,000
----------- -----------
Net cash used in financing activities.............. 2,850,000 600,000
----------- -----------
Net Increase (decrease) in Unrestricted Cash......... (2,297,820) 295,590
Unrestricted Cash Balance at Beginning of Period..... 2,742,064 544,575
----------- -----------
Cash Balance at End of Period........................ $ 444,244 $ 840,165
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-20
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND RETAINED EARNINGS
For the six months ended June 30, 1999, and the year ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid In Retained
Shares Amount Capital Earnings Total
------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997. 1,000 $10 $1,812,197 $ 7,779,310 $ 9,591,517
Intercompany payables
converted to Equity by
Parent................... $1,662,841 $1,662,841
Net income (loss)......... ($1,940,848) ($1,940,848)
----- --- ---------- ------------ ------------
Balance December 31, 1998. 1,000 $10 $3,475,038 $ 5,838,462 $ 9,313,510
Net income................ 150,176 $ 150,176
----- --- ---------- ------------ ------------
Balance June 30, 1999..... 1,000 $10 $3,475,038 $ 5,988,638 $ 9,463,686
===== === ========== ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-21
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Significant Accounting Policies:
Nature of Operation--Bonneville Fuels Corporation (BFC), a wholly-owned
subsidiary of Bonneville Pacific Corporation (BPC), was incorporated in the
State of Colorado in April 1987 and began doing business in June 1987. BFC
owns four subsidiaries, Bonneville Fuels Marketing Corporation (BFMC),
Bonneville Fuels Management Corporation (BFM Corp.), Bonneville Fuels
Operating Corporation (BFO), and Colorado Gathering Corporation (CGC).
Collectively, these entities are referred to as the Company. The Company's
principal operations include exploration for and production of oil and gas
reserves, marketing of natural gas, and gathering of natural gas. From time to
time the Company also purchases and resells electricity.
These financial statements are prepared in accordance with generally
accepted accounting principles 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 positions of BFC as of June 30, 1999 and 1998 and the results of
its operations and of its cash flows for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results
to be expected for the full year.
Principles of Consolidation--The consolidated financial statements include
the accounts of BFC and its four wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in the
accompanying consolidated financial statements.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Gas Marketing--The Company's marketing contracts are generally month-to-
month or up to eighteen months, and provide that the Company will sell gas to
end users which is produced from the Company's properties and acquired from
third parties.
Investment Margin Account--This account generally represents net cash
margin deposits held by a brokerage firm for the Company's trading accounts.
Oil and Gas Producing Activities--The Company follows the "successful
efforts" method of accounting for its oil and gas properties, all of which are
located in the continental United States. Under this method of accounting, all
property acquisition costs and costs of exploratory and development wells are
capitalized when incurred, pending determination of whether the well has found
proved reserves. If an exploratory well has not found proved reserves, the
costs of drilling the well are charged to expense. The costs of development
wells are capitalized whether productive or nonproductive.
Geological and geophysical costs and the costs of carrying and retaining
undeveloped properties are expensed as incurred. Depreciation and depletion of
capitalized costs for producing oil and gas properties is computed using the
units-of-production method based upon proved reserves for each field.
In 1997, the Company began to accrue for future plugging, abandonment, and
remediation using the negative salvage value method whereby costs are expensed
through additional depletion expense over the remaining economic lives of the
wells. Management's estimate of the total future costs to plug, abandon, and
remediate the Company's share of all existing wells, including those currently
shut in, is approximately $3,500,000, net of salvage values. The total amount
expensed for this liability was $100,000 and $-0-, for the periods ended June
30, 1999 and 1998, respectively.
F-22
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company follows Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for Impairment of Long-Lived Assets. This statement limits net
capitalized costs of proved and unproved oil and gas properties to the
aggregate undiscounted future net revenues related to each field. If the net
capitalized costs exceed the limitation, impairment is provided to reduce the
carrying value of the properties in the field to estimated actual value. The
impairment is included as a reduction of gross oil and gas properties in the
accompanying balance sheets. In the first six months of 1999, the Company
incurred impairment cost of $60,000. In 1998, the Company recorded impairment
cost of $1,858,000. Factors causing the impairment of oil and gas properties
were the decline in oil prices worldwide and the re-assessment of reserve
values on certain producing properties in 1998, and re-assessment of reserve
values on a drilling venture in 1999.
Gains and losses are generally recognized upon the sale of interests in
proved oil and gas properties based on the portion of the property sold. For
sales of partial interests in unproved properties, the Company treats the
proceeds as a recovery of costs with no gain recognized until all costs have
been recovered.
Energy Marketing Arrangements--In 1998, BFC entered into an agreement to
manage certain natural gas contracts of an unrelated entity. For contracts
under which BFC takes title to the gas which services these contracts, BFC
consolidates by item, all revenue, expense, receivables and payables associated
with the contracts. In contracts where title is not taken, BFC records only the
margin associated with the transaction. This agreement was terminated at the
end of April 1999.
Other Property and Equipment--Depreciation of other property and equipment
is calculated using the straight-line method over the estimated useful lives
(ranging from 3 to 25 years) of the respective assets. The cost of normal
maintenance and repairs is charged to operating expenses as incurred. Material
expenditures which increase the life of an asset are capitalized and
depreciated over the estimated remaining useful life of the asset. The cost of
properties sold, or otherwise disposed of, and the related accumulated
depreciation or amortization is removed from the accounts, and any gains or
losses are reflected in current operations.
Deferred Loan Costs--Costs associated with the Company's note payable have
been deferred and are being amortized using the effective interest method over
the original term of the note.
Gas Balancing--The Company uses the sales method of accounting for amounts
received from natural gas sales resulting from production credited to the
Company in excess of its revenue interest share. Under this method, all
proceeds from production credited to the Company are recorded as revenue until
such time as the Company has produced its share of related estimated remaining
reserves. Thereafter, additional amounts received are recorded as a liability.
Income Taxes--The Company accounts for income taxes under the liability
method which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. BPC includes the Company's operations in
its consolidated tax return. Income taxes are allocated by BPC as if the
Company were a separate taxpayer.
Accounting for Hedged Transactions--The Company periodically enters into
futures, forwards, and swap contracts as hedges of commodity prices associated
with the production of oil and gas and with the purchase and sale of natural
gas in order to mitigate the risk of market price fluctuations. Changes in the
market value of futures, forwards, and swap contracts are not recognized until
the related production occurs or until the related
F-23
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
gas purchase or sale takes place. Realized losses from any positions which were
closed early are deferred and recorded as an asset or liability in the
accompanying balance sheet, until the related production, purchase or sale
takes place. Gains and losses incurred on these contracts are included in oil
and gas revenue or in gas marketing costs in the accompanying statements of
operations.
Reclassifications--Certain reclassifications have been made to conform the
1999 financial statements to the presentation in 1998. These reclassifications
had no effect on net income.
2. Parent Company Bankruptcy and Related Transactions:
In 1991, BPC filed a petition for re-organization under Chapter 11 of the
U.S. Bankruptcy Code and in June 1992, a Trustee was appointed for the case. As
a result of BPC's bankruptcy, the Company established, prior to 1994, an
allowance for doubtful accounts from BPC equal to the receivable. In 1995,
claims filed against the estate of BPC were amended to total $1,788,000 to
reflect additional amounts due related to pre-petition transactions.
As a condition of granting a loan in 1991, the lender required that BPC
convert intercompany debt of $3,600,000 to equity. In Board meetings at both
the Company and BPC, the officers of each company were authorized and directed
to complete this financing. In their respective internal financial statements,
both the Company and BPC treated the intercompany debt as converted to equity.
In 1993, it was discovered that the BPC Board resolution to ratify the
conversion had not been duly executed. The Company, therefore, continued to
disclose the intercompany debt as a liability.
On December 20, 1996, the Bankruptcy Court authorized the Trustee to offset
the mutual debts of the Company and BPC. After the offset, the Company was to
convert any remaining intercompany debt to equity. The Company had established,
prior to 1994, an allowance for doubtful accounts from BPC equal to the
receivable. The amount of the offset equal to the allowance was recorded as an
extraordinary gain on extinguishment of debt, with the remainder being recorded
as a contribution of capital.
In 1998, BPC approved the conversion of $1,663,000 in taxes payable to
equity. Also in 1998, BPC emerged from bankruptcy.
3. Long-Term Debt:
The Company has an asset-based line-of-credit with a bank which provides for
borrowing up to the borrowing base (as defined). The borrowing base was
$16,900,000 at June 30, 1999. Outstanding borrowings amounted to $8,400,000,
with interest at a variable rate that approximated 6.70% at June 30, 1999. The
Company has issued letters of credit totaling $2,500,000 which further reduce
the amount available for borrowing under the base. This facility is
collateralized by certain oil and gas properties of the Company and is
scheduled to convert to a term note on July 1, 2001. This term loan is
scheduled to have a maturity of either the economic half life of the Company's
remaining reserves on the date of conversion, or July 1, 2006, whichever is
earlier. The borrowing base is based upon the lender's evaluation of BFC's
proved oil and gas reserves, generally determined semi-annually. The future
minimum principal payments under the term note will be dependent upon the
bank's evaluation of the Company's reserves at that time.
The Company also has an accounts receivable-based credit facility which
includes a revolving line-of-credit with the bank which provides for borrowings
up to $1,500,000. Outstanding borrowings under this facility at June 30, 1999
amounted to $300,000. This facility bears interest at prime (7.75% at June 30,
1999). This facility is collateralized by certain trade receivables of BFC and
has a maturity date of July 1, 2001.
F-24
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The credit agreement contains various covenants which prohibit or limit the
Company's ability to pay dividends, purchase treasury shares, incur
indebtedness, repay debt to the Parent, sell properties or merge with another
entity. Additionally, the Company is required to maintain certain financial
ratios.
4. Commitments:
Office Lease--The Company leases office space under a noncancellable
operating lease. Total rental expense was approximately $73,000 and $57,000 for
the periods ended June 30, 1999 and 1998, respectively. Beginning in 1998, the
Company has a new lease agreement which provides for total minimum rental
commitments of:
<TABLE>
<S> <C>
1999 (balance of year).......................................... $ 73,000
2000............................................................ 153,000
2001............................................................ 159,000
2002............................................................ 166,000
--------
$551,000
========
</TABLE>
5. Income Taxes:
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December
31, 1998
-----------
<S> <C>
Excess of tax basis over book basis of oil and gas
properties................................................ $ 1,873,000
-----------
Deferred tax asset......................................... 1,873,000
Less valuation allowance................................... (1,873,000)
-----------
Net deferred tax asset..................................... $ -0-
===========
</TABLE>
The Company has not accrued an income tax liability for the six months
ending June 30, 1999 due to the availability of intangible drilling cost which
will essentially eliminate taxable net income.
The effective tax rate of the Company differed from the Federal statutory
rate primarily due to changes in the valuation allowance on the deferred tax
asset.
6. Concentrations of Credit Risk and Price Risk Management:
Concentrations of Credit Risk--Substantially all of the Company's accounts
receivable at June 30, 1999 result from crude oil and natural gas sales and/or
joint interest billings to companies in the oil and gas industry. This
concentration of customers and joint interest owners may impact the Company's
overall credit risk, either positively or negatively, since these entities may
be similarly affected by changes in economic or other conditions. In
determining whether or not to require collateral from a customer or joint
interest owner, the Company analyzes the entity's net worth, cash flows,
earnings, and credit ratings. Receivables are generally not collateralized.
Historical credit losses incurred on trade receivables by the Company have been
insignificant.
The Company's revenues are predominantly derived from the sale of natural
gas. Management estimates that over 85% of the value of the Company's
properties is derived from natural gas reserves.
Energy Financial Instruments--BFC uses energy financial instruments and
long-term user contracts to minimize its risk of price changes in the spot and
fixed price natural gas and crude oil markets. Energy risk management products
used include commodity futures and options contracts, fixed-price swaps, and
basis swaps. Pursuant to company guidelines BFC is to engage in these
activities only as a hedging mechanism against price volatility associated with
pre-existing or anticipated gas or crude oil sales in order to protect profit
margins. As of June 30, 1999, BFC has financial and physical contracts which
hedge 5.1 bcf (billion cubic feet) of production through December 2001.
F-25
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the current market value of the hedging contracts
and the original market value of the hedging contracts was an unfavorable
$894,000 and an unfavorable $209,000 as of June 30, 1999 and 1998,
respectively. These amounts are not reflected in the accompanying financial
statements. In the event energy financial instruments do not qualify for hedge
accounting, the difference between the current market value and the original
contract value would be currently recognized in the statement of operations.
In the event that the energy financial instruments are terminated prior to the
delivery of the item being hedged, the gains and losses at the time of the
termination are deferred until the period of physical delivery. Such deferrals
were immaterial in all periods presented.
7. Financial Instruments:
SFAS Nos. 107 and 127 requires certain entities to disclose the fair value
of certain financial instruments in their financial statements. Accordingly,
management's best estimate is that the carrying amount of cash, receivables,
notes payable, accounts payable, undistributed revenue, and accrued expenses
approximates fair value of these instruments. See Note 6 for a discussion
regarding the fair value of energy financial instruments.
8. Management Retention Bonuses and Employment Contracts:
The Company has accrued bonuses as of June 30, 1999 of $164,000 in
accordance with a management retention program approved by the bankruptcy
court. The Company has also entered into certain employment contracts with key
employees that provide for certain benefits to the employees upon termination
without cause.
9. Subsequent Event:
During the first quarter, BPC engaged a financial advisor to pursue various
strategic opportunities. BPC is considering several options including the
continued operation of all its subsidiaries or the sale of the entire company
or any part thereof. BFC management has had discussions with various
interested parties during the second quarter, but no agreements have been
reached. No adjustment to the financial statements has been made to reflect
this uncertainty.
F-26
<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 the statements 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
Calgary, Canada
February 16, 1999
F-27
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
-----------------------
1998 1997
------- --------------
ASSETS (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 and
amortization (Notes 2 and 5)........................ (9,015) (7,990)
------- -------
Net property and equipment....................... 8,762 9,579
------- -------
$11,235 $11,378
======= =======
</TABLE>
(continued)
F-28
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS--(continued)
<TABLE>
<CAPTION>
November 30,
----------------------
1998 1997
------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (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.
F-29
<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.
F-30
<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>
Shares Held
for
Share Capital Cancellation
----------------- Retained ---------------
Shares Amount Earnings Shares Amount
--------- ------ -------- ------- ------
(Reclassified,
Note 3)
<S> <C> <C> <C> <C> <C>
Balances, December 1, 1995......... 1,500,000 $ 502 $6,552 -- $--
Exercise of employee stock options
(Note 8).......................... 10,000 32 -- -- --
--------- ------ ------ -------
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.
F-31
<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 other.... (51) (75) (29)
------ ------- -------
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
activities....................................... (209) (98) 604
------ ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 593 361 (73)
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.
F-32
<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.
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.
F-33
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 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 Common Paid-in
Capital Stock Capital
------- ------ ----------
<S> <C> <C> <C>
1995As previously reported..................... $ -- $ 300 $ 202
Reclassification............................ 502 (300) (202)
------ ----- -----
As reclassified............................. $ 502 $ -- $ --
====== ===== =====
1996As previously reported..................... $ -- $ 318 $ 788
Reclassification............................ 1,106 (318) (788)
------ ----- -----
As reclassified............................. $1,106 $ -- $ --
====== ===== =====
1997As previously reported..................... $ -- $ 318 $ 788
Reclassification............................ 1,106 (318) (788)
------ ----- -----
As reclassified............................. $1,106 $ -- $ --
====== ===== =====
</TABLE>
(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
F-34
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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>
Year Ended November 30, Net Cash Provided by Net Cash Provided by
1997 Operating 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:
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(in thousands)
<TABLE>
<CAPTION>
November 30,
----------------
1998 1997
------- -------
<S> <C> <C>
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.
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
(in thousands)
<TABLE>
<CAPTION>
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.
F-35
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
(in thousands)
<TABLE>
<CAPTION>
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
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.
F-36
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(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>
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>
Dec. 1, Current Nov. 30,
1997 Activity 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.
F-37
<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:
<TABLE>
<S> <C>
Year Ended November 30, 1998........................................ $334
Year Ended November 30, 1997........................................ 394
Year Ended November 30, 1996........................................ 445
</TABLE>
(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.
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.
F-38
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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
"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
Period GigaJoules GigaJoule Price/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
F-39
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Board of Directors, officers and non-officer employees may receive upon their
retirement the same benefits they would have 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.
(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)
<S> <C> <C> <C>
Operating revenues from unaffiliated
services (a):
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.
F-40
<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. 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
F-41
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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)
<S> <C> <C> <C>
Net income
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>
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
Price Price Price
Shares Shares Shares
---------- --------- ----------
(options in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
during the year............................... $0.83 N/A $1.28
</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 Options Exercisable
thousands) (in thousands)
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Options Contractual Average Options Average
Outstanding Life Exercise Exercisable Exercise
Range of Exercise Prices At Year End (Years) Price at Year End 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>
F-42
<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%.
F-43
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November
ASSETS 1999 30, 1998
------ ----------- --------
(unaudited)
(in Canadian
dollars)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ -- $ 1,666
Accounts receivable:
Oil and gas sales..................................... 421 466
Crown royalty refund and other........................ 470 333
Joint interest partners............................... 24 8
Income tax receivable................................... 58 0
-------- -------
Total current assets................................ 973 2,473
-------- -------
Property and equipment:
Oil and gas assets, full cost method.................... 22,023 16,192
Liquid extraction plant................................. 1,477 1,477
Other property and equipment............................ 200 108
-------- -------
23,700 17,777
Less: Accumulated depreciation, depletion and
amortization........................................... (10,556) (9,015)
-------- -------
Net property and equipment.............................. 13,144 8,762
-------- -------
Other assets............................................ 1,864 --
-------- -------
$ 15,981 $11,235
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................................ $ 282 $ 237
Income tax payable...................................... 2 3
Undistributed oil and gas production receipts........... 507 113
-------- -------
Total current liabilities............................. 791 353
-------- -------
Future site restoration costs (Note 5).................... 221 165
Deferred income taxes (Note 3)............................ 1,739 1,995
Long-term debt (Note 7)................................... 4,850 --
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....................................... 6,868 7,188
-------- -------
Total stockholders' equity............................ 8,380 8,722
-------- -------
$ 15,981 $11,235
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended August
31,
--------------
1999 1998
------ ------
(in Canadian
dollars)
(in
thousands,
except per
share data)
<S> <C> <C>
Oil and gas sales............................................... $3,684 $2,380
Royalties....................................................... (732) (460)
Alberta royalty tax credit...................................... 434 242
Field services.................................................. 75 175
Other........................................................... 2 27
------ ------
Total revenues................................................ 3,463 2,364
------ ------
Lease operating expenses........................................ 585 563
Field services.................................................. 65 111
General and administrative...................................... 1,522 615
Depreciation, depletion and amortization........................ 1,597 686
------ ------
Total costs and expenses...................................... 3,769 1,975
------ ------
Operating income................................................ (306) 389
------ ------
Interest expense and other...................................... 136 (23)
------ ------
Earnings before income taxes.................................... (442) 412
Provisions for income taxes (Note 3)............................ (254) 144
------ ------
Net earnings.................................................... $ (188) $ 268
====== ======
Earnings per share.............................................. $(0.12) $ 0.17
====== ======
Basic........................................................... $(0.12) $ 0.17
====== ======
Average number of common shares outstanding
Basic........................................................... 1,529 1,542
====== ======
Fully diluted................................................... 1,529 1,546
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
CEC RESOURCES LTD.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended August 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Earnings
Shares Amount Retained
--------- ------ --------
(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 August 31, 1999............................ 1,521,400 $1,512 $6,832
========= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF CASH FLOW (Note 2)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended August
31,
---------------
1999 1998
------- ------
(in Canadian
dollars)
(in thousands)
<S> <C> <C>
Net earnings.................................................. $ (188) $ 268
Adjustments to reconcile net earnings to net cash provided by
operating activities:........................................ -- --
Depreciation, depletion and amortization.................... 1,597 686
Future income taxes......................................... (256) 120
Other....................................................... (55) --
Net change in operating assets and liabilities................ 291 144
------- ------
Net cash provided by operating activities................... 1,389 1,218
------- ------
Cash flows from investing activities:
Additions to oil and gas properties......................... (5,851) (489)
Additions to other assets................................... (1,900) --
------- ------
Net cash used in investing activities....................... (7,751) (489)
Cash flows from financing activities:
Proceeds from long-term debt................................ 4,850 0
Proceeds from issuance of common stock...................... 513
Purchase of common stock.................................... (154) (592)
------- ------
Net cash provided by (used in) financing activities......... 4,696 (79)
Net increase (decrease) in cash and cash equivalents.......... (1,666) 650
Cash and cash equivalents at beginning of period.............. 1,666 1,073
------- ------
Cash and cash equivalents at end of period.................... $ 0 $1,723
======= ======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes, net of refunds.............................. $ 40 $ (50)
------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<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 is an independent oil and gas company
and was incorporated on May 31, 1955 under the Business Corporations Act
(Alberta ) in Canada and was acquired by the former parent of Columbus Energy
Corporation ("Columbus") in 1969 and by Columbus on July 31, 1984. It remained
a wholly owned subsidiary of Columbus until spun-off from Columbus by a rights
offering in February 1995.
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 August
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 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 costs of 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 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 natural gas liquids processing plant and other property and equipment
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.
F-48
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Field Services Business Segment
The Company receives field service revenue generated by its share of
natural gas processing fees at the Carbon gas plant. The portion of the plant
processing fee revenue attributable to Resources own gas volumes processed by
the plant is not reported as field service revenue, but instead offsets an
identical amount otherwise chargeable to lease operating expenses. The Carbon
plant also processes natural gas belonging to unrelated plant non-owners which
represents the majority of Resources field services revenues.
Resources also derives less significant revenues and net cash flow from
other gathering and compression facilities in which it has ownership. Amounts
applicable to Resources' own gas production volumes have likewise been
eliminated from both revenues and expenses from these operations.
Income Taxes
The liability method is used in measuring income taxes based on temporary
differences including timing differences and other differences between the tax
basis of an asset or liability and its carrying amount in the financial
statements. The method uses the tax rate and the 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.
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
dilutive options.
(2) Statements of Cash Flow
The Company elected for 1998 to adopt Canadian Institute of Chartered
Accountants (CICA) 1540, Cash Flow Statements, which require a business
enterprise to provide a statement of cash flow in place of a statement of
changes in financial position. Application of CICA 1540 is required for fiscal
years beginning on or after August 1, 1998. Cash flow information for prior
years is restated to conform to the requirements of CICA 1540 as follows:
<TABLE>
<CAPTION>
Net Cash
Provided by Net Cash Provided by
Operating (Used In) Investing
Activities Activities
----------- --------------------
(In Canadian Dollars)
(in thousands)
<S> <C> <C>
Nine Months Ended August 31, 1998
As previously reported................... $ 835 $(106)
Restatement.............................. 383 (383)
------ -----
As Restated.............................. $1,218 $(489)
====== =====
</TABLE>
F-49
<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>
Nine
Months
Ended
August 31,
-----------
1999 1998
----- ----
<S> <C> <C>
Current:
Federal..................................................... $ 2 $ 24
Alberta..................................................... -- --
----- ----
2 24
----- ----
Future:
Federal..................................................... (160) 68
Alberta..................................................... (96) 52
----- ----
(256) 120
----- ----
Total income tax expense...................................... $(254) $144
===== ====
</TABLE>
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
Nine
Months
Ended
August
31,
----------
1999 1998
---- ----
<S> <C> <C>
Federal Canadian and provincial statutory rates............... 45% 45%
Resource allowance............................................ 28 (27)
Crown royalties, net of credits............................... (19) 16
Adjustments of prior year amounts and other................... 3 1
--- ---
Effective Rate................................................ 57% 35%
=== ===
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities and charges were as follows (in thousands):
<TABLE>
<CAPTION>
Current
Dec. 1, Year August 31,
1998 Activity 1999
------- -------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
Temporary differences, principally oil and
gas properties............................ $1,995 $(256) $1,739
====== ===== ======
</TABLE>
For Canadian income tax purposes Resources has tax pools available at
August 31, 1999 to reduce future taxable income. These pools include oil and
gas property expenses of $4,235,000, development and exploration expenses of
$1,042,000, earned depletion base of $1,170,000 and undepreciated capital
costs of $2,465,000. The tax attributes of carryforward pools are included to
determine the temporary differences shown as deferred tax liabilities. These
attributes generally do not expire.
F-50
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(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 $271,000 for the nine months of 1999
and 1998, respectively. Effective March 31, 1999, this management agreement
was terminated.
(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
August 31, 1999, the Company had seven 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:
<TABLE>
<CAPTION>
Daily Contract
Quantity Quantity Fixed
Period GigaJoules GigaJoules Price/GigaJoule
------ ---------- ---------- ---------------
<S> <C> <C> <C>
Apr 99-Oct 99....................... 1,055 226,000 $2.390
Dec 98-Oct 01....................... 1,055 1,125,000 $2.570
Apr 99-Oct 99....................... 1,000 214,000 $2.310
Apr 99-Oct 99....................... 500 107,000 $2.220
Nov 99-Oct 00....................... 1,000 366,000 $2.730
Nov 99-Mar 00....................... 750 113,250 $3.620
Apr 00-Oct 00....................... 750 160,500 $2.925
</TABLE>
The unrecognized loss on these contracts totaled $806,000 based on August
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 $434,362 as
of August 31, 1999 in addition to $221,000 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
Between December 1998 and April 1999, Resources purchased producing oil and
gas properties and natural gas gathering and compression facilities in
Alberta, Canada. These acquisitions were accounted for as a purchase and
considered "material" by management for purposes of pro forma disclosure. The
following pro forma statement presents incremental results of operations for
the current year and for the corresponding period of the preceding year as
though the acquisitions had occurred at the beginning of the periods being
reported on. Revenues and expenses subsequent to the purchase dates have been
included in 1999 operating results and are not included in the incremental
results.
The incremental 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 pro forma results are not intended to be a
F-51
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Unaudited)
projection of future results. Financial information showing the incremental
pro forma results of the acquisition is presented below:
<TABLE>
<CAPTION>
Nine Months
Ended
August 31,
-------------
1999 1998
----- ------
(in Canadian
dollars)
(in
thousands,
except per
share data)
<S> <C> <C>
Revenues................................................... $ 168 $1,080
Direct Operating Expenses.................................. 64 510
Depreciation & Depletion................................... 109 682
Interest Expense........................................... 40 237
Income Tax Expense (a)..................................... (15) (122)
Net Income................................................. (30) (227)
Earnings per share......................................... (0.02) (0.15)
</TABLE>
- --------
(a) Income taxes at Company's effective rate for the applicable period.
(7) Long-Term Debt
The Company has a revolving loan from a bank used to finance acquisitions
of oil and gas reserves and for normal operating requirements. The loan is
secured by the Company's oil and gas assets and had a borrowing base of $5.0
million at August 31, 1999. The interest rate on the outstanding borrowings is
the bank's prime rate, plus 3/4% which has averaged 7.25% for the nine months
ended August 31, 1999. The revolving phase of the loan will expire on April
30, 2000 and may be renewed by the bank. If the revolving commitment is not
renewed by the bank the loan will be converted into a term loan and will be
permanently reduced by way of conseutive monthly principal payments over a
period not to exceed 36 months. Outstanding borrowings amounted to $4.5
million at August 31, 1999.
(8) Generally Accepted Accounting Principles in Canada and the United States
The financial statements have been prepared in accordance with Canadian
GAAP and differ in certain respects from financial statements which the
Company would have made had its financial statements been prepared in
accordance with United States GAAP. Differences between the two methods 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 in cash of
temporary investments with maturities greater than 90 days. 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. Under U.S. GAAP, fully diluted
earnings per share are reported using the "treasury stock method". Under
Canadian GAAP, fully diluted earnings per share assumes that cash proceeds
from the deemed exercise of stock options are invested by the Company in
such a way as to earn a reasonable return. The number of shares used in the
calculation is the same for both methods.
(c) Under U.S. GAAP, the full cost accounting method requires that
capitalized costs less related accumulated depletion and deferred income
taxes may not exceed the sum of (1) the present value (discounted at 10%)
of future net revenues from estimated production of proved oil and gas
reserves; plus (2) the cost of properties not being amortized, if any, plus
(3) the lower of cost or estimated fair value of unproved properties
included in the costs being amortized if any, less (4) income tax effects
related to differences in the book and tax basis of oil and gas properties.
Using U.S. GAAP, there would not have been an impairment to the full cost
pool.
F-52
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification Of Directors And Officers
Under the Colorado Business Corporation Act, we have broad powers to
indemnify our directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act. Colorado law
provides that a director, officer or any other employee, fiduciary or agent,
may be entitled to indemnification if: (1) the person conducted himself or
herself in good faith; (2) the person reasonably believed, (a) in the case of
conduct in an official capacity with the corporation, that his or her conduct
was in the corporation's best interests, and (b) in all other cases, that his
or her conduct was at least not opposed to the corporation's best interests;
and (3) in the case of any criminal proceeding, the person had no reasonable
cause to believe his or her conduct was unlawful. A corporation may not
indemnify a director in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation or in
connection with any other proceeding charging that the director derived an
improper personal benefit, whether or not involving action in an official
capacity, in which the director was adjudged liable on the basis that he or
she derived an improper personal benefit.
Our Bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to
the full extent permitted under Colorado law. We have also entered into
indemnification agreements with each of our executive officers and directors.
The terms of these indemnification agreements are described in "Management--
Indemnification and Limitation of Liability."
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Carbon
pursuant to the foregoing provisions, we have been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
2 Articles of Incorporation of Carbon Energy Corporation.
3 Bylaws of Carbon Energy Corporation.
4 Specimen stock certificate representing shares of common stock
of Carbon Energy Corporation.*
5 Opinion of Holland & Hart LLP regarding the legality of the
securities being registered.*
8.1 Tax Opinion of Holland & Hart LLP, dated October 20, 1999.
8.2 Tax Opinion of Bennett Jones, dated October 20, 1999.
10.1 1999 Stock Option Plan.
10.2 1999 Restricted Stock Plan.
10.3 Exchange and Financing Agreement dated October 14, 1999 among
Carbon Energy Corporation, CEC Resources Ltd and Yorktown
Energy Partners III, L.P.
10.4 Stock Purchase Agreement dated August 11, 1999 between
Bonneville Pacific Corporation and CEC Resources Ltd.
10.5 Form of Indemnification Agreement between Carbon Energy
Corporation and its officers and directors.
10.6 Form of Employment Agreement, dated as of October 29, 1999,
between Carbon Energy Corporation and Patrick R. McDonald.
10.7 Form of Employment Agreement, dated as of October 29, 1999,
between Carbon Energy Corporation and Kevin D. Struzeski.
23.1 Consent of Holland & Hart LLP (included in Exhibits 5 and
8.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Hein + Associates LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent to Being Director of Harry A. Trueblood, Jr.
23.6 Consent of Reed W. Ferrill & Associates, Inc.
23.7 Consent of Sproule Associates Limited
23.8 Ryder Scott Company, L.P.
24 Power of Attorney.
27 Financial Data Schedule
</TABLE>
- --------
*to be filed by amendment
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of the filing on Form S-4 and authorized this
registration statement to be signed on its behalf by the undersigned in the
City of Denver, State of Colorado, on October 22, 1999.
Carbon Energy Corporation
/s/ Patrick R. McDonald
By: _________________________________
Patrick R. McDonald
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Patrick R. McDonald President (Principal October 26, 1999
____________________________________ Executive Officer)
Patrick R. McDonald
/s/ David H. Kennedy* Director October 26, 1999
____________________________________
David H. Kennedy
/s/ Lambros J. Lambros* Director October 26, 1999
____________________________________
Lambros J. Lambros
/s/ Bryan H. Lawrence* Director October 26, 1999
____________________________________
Bryan H. Lawrence
/s/ Peter A. Leidel* Director October 26, 1999
____________________________________
Peter A. Leidel
/s/ Kevin D. Struzeski* Treasurer (Principal October 26, 1999
____________________________________ Financial Officer and
Kevin D. Struzeski Principal Accounting
Officer)
</TABLE>
/s/ Patrick R. McDonald
*By: __________________________
Attorney-in-Fact
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
2 Articles of Incorporation of Carbon Energy Corporation.
3 Bylaws of Carbon Energy Corporation.
4 Specimen stock certificate representing shares of common stock of
Carbon Energy Corporation.*
5 Opinion of Holland & Hart LLP regarding the legality of the securities
being registered.*
8.1 Tax Opinion of Holland & Hart LLP, dated October 20, 1999.
8.2 Tax Opinion of Bennett Jones, dated October 20, 1999.
10.1 1999 Stock Option Plan.
10.2 1999 Restricted Stock Plan.
10.3 Exchange and Financing Agreement dated October 14, 1999 among Carbon
Energy Corporation, CEC Resources Ltd and Yorktown Energy Partners
III, L.P.
10.4 Stock Purchase Agreement dated August 11, 1999 between Bonneville
Pacific Corporation and CEC Resources Ltd.
10.5 Form of Indemnification Agreement between Carbon Energy Corporation
and its officers and directors.
10.6 Form of Employment Agreement, dated as of October 29, 1999, between
Carbon Energy Corporation and Patrick R. McDonald.
10.7 Form of Employment Agreement, dated as of October 29, 1999, between
Carbon Energy Corporation and Kevin D. Struzeski.
23.1 Consent of Holland & Hart LLP (included in Exhibits 5 and 8.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Hein + Associates LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent to Being Director of Harry A. Trueblood, Jr.
23.6 Consent of Reed W. Ferrill & Associates, Inc.
23.7 Consent of Sproule Associates Limited
23.8 Consent of Ryder Scott Company, L.P.
24 Power of Attorney.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
</TABLE>
- --------
*To be filed by Amendment
<PAGE>
EXHIBIT 2
ARTICLES OF INCORPORATION
OF
CARBON ENERGY CORPORATION
The undersigned, acting as the incorporator of a corporation to be
incorporated under the laws of the State of Colorado, adopts these Articles of
Incorporation.
ARTICLE I.
Name
The name of the Corporation is Carbon Energy Corporation.
ARTICLE II.
Authorized Capital
A. Authorized Shares. The aggregate number of shares which the
Corporation shall have the authority to issue is 20,000,000 shares of common
stock, without par value (the "Common Stock") and 10,000,000 shares of preferred
stock, without par value (the "Preferred Stock"). The Preferred Stock may be
issued in series. Except as otherwise expressly provided by law, and subject to
the voting rights, if any, provided to the holders of Preferred Stock by these
Articles of Incorporation, the Common Stock has exclusive voting rights on all
matters requiring a vote of shareholders. Except for and subject to those rights
expressly granted to the holders of the Preferred Stock, or except as may be
provided by law, the holders of Common Stock shall have exclusively all other
rights of shareholders.
B. Preferred Stock. The Corporation's board of directors shall have the
authority, without shareholder action, to determine the preferences, limitations
and relative rights of any Preferred Stock (whether in a series or as a class),
including without limitation the following: (i) the designation of any series of
Preferred Stock; (ii) unlimited, special, conditional, or limited voting rights,
or no right to vote; except that no condition, limitation, or prohibition on
voting shall eliminate any right to vote provided by the Colorado Business
Corporation Act; (iii) redemption rights; (iv) conversion rights; (v)
distribution or dividend rights, including the determination of whether such
rights are cumulative, noncumulative or partially cumulative; and (vi)
preference rights over any other class or series of shares with respect to
distributions, including dividends and distributions upon the dissolution of the
Corporation.
ARTICLE III.
Agent -- Offices
A. Initial Registered Agent. The street address of the initial registered
office of the Corporation is 1700 Broadway, Suite 1150, Denver, CO 80290-1101,
and the name of the Corporation's initial registered agent at that address is
Kevin D. Struzeski. The written consent of the Corporation's initial registered
agent to the appointment as such is stated below.
B. Initial Principal Office. The address of the Corporation's initial
principal office is 1700 Broadway, Suite 1150, Denver, CO 80290-1101.
ARTICLE IV.
Incorporator
The name and address of the incorporator is Rondi J. Boroos, 555 17/th/
Street, Suite 3200, Denver, Colorado 80202.
-1-
<PAGE>
ARTICLE V.
Purpose -- Powers
A. Purpose. The purpose for which the Corporation is organized is to
engage in any lawful business or businesses.
B. Powers. The Corporation shall have and may exercise all powers and
rights granted or otherwise provided by the Colorado Business Corporation Act as
in effect from time to time and any successor law (the "Act").
ARTICLE VI.
Preemptive Rights
No shareholder of the Corporation shall be entitled as of right to acquire
unissued shares of the Corporation or securities convertible into such shares or
carrying a right to subscribe for or to acquire such shares.
ARTICLE VII.
Board of Directors
The corporate powers shall be exercised by or under the authority of, and
the business and affairs of the Corporation shall be managed under the direction
of, a board of directors which shall consist of one or more members, with the
number specified or fixed in accordance with the bylaws.
The directors shall be elected at each annual meeting of the shareholders.
Each director shall continue to serve until such director's successor is elected
and qualifies.
The names and addresses of the members of the initial board of directors
are as follows:
Name Address
---- -------
David H. Kennedy 18 Pasture Lane
Carien, CT 06820
Lambros J. Lambros 131 Goshen Road
Norfolk, CT 06058
Bryan H. Lawrence 410 Park Avenue
New York, NY 10022
Peter A. Leidel 410 Park Avenue
New York, NY 10022
Patrick R. McDonald 1700 Broadway, Suite 1150
Denver, CO 80290-1101
ARTICLE VIII.
Cumulative Voting
Cumulative voting shall not be permitted in the election of directors.
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<PAGE>
ARTICLE IX.
Limitation on Director Liability
There shall be no personal liability, either direct or indirect, of any
director of the Corporation to the Corporation or to its shareholders for
monetary damages for any breach or breaches of fiduciary duty as a director;
except that this provision shall not eliminate the liability of a director to
the Corporation or to its shareholders for monetary damages for any breach, act,
omission or transaction as to which the Act prohibits expressly the elimination
of liability. This provision shall not limit the rights of directors of the
Corporation for indemnification or other assistance from the Corporation. Any
repeal or modification of this Article IX shall not adversely affect any right
or protection of a director of the Corporation under this Article IX, as in
effect immediately prior to such repeal or modification, with respect to any act
or omission of such director occurring prior to such repeal or modification.
ARTICLE X.
Quorum and Voting Requirements for Shareholders' Meetings
A. Quorum. A majority of the votes entitled to be cast on a matter by a
voting group shall constitute a quorum of that voting group for action on that
matter at any meeting of shareholders. (When used in these Articles of
Incorporation, the term "voting group" or "voting groups" shall have the meaning
assigned by the Act.)
B. Voting. Except as is otherwise required by the Act, action by a
voting group on a matter other than the election of directors is approved if a
quorum exists and if the votes cast within the voting group favoring the action
exceed the votes cast within the voting group opposing the action.
C. Change in Quorum or Voting Requirements. Any amendment to these
Articles of Incorporation adding, changing, or deleting a greater quorum or
voting requirement for shareholders shall meet the same quorum requirement and
be adopted by the same vote and voting groups required to take action under the
quorum and voting requirements then in effect or proposed to be adopted,
whichever are greater.
The undersigned incorporator who is a natural person over the age of
eighteen years has executed these Articles of Incorporation on September 14,
1999.
Name: /s/ Rondi J. Boroos
---------------------------
Rondi J. Boroos
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<PAGE>
Registered Agent's Consent Option
CONSENT OF REGISTERED AGENT
The undersigned initial registered agent of Carbon Energy Corporation does
hereby confirm the address for such agent and consent to the undersigned's
appointment as such registered agent, all as set forth in Article III, above, as
provided in Section 7-102-102(1)(f) of the Colorado Business Corporation Act.
Executed this 13 day of September, 1999.
Name: /s/ Kevin D. Struzeski
-------------------------------
Kevin D. Struzeski
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<PAGE>
EXHIBIT 3
BYLAWS
OF
CARBON ENERGY CORPORATION
(A Colorado Corporation)
Effective as of September 15, 1999
<PAGE>
BYLAWS
OF
CARBON ENERGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. Offices.............................................................. 1
1. Business Offices........................................................ 1
2. Principal Office........................................................ 1
3. Registered Office....................................................... 1
ARTICLE II. Shareholders' Meetings.............................................. 1
1. Annual Meetings......................................................... 1
2. Special Meetings........................................................ 2
3. Place of Special Meetings............................................... 2
4. Notice of Meetings...................................................... 3
5. Shareholders' List...................................................... 3
6. Organization............................................................ 4
7. Agenda and Procedure.................................................... 5
8. Quorum.................................................................. 5
9. Adjournment............................................................. 5
10. Voting................................................................. 6
11. Inspectors............................................................. 7
12. Meeting by Telecommunication........................................... 7
ARTICLE III. Board of Directors................................................. 8
1. Authority, Election and Tenure.......................................... 8
2. Number and Qualification................................................ 9
3. Regular Meetings........................................................ 9
4. Special Meetings........................................................ 9
5. Place of Meetings....................................................... 9
6. Notice of Meetings...................................................... 9
7. Quorum and Voting....................................................... 10
8. Organization, Agenda and Procedure...................................... 10
9. Resignation............................................................. 11
10. Removal................................................................ 11
11. Vacancies.............................................................. 11
12. Executive and Other Committees......................................... 12
13. Compensation of Directors.............................................. 13
14. Meeting by Telecommunication........................................... 13
ARTICLE IV. Waiver of Notice by Shareholders and Directors and Action of
Shareholders and Directors by Consent...................................... 14
1. Waiver of Notice........................................................ 14
2. Action Without a Meeting................................................ 15
ARTICLE V. Officers............................................................. 16
1. Election and Tenure..................................................... 16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
2. Resignation, Removal and Vacancies........................................ 16
3. Chairman of the Board..................................................... 17
4. President................................................................. 17
5. Vice Presidents........................................................... 17
6. Secretary................................................................. 18
7. Treasurer................................................................. 18
8. Assistant Secretaries and Assistant Treasurers............................ 19
9. Bond of Officers.......................................................... 19
10. Compensation............................................................. 19
ARTICLE VI. Indemnification....................................................... 20
1. Indemnification........................................................... 20
2. Provisions Not Exclusive.................................................. 20
3. Effect of Modification of Act............................................. 21
4. Definitions............................................................... 21
5. Insurance................................................................. 22
6. Expenses as a Witness..................................................... 23
7. Notice to Shareholders.................................................... 23
ARTICLE VII. Execution of Instruments; Loans; Checks and Endorsements;
Deposits; Proxies............................................................ 23
1. Execution of Instruments.................................................. 23
2. Borrowing................................................................. 24
3. Loans to Directors, Officers and Employees................................ 24
4. Checks and Endorsements................................................... 25
5. Deposits.................................................................. 25
6. Proxies................................................................... 25
ARTICLE VIII. Shares of Stock..................................................... 26
1. Certificates of Stock..................................................... 26
2. Shares Without Certificates............................................... 26
3. Record.................................................................... 27
4. Transfer of Stock......................................................... 27
5. Transfer Agents and Registrars; Regulations............................... 27
6. Lost, Destroyed or Mutilated Certificates................................. 28
ARTICLE IX. Corporate Seal........................................................ 28
ARTICLE X. Fiscal Year............................................................ 28
ARTICLE XI. Corporate Records..................................................... 28
1. Corporate Records......................................................... 28
2. Addresses of Shareholders................................................. 29
3. Fixing Record Date........................................................ 29
4. Inspection of Corporate Records........................................... 30
5. Distribution of Financial Statements...................................... 30
6. Audits of Books and Accounts.............................................. 30
ARTICLE XII. Emergency Bylaws and Actions......................................... 30
ARTICLE XIII. Amendments.......................................................... 30
</TABLE>
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<PAGE>
BYLAWS
OF
Carbon Energy Corporation
(a Colorado Corporation)
ARTICLE I.
Offices
1. Business Offices. The Corporation may have one or more offices at such
place or places within or without the State of Colorado as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
2. Principal Office. The initial principal office of the Corporation
shall be as set forth in the Articles of Incorporation. The Board of Directors,
from time to time, may change the principal office of the Corporation.
3. Registered Office. The registered office of the Corporation shall be
as set forth in the Articles of Incorporation, unless changed as provided by the
provisions of the Colorado Business Corporation Act, as it may be amended from
time to time, or any successor law (the "Act").
ARTICLE II.
Shareholders' Meetings
1. Annual Meetings. The annual meetings of shareholders for the election
of directors to succeed those directors whose terms expire and for the
transaction of such other business as may come before the meeting shall be held
each year at such date, time and place, either within or without the State of
Colorado, as may be designated by resolution of the Board of Directors from time
to time; provided, however, that an
<PAGE>
annual meeting shareholders shall be held each year on a date that is within the
earlier of six months after the close of the last fiscal year or fifteen months
after the last annual meeting. If the day so fixed for such annual meeting shall
be a legal holiday at the place of the meeting, then such meeting shall be held
on the next succeeding business day at the same hour.
2. Special Meetings. Special meetings of shareholders for any purpose or
purposes, unless otherwise prescribed by statute or by the Articles of
Incorporation, may be called at any time by the President or by the Board of
Directors and shall be called by the President or the Secretary upon one or more
written demands (which shall state the purpose or purposes therefor) signed and
dated by the holders of shares representing not less than ten percent of all
votes entitled to be cast on any issue proposed to be considered at the meeting.
The record date for determining the shareholders entitled to demand a special
meeting is the date of the earliest of any of the demands pursuant to which the
meeting is called, or the date that is 60 days before the date on which the
first of such demands is received, whichever is later. Business transacted at
any special meeting of shareholders shall be limited to the purpose or purposes
stated in the notice of such meeting.
3. Place of Special Meetings. Special meetings of shareholders shall be
held at such place or places, within or without the State of Colorado, as may be
determined by the Board of Directors and designated in the notice of the
meeting, or, if no place is so determined and designated in the notice, special
meetings of shareholders shall be held at the principal office of the
Corporation.
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<PAGE>
4. Notice of Meetings. Not less than 10 nor more than 60 days prior to
each annual or special meeting of shareholders, written notice of the date, time
and place of each annual and special shareholders' meeting shall be given to
each shareholder entitled to vote at such meeting; provided, however, that if
the authorized shares of the Corporation are proposed to be increased, at least
30 days' notice in like manner shall be given; and provided, further, that if
the Act prescribes notice requirements for particular circumstances (as in the
case of the sale, lease or exchange of the Corporation's assets other than in
the usual and regular course of business, or the merger or dissolution of the
Corporation), the provisions of the Act shall govern. Notice may be given in
person; by telephone, telegraph, teletype, electronically transmitted facsimile,
or other form of wire or wireless communication; and, if so given, shall be
effective when received by the shareholder. Notice may also be given by deposit
in the United States mail, postage prepaid, if addressed to the shareholder at
the address of such shareholder shown in the Corporation's current record of
shareholders, and, of so given, shall be effective when mailed. If three
successive notices mailed to any shareholder in accordance with the provisions
of this Section 4 are returned as undeliverable, no further notices to such
shareholder shall be necessary until another address for such shareholder is
made known to the Corporation. The notice of a special meeting shall, in
addition, state the meeting's purposes.
5. Shareholders' List. A complete record of the shareholders entitled to
notice of any shareholders' meeting (or an adjourned meeting described in
Section 9 of this Article II) shall be prepared by the Secretary of the
Corporation. Such shareholders' list shall be arranged by voting groups and,
within each voting group by class or series of
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<PAGE>
shares, shall be alphabetical within each class or series and shall show the
address of, and the number of shares of each such class and series that are held
by, each shareholder. (When used in these Bylaws, the term "voting group" or
"voting groups" shall have the meaning assigned by the Act.) The shareholders'
list shall be available for inspection by any shareholder beginning on the
earlier of ten days before the meeting for which the list was prepared or two
business days after notice is given and continuing through the meeting and any
adjournment thereof at the Corporation's principal office or at a place
identified in the notice of the meeting in the city where the meeting will be
held. A shareholder or his agent or attorney is entitled on written demand to
inspect and, subject to the requirements of the Act, to copy the list during
regular business hours and during the period it is available for inspection.
6. Organization. The Chairman of the Board, if any, or, if there is no
Chairman of the Board or in the Chairman of the Board's absence, the President,
or in the President's absence, any Vice President shall call meetings of
shareholders to order and act as chairperson of such meetings. In the absence
of said officers, any shareholder entitled to vote at the meeting, or any proxy
of any such shareholder, may call the meeting to order and a chairperson shall
be elected by a majority of the votes present and entitled to be cast at the
meeting. The Secretary or any Assistant Secretary of the Corporation or any
person appointed by the chairperson may act as secretary of such meetings.
7. Agenda and Procedure. The Board of Directors shall have the
responsibility of establishing an agenda for each meeting of shareholders,
subject to the rights of shareholders to raise matters, if any, which may
properly be brought before the
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<PAGE>
meeting although not included within the agenda. The chairperson shall be
charged with the orderly conduct of all meetings of shareholders.
8. Quorum. Shares entitled to vote as a separate voting group may take
action on a matter at a meeting only if a quorum of those shares exists with
respect to that matter. Unless otherwise provided in the Act or in the
Corporation's Articles of Incorporation a majority of the votes entitled to be
cast on a matter by a voting group constitutes a quorum of that voting group for
action on that matter. In the absence of a quorum at any shareholders' meeting,
a majority of the votes present in person or represented by proxy and entitled
to vote on any matter at the meeting may adjourn the meeting from time to time
for a period not to exceed 120 days from the original date of the meeting
without further notice (except as provided in Section 9 of this Article II)
until a quorum shall be present or represented.
9. Adjournment. When a meeting is for any reason adjourned to another
date, time or place, notice need not be given of the adjourned meeting if the
date, time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, any business may be transacted
which might have been transacted at the original meeting. If the adjournment is
for more than 120 days from the date of the original meeting, or if, after the
adjournment, a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder as of the new record
date.
10. Voting.
(a) Except as provided by law or in the Articles of Incorporation, at
every meeting of shareholders, or with respect to corporate action which may be
taken
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<PAGE>
without a meeting, each outstanding share having voting power is entitled to one
vote, and each fractional share, if any is outstanding, is entitled to a
corresponding fractional vote, on each matter voted on at a shareholders'
meeting.
(b) A shareholder may vote the shareholder's shares in person or by
proxy. A shareholder may appoint a proxy by signing an appointment form, either
personally or by the shareholder's attorney-in-fact. A shareholder may appoint
a proxy by transmitting or authorizing the transmission of a telegram, teletype
or other electronic transmission providing a written statement of the
appointment to the proxy, to a proxy solicitor, proxy support service
organization, or other person duly authorized by the proxy to receive
appointments as agent for the proxy, or to the Corporation; except that the
transmitted appointment shall set forth or be transmitted with written evidence
from which it can be determined that the shareholder transmitted or authorized
the transmission of the appointment. An appointment of a proxy is not effective
against the Corporation until the appointment is received by the Corporation.
The appointment is effective for eleven months unless a different period is
expressly provided in the appointment form. An appointment of a proxy shall be
revocable by the shareholder except as may be permitted or provided by law.
(c) When a quorum is present at any meeting of shareholders, action on
a matter, other than the election of directors, by a voting group is approved if
the votes cast within the voting group favoring the action exceed the votes cast
within the voting group opposing the action, unless the matter is one upon which
a different vote is required by express provision of a statute, or the Articles
of Incorporation, or these
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<PAGE>
Bylaws, in which case such express provision shall govern and control the
decision on such matter.
11. Inspectors. The chairperson of the meeting may at any time appoint two
or more inspectors to serve at a meeting of the shareholders. Such inspectors
shall decide upon the qualifications of voters, including the validity of
proxies, accept and count the votes for and against the matters presented,
report the results of such votes, and subscribe and deliver to the secretary of
the meeting a certificate stating the number of shares of stock within each
voting group that is issued and outstanding and entitled to vote thereon and the
number of shares within each voting group that voted for and against the matters
presented. The voting inspectors need not be shareholders of the Corporation,
and any director or officer of the Corporation may be an inspector on any matter
other than a vote for or against such director's or officer's election to any
position with the Corporation or on any other matter in which such officer or
director may be directly interested.
12. Meeting by Telecommunication. If and only if permitted by the Board of
Directors, any or all of the shareholders may participate in an annual or
special shareholders' meeting by, or the meeting may be conducted through the
use of, any means of communication by which all persons participating in the
meeting may hear each other during the meeting. If the Board of Directors
determines to allow shareholders to participate in a shareholders' meeting by
telecommunication, the Board shall establish the terms and conditions under
which shareholders may participate by such means and shall cause the notice of
the meeting to contain such terms and conditions. Only shareholders who comply
with the terms and conditions indicated in such notice shall be entitled to so
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<PAGE>
participate by telecommunication in the shareholders' meeting. A shareholder
participating in a meeting by telecommunication in compliance with the terms and
conditions established by the Board of Directors is deemed to be present in
person at the meeting.
ARTICLE III.
Board of Directors
1. Authority, Election and Tenure. All corporate power shall be
exercised by or under the authority of, and the business and affairs of the
Corporation shall be managed by, a Board of Directors. The Board of Directors
shall be elected at each annual meeting of shareholders. In an election of
directors, that number of candidates equaling the number of directors to be
elected having the highest number of votes cast in favor of their election shall
be elected to the Board of Directors. The terms of the initial directors of the
Corporation shall expire at the first shareholders' meeting at which directors
are elected. The term of each director who is not an initial director of the
Corporation shall expire at the next annual meeting of shareholders; provided,
however, that a director shall continue to serve, despite the expiration of his
or her term, until such director's successor shall be elected and shall qualify,
or until such director's earlier death, resignation or removal.
2. Number and Qualification. The number of directors shall be fixed from
time to time by resolution of the Board of Directors and may be increased or
decreased from time to time by resolution of the Board of Directors, but no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director.
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<PAGE>
Directors must be natural persons at least eighteen years of age but need not be
shareholders or residents of the State of Colorado.
3. Regular Meetings. Regular meetings of the Board of Directors shall be
held at such dates, times and places as may be determined by the Board of
Directors. Regular meetings of the Board of Directors may be held without
notice of the date, time, place or purpose of the meeting.
4. Special Meetings. Special meetings of the Board of Directors may be
called by the President at any time and shall be called by the President or the
Secretary on the written request of any two directors.
5. Place of Meetings. Any meeting of the Board of Directors may be held
at such place or places either within or without the State of Colorado as shall
from time to time be determined by the Board of Directors and as shall be
designated in the resolution of the Board of Directors fixing the date, time and
place of the regular meetings of the Board of Directors or in the notice of
special meeting.
6. Notice of Meetings. Notice of the date, time and place of each special
meeting of directors shall be given to each director at least two days prior to
such meeting. The notice of a special meeting of the Board of Directors need
not state the purposes of the meeting. Notice to each director of any special
meeting may be given in person; by telephone, telegraph, teletype,
electronically transmitted facsimile, or other form of wire or wireless
communication; or by mail or private carrier. Oral notice to a director of any
special meeting is effective when communicated. Written notice to a director of
any special meeting, including without limitation notice sent by electronic
mail, is effective at the earliest of: (a) the date received; (b) five days
after it is deposited
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<PAGE>
in the United States mail, properly addressed to the last address for the
director shown on the records of the Corporation, first class postage prepaid;
(c) the date shown on the return receipt if mailed by registered or certified
mail, return receipt requested, postage prepaid, in the United States mail and
if the return receipt is signed by or on behalf of the director to whom the
notice is addressed.
7. Quorum and Voting. A majority of the number of directors fixed by or
in accordance with Section 2 of this Article III shall constitute a quorum at
all meetings of the Board of Directors. The vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, except as otherwise required by the Act.
8. Organization, Agenda and Procedure. The of the Board, if any, or, if
there is no Chairman of the Board or in the absence of the Chairman of the
Board, the President, or in the President's absence, any director chosen by a
majority of the directors present, shall act as chairperson of the meetings of
the Board of Directors. The Secretary, any Assistant Secretary, or any other
person appointed by the chairperson shall act as secretary of each meeting of
the Board of Directors. The agenda of and procedure for such meetings shall be
as determined by the Board of Directors.
9. Resignation. Any director of the Corporation may resign at any time
by giving written resignation notice to the Corporation or the Secretary of the
Corporation at the Corporation's principal office. Such resignation shall take
effect at the date of receipt of such notice or at any later time specified
therein and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it
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<PAGE>
effective, unless it so provides. A director who resigns may deliver to the
Secretary of State for filing a statement to that effect.
10. Removal. Any director may be removed, either with or without cause,
at any time, at a special meeting of the shareholders called and held for such
purpose if the number of votes cast in favor of removal exceeds the number of
votes cast against removal; provided, however, that if a director is elected by
a voting group of shareholders, only the shareholders of that voting group may
participate in the vote to remove that director. A vacancy in the Board of
Directors caused by any such removal may be filled by the Corporation's
shareholders at such meeting or, if the shareholders at such meeting shall fail
to fill such vacancy, by the Board of Directors as provided in Section 11 of
this Article III.
11. Vacancies. If a vacancy occurs on the Board of Directors, including a
vacancy resulting from an increase in the number of directors: (a) the
shareholders may fill the vacancy at the next annual meeting or at a special
meeting called for that purpose; or (b) the Board of Directors may fill the
vacancy; or (c) if the directors remaining in office constitute fewer than a
quorum of the Board of Directors, they may fill the vacancy by the affirmative
vote of a majority of all the directors remaining in office. The term of a
director elected to fill a vacancy pursuant to subparagraph (b) or (c) of the
foregoing sentence expires at the next annual shareholders' meeting. The term
of a director elected to fill a vacancy pursuant to subparagraph (a) of this
Section 11 shall be the unexpired term of such director's predecessor in office;
except that, if the director's predecessor had been elected to fill a vacancy
pursuant to Subparagraph (b) or (c) of this Section 11, the term of a director
elected pursuant to Section (a) of this Section 11 shall
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<PAGE>
be the unexpired term of the last predecessor elected by the shareholders. If
the vacant directorship was held by a director elected by a voting group of
shareholders and one or more of the remaining directors were elected by the same
voting group, only such directors are entitled to vote to fill the vacancy if it
is filled by directors, and they may do so by the affirmative vote of a majority
of such directors remaining in office; and only the holders of shares of that
voting group are entitled to vote to fill such vacancy if it is filled by the
shareholders.
12. Executive and Other Committees. Except as otherwise required by the
Act, the Board of Directors, by resolution adopted by the greater of a majority
of the number of directors fixed by or in accordance with Section 2 of this
Article III or the number of directors required to take action pursuant to
Section 7 of this Article III, may designate from among its members an executive
committee and one or more other committees each of which, to the extent provided
in the resolution and except as otherwise prescribed by the Act, shall have and
may exercise all of the authority of the Board of Directors in the management of
the Corporation, except that no committee shall: (a) authorize distributions;
(b) approve or propose to shareholders action that the Act requires to be
approved by shareholders; (c) fill vacancies on the Board of Directors or on any
of its committees; (d) amend the Articles of Incorporation; (e) adopt, amend, or
repeal these Bylaws; (f) approve a plan of merger not requiring shareholder
approval; (g) authorize or approve reacquisition of shares, except according to
a formula or method prescribed by the Board of Directors; or (h) authorize or
approve the issuance or sale of shares, or a contract for the sale of shares, or
determine the designation and relative rights, preferences, and limitations of a
class or series of shares, except that with
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<PAGE>
respect to this clause (h) the Board of Directors may authorize a committee to
do so within limits specifically prescribed by the Board of Directors. The
provision of these Bylaws governing meetings, action without meeting, notice,
waiver of notice, and quorum and voting requirements of the Board of Directors
shall apply to committees and the members thereof.
13. Compensation of Directors. Each director may be paid such compensation
as fixed from time to time by resolution of the Board of Directors, together
with reimbursement for the reasonable and necessary expenses incurred by such
director in connection with the performance of such director's duties. Nothing
herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity or any of its subsidiaries in any other
capacity and receiving proper compensation therefor.
14. Meeting by Telecommunication. One or more members of the Board of
Directors or any committee designated by the Board of Directors may hold or
participate in a meeting of the Board of Directors or such committee through the
use of any means of communication by which all persons participating can hear
each other at the same time.
ARTICLE IV.
Waiver of Notice by Shareholders and Directors and Action
of Shareholders and Directors by Consent
1. Waiver of Notice. A shareholder may waive any notice required by the
Act or by the Articles of Incorporation or these Bylaws, and a director may
waive any notice of a directors' meeting, whether before or after the date or
time stated in the notice as the date or time when any action will occur or has
occurred. The waiver shall be in
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<PAGE>
writing, be signed by the shareholder or director entitled to the notice, and be
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records, but such delivery and filing shall not be conditions of the
effectiveness of the waiver. Attendance of a shareholder at a meeting waives
objection to lack of notice or defective notice of the meeting, unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting because of lack of notice or defective
notice, and waives objection to consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice unless the shareholder objects to considering the matter when it is
presented. A director's attendance at or participation in a meeting waives any
required notice to him or her of the meeting unless the director, at the
beginning of the meeting or promptly upon his or her later arrival, objects to
holding the meeting or transacting business at the meeting because of lack of
notice or defective notice and does not thereafter vote for or assent to action
taken at the meeting, or if special notice was required of a particular purpose
pursuant to the Act, the director objects to transacting business with respect
to the purpose for which such special notice was required and does not
thereafter vote for or assent to action taken at the meeting with respect to
such purpose.
2. Action Without a Meeting. Any action required or permitted to be taken
at a meeting of the shareholders, directors or members of an executive or other
committee, as applicable, may be taken without a meeting if all shareholders
entitled to vote with respect to such action, or all directors or all members of
an executive or other committee, as the case may be, give written consent to
such action in writing. The record date for determining shareholders entitled
to take action without a meeting is the
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<PAGE>
date a writing upon which the action is taken, pursuant to this Section 2 of
Article IV, is first received by the Corporation. Any shareholder who has signed
a writing describing and consenting to action taken pursuant to this Section 2
of this Article IV may revoke such consent by a writing signed by such
shareholder describing the action and stating that the shareholder's prior
consent thereto is revoked, if such writing is received by the Corporation
before the effectiveness of the action. Action taken without a meeting shall be
effective: in the case of an action of shareholders, as of the date the last
writing necessary to effect the action is received by the Corporation unless all
of the writings necessary to effect the action specify another date, which may
be before or after the date the writings are received by the Corporation; and in
the case of directors' action, action is taken when the last director signs a
writing describing the action taken unless before such time the Secretary has
received a written revocation of the consent of any other director, and any
action so taken shall be effective at the time taken unless the directors
specify a different effective date.
ARTICLE V.
Officers
1. Election and Tenure. The officers of the Corporation shall consist of
a Chairman of the Board if the Board of Directors determines that there shall be
such a position, a President, a Secretary and Treasurer, each of whom shall be
appointed annually by the Board of Directors. The Board of Directors may also
designate and appoint such other officers and assistant officers as may be
deemed necessary. The Board of Directors may delegate to any such officer the
power to appoint or remove subordinate officers, agents or employees. Any two or
more offices may be held by the
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<PAGE>
same person. Each officer so appointed shall continue in office until a
successor shall be appointed and shall qualify, or until the officer's earlier
death, resignation or removal. Each officer shall be a natural person who is
eighteen years of age or older.
2. Resignation, Removal and Vacancies. Any officer may resign at any time
by giving written notice of resignation to the Board of Directors or the
President. Such resignation shall take effect when the notice is received by the
Corporation unless the notice specifies a later effective date, and acceptance
of the resignation shall not be necessary to render such resignation effective.
Any officer may at any time be removed by the Board of Directors. If any office
becomes vacant for any reason, the vacancy may be filled by the Board of
Directors. An officer appointed to fill a vacancy shall be appointed for the
unexpired term of such officer's predecessor in office and shall continue in
office until a successor shall be elected or appointed and shall qualify, or
until such officer's earlier death, resignation or removal. The appointment of
an officer shall not itself create contract rights in favor of the officer, and
the removal of an officer does not affect the officer's contract rights, if any,
with the Corporation and the resignation of an officer does not affect the
Corporation's contract rights, if any, with the officer.
3. Chairman of the Board. If there shall be a Chairman of the Board, the
Chairman of the Board shall preside at meetings of the Board of Directors and of
the shareholders at which he or she is present, and shall give counsel and
advice to the Board of Directors and the officers of the Corporation on all
subjects concerning the welfare of the Corporation and the conduct of its
business. The Chairman of the Board of Directors shall perform such other duties
as the Board may from time to time determine.
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4. President. The President shall be the chief executive officer of the
Corporation. If there is no Chairman of the Board, or if there is a Chairman of
the Board in the absence of the Chairman of the Board, or if authorized by the
Chairman of the Board, the President shall preside at meetings of the
shareholders. The President shall have general and active management of the
business of the Corporation; shall see that all orders and resolutions of the
Board of Directors are carried into effect; and shall perform all duties as may
from time to time be assigned by the Board of Directors.
5. Vice Presidents. The Vice Presidents, if any, shall perform such
duties and possess such powers as from time to time may be assigned to them by
the Board of Directors or the President. In the absence of the President or in
the event of the inability or refusal of the President to act, the Vice
President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated by the Board of Directors, or in the absence
of any designation, then in the order of the election or appointment of the Vice
Presidents) shall perform the duties of the President and when so performing
shall have all the powers of and be subject to all the restrictions upon the
President.
6. Secretary. The Secretary shall perform such duties and shall have such
powers as may from time to time be assigned by the Board of Directors or the
President. In addition, the Secretary shall perform such duties and have such
powers as are incident to the office of Secretary including, without limitation,
the duty and power to give notice of all meetings of shareholders and the Board
of Directors, the preparation and maintenance of minutes of the directors' and
shareholders' meetings and other records and information required to be kept by
the Corporation under Article XI and for
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authenticating records of the Corporation, and to be custodian of the corporate
seal and to affix and attest to the same on documents, the execution of which on
behalf of the Corporation is authorized by these Bylaws or by the action of the
Board of Directors.
7. Treasurer. The Treasurer shall perform such duties and shall have such
powers as may from time to time be assigned by the Board of Directors or the
President. In addition, the Treasurer shall perform such duties and have such
powers as are incident to the office of Treasurer including, without limitation,
the duty and power to keep and be responsible for all funds and securities of
the Corporation, to deposit funds of the Corporation in depositories selected in
accordance with these Bylaws, to disburse such funds as ordered by the Board of
Directors, making proper accounts thereof, and to render as required by the
Board of Directors statements of all these transactions taken as Treasurer and
of the financial condition of the Corporation.
8. Assistant Secretaries and Assistant Treasurers. The Assistant
Secretaries and Assistant Treasurers, if any, shall perform such duties as shall
be assigned to them by the Secretary or the Treasurer, respectively, or by the
President or the Board of Directors. In the absence, inability or refusal to act
of the Secretary or the Treasurer, the Assistant Secretaries or Assistant
Treasurers, respectively, in the order designated by the Board of Directors, or
in the absence of any designation, then in the order of their election or
appointment, shall perform the duties and exercise the powers of the Secretary
or Treasurer, as the case may be.
9. Bond of Officers. The Board of Directors may require any officer to
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for such terms and conditions as
the Board of
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Directors may specify, including without limitation for the faithful performance
of such officer's duties and for the restoration to the Corporation of any
property belonging to the Corporation in such officer's possession or under the
control of such officer.
10. Compensation. Officers of the Corporation shall be entitled to such
salaries, emoluments, compensation or reimbursement as shall be fixed or
authorized from time to time by the Board of Directors.
ARTICLE VI.
Indemnification
1. Indemnification. To the extent permitted or required by the Act and
any other applicable law, if any director or officer of the Corporation is made
a party to or is involved in any proceeding because such person is or was a
director or officer of the Corporation, the Corporation shall (a) indemnify such
person from and against any liability, including but not limited to expenses of
investigation and preparation, expenses in connection with appearance as a
witness, and fees and disbursements of counsel, accountants or other experts,
incurred by such person in such proceeding, and (b) advance to such person
expenses incurred in such proceeding. The Corporation may in its discretion, but
is not obligated in any way to, indemnify and advance expenses to an employee or
agent of the Corporation to the same extent as to a director or officer, and the
Corporation may indemnify an employee, fiduciary, or agent of the Corporation to
a greater extent than expressly permitted herein for officers and directors if
not inconsistent with public policy.
2. Provisions Not Exclusive. The foregoing provisions for indemnification
and advancement of expenses are not exclusive, and the Corporation may at its
discretion
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provide for indemnification or advancement of expenses in a resolution of its
shareholders or directors, in a contract or in its Articles of Incorporation.
3. Effect of Modification of Act. Any repeal or modification of the
foregoing provisions of this Article for indemnification or advancement of
expenses shall not affect adversely any right or protection stated in such
provisions with respect to any act or omission occurring prior to the time of
such repeal or modification. If any provision of this Article or any part
thereof shall be held to be prohibited by or invalid under applicable law, such
provision or part thereof shall be deemed amended to accomplish the objectives
of the provision or part thereof as originally written to the fullest extent
permitted by law, and all other provisions or parts shall remain in full force
and effect.
4. Definitions. As used in this Article, the following terms have the
following meanings:
(a) Act. When used with reference to an act or omission occurring
prior to the effectiveness of any amendment to the Act which occurs after the
effectiveness of the adoption of this Article, the term "Act" shall include such
amendment only to the extent that the amendment permits a corporation to provide
broader indemnification rights than the Act permitted prior to the amendment.
(b) Corporation. The term "Corporation" includes any domestic or
foreign entity that is a predecessor of the Corporation by reason of a merger or
other transaction in which the predecessor's existence ceased upon consummation
of the transaction.
(c) Director or Officer. A "director" or "officer" is an individual
who is or was a director or officer of the Corporation or an individual who,
while a director
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or officer of the Corporation, is or was serving at the Corporation's request as
a director, officer, partner, trustee, employee, fiduciary, or agent of another
domestic or foreign corporation or other person or entity or of an employee
benefit plan. A director or officer is considered to be serving an employee
benefit plan at the Corporation's request if his or her duties to the
Corporation also impose duties on, or otherwise involve services by, the
director or officer to the plan or to participants in or beneficiaries of the
plan. The terms "director" and "officer" include, unless the context requires
otherwise, the estate or personal representative of a director, or officer.
(d) Liability. The term "liability" means the obligation incurred
with respect to a proceeding to pay a judgment, settlement, penalty, fine
(including any excise tax assessed with respect to an employee benefit plan), or
reasonable expenses.
(e) Proceeding. The term "proceeding" means any threatened, pending
or completed action, suit, or proceeding whether civil, criminal, administrative
or investigative, and whether formal or informal.
5. Insurance. The Corporation may purchase and maintain insurance on
behalf of a person who is or was a director, officer, employee, fiduciary, or
agent of the Corporation, or who, while a director, officer, employee,
fiduciary, or agent of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee, fiduciary, or
agent of another domestic or foreign corporation or other person or entity or of
an employee benefit plan, against liability asserted against or incurred by the
person in that capacity or arising from his or her status as a director,
officer, employee, fiduciary, or agent, whether or not the Corporation would
have power to indemnify the person against the same liability under the Act. Any
such insurance may
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<PAGE>
be procured from any insurance company designated by the Board of Directors,
whether such insurance company is formed under the laws of this state or any
other jurisdiction of the United States or elsewhere, including any insurance
company in which the Corporation has an equity or any other interest through
stock ownership or otherwise.
6. Expenses as a Witness. The Corporation may pay or reimburse expenses
incurred by a director, officer, employee, fiduciary, or agent in connection
with an appearance as a witness in a proceeding at a time when he or she has not
been made a named defendant or respondent in the proceeding.
7. Notice to Shareholders. If the Corporation indemnifies or advances
expenses to a director under this Article in connection with a proceeding by or
in the right of the Corporation, the Corporation shall give written notice of
the indemnification or advance to the shareholders with or before the notice of
the next shareholders' meeting. If the next shareholder action is taken without
a meeting at the instigation of the Board of Directors, such notice shall be
given to the shareholders at or before the time the first shareholder signs a
writing consenting to such action.
ARTICLE VII.
Execution of Instruments; Loans; Checks and Endorsements;
Deposits; Proxies
1. Execution of Instruments. The President or any Vice President shall
have the power to execute and deliver on behalf of and in the name of the
Corporation any instrument requiring the signature of an officer of the
Corporation, except as otherwise provided in these Bylaws or when the execution
and delivery of the instrument shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation. Unless authorized
to do so by these Bylaws or by the Board of Directors,
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<PAGE>
no officer, agent or employee shall have any power or authority to bind the
Corporation in any way, to pledge its credit or to render it liable pecuniarily
for any purpose or in any amount.
2. Borrowing. No loan shall be contracted on behalf of the Corporation,
and no evidence of indebtedness shall be issued, endorsed or accepted in its
name, unless authorized by the Board of Directors or a committee designated by
the Board of Directors so to act. Such authority may be general or confined to
specific instances. When so authorized, an officer may (a) effect loans at any
time for the Corporation from any bank or other entity and for such loans may
execute and deliver promissory notes or other evidences of indebtedness of the
Corporation; and (b) mortgage, pledge or otherwise encumber any real or personal
property, or any interest therein, owned or held by the Corporation as security
for the payment of any loans or obligation of the Corporation, and to that end
may execute and deliver for the Corporation such instruments as may be necessary
or proper in connection with such transaction.
3. Loans to Directors, Officers and Employees. The Corporation may lend
money to, guarantee the obligations of and otherwise assist directors, officers
and employees of the Corporation, or directors of another corporation of which
the Corporation owns a majority of the voting stock, only upon compliance with
the requirements of the Act.
4. Checks and Endorsements. All checks, drafts or other orders for the
payment of money, obligations, notes or other evidences of indebtedness, bills
of lading, warehouse receipts, trade acceptances and other such instruments
shall be signed or endorsed for the Corporation by such officers or agents of
the Corporation as shall from
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<PAGE>
time to time be determined by resolution of the Board of Directors, which
resolution may provide for the use of facsimile signatures.
5. Deposits. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the Corporation's credit in such banks or other
depositories as shall from time to time be determined by resolution of the Board
of Directors, which resolution may specify the officers or agents of the
Corporation who shall have the power, and the manner in which such power shall
be exercised, to make such deposits and to endorse, assign and deliver for
collection and deposit checks, drafts and other orders for the payment of money
payable to the Corporation or its order.
6. Proxies. Unless otherwise provided by resolution adopted by the Board
of Directors, the President or any Vice President: (a) may from time to time
appoint one or more agents of the Corporation, in the name and on behalf of the
Corporation, (i) to cast the votes which the Corporation may be entitled to cast
as the holder of stock or other securities in any other corporation, association
or other entity whose stock or other securities may be held by the Corporation,
at meetings of the holders of the stock or other securities of such other
corporation, association or other entity, or (ii) to consent in writing to any
action by such other corporation, association or other entity; (b) may instruct
the person so appointed as to the manner of casting such votes or giving such
consent; and (c) may execute or cause to be executed in the name and on behalf
of the Corporation and under its corporate seal, or otherwise, all such written
proxies or other instruments as may be deemed necessary or proper.
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ARTICLE VIII.
Shares of Stock
1. Certificates of Stock. The shares of the Corporation may but need not
be represented by certificates. Unless the Act or another law expressly provides
otherwise, the fact that the shares are not represented by certificates shall
have no effect on the rights and obligations of shareholders. If the shares are
represented by certificates, such certificates shall be signed either manually
or in facsimile by the President and the Secretary or such other representatives
of the Corporation as are designated by the Board of Directors. If the person
who signed, either manually or in facsimile, a share certificate, no longer
holds office when the certificate is issued, the certificate is nevertheless
valid. Every certificate representing shares issued by the Corporation shall
state the number and class of shares and the designation of the series, if any,
the certificate represents, and shall otherwise be in such form as is required
by law and as the Board of Directors shall prescribe.
2. Shares Without Certificates. The Board of Directors may authorize the
issuance of any class or series of shares of the Corporation without
certificates. Such authorization shall not affect shares already represented by
certificates until they are surrendered to the Corporation. Within a reasonable
time following the issue or transfer of shares without certificates, the
Corporation shall send the shareholder a complete written statement of the
information required on certificates by the Act.
3. Record. A record shall be kept of the names and addresses of the
Corporation's shareholders, in a form that permits preparation of a list of
shareholders that is arranged by voting group and within each voting group by
class or series of
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shares, that is alphabetical within each class or series, and that shows the
addresses of, and the number of shares of each class and series and the date of
issuance of the shares (and in case of cancellation, the date of cancellation)
held by, each shareholder. The person or other entity in whose name shares of
stock stand on the books of the Corporation shall be deemed the owner thereof,
and thus a holder of record of such shares of stock, for all purposes as regards
the Corporation.
4. Transfer of Stock. Transfers of shares of the stock of the Corporation
shall be made only on the books of the Corporation by the registered holder
thereof, or by such registered holder's attorney thereunto authorized, and on
the surrender of the certificate or certificates for such shares properly
endorsed.
5. Transfer Agents and Registrars; Regulations. The Board of Directors
may appoint one or more transfer agents or registrars with respect to shares of
the stock of the Corporation. The Board of Directors may make such rules and
regulations as it may deem expedient and as are not inconsistent with these
Bylaws, concerning the issue, transfer and registration of certificates for
shares of the stock of the Corporation.
6. Lost, Destroyed or Mutilated Certificates. In case of the alleged
loss, destruction or mutilation of a certificate representing stock of the
Corporation, a new certificate may be issued in place thereof, in such manner
and upon such terms and conditions as the Board of Directors may prescribe, and
shall be issued in such situations as required by the Act.
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ARTICLE IX.
Corporate Seal
The corporate seal shall be in the form approved by resolution of the Board
of Directors. Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced. The impression of the
seal may be made and attested by either the Secretary or any Assistant Secretary
for the authentication of contracts or other papers requiring the seal.
ARTICLE X.
Fiscal Year
The fiscal year of the Corporation shall be the year established by the
Board of Directors.
ARTICLE XI.
Corporate Records
1. Corporate Records. The Corporation shall comply with the provisions of
the Act regarding maintenance of records and shall keep such records at such
place as the Act may designate or, if the Act does not designate the place for
such records, then at such place or places as may be from time to time
designated by the Board of Directors.
2. Addresses of Shareholders. Each shareholder shall furnish to the
Secretary of the Corporation or the Corporation's transfer agent an address to
which notices from the Corporation, including notices of meetings, may be
directed and if any shareholder shall fail so to designate such an address, it
shall be sufficient for any such
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notice to be directed to such shareholder at such shareholder's address last
known to the Secretary or transfer agent.
3. Fixing Record Date. The Board of Directors may fix in advance a date
as a record date for the determination of the shareholders entitled to a notice
of or to vote at any meeting of shareholders or entitled to receive payment of
any dividend or other distribution or allotment of rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 70 days before the meeting or
action requiring a determination of shareholders; except that the record date
for determining shareholders entitled to take action without a meeting or
entitled to be given notice of action so taken is the date upon which a writing
upon which such action is taken is first received by the Corporation. Only such
shareholders as shall be shareholders of record on the date so fixed shall be so
entitled with respect to the matter to which the same relates. If the Board of
Directors shall not fix a record date as above provided, then the record date
shall be determined in accordance with the Act.
4. Inspection of Corporate Records. Shareholders shall have those rights
to inspect and copy the Corporation's records as provided in the Act.
5. Distribution of Financial Statements. Upon the written request of any
shareholder of the Corporation, the Corporation shall mail to such shareholder
its last annual and most recently published financial statement, if any.
6. Audits of Books and Accounts. The Corporation's books and accounts may
be audited at such times and by such auditors as shall be specified and
designated by resolution of the Board of Directors.
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ARTICLE XII.
Emergency Bylaws and Actions
Subject to repeal or change by action of the shareholders, the Board of
Directors may adopt emergency bylaws and exercise other powers in accordance
with and pursuant to the provisions of the Act.
ARTICLE XIII.
Amendments
Unless the Act, the Articles of Incorporation or a particular Bylaw
reserves the right to amend the Bylaws exclusively to the shareholders, the
Board of Directors may amend or repeal these Bylaws or adopt new bylaws. The
shareholders may also amend or repeal these Bylaws or adopt new bylaws.
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EXHIBIT 8.1
[Letterhead of Holland & Hart LLP]
October 20, 1999
Board of Directors
Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, CO 80290
Re: Carbon Energy Corporation's Acquisition of Common Stock of CEC
Resources Ltd. in Exchange for Carbon Energy Corporation Voting Stock
Gentlemen:
This letter is in response to your request for our opinion concerning the
U.S. federal income tax consequences of Carbon Energy Corporation's ("Carbon")
acquisition of common stock of CEC Resources Ltd. ("CEC") in exchange for Carbon
voting stock. As described below, Carbon will effectuate such exchange by
offering to exchange one share of Carbon common stock for each share of CEC
stock. This exchange offer will be open to all holders of CEC common stock.
The factual context of the Exchange Offer is generally described below and
in more detail in the draft Form S-4 Registration Statement to be filed by
Carbon with the Securities and Exchange Commission ("SEC") on or about October
22, 1999 (the "Registration Statement") and representation letters from CEC and
Carbon to us dated October 20, 1999 (the "Representation Letters").
General Factual Context
-----------------------
CEC is a publicly traded Canadian corporation organized under the laws of
Alberta. Yorktown Energy Partners III, L.P. ("Yorktown") is a limited
partnership organized under the laws of Delaware. Carbon is a U.S. corporation
organized under the laws of Colorado. Yorktown formed Carbon for the purposes of
facilitating the following transactions.
On August 11, 1999, CEC entered into a Stock Purchase Agreement with
Bonneville Pacific Corporation, under which CEC agreed to purchase all
outstanding shares of Bonneville Fuels Corporation ("BFC") for $23,857,951 in
<PAGE>
Carbon Energy Corporation
Board of Directors
October 20, 1999
Page 2
cash, subject to certain adjustments, with debt, less working capital, of
approximately $6,500,000 remaining at BFC. The Stock Purchase Agreement
provided for the assignment of CEC's rights and obligations thereunder to Carbon
as an affiliate of Yorktown.
On October 14, 1999, Carbon, CEC and Yorktown entered into an Exchange and
Financing Agreement. Under the Exchange and Financing Agreement, each of
Carbon, CEC and Yorktown agreed that, as part of an overall plan to contribute
cash, securities and other property to Carbon by CEC, Yorktown and CEC
shareholders: (1) CEC would assign its rights under the BFC Stock Purchase
Agreement to Carbon; (2) Yorktown would purchase 4,500,000 shares of Carbon
common stock for $24,750,000 (in order, in large part, to provide equity
financing for the total purchase price of the BFC shares under the Stock
Purchase Agreement); and (3) Carbon would make an offer to all shareholders of
CEC to exchange one share of Carbon common stock for each outstanding share of
CEC common stock (hereinafter referred to as the "Exchange Offer").
You have requested our opinion as to whether the Exchange Offer described
above is a taxable transaction for U.S. federal income tax purposes.
Assumptions, Qualifications and Conditions
------------------------------------------
Our opinion as set forth below is based upon a number of assumptions,
qualifications and conditions. If any of these assumptions, qualifications or
conditions is not accurate or satisfied, the opinion set forth below could
change or be withdrawn. These assumptions, qualifications and conditions are as
follows:
1. The Exchange Offer will be effectuated in accordance with the executed
Exchange and Financing Agreement, as amended, between Carbon, CEC and Yorktown
dated October 14, 1999 pertaining to the Exchange Offer, and all other documents
entered into in connection with the Exchange and Financing Agreement (the
"Transaction Documents");
2. All Transaction Documents have been or will be properly executed and are
valid, binding and enforceable in accordance with their terms, and all copies of
such documents provided to us are accurate reproductions of the originals;
<PAGE>
Carbon Energy Corporation
Board of Directors
October 20, 1999
Page 3
3. The Exchange Offer and related transactions will take place as described
in the Transaction Documents and in the Registration Statement, and the facts
described in those documents are accurate, complete and will not materially
change, and the conduct of the parties is and will be materially consistent with
those facts; and
4. The representations made to us in the Representation Letters, which we
have not independently verified, and the factual matters described in the
Registration Statement, which have not been independently verified, are true,
complete and accurate in all material respects.
Our opinion is based on the existing Sections of the Code,/1/ applicable
Treasury Regulations issued thereunder, the official published interpretations
of those provisions by the Internal Revenue Service and the courts, and other
administrative pronouncements of the Internal Revenue Service, all of which are
subject to change, which changes could be applied retroactively. If the
applicable law changes, our opinion may be different. Moreover, the IRS or a
court may disagree with the conclusions expressed herein.
Opinion Not a Guarantee of Favorable Results
--------------------------------------------
Any tax planning of consequence involves inherent risk. Our opinion set
forth below merely constitutes our best legal judgment based upon the facts, the
assumptions, and qualifications and the conditions set forth above. Our opinion
is not binding on the Service or the courts, and our opinion does not constitute
"insurance" or a guarantee that our conclusion is correct. Rather, the Service
may challenge the positions set forth below and the courts may uphold that
position.
Opinion
-------
Subject to the assumptions, conditions and qualifications described above,
and based on existing federal income tax law, it is our opinion that, for U.S.
federal income tax purposes, assuming that Carbon acquires 80% of the
outstanding CEC stock pursuant to the Exchange Offer, the Exchange Offer should
be treated as a tax-free reorganization under Section 368(a)(1)(B) of the
____________________
/1/ All Section references are to the Internal Revenue Code of 1986, as amended,
unless otherwise specified.
<PAGE>
Carbon Energy Corporation
Board of Directors
October 20, 1999
Page 4
Code. Furthermore, the Exchange Offer likely constitutes a tax-free transfer of
property to Carbon by the holders of CEC common stock governed by Section 351 of
the Code.
The undersigned hereby consents to: (i) filing this opinion as Exhibit 8.1
to the Registration Statement; and (ii) using its name in the Registration
Statement under the caption "LEGAL MATTERS."
Very truly yours,
Holland & Hart LLP
<PAGE>
EXHIBIT 8.2
[Letterhead of Bennett Jones]
October 20, 1999
Board of Directors
Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, CO 80290-1101
Ladies and Gentlemen:
Re: Exchange of CEC Resources Ltd. ("CEC") Shares for
Carbon Energy Corporation ("Carbon") Shares
We have been asked to give an opinion on the material Canadian income tax
consequences for the exchange (the "Exchange") of common stock of CEC for common
stock in Carbon. The Exchange will occur pursuant to the terms of the exchange
offer (the "Exchange Offer") contained in the draft Form S-4 Registration
Statement to be filed by Carbon with the United States Securities and Exchange
Commission ("SEC") on or about October 22, 1999 (the "Registration Statement").
Opinion
Based upon and subject to the foregoing, the discussions (which are reproduced
below) contained in the Registration Statement under the caption "Canadian
Federal Income Tax Consequences" express our opinion as to the material Canadian
income tax consequences of the Exchange to be effected in accordance with the
terms of the Exchange Offer. Due to the fact that this opinion is being
delivered prior to the Exchange being effectuated, it must be considered
prospective and dependent on future events. There can be no assurance that
changes in the law will not take place which could affect the Canadian income
tax consequences of the Exchange or that contrary positions may not be taken by
Revenue Canada and the applicable Canadian provincial taxing authorities. In
addition, our opinion is subject to the limitations and qualifications expressed
in the following opinion.
<PAGE>
October 20, 1999
Page Two
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Subject to the qualifications and assumptions contained herein, in the
opinion of Bennett Jones, Canadian counsel to CEC, the following is a
general summary of the material Canadian federal income tax consequences
generally applicable to holders of CEC common stock who dispose of CEC
common stock pursuant to the exchange offer. This summary:
(i) is based on the current provisions of the Income Tax Act (Canada) (the
"Canadian Tax Act"), the regulations thereunder (the "Regulations")
and counsel's understanding of the current administrative practices of
Revenue Canada, Customs, Excise and Taxation. This summary also takes
into account the amendments to the Canadian Tax Act and Regulations
publicly announced by the Canadian Minister of Finance prior to the
date hereof (the "Proposed Amendments") and assumes that all such
Proposed Amendments will be enacted in their present form. However,
no assurances can be given that the Proposed Amendments will be
enacted in the form proposed, or at all. Except for the foregoing,
this summary does not take into account or anticipate any changes in
law, whether by legislative, administrative or judicial decision or
action, nor does it take into account provincial, territorial or
foreign income tax legislation or considerations, which may differ
from the Canadian federal income tax consequences described herein;
and
(ii) applies only to persons who, within the meaning of the Canadian Tax
Act, acquire, hold and dispose of CEC common stock and Carbon common
stock as capital property, deal at arm's length with CEC and Carbon
and are not "financial institutions" for the purposes of the mark-to-
market rules. CEC common stock and Carbon common stock will generally
be considered to be capital property to a holder thereof provided that
the holder does not hold any such shares in the course of carrying on
a business of buying and selling shares and has not acquired such
shares in a transaction considered to be an adventure in the nature of
trade. Certain holders who are resident in Canada and who might not
otherwise be considered to hold CEC common stock as capital property
may be entitled to have such shares treated as capital property by
making the election provided by subsection 39(4) of the Canadian Tax
Act.
The tax consequences of the exchange will in all likelihood differ from one
holder to the next. Therefore, we urge you to consult your tax advisor
regarding the tax consequences unique to your situation.
<PAGE>
October 20, 1999
Page Three
Holders Resident in Canada
The following portion of the summary is applicable only to holders of CEC
common stock who are resident or deemed to be resident in Canada for the
purposes of the Canadian Tax Act (a "Canadian Holder").
Disposition of CEC Common Stock
On the exchange of CEC common stock for Carbon common stock, a Canadian
Holder will be considered to have disposed of the CEC common stock for
proceeds of disposition equal to the fair market value at the time of the
exchange of the Carbon common stock received by the holder. A Canadian
Holder will realize a capital gain or capital loss, as appropriate, equal
to the amount by which such proceeds of disposition, net of any reasonable
costs associated with the disposition, exceed or are less than, as
appropriate, the holder's adjusted cost base of the CEC common stock. The
cost to the Canadian Holder of the Carbon common stock received by such
holder will be equal to the fair market value of such shares at the time of
the exchange. The computation of the adjusted cost base of Carbon common
stock is discussed below in this section under the heading "Disposition of
Carbon Common Stock." The general tax treatment of capital gains and
losses is discussed in this section under the heading "Capital Gains and
Losses."
Disposition of Carbon Common Stock
A disposition or deemed disposition by a Canadian Holder of Carbon common
stock will generally give rise to a capital gain or capital loss, as
appropriate, equal to the amount by which the proceeds of disposition of
the Carbon common stock, net of any reasonable costs associated with the
disposition, exceed or are less than, as appropriate, the holder's adjusted
cost base of the Carbon common stock. In that regard, the cost to the
holder of the Carbon common stock acquired on the exchange will be averaged
with the adjusted cost base of any other Carbon common stock then owned by
such holder as capital property for the purposes of determining the
adjusted cost base of such Carbon common stock. The general tax treatment
of capital gains and losses is discussed below in this section under the
heading "Capital Gains and Losses".
Capital Gains and Losses
A Canadian Holder's taxable capital gain or allowable capital loss from the
disposition of CEC common stock or Carbon common stock will be equal to
three-quarters of the amount of the holder's capital gain or capital loss,
as appropriate, in respect of such disposition. A Canadian Holder must
include any such taxable capital gain in income for the taxation year of
disposition, and may, subject to the detailed provisions of the
<PAGE>
October 20, 1999
Page Four
Canadian Tax Act, deduct any such allowable capital loss from taxable
capital gains in the year in which such allowable capital loss is realized.
Subject to the detailed rules contained in the Canadian Tax Act, any
remaining allowable capital loss may generally be applied to reduce net
taxable gains realized by the holder in the three preceding and in all
subsequent taxation years.
If a Canadian Holder is a corporation, the amount of any capital loss
arising from a disposition or deemed disposition of CEC common stock or
Carbon common stock may be reduced by the amount of dividends received or
deemed to have been received by it on such shares to the extent and under
circumstances prescribed by the Canadian Tax Act. Similar rules may apply
where a corporation is a member of a partnership or a beneficiary of a
trust that owns CEC common stock or Carbon common stock.
Capital gains realized by a Canadian Holder who is an individual may be
subject to alternative minimum tax under the Canadian Tax Act, depending on
the individual's circumstances.
A Canadian Holder that is a "Canadian-controlled private corporation," as
defined in the Canadian Tax Act, may be liable to pay an additional
refundable tax of 6-2/3 percent on certain investment income, including
amounts in respect of taxable capital gains.
Eligibility for Investment
The Carbon common stock issued pursuant to the offer, when listed on a
prescribed stock exchange, which includes the American Stock Exchange, will
be qualified investments under the Canadian Tax Act for trusts governed by
registered retirement savings plans, registered retirement income funds and
deferred profit sharing plans. However, such shares will constitute
"foreign property," as defined in the Canadian Tax Act, for the purposes of
such plans.
Subsequent Transactions
As described in "The Exchange Offer - Second Step Merger", Carbon may, in
certain circumstances, merge CEC with a wholly-owned Canadian subsidiary of
Carbon (the "Second Step Merger"). The consequences under the Canadian Tax
Act to a holder whose CEC common stock is not exchanged under the exchange
offer and is disposed of in connection with the Second Step Merger will
depend upon the circumstances of the merger including, without limitation,
the consideration received by the holder and the person from whom such
consideration is received.
If a holder receives Carbon common stock or cash in consideration for the
disposition of CEC common stock to Carbon, the holder will realize a
capital gain (or a capital loss) to the extent that the proceeds received
for such common stock, net of any
<PAGE>
October 20, 1999
Page Five
reasonable costs associated with the disposition, exceed (or are less than)
the adjusted cost base of the CEC common stock disposed of.
If in the course of the Second Step Merger, CEC common stock is acquired by
CEC from an individual holder (including upon the exercise by an individual
holder of certain dissent rights), the individual holder will be deemed to
have received a taxable dividend in the amount by which the amount received
(other than in respect of interest awarded by a Court) exceeds the paid-up
capital of such CEC common stock. This amount will be excluded from the
former individual holder's proceeds of disposition for the purposes of
computing any taxable gain on the disposition. If the former individual
holder is a resident of Canada, the deemed dividend will be treated in the
same manner as a regular taxable dividend received from CEC. Corporations
or trusts or partnerships which have corporations as beneficiaries or
partners should consult their own tax advisors with respect to the income
tax consequences where CEC common stock is acquired by CEC.
Upon the merger of CEC and a wholly-owned Canadian affiliate of Carbon, the
Canadian Tax Act deems the CEC common stock to be disposed of and the
shares of the amalgamated corporation to be acquired for an amount equal to
the adjusted cost base to the former holders of the CEC common stock.
Consequently, no capital gain or capital loss would be realized by the
former holders upon such amalgamation. A subsequent disposition of the
shares of the amalgamated corporation acquired on the amalgamation may give
rise to a capital gain, a capital loss, or if such shares are repurchased
by the amalgamated corporation, a deemed dividend. If on such amalgamation
the former holder receives property other than shares of the amalgamated
corporation (such as Carbon shares or cash) or exercises a dissent right
pursuant to the Alberta Business Corporations Act and receives cash in
consideration for his CEC common stock, such former holder will have a
capital gain (or a capital loss) to the extent that the proceeds received
for such CEC common stock (other than in respect of interest awarded by a
Court), net of any reasonable costs associated with the disposition, exceed
(or are less than) the adjusted cost base of the CEC common stock disposed
of by the former holder.
Holders Not Resident in Canada
The following portion of the summary is applicable only to holders of CEC
common stock who are not and will not be resident nor deemed to be resident
in Canada for the purposes of the Canadian Tax Act and any applicable tax
treaty at any time they hold such shares, who do not use or hold and are
not deemed to use or hold their CEC common stock in carrying on a business
in Canada, and in the case of a holder who carries on an insurance business
in Canada and elsewhere, whose shares are not "designated insurance
property" and are not effectively connected with an insurance business
carried on in Canada at any time (a "Non-Resident Holder").
<PAGE>
October 20, 1999
Page Six
A Non-Resident Holder will not be subject to tax in respect of capital
gains realized on the disposition of CEC common stock provided that the CEC
common stock is not "taxable Canadian property" of the Non-Resident Holder
immediately before the exchange. The CEC common stock will not constitute
"taxable Canadian property" of a Non-Resident Holder provided that such
shares are listed on a prescribed stock exchange (which currently includes
the American Stock Exchange), and the holder, persons with whom such holder
does not deal at arm's length, or the holder together with all such
persons, has not owned (or had under option) 25 percent or more of the
issued shares of any class or series of the capital stock of CEC at any
time within five years preceding the date of the exchange, and the shares
were not acquired in a transaction which deemed them to be "taxable
Canadian property."
The Canadian federal income tax consequences to a Non-Resident Holder who
does not tender to the offer of the transactions described in this summary
under "Subsequent Transaction" may be substantially different than those
described above and may include, without limitation, the recognition of a
gain which is subject to tax in Canada and/or the receipt of deemed
dividends and/or interest which would be subject to Canadian withholding
tax. If CEC common stock ceases at any time to be listed on a prescribed
exchange, the stock will at that time be considered "taxable Canadian
property" to the Non-Resident Holder. Non-Resident Holders who are
considering not tendering to the exchange offer are urged to consult their
tax advisors as to the potential consequences to them of such transactions.
This opinion is effective as at the date hereof and is based upon laws in effect
and facts in existence as of such date. We undertake no duty to modify this
opinion to reflect subsequent facts or developments in the law occurring after
the date hereof.
The opinion has been delivered to you for the purposes of being included in
documents to be filed with the SEC. We hereby consent to the filing of this
opinion as such an exhibit. We also consent to the reference to our firm name
wherever appearing in the Registration Statement with respect to the discussion
of the material Canadian income tax consequences in connection with the Exchange
Offer. In giving this consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the SEC thereunder, nor
do we thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the SEC
thereunder.
Yours truly,
/s/ BENNETT JONES
<PAGE>
10/13/99
EXHIBIT 10.1
CARBON ENERGY CORPORATION
1999 STOCK OPTION PLAN
SECTION 1: PURPOSE
------------------
The purpose of the Carbon Energy Corporation 1999 Stock Option Plan (the
"Plan") is to further the growth and development of Carbon Energy Corporation, a
Colorado corporation (the "Company"), by affording an opportunity for stock
ownership to selected employees, directors and consultants of the Company and
its Subsidiaries who are responsible for the conduct and management of its
business or who are involved in endeavors significant to its success.
SECTION 2: DEFINITIONS
----------------------
Unless otherwise indicated, the following words when used herein shall have
the following meanings:
(a) "Affiliate" shall mean, with respect to any person or entity, a
person or entity that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such person or entity.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Cause" shall mean a termination on account of (1) repeated
refusal to obey written directions of the Board of Directors or a superior
officer (so long as such directions do not involve illegal or immoral
acts), (2) repeated acts of substance abuse which are materially injurious
to the Company or any of its Subsidiaries, (3) fraud or dishonesty that is
materially injurious to the Company or any of its Subsidiaries, (4) breach
of any material obligation of nondisclosure or confidentiality owed to the
Company or any of its Subsidiaries, (5) commission of a criminal offense
involving money or other property of the Company (excluding any traffic
violations or similar violations), or (6) commission of a criminal offense
that constitutes a felony in the jurisdiction in which the offense is
committed.
(d) "Change in Control" shall be deemed to have occurred:
(1) At such time as a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, becomes the beneficial owner of shares of the Company having
50% or more of the total number of votes that may be cast for the
election of Directors of the Company; or
(2) On the date on which the stockholders of the Company
approve: (A) any agreement for a merger or consolidation of the
Company with another entity, provided that there shall be no Change in
Control if the persons and entities who were the stockholders of the
Company immediately before such merger or consolidation continue to
own directly more than two-thirds of the outstanding
<PAGE>
voting securities of the corporation resulting from such merger or
consolidation in substantially the same proportion as their ownership
of the voting securities of the Company outstanding immediately before
such merger or consolidation; or (B) any sale, exchange or other
disposition of all or substantially all of the Company's assets; or
(3) On the effective date of any sale, exchange or other
disposition of greater than 50% in fair market value of the Company's
assets, other than in the ordinary course of business, whether in a
single transaction or a series of related transactions; or
(4) At such time that there is a change in more than a majority
of the Company's Board of Directors as a result of a proxy contest,
except this clause (4) will not apply to any Options of an Optionee
who, or an Affiliate of whom, has waged the proxy contest or has
endorsed the change in the Board of Directors.
In determining whether clause (1) of the preceding sentence has been
satisfied, the third person owning shares must be someone other than
Yorktown Energy Partners III, L.P., Yorktown Partners LLC, or entities
controlled by Yorktown Partners LLC. For this purpose, the term
"controlled" means possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person, whether
(1) through the ownership of more than 50% of the outstanding voting
securities of the person, (2) by contract or (3) by a position such as a
general partner or manager. The Plan Administrator's reasonable
determination as to whether such an event has occurred shall be final and
conclusive.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Common Stock" shall mean the Company's common stock (no par
value) and any share or shares of the Company's capital stock hereafter
issued or issuable in substitution for such shares.
(g) "Director" shall mean a member of the Board of Directors.
(h) "Early Exercise Stock Purchase Agreement" shall mean an agreement
for the repurchase by the Company of shares acquired upon exercise of any
portion of an Option prior to its vesting.
(i) "Incentive Stock Option" shall mean any Option granted to an
eligible employee under the Plan, which the Company intends at the time the
Option is granted to be an Incentive Stock Option within the meaning of
Section 422 of the Code.
(j) "Non-Employee Director" shall mean a Director who is a Non-
Employee Director within the meaning of Rule 16b-3 as promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as
amended from time to time.
2
<PAGE>
(k) "Nonqualified Stock Option" shall mean any Option granted to an
eligible employee, director or consultant under the Plan which is not an
Incentive Stock Option.
(l) "Option" shall mean and refer collectively to Incentive Stock
Options and Nonqualified Stock Options.
(m) "Option Agreement" means the agreement specified in Section 7.2.
(n) "Optionee" shall mean any employee, director or consultant who is
granted an Option under the Plan. "Optionee" shall also mean the personal
representative of an Optionee and any other person who acquires the right
to exercise an Option by bequest or inheritance.
(o) "Parent" shall mean a parent corporation of the Company as
defined in Section 424(e) of the Code.
(p) "Plan Administrator" shall mean the body which is responsible for
the administration of the Plan, as determined pursuant to Section 4.1.
(q) "Subsidiary" shall mean a subsidiary corporation of the Company
as defined in Section 424(f) of the Code.
SECTION 3: EFFECTIVE DATE
-------------------------
The effective date of the Plan is October 14, 1999; provided, however, that
the adoption of the Plan by the Board of Directors is subject to approval and
ratification by the stockholders of the Company within 12 months of the
effective date. Options granted under the Plan prior to approval of the Plan by
the stockholders of the Company shall be subject to approval of the Plan by the
stockholders of the Company.
SECTION 4: ADMINISTRATION
-------------------------
4.1 Plan Administrator. The Plan shall be administered by the Board of
------------------
Directors, unless and until such time as the Board of Directors delegates the
administration of the Plan to a committee. Any such committee shall be
appointed by and shall serve at the pleasure of the Board of Directors and shall
consist of two or more Non-Employee Directors and the President of the Company;
provided that no member of such committee shall participate in the deliberations
and actions of the committee with respect to the granting of an Option to that
member. The Board of Directors may from time to time remove members from or add
members to any such committee, and vacancies on the committee, howsoever caused,
shall be filled by the Board of Directors.
4.2 Meetings and Actions. The Plan Administrator shall hold meetings at
--------------------
such times and places as it may determine. A majority of the members of the Plan
Administrator shall constitute a quorum, and the acts of the majority of the
members present at a meeting or a consent in writing signed by all members of
the Plan Administrator shall be the acts of the Plan Administrator and shall be
final, binding and conclusive upon all persons, including the Company,
3
<PAGE>
its Subsidiaries, its stockholders, and all persons having any interest in
Options which may be or have been granted pursuant to the Plan.
4.3 Powers of Plan Administrator. The Plan Administrator shall have the
----------------------------
full and exclusive right to grant and determine terms and conditions of all
Options granted under the Plan and to prescribe, amend and rescind rules and
regulations for administration of the Plan. In granting Options, the Plan
Administrator shall take into consideration the contribution the Optionee has
made or may make to the success of the Company or its Subsidiaries and such
other factors as the Plan Administrator shall determine.
4.4 Interpretation of Plan. The determination of the Plan Administrator as
----------------------
to any disputed question arising under the Plan, including questions of
construction and interpretation, shall be final, binding and conclusive upon all
persons, including the Company, its Subsidiaries, its stockholders, and all
persons having any interest in Options which may be or have been granted
pursuant to the Plan.
4.5 Indemnification. Each person who is or shall have been a member of the
---------------
Plan Administrator or of the Board of Directors shall be indemnified and held
harmless by the Company against and from any loss, cost, liability or expense
that may be imposed upon or reasonably incurred in connection with or resulting
from any claim, action, suit or proceeding to which such person may be a party
or in which such person may be involved by reason of any action taken or failure
to act under the Plan and against and from any and all amounts paid in
settlement thereof, provided that the Company approved such settlement, or paid
in satisfaction of a judgment in any such action, suit or proceeding, provided
such person shall give the Company an opportunity, at its own expense, to handle
and defend the same before undertaking to handle and defend it on such person's
own behalf. The foregoing right of indemnification shall not be exclusive of,
and is in addition to, any other rights of indemnification to which any person
may be entitled under the Company's Certificate of Incorporation or Bylaws, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
them or hold them harmless.
SECTION 5: STOCK SUBJECT TO THE PLAN
------------------------------------
5.1 Number. The aggregate number of shares of Common Stock which may be
------
issued under Options granted pursuant to the Plan shall not exceed seven hundred
thousand (700,000) shares. Shares which may be issued under Options may consist,
in whole or in part, of authorized but unissued stock or treasury stock of the
Company not reserved for any other purpose.
5.2 Unused Stock. If any outstanding Option under the Plan expires or for
------------
any other reason ceases to be exercisable, in whole or in part, other than upon
exercise of the Option, the shares which were subject to such Option and as to
which the Option had not been exercised shall continue to be available for
issuance under the Plan.
5.3 Adjustment for Change in Outstanding Shares. If there is any change,
-------------------------------------------
increase or decrease, in the outstanding shares of Common Stock which is
effected without receipt of additional consideration by the Company, by reason
of a stock dividend, recapitalization, merger, consolidation, stock split,
combination or exchange of stock, or other similar circumstances, then
4
<PAGE>
in each such event, the Plan Administrator shall make an appropriate adjustment
in the aggregate number of shares of stock available under the Plan, the number
of shares of stock subject to each outstanding Option and the Option prices in
order to prevent the dilution or enlargement of any Optionee's rights. The Plan
Administrator's determinations in making adjustments shall be final and
conclusive.
5.4 Reorganization or Sale of Assets. In the event of (i) a dissolution,
--------------------------------
liquidation or sale of all or substantially all of the Company's assets; (ii) a
merger or consolidation of the Company with another entity; or (iii) any other
capital reorganization in which the persons and entities who were the
stockholders of the Company immediately before such capital reorganization own,
directly or indirectly, less than two-thirds of the outstanding voting
securities of the Company following such capital reorganization (each of such
events being referred to hereinafter as a "Reorganization Event"), the Plan
Administrator shall, as to outstanding Options, either (1) make appropriate
provision for the protection of any such outstanding Options by the substitution
on an equitable basis of appropriate stock of the Company, or of the merged,
consolidated or otherwise reorganized corporation, which will be issuable in
respect of the Common Stock, provided that no additional benefits shall be
conferred upon Optionees as a result of such substitution, and provided further
that the excess of the aggregate fair market value of the shares subject to the
Options immediately after such substitution over the purchase price thereof is
not more than the excess of the aggregate fair market value of the shares
subject to such Options immediately before such substitution over the purchase
price thereof, or (2) upon written notice to all Optionees, which notice shall
be given not less than 20 days prior to the effective date of the Reorganization
Event, provide that all unexercised Options must be exercised within a specified
number of days (which shall not be less than 30) of the date of such notice or
such Options will terminate. In response to a notice provided pursuant to
clause (2) of the preceding sentence, an Optionee may make an irrevocable
election to exercise the Optionee's Option contingent upon and effective as of
the effective date of the Reorganization Event. Options which are not exercised
within the specified period following the receipt of such a notice shall
terminate and cease to be outstanding. If the Reorganization Event results in a
Change of Control, then the provisions of Section 9 shall be applied before the
provisions of this Section 5.4 become effective.
SECTION 6: ELIGIBILITY
----------------------
All salaried employees of the Company and its Subsidiaries who are
responsible for the conduct and management of its business or who are involved
in endeavors significant to its success shall be eligible to receive both
Incentive Stock Options and Nonqualified Stock Options under the Plan.
Directors and consultants who are not employees of the Company or its
Subsidiaries but who are involved in endeavors significant to its success shall
be eligible to receive Nonqualified Stock Options, but not Incentive Stock
Options, under the Plan.
SECTION 7: GRANT OF OPTIONS
---------------------------
7.1 Grant of Options. The Plan Administrator may from time to time in its
----------------
discretion determine which of the eligible employees, directors and consultants
of the Company or its Subsidiaries should receive Options, the type of Options
to be granted (whether Incentive Stock Options or Nonqualified Stock Options),
the number of shares subject to such Options, and the
5
<PAGE>
dates on which such Options are to be granted. No employee may be granted
Incentive Stock Options to the extent that the aggregate fair market value
(determined as of the time each Option is granted) of the Common Stock with
respect to which any such Options are exercisable for the first time during a
calendar year (under all incentive stock option plans of the Company and its
Parent and Subsidiaries) would exceed $100,000. To the extent that the
limitation set forth in the preceding sentence has been exceeded, the Options
which exceed the annual limitation shall be deemed to be Nonqualified Stock
Options rather than Incentive Stock Options.
7.2 Option Agreement. Each Option granted under the Plan shall be
----------------
evidenced by a written Option Agreement setting forth the terms upon which the
Option is granted. Each Option Agreement shall designate the type of Options
being granted (whether Incentive Stock Options or Nonqualified Stock Options),
and shall state the number of shares of Common Stock, as designated by the Plan
Administrator, to which that Option pertains. More than one Option may be
granted to an eligible person.
7.3 Option Price. The option price per share of Common Stock under each
------------
Option shall be determined by the Plan Administrator and stated in the Option
Agreement. The option price for Incentive Stock Options granted under the Plan
shall not be less than 100% of the fair market value (determined as of the day
the Option is granted) of the shares subject to the Option. The option price for
Nonqualified Stock Options granted under the Plan shall not be less than 85% of
the fair market value (determined as of the day the Option is granted) of the
shares subject to the Option.
7.4 Determination of Fair Market Value. If the Common Stock is listed upon
----------------------------------
an established stock exchange or exchanges, then the fair market value per share
shall be deemed to be the average of the quoted closing prices of the Common
Stock on such stock exchange or exchanges for the five business days immediately
preceding the day for which the determination is made. If the Common Stock is
not listed upon an established stock exchange but is traded in the NASDAQ
National Market System, the fair market value per share shall be deemed to be
the average of the closing price of the Common Stock in the National Market
System for the five business days immediately preceding the day for which the
determination is made. If the Common Stock is not listed upon an established
stock exchange and is not traded in the National Market System, the fair market
value per share shall be deemed to be the average of the mean between the dealer
"bid" and "ask" closing prices of the Common Stock on the NASDAQ System for each
of the five business days immediately preceding the day for which the
determination is made, or if there shall have been no trading of the Common
Stock during those days, on the next preceding five business days during which
there was such trading. If none of these conditions apply, the fair market value
per share shall be deemed to be an amount as determined in good faith by the
Plan Administrator by applying any reasonable valuation method.
7.5 Duration of Options. Each Option shall be of a duration as specified
-------------------
in the Option Agreement; provided, however, that the term of each Option shall
be no more than ten years from the date on which the Option is granted and shall
be subject to early termination as provided herein.
6
<PAGE>
7.6 Additional Limitations on Grant. No Incentive Stock Option shall be
-------------------------------
granted to an employee who, at the time the Incentive Stock Option is granted,
owns stock (as determined in accordance with Section 424(d) of the Code)
representing more than 10% of the total combined voting power of all classes of
stock of the Company or of any Parent or Subsidiary, unless the option price of
such Incentive Stock Option is at least 110% of the fair market value
(determined as of the day the Incentive Stock Option is granted) of the stock
subject to the Incentive Stock Option and the Incentive Stock Option by its
terms is not exercisable more than five years from the date it is granted.
7.7 Early Exercise. The Option Agreement may, but need not, provide that
--------------
the Optionee may elect to exercise all or any portion of the Option prior to its
vesting. Any shares purchased upon exercise of an unvested portion of the Option
shall be subject to a right of repurchase in favor of the Company in accordance
with the terms of an Early Exercise Stock Purchase Agreement which shall be set
forth as an attachment to the Stock Option Agreement.
7.8 Other Terms and Conditions. The Option Agreement may contain such
--------------------------
other provisions, which shall not be inconsistent with the Plan, as the Plan
Administrator shall deem appropriate, including, without limitation, provisions
that relate the Optionee's ability to exercise an Option to the passage of time
or the achievement of specific goals or the occurrence of certain events, as
specified by the Plan Administrator.
7.9 Substitution of Options for Existing Options Under the CEC Resources
--------------------------------------------------------------------
Ltd. Employee Incentive Share Option Plan. The Plan Administrator shall grant
- -----------------------------------------
under the Plan substitute Options for each option outstanding as of October 14,
1999, under the CEC Resources Ltd. Employee Incentive Share Option Plan (the
"Prior Plan"). Any Option granted under this Plan in substitution for an option
granted under the Prior Plan shall expressly provide that it is being granted in
full satisfaction of, and in substitution for, any and all options previously
granted under the Prior Plan. The following terms and conditions of the
substitute Options granted pursuant to this Plan shall be the same as the terms
and conditions relating to the specific options granted pursuant to an
optionee's Stock Option Agreement executed under the terms of the Prior Plan:
(1) the grant and exercise prices of the Option; (2) the character of the Option
as an Incentive Stock Option or a Nonqualified Stock Option; (3) the vesting
provisions applicable to the Option (except to the extent previously modified in
executed employment agreements between the Optionee and CEC Resources Ltd.); (4)
the change in control provisions applicable to the Option (except to the extent
previously modified in executed employment agreements between the Optionee and
CEC Resources, Ltd.); (5) the provisions addressing the consequences of the
Optionee's termination of employment for any reason; (6) the limitations on
assignability of the Option; (7) the expiration date of the Option; and (8) the
payment method for the purchase of the shares subject to the Option. To the
maximum extent possible, such substitution shall be accomplished in a manner
that meets the requirements of Section 424(a) of the Code.
SECTION 8: EXERCISE OF OPTIONS
------------------------------
8.1 Manner of Exercise. Subject to the limitations and conditions of the
------------------
Plan or the Option Agreement, an Option shall be exercisable, in whole or in
part, from time to time, by giving written notice of exercise to the Secretary
of the Company, which notice shall specify the
7
<PAGE>
number of shares of Common Stock to be purchased and shall be accompanied by (1)
payment in full to the Company of the purchase price of the shares to be
purchased, plus (2) payment in full of such amount as the Company shall
determine to be sufficient to satisfy any liability it may have for any
withholding of federal, state or local income or other taxes incurred by reason
of the exercise of the Option, and (3) representations meeting the requirements
of Sections 12.3 if requested by the Company.
8.2 Payment of Purchase Price. Payment for shares and withholding taxes
-------------------------
shall be in the form of either (1) cash, (2) a certified or bank cashier's check
to the order of the Company, or (3) shares of the Common Stock, properly
endorsed to the Company, in an amount the fair market value of which on the date
of receipt by the Company (as determined in accordance with Section 7.4) equals
or exceeds the aggregate option price of the shares with respect to which the
Option is being exercised, (4) any other form of legal consideration that may be
acceptable to the Plan Administrator, or (5) in any combination thereof;
provided, however, that no payment may be made in shares of Common Stock unless
the Plan Administrator has approved of payment in such form by such Optionee
with respect to the Option exercise in question. Should the Common Stock be
registered under Section 12(g) of the Securities Exchange Act of 1934, as
amended, at the time an Option is exercised, and to the extent the Option is
exercised for vested shares, then payment may also be made through a special
sale and remittance procedure pursuant to which the Optionee shall concurrently
provide irrevocable written instructions (A) to a brokerage firm designated by
the Company to effect the immediate sale of the purchased shares and remit to
the Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable withholding taxes, and (B) to the Company to deliver
the certificates for the purchased shares directly to such brokerage firm in
order to complete the sale. Upon the exercise of any Option, the Company, in its
sole discretion, may permit the deferred payment of the purchase price on such
terms and conditions as the Company shall specify.
SECTION 9: CHANGE IN CONTROL
----------------------------
Notwithstanding any vesting requirements contained in any Option Agreement,
all outstanding Options shall become immediately exercisable in full upon the
occurrence of a Change in Control. However, if the Change in Control occurs
because of the change in the Board of Directors described in clause (4) of the
definition of Change in Control, this Section 9 shall not apply to any Options
of an Optionee who, or an Affiliate of whom, has waged a proxy contest resulting
in the change in more than a majority of the Board of Directors or has endorsed
the change in the Board of Directors, and the exercisability of the Options of
that Optionee shall not be affected by this Section 9. If any employment
agreement between an Optionee and the Company provides that Options granted
under this Plan will become vested upon the occurrence of other events (such as,
but not limited to, an event that constitutes a change in control as defined in
that employment agreement but that is not a Change in Control as defined in
Section 2(d) of this Plan), then Options granted under this Plan shall become
vested upon the occurrence of such other events in accordance with the terms of
such employment agreement, in addition to becoming vested in accordance with the
terms of this Plan and the Option Agreement issued to the Optionee under this
Plan.
8
<PAGE>
SECTION 10: EFFECT OF TERMINATION OF EMPLOYMENT
-----------------------------------------------
10.1 Termination of Employment Other Than Upon Death or Disability.
-------------------------------------------------------------
Subject to any limitations set forth in the Option Agreement, and provided that
the notice of exercise is provided prior to the expiration of the Option, the
Optionee shall be entitled to exercise the Option (i) during the Optionee's
employment by the Company or a Subsidiary and (ii) for a period of three months
after the date of a termination of employment other than for Cause. Any vesting
of the Option shall cease upon termination of employment, and the Option shall
be exercisable only to the extent that it was exercisable on the date of such
termination. Any Options not exercisable as of the date of termination, and any
Options or portions of Options not exercised within the period specified herein,
shall terminate.
10.2 Termination By Death of Optionee. Notwithstanding Section 10.1, if an
--------------------------------
Optionee should die while in the employ of the Company or a Subsidiary or within
a period of three months after termination of employment with the Company or a
Subsidiary under circumstances in which Section 10.1 would permit the exercise
of the Option following termination, the personal representatives of the
Optionee's estate or the person or persons who shall have acquired the Option
from the Optionee by bequest or inheritance may exercise the Option at any time
within the year after the date of death, but not later than the expiration date
of the Option. Any vesting of the Option shall cease upon termination of
employment, and the Option shall be exercisable only to the extent that it was
exercisable on the date of such termination. Any Options not exercisable as of
the date of termination, and any Options or portions of Options not exercised
within the period specified herein, shall terminate.
10.3 Termination By Disability of Optionee. Notwithstanding Section 10.1,
-------------------------------------
if an Optionee should terminate employment with the Company or a Subsidiary by
reason of the Optionee's disability (within the meaning of Section 22(e)(3) of
the Code), the Optionee may exercise the Option at any time within one year
after the date of termination but not later than the expiration date of the
Option. Any vesting of the Option shall cease upon termination of employment,
and the Option shall be exercisable only to the extent that it was exercisable
on the date of such termination. Any Options not exercisable as of the date of
termination, and any Options or portions of Options not exercised within the
period specified herein, shall terminate.
10.4 Termination of Directors and Consultants. For purposes of this
----------------------------------------
Section 10, a termination of employment shall be deemed to include the
termination of a director's service as a member of the board of directors and
the termination of a consulting arrangement in the case of consultants, provided
that immediately following such termination the director or consultant is not
employed by the Company or a Subsidiary.
10.5 Breach of Covenant Not to Compete. Notwithstanding anything herein to
---------------------------------
the contrary, Options granted to the Optionee shall terminate immediately if the
Optionee breaches any obligation under a covenant not to compete with the
Company or any of its Subsidiaries.
10.6 Extension of Option Termination Date. The Plan Administrator, in its
------------------------------------
sole discretion, may extend the termination date of an Option granted under the
Plan without regard to the preceding provisions of this Section 10. In such
event, the termination date shall be a date
9
<PAGE>
selected by the Plan Administrator in its sole discretion, but not later than
the latest expiration date of the Option permitted pursuant to Section 7.5. Such
extension may be made in the Option Agreement as originally executed or by
amendment to the Option Agreement, either prior to or following termination of
an Optionee's employment. The Plan Administrator shall have no power to extend
the termination date of an Incentive Stock Option beyond the periods provided in
Sections 10.1, 10.2 and 10.3 prior to the termination of the Optionee's
employment or without the approval of the Optionee, which may be granted or
withheld in the Optionee's sole discretion. Any extension of the termination
date of an Incentive Stock Option shall be deemed to be the grant of a new
Option for purposes of the Code. Any extension of the termination date of an
Incentive Stock Option beyond the termination dates set forth in Sections 10.1,
10.2 and 10.3 may result in the disqualification of the Option as an Incentive
Stock Option.
SECTION 11: NON-TRANSFERABILITY OF OPTION
------------------------------------------
Options granted pursuant to the Plan are not transferable by the Optionee
other than by Will or the laws of descent and distribution and shall be
exercisable during the Optionee's lifetime only by the Optionee. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the
Option contrary to the provisions hereof, or upon the levy of any attachment or
similar process upon the Option, the Option shall immediately become null and
void. Notwithstanding the foregoing, an Option may be transferred by an
Optionee solely to (i) members of the Optionee's immediate family (children,
grandchildren, or spouse); (ii) trusts for the benefit of such family members;
or (iii) partnerships where the only partners are such family members.
SECTION 12: ISSUANCE OF SHARES
------------------------------
12.1 Transfer of Shares to Optionee. As soon as practicable after the
------------------------------
Optionee has given the Company written notice of exercise of an Option and has
otherwise met the requirements of Section 8.1, the Company shall issue or
transfer to the Optionee the number of shares of Common Stock as to which the
Option has been exercised and shall deliver to the Optionee a certificate or
certificates therefor, registered in the Optionee's name. If the Optionee has
made an early exercise in accordance with the Option Agreement, the Company may
retain the non-vested shares of Common Stock until they have vested pursuant to
the Early Exercise Stock Purchase Agreement. In no event shall the Company be
required to transfer fractional shares to the Optionee, and in lieu thereof, the
Company may pay an amount in cash equal to the fair market value (as determined
in accordance with Section 7.4) of such fractional shares on the date of
exercise.
12.2 Compliance with Laws. If the issuance or transfer of shares by the
--------------------
Company would for any reason, in the opinion of counsel for the Company, violate
any applicable federal or state laws or regulations, the Company may delay
issuance or transfer of such shares to the Optionee until compliance with such
laws can reasonably be obtained. In no event shall the Company be obligated to
effect or obtain any listing, registration, qualification, consent or approval
under any applicable federal or state laws or regulations or any contract or
agreement to which the Company is a party with respect to the issuance of any
such shares. If, after reasonable efforts, the Company is unable to obtain the
authority which counsel for the Company deems
10
<PAGE>
necessary for the lawful issuance and sale of shares upon exercise of Options
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell shares upon exercise of such Options unless and until such
authority is obtained.
12.3 Investment Representation. The Company may require any Optionee, as a
-------------------------
condition precedent to exercising any Option, to provide a written
representation providing assurances satisfactory to the Company (i) as to the
Optionee's knowledge and experience in financial and business matters and/or
that the Optionee has engaged a purchaser representative reasonably satisfactory
to the Company who is knowledgeable and experienced in financial and business
matters, (ii) that the Optionee is capable of evaluating, alone or together with
the purchaser representative, the merits and risks of exercising the Option; and
(iii) that the Optionee is acquiring the stock subject to the Option for such
person's own account and not with any present intention of selling or otherwise
distributing the stock. Such a representation shall not be required if (A) the
issuance of the shares upon the exercise of the Option has been registered under
a then currently effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), or (B) as to any particular
requirement, a determination is made by counsel for the Company that such
representation is not required. Certificates representing Common Stock acquired
upon exercise of Options may contain such legends and transfer restrictions as
the Company shall deem reasonably necessary or desirable, including, without
limitation, legends restricting transfer of the Common Stock until there has
been compliance with federal and state securities laws and until the Optionee or
any other holder of the Common Stock has paid the Company such amounts as may be
necessary in order to satisfy any withholding tax liability of the Company.
SECTION 13: AMENDMENTS
----------------------
The Board of Directors may at any time and from time to time alter, amend,
suspend or terminate the Plan or any part thereof as it may deem proper, except
that no such action shall diminish or impair the rights under an Option
previously granted. Unless the stockholders of the Company shall have given
their approval, the total number of shares for which Options may be issued under
the Plan shall not be increased, except as provided in Section 5.3, and no
amendment shall be made which reduces the price at which the Common Stock may be
offered under the Plan below the minimum required by Section 7.3, except as
provided in Section 5.3, or which materially modifies the requirements as to
eligibility for participation in the Plan. Subject to the terms and conditions
of the Plan, the Board of Directors may modify, extend or renew outstanding
Options granted under the Plan, or accept the surrender of outstanding Options
to the extent not theretofore exercised and authorize the granting of new
Options in substitution therefor, except that no such action shall diminish or
impair the rights under an Option previously granted without the consent of the
Optionee.
SECTION 14: TERM OF PLAN
------------------------
This Plan shall terminate on September 1, 2009; provided, however, that the
Board of Directors may at any time prior thereto suspend or terminate the Plan.
No such suspension or termination shall diminish or impair the rights under an
Option previously granted without the consent of the Optionee.
11
<PAGE>
SECTION 15: RIGHTS AS STOCKHOLDER
----------------------------------
An Optionee shall have no rights as a stockholder of the Company with
respect to any shares of Common Stock covered by an Option until the date of the
issuance of the stock certificate for such shares.
SECTION 16: NO EMPLOYMENT RIGHTS
---------------------------------
Nothing contained in this Plan or in any Option granted under the Plan
shall confer upon any Optionee any right with respect to the continuation of
such Optionee's employment by the Company or any Subsidiary or interfere in any
way with the right of the Company or any Subsidiary, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the Optionee from the
rate in existence at the time of the grant of the Option.
SECTION 17: GOVERNING LAW
--------------------------
This Plan, and all Options granted under this Plan, shall be construed and
shall take effect in accordance with the laws of the State of Colorado, without
regard to the conflicts of laws rules of such State.
SECTION 18: USE OF PROCEEDS
----------------------------
Any cash proceeds received by the Company from the sale of shares of Common
Stock under the Plan shall be used for general corporate purposes.
Adopted effective the 14th day of October, 1999.
CARBON ENERGY CORPORATION
By:______________________________
Title:___________________________
12
<PAGE>
10/13/99
EXHIBIT 10.2
CARBON ENERGY CORPORATION
1999 RESTRICTED STOCK PLAN
SECTION 1: Purpose
-------------------
The purpose of the Carbon Energy Corporation 1999 Restricted Stock Plan
(the "Plan") is to further the growth and development of Carbon Energy
Corporation, a Colorado corporation (the "Company"), by affording an opportunity
for stock ownership to selected employees, directors and consultants of the
Company and its Subsidiaries who are responsible for the conduct and management
of its business or who are involved in endeavors significant to its success.
SECTION 2: Definitions
-----------------------
Unless otherwise indicated, the following words when used herein shall have
the following meanings:
(a) "Affiliate" shall mean, with respect to any person or entity, a
person or entity that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such person or entity.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Change in Control" shall be deemed to have occurred:
(1) At such time as a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, becomes the beneficial owner of shares of the Company having
50% or more of the total number of votes that may be cast for the
election of Directors of the Company; or
(2) On the date on which the stockholders of the Company
approve: (A) any agreement for a merger or consolidation of the
Company with another entity, provided that there shall be no Change in
Control if the persons and entities who were the stockholders of the
Company immediately before such merger or consolidation continue to
own directly more than two-thirds of the outstanding voting securities
of the corporation resulting from such merger or consolidation in
substantially the same proportion as their ownership of the voting
securities of the Company outstanding immediately before such merger
or consolidation; or (B) any sale, exchange or other disposition of
all or substantially all of the Company's assets; or
(3) On the effective date of any sale, exchange or other
disposition of greater than 50% in fair market value of the Company's
assets, other than in the ordinary course of business, whether in a
single transaction or a series of related transactions; or
<PAGE>
(4) At such time that there is a change in more than a majority
of the Company's Board of Directors as a result of a proxy contest,
except this clause (4) will not apply to any Common Stock of a Grantee
who, or an Affiliate of whom, has waged the proxy contest or has
endorsed the change in the Board of Directors.
In determining whether clause (1) of the preceding sentence has been
satisfied, the third person owning shares must be someone other than
Yorktown Energy Partners III, L.P., Yorktown Partners LLC, or entities
controlled by Yorktown Partners LLC. For this purpose, the term
"controlled" means possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person, whether
(1) through the ownership of more than 50% of the outstanding voting
securities of the person, (2) by contract or (3) by a position such as a
general partner or manager. The Plan Administrator's reasonable
determination as to whether such an event has occurred shall be final and
conclusive.
(d) "Common Stock" shall mean the Company's common stock (no par
value) and any share or shares of the Company's capital stock hereafter
issued or issuable in substitution for such shares.
(e) "Director" shall mean a member of the Board of Directors.
(f) "Plan Administrator" shall mean the body which is responsible for
the administration of the Plan, as determined pursuant to Section 4.1.
(g) "Recipient" shall mean the employee, director, or consultant of
the Company or its Subsidiaries who has been granted Restricted Stock under
this Plan.
(h) "Restricted Stock" shall mean shares of Common Stock granted to
an employee, director, or consultant of the Company or its Subsidiaries,
which are subject to restrictions set forth in a Stock Restriction
Agreement in such form as the Plan Administrator in its sole discretion
shall specify at the time that the shares are granted.
(i) "Stock Restriction Agreement" shall mean the agreement between
the Company and a Recipient pursuant to which Restricted Stock is granted
to the Recipient and which sets forth the restrictions on such Restricted
Stock.
(j) "Subsidiary" shall mean a subsidiary corporation of the Company
as defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended.
SECTION 3: EFFECTIVE DATE
--------------------------
The effective date of the Plan is October 14, 1999.
SECTION 4: ADMINISTRATION
--------------------------
4.1 Plan Administrator. The Plan shall be administered by the Board of
------------------
Directors, unless and until such time as the Board of Directors delegates the
administration of the Plan to a
2
<PAGE>
committee. Any such committee shall be appointed by and shall serve at the
pleasure of the Board of Directors and shall consist of two or more non-employee
Directors and the President of the Company; provided that no member of such
committee shall participate in the deliberations and actions of the committee
with respect to the granting of Restricted Stock to that member. The Board of
Directors may from time to time remove members from or add members to any such
committee, and vacancies on the committee, howsoever caused, shall be filled by
the Board of Directors.
4.2 Meetings and Actions. The Plan Administrator shall hold meetings at
--------------------
such times and places as it may determine. A majority of the members of the Plan
Administrator shall constitute a quorum, and the acts of the majority of the
members present at a meeting or a consent in writing signed by all members of
the Plan Administrator shall be the acts of the Plan Administrator and shall be
final, binding and conclusive upon all persons, including the Company, its
Subsidiaries, its stockholders, and all persons having any interest in
Restricted Stock which may be or has been granted pursuant to the Plan.
4.3 Powers of Plan Administrator. The Plan Administrator shall have the
----------------------------
full and exclusive right to grant and determine terms and conditions of all
Stock Restriction Agreements under the Plan and to prescribe, amend and rescind
rules and regulations for administration of the Plan. In granting Restricted
Stock, the Plan Administrator shall take into consideration the contribution the
Recipient has made or may make to the success of the Company or its Subsidiaries
and such other factors as the Plan Administrator shall determine.
4.4 Interpretation of Plan. The determination of the Plan Administrator as
----------------------
to any disputed question arising under the Plan, including questions of
construction and interpretation, shall be final, binding and conclusive upon all
persons, including the Company, its Subsidiaries, its stockholders, and all
persons having any interest in Restricted Stock which may be or has been granted
pursuant to the Plan.
4.5 Indemnification. Each person who is or shall have been a member of the
---------------
Plan Administrator or of the Board of Directors shall be indemnified and held
harmless by the Company against and from any loss, cost, liability or expense
that may be imposed upon or reasonably incurred in connection with or resulting
from any claim, action, suit or proceeding to which such person may be a party
or in which such person may be involved by reason of any action taken or failure
to act under the Plan and against and from any and all amounts paid in
settlement thereof, provided that the Company approved such settlement, or paid
in satisfaction of a judgment in any such action, suit or proceeding, provided
such person shall give the Company an opportunity, at its own expense, to handle
and defend the same before undertaking to handle and defend it on such person's
own behalf. The foregoing right of indemnification shall not be exclusive of,
and is in addition to, any other rights of indemnification to which any person
may be entitled under the Company's Certificate of Incorporation or Bylaws, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
them or hold them harmless.
3
<PAGE>
SECTION 5: STOCK SUBJECT TO THE PLAN
-------------------------------------
5.1 Number. The aggregate number of shares of Common Stock which may be
------
granted under the Plan shall not exceed three hundred thousand (300,000) shares.
Shares which may be issued as Restricted Stock may consist, in whole or in part,
of authorized but unissued stock or treasury stock of the Company not reserved
for any other purpose.
5.2 Unused Stock. If any Restricted Stock granted under the Plan is
------------
forfeited, in whole or in part, such shares shall once again be available for
issuance under the Plan.
5.3 Adjustment for Change in Outstanding Shares. If there is any change,
-------------------------------------------
increase or decrease, in the outstanding shares of Common Stock which is
effected without receipt of additional consideration by the Company, by reason
of a stock dividend, recapitalization, merger, consolidation, stock split,
combination or exchange of stock, or other similar circumstances, then in each
such event, the Plan Administrator shall make an appropriate adjustment in the
aggregate number of shares of Common Stock available under the Plan. The Plan
Administrator's determinations in making adjustments shall be final and
conclusive.
SECTION 6: ELIGIBILITY
-----------------------
All salaried employees, all directors, and all consultants of the Company
and its Subsidiaries who are responsible for the conduct and management of its
business or who are involved in endeavors significant to its success shall be
eligible to receive grants of Restricted Stock under the Plan.
SECTION 7: GRANT OF RESTRICTED STOCK
-------------------------------------
The Plan Administrator may from time to time in its sole discretion
determine which of the eligible employees, directors, or contractors of the
Company should receive grants of Restricted Stock, the number of shares of
Restricted Stock to be granted to each such eligible employee, director, and
contractor, the dates on which such shares of Restricted Stock are to be
granted, and the restrictions applicable to each grant of shares of Restricted
Stock. The restrictions applicable to each grant of shares of Restricted Stock
shall be set forth in a Stock Restriction Agreement in such form as the Plan
Administrator, in its sole discretion, shall determine to be appropriate. The
terms of any Stock Restriction Agreement need not be identical to the terms of
other Stock Restriction Agreements applicable to other grants of Restricted
Stock under the Plan to the same or other Recipients. No shares of Restricted
Stock shall be issued under the Plan until the Recipient of such shares provides
the Company with a signed Stock Restriction Agreement in the form specified by
the Plan Administrator with respect to the grant of Restricted Stock to that
recipient.
SECTION 8: CHANGE IN CONTROL
-----------------------------
Notwithstanding any vesting requirements contained in any Stock Restriction
Agreement, all Restricted Stock issued under the Plan shall become immediately
vested in full upon the occurrence of a Change in Control. However, if the
Change in Control occurs because of the change in the Board of Directors
described in clause (4) of the definition of Change in Control,
4
<PAGE>
this Section 8 shall not apply to any Restricted Stock of a Recipient who, or an
Affiliate of whom, has waged a proxy contest resulting in the change in more
than a majority of the Board of Directors or has endorsed the change in the
Board of Directors, and the Restricted Stock of that Recipient shall not be
affected by this Section 8. If any employment agreement between a Recipient and
the Company provides that Restricted Stock granted under this Plan will become
vested upon the occurrence of other events (such as, but not limited to, an
event that constitutes a change in control as defined in that employment
agreement but that is not a Change in Control as defined in Section 2(c) of this
Plan), then Restricted Stock granted under this Plan shall become vested upon
the occurrence of such other events in accordance with the terms of such
employment agreement, in addition to becoming vested in accordance with the
terms of this Plan and the Stock Restriction Agreement issued to the Recipient
under this Plan.
SECTION 9: ISSUANCE OF SHARES
------------------------------
9.1 Compliance with Laws. If the issuance or transfer of shares by the
--------------------
Company would for any reason, in the opinion of counsel for the Company, violate
any applicable federal or state laws or regulations, the Company may delay
issuance or transfer of such shares to the Recipient until compliance with such
laws can reasonably be obtained. In no event shall the Company be obligated to
effect or obtain any listing, registration, qualification, consent or approval
under any applicable federal or state laws or regulations or any contract or
agreement to which the Company is a party with respect to the issuance of any
such shares. If, after reasonable efforts, the Company is unable to obtain the
authority which counsel for the Company deems necessary for the lawful issuance
of shares under the Plan, the Company shall be relieved from any liability for
failure to issue shares unless and until such authority is obtained.
9.2 Investment Representation. The Company may require any Recipient to
-------------------------
provide a written representation providing assurances satisfactory to the
Company (i) as to the Recipient's knowledge and experience in financial and
business matters and/or that the Recipient has engaged a representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, (ii) that the Recipient is capable of
evaluating, alone or together with the representative, the merits and risks of
owning the Restricted Stock; and (iii) that the Recipient is acquiring the
Restricted Stock for such person's own account and not with any present
intention of selling or otherwise distributing the stock. Certificates
representing Restricted Stock may contain such legends and transfer restrictions
as the Company shall deem reasonably necessary or desirable, including, without
limitation, legends restricting transfer of the Restricted Stock until there has
been compliance with federal and state securities laws.
SECTION 10: AMENDMENTS
-----------------------
The Board of Directors may at any time and from time to time alter, amend,
suspend or terminate the Plan or any part thereof as it may deem proper, except
that no such action shall diminish or impair the rights under a previous grant
of Restricted Stock. Subject to the terms and conditions of the Plan, the Board
of Directors may modify, extend or renew outstanding Stock Restriction
Agreements granted under the Plan, except that no such action shall diminish or
impair the rights under a Stock Restriction Agreement previously granted without
the consent of the Recipient.
5
<PAGE>
SECTION 11: TERM OF PLAN
-------------------------
This Plan shall terminate on September 1, 2009; provided, however, that the
Board of Directors may at any time prior thereto suspend or terminate the Plan.
No such suspension or termination shall diminish or impair the rights under a
grant of Restricted Stock previously made without the consent of the Recipient.
SECTION 12: NO EMPLOYMENT RIGHTS
---------------------------------
Nothing contained in this Plan shall confer upon any person any right with
respect to the continuation of such person's employment by the Company or any
Subsidiary or interfere in any way with the right of the Company or any
Subsidiary, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase or decrease
the compensation of the person from the rate in existence at the time of the
grant of the Restricted Stock.
SECTION 13: GOVERNING LAW
--------------------------
This Plan, and all Stock Restriction Agreements granted under this Plan,
shall be construed and shall take effect in accordance with the laws of the
State of Colorado, without regard to the conflicts of laws rules of such State.
Adopted effective the 14th day of October, 1999.
CARBON ENERGY CORPORATION
By:_________________________________________
Title:______________________________________
6
<PAGE>
Exhibit 10.3
EXCHANGE AND FINANCING AGREEMENT
AMONG
CARBON ENERGY CORPORATION
CEC RESOURCES LTD.
AND
YORKTOWN ENERGY PARTNERS III, L.P.
DATED
OCTOBER 14, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
Article 1 Articles and Bylaws of Carbon........................................2
Article 2 Authorization and Sale of Carbon Common Stock........................2
2.1 Authorization and Sale of Shares .....................................2
2.2 Closing for Shares ...................................................2
2.3 Use of Proceeds ......................................................2
Article 3 Assignment of Stock Purchase Agreement...............................3
3.1 Assignment ...........................................................3
3.2 Assumption; Reimbursement of Deposit .................................3
3.3 Amendments ...........................................................3
Article 4 Exchange Offer.......................................................3
4.1 The Offer ............................................................3
4.2 Compliance With Applicable Law .......................................4
4.3 CEC Canada Approval ..................................................4
4.4 Shareholder Information ..............................................5
Article 5 Stock Options........................................................5
5.1 Stock Option Plan ....................................................5
5.2 Replacement of Stock Options .........................................5
5.3 Employment Agreements ................................................6
5.4 Related Actions ......................................................6
5.5 [Other Employee Plans] ...............................................6
Article 6 Board of Directors of Carbon.........................................6
6.1 Definitions ..........................................................6
i
<PAGE>
6.2 Board of Directors After BFC Closing .................................7
6.3 Yorktown Designations ................................................7
6.4 McDonald as a Director ...............................................7
6.5 Nominating Committee .................................................7
6.6 Nomination of Directors ..............................................8
6.7 Vacancies ............................................................8
6.8 Voting of Shares .....................................................8
6.9 Super Majority .......................................................9
6.10 Termination of this Article .........................................9
Article 7 Representations and Warranties of Carbon.............................9
7.1 Organization and Authority ...........................................9
7.2 No Subsidiaries ......................................................9
7.3 Capitalization ......................................................10
7.4 Authorization; No Conflict ..........................................10
7.5 No Operations .......................................................11
7.6 Brokers and Finders .................................................11
Article 8 Representations and Warranties of CEC Canada........................11
8.1 Organization and Authority ..........................................11
8.2 No Subsidiaries .....................................................11
8.3 Capitalization ......................................................11
8.4 Authorization; No Conflict ..........................................12
8.5 Brokers and Finders .................................................13
8.6 SEC Reports .........................................................13
Article 9 Representations and Warranties of Yorktown..........................13
ii
<PAGE>
9.1 Organization and Authority ..........................................13
9.2 Authorization .......................................................14
9.3 Brokers and Finders .................................................14
9.4 Investment Matters ..................................................15
Article 10 Covenants..........................................................15
10.1 Covenants of Carbon ................................................15
10.2 Covenants of CEC Canada ............................................18
10.3 Covenants of Yorktown ..............................................20
Article 11 Conditions.........................................................21
11.1 Conditions Precedent to Obligation of Carbon and CEC Canada ........21
11.2 Condition Precedent to Obligation of Yorktown ......................21
Article 12 Termination and Miscellaneous......................................22
12.1 Obligation to Make Exchange Offer ..................................22
12.2 Termination of Agreement ...........................................22
12.3 HSR Act Filing .....................................................23
12.4 Expenses ...........................................................23
12.5 Successors and Assigns .............................................23
12.6 Third Party Beneficiaries ..........................................23
12.7 Notices ............................................................24
12.8 Complete Agreement .................................................25
12.9 Captions ...........................................................25
12.10 Waiver and Other Action ...........................................25
12.11 Amendment .........................................................25
12.12 Governing Law .....................................................25
iii
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12.13 Non-Survival of Representations and Warranties ....................25
12.14 Attorneys' Fees ...................................................25
12.15 Counterparts ......................................................25
iv
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EXCHANGE AND FINANCING AGREEMENT
This Agreement is made as of October 14, 1999 among Carbon Energy
Corporation ("Carbon"), a Colorado corporation, CEC Resources Ltd. ("CEC
Canada"), an Alberta corporation, and Yorktown Energy Partners III, L.P.
("Yorktown").
Recitals
A. CEC Canada has entered into a Stock Purchase Agreement dated August 11,
1999 (as it may be amended from time to time, called the "Stock Purchase
Agreement") with Bonneville Pacific Corporation ("Bonneville Pacific"). The
Stock Purchase Agreement provides for the purchase by CEC Canada from Bonneville
Pacific of all outstanding shares of Bonneville Fuels Corporation ("BFC") for
$24,000,000 in cash, subject to certain adjustments. After this transaction, BFC
will continue to have outstanding certain indebtedness.
B. The parties desire that the purchase of BFC stock under the Stock
Purchase Agreement be completed by Carbon which is a corporation organized under
the laws of a state in the United States and which has its principal executive
offices in the United States. The Stock Purchase Agreement permits the
assignment of rights and obligations of CEC Canada under the Stock Purchase
Agreement to Carbon as an affiliate of Yorktown.
C. Yorktown has committed to purchase equity of Carbon for $24,750,000 in
order to provide equity financing for the total purchase price of the BFC shares
under the Stock Purchase Agreement.
D. All parties to this Agreement require that, in connection with the
assignment of the Stock Purchase Agreement to Carbon and as part of an overall
plan to contribute cash, securities and other property by CEC Canada, Yorktown
and shareholders of CEC Canada to Carbon, Carbon shall make an offer to all
shareholders of CEC Canada to exchange one share of Carbon for each outstanding
share of CEC Canada.
E. The Boards of Directors of CEC Canada and Carbon have unanimously
approved of the making of the exchange offer described in paragraph D above and
later in this Agreement. The Board of Directors of CEC Canada has also resolved
to recommend that the holders of shares of CEC Canada tender their shares
pursuant to that exchange offer.
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Agreement
In consideration of the mutual promises and covenants contained in this
Agreement, the parties, intending to be legally bound, agree as follows:
Article 1
Articles and Bylaws of Carbon
The parties concur and approve of the Articles of Incorporation of Carbon
and Bylaws of Carbon as currently in effect, subject to any changes to be made
in the future.
Article 2
Authorization and Sale of Carbon Common Stock
2.1 Authorization and Sale of Shares.
--------------------------------
Carbon shall authorize the sale and issuance of 4,500,000 shares of its
common stock to Yorktown. Subject to the terms and conditions of this
Agreement, Carbon shall issue and sell to Yorktown, and Yorktown shall purchase
from Carbon, 4,500,000 shares of Carbon common stock at a total purchase price
of $24,750,000 in cash, which is $5.50 per share.
2.2 Closing for Shares.
------------------
The closing of the purchase and sale of the Carbon common stock to Yorktown
as provided in Section 2.1 shall be held at a date, time and place mutually
agreeable to all parties to this Agreement but in any event no later than the
closing of the purchase of BFC stock under the Stock Purchase Agreement (the
"BFC Closing"). At the closing for the sale of Carbon shares as provided in
Section 2.1, Carbon shall deliver to Yorktown a certificate or certificates,
registered in Yorktown's name, representing 4,500,000 shares, free and clear of
any liens, security interests or encumbrances (other than any transfer
restrictions imposed by securities laws); and at that closing Yorktown shall pay
to Carbon the purchase price of $24,750,000 in immediately available funds by
wire transfer per instructions of Carbon.
2.3 Use of Proceeds.
---------------
The proceeds of the sale of shares to Yorktown as provided in this
Agreement shall be used for the purchase of BFC shares under the Stock Purchase
Agreement, and any remaining proceeds after that purchase shall be added to and
be part of the working capital of Carbon.
2
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Article 3
Assignment of Stock Purchase Agreement
3.1 Assignment.
----------
On a date mutually agreed upon by all parties to this Agreement but in any
event immediately prior to the BFC Closing, CEC Canada shall assign all rights
and obligations of CEC Canada under the Stock Purchase Agreement to Carbon,
including the right to purchase all outstanding BFC shares. CEC Canada shall
cause prior notice of this assignment to be given to Bonneville Pacific under
the terms of the Stock Purchase Agreement. It is further understood that, in
accordance with the terms of the Stock Purchase Agreement, CEC Canada shall
remain fully liable for all of its obligations under the Stock Purchase
Agreement.
3.2 Assumption; Reimbursement of Deposit.
------------------------------------
Carbon, upon receipt of that assignment of the Stock Purchase Agreement,
shall perform and comply with all obligations and terms applicable to CEC Canada
under the Stock Purchase Agreement, as if Carbon were named as the Buyer in the
Stock Purchase Agreement instead of CEC Canada. Also, upon receipt of that
assignment of the Stock Purchase Agreement, Carbon shall pay $1,200,000 to CEC
Canada as reimbursement of the deposit made by CEC Canada on the purchase price
under the Stock Purchase Agreement.
3.3 Amendments.
----------
Neither CEC Canada nor Carbon will make any amendment to the Stock Purchase
Agreement or grant any waiver under the Stock Purchase Agreement without the
permission and consent of the other parties to this Agreement, including
Yorktown.
Article 4
Exchange Offer
4.1 The Offer.
---------
Carbon shall, and Yorktown and CEC Canada shall cause Carbon to, make an
offer to all holders of shares of CEC Canada to exchange one share of common
stock of Carbon for each outstanding share of CEC Canada (the "Exchange Offer")
as promptly as reasonably practicable after the BFC Closing. The obligation of
Carbon to make the Exchange Offer is subject only to the assignment of the Stock
Purchase Agreement by CEC Canada to Carbon as provided above and the
consummation of the BFC Closing. In order for any specific term to be included
in the Exchange Offer, the term must be approved by Yorktown, CEC Canada and
Carbon, whose approval shall not be unreasonably withheld. Promptly after the
expiration of any
3
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withdrawal rights for tendered shares in the Exchange Offer or the expiration of
the Exchange Offer, as the case may be, Carbon shall exchange its shares for all
shares of CEC Canada validly tendered in the Exchange Offer and not withdrawn.
4.2 Compliance With Applicable Law.
------------------------------
Carbon shall take, and CEC Canada and Yorktown shall cause Carbon to take,
all necessary steps to comply with applicable law in making the Exchange Offer,
including without limitation (a) filing with the Securities and Exchange
Commission ("SEC") a registration statement on Form S-4 (together with any
amendments and supplements, called the "Registration Statement") under the
Securities Act of 1933 (the "Securities Act"), (b) filing with the SEC a tender
offer statement on Schedule 14D-1 (together with all amendments and supplements,
called the "Schedule 14D-1") with respect to the Exchange Offer, and (c) filing
all documents required to obtain any permits and approvals, if any, required to
carry out the transactions contemplated by this Agreement under any applicable
Canadian laws or state securities laws and will use its best efforts to obtain
such permits and approvals. The Registration Statement and Schedule 14D-1 shall
include summary advertisements, letters of transmittal and such other documents
as necessary to make the Exchange Offer (the Registration Statement, Schedule
14D-1 and other documents, together with all supplements and amendments, are
called collectively the "Offer Documents").
4.3 CEC Canada Approval.
-------------------
CEC Canada hereby approves of the Exchange Offer and represents that the
Board has unanimously determined that this Agreement and the transactions
contemplated by this Agreement, including the Exchange Offer, are fair to and in
the best interests of the shareholders of CEC Canada. The Board of Directors of
CEC Canada shall recommend that the shareholders of CEC Canada accept the
Exchange Offer, and CEC Canada consents to the inclusion in the Registration
Statement and other Offer Documents of the recommendation of the Board of
Directors as described above. Also CEC Canada represents that it has been
advised by each of its directors and executive officers that each of them
intends either to tender or cause to be tendered all shares of CEC Canada
beneficially owned by them in the Exchange Offer. As soon as reasonably
practical and no later than the date of commencement of the Exchange Offer, CEC
Canada shall file with the SEC a Solicitation/ Recommendation Statement on
Schedule 14D-9 (which, together with all amendments and supplements, is called
the "Schedule 14D-9") containing the recommendation of the Board described in
this Section and shall disseminate the Schedule 14D-9 to the extent required by
rules of the SEC under the Securities Exchange Act of 1934 (the "Exchange Act")
and any other applicable federal securities laws. CEC Canada agrees to correct
promptly any information provided by it for use in the Schedule 14D-9 which
shall have become false or misleading and to take all steps necessary to cause
the Schedule 14D-9 as so corrected to be filed with
4
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the SEC and disseminated to holders of shares of CEC Canada to the extent
required by applicable federal securities laws.
4.4 Shareholder Information.
-----------------------
CEC Canada shall promptly furnish to Carbon mailing labels containing the
name and addresses of all record holders of shares of CEC Canada and with
security position listings of all shares held in stock depositories, each as of
a recent date, together with all other available listings and computer files
containing names, addresses and security position listings of record holders and
beneficial owners of shares of CEC Canada. CEC Canada shall furnish Carbon with
such additional information, including without limitation, updated listings and
computer files of shareholders, mailing labels and security position listings
and such other assistance as Carbon may reasonably request for the Exchange
Offer. Carbon shall, subject to the requirements of applicable law and except
as necessary to disseminate the Exchange Offer and any Offer Documents, hold in
confidence the information contained in those labels, listings and files and
shall use such information only in connection with the Exchange Offer.
Article 5
Stock Options
5.1 Stock Option Plan.
-----------------
Each of the parties shall approve the 1999 Stock Option Plan of Carbon (the
"Carbon Stock Option Plan") and the 1999 Restricted Stock Plan, both attached
as Exhibit 1, and shall cause these Plans to be in effect prior to the BFC
---------
Closing.
5.2 Substitution of Stock Options.
-----------------------------
Carbon shall grant under the Carbon Stock Option Plan substitute options
for each option outstanding under the CEC Resources Ltd. Stock Option Plan (the
"CEC Canada Stock Option Plan"). Any option granted by Carbon in substitution
for an option granted under the CEC Stock Option Plan shall expressly provide
that it is being granted in full satisfaction of, and in substitution for, any
and all options for CEC Resources, Ltd. Stock previously granted under the CEC
Stock Option Plan. The following terms and conditions of the substitute options
granted pursuant to the Carbon Stock Option Plan shall be the same as the terms
and conditions relating to the specific options granted pursuant to an
optionee's Stock Option Agreement executed under the terms of CEC Stock Option
Plan: (1) the grant and exercise prices of the option; (2) the character of the
option as an "incentive stock option" or a "nonqualified stock option" (as
defined in the Code); (3) the vesting provisions applicable to the option
(except to the extent previously modified in executed employment agreements
between the optionee and CEC Canada); (4) the change in
5
<PAGE>
control provisions applicable to the option (except to the extent previously
modified in executed employment agreements between the optionee and CEC Canada);
(5) the provisions addressing the consequences of the optionee's termination of
employment for any reason; (6) the limitations on assignability of the option;
(7) the expiration date of the option; and (8) the payment method for the
purchase of the shares subject to the option.
5.3 Employment Agreements.
---------------------
The parties approve of the Employment Agreements with Patrick R. McDonald
("McDonald") and Kevin Struzeski ("Struzeski") in the forms attached as Exhibit
-------
2 to this Agreement and will cause Carbon to enter into these Employment
- -
Agreements on or prior to the BFC Closing.
5.4 Related Actions.
---------------
Concurrently with acquiring shares of Carbon as provided below, Yorktown
shall, as a shareholder of Carbon, approve of the Carbon Stock Option Plan,
Carbon's 1999 Restricted Stock Plan and the above-described Employment
Agreements. Carbon and Yorktown shall cause the Board of Directors of Carbon to
approve and adopt the Carbon Stock Option Plan, Carbon's 1999 Restricted Stock
Plan and the Employment Agreements.
5.5 Other Employee Plans.
--------------------
CEC Canada may, in its discretion, transfer the sponsorship of all employee
benefit plans formerly sponsored by CEC Canada, including but not limited to the
CEC Resources Ltd. 401(k) Profit Sharing Plan, to Carbon as soon as practicable
following the completion of the Exchange Offer.
Article 6
Board of Directors of Carbon
6.1 Definitions.
-----------
For purposes of this Article 6, the following terms have the following
meanings:
"Beneficial ownership" or "owned beneficially" with respect to any voting
stock means stock of which a person or entity is a beneficial owner as defined
at the date hereof in Rule 13d-3 of the SEC under the Exchange Act.
"Independent director" means a person who is not an officer or employee of
Carbon, is not related to an officer of Carbon and does not represent Yorktown
or any other beneficial owner of 10% or more of the outstanding voting stock of
Carbon.
6
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"Super majority vote of the Board" means approval by a majority of the
entire Board of Directors of Carbon, which majority includes a majority of all
Yorktown directors and at least one independent director.
"Voting stock" means securities having the right to vote generally in any
election of directors of Carbon.
6.2 Board of Directors After BFC Closing.
------------------------------------
After consummation of the BFC Closing, the Board of Directors of Carbon
shall consist of five directors, and these five directors shall be: David H.
Kennedy; Lambros J. Lambros; Bryan H. Lawrence; Peter A. Leidel; and McDonald.
Upon completion of the Exchange Offer, and if Harry A. Trueblood accepts the
Exchange Offer for all CEC shares owned beneficially by him, the Board of
Directors of Carbon shall consist of six directors, and these six directors
shall be the above-named five persons and Harry A. Trueblood.
6.3 Yorktown Designations.
---------------------
Bryan H. Lawrence and Peter A. Leidel named above are persons designated by
Yorktown. So long as Yorktown is the beneficial owner of voting shares with 50%
or more of the outstanding votes in the election of directors of Carbon,
Yorktown shall have the right to designate for nomination two directors of
Carbon ("Yorktown Directors"). If Yorktown owns beneficially voting stock with
25% or more but less than 50% of the outstanding votes in the election of
directors of Carbon, then Yorktown shall have the right to designate for
nomination one director of Carbon. Yorktown will not have the right, as a
contractual matter under this Agreement, to designate any persons for nomination
as directors if Yorktown owns beneficially voting stock with less than 25% of
the outstanding votes in the election of directors of Carbon.
6.4 McDonald as a Director.
----------------------
So long as McDonald is an officer of Carbon, McDonald shall be designated
for nomination as a director of Carbon.
6.5 Nominating Committee.
--------------------
The Board of Directors of Carbon shall establish, empower and maintain a
nominating committee. The nominating committee shall be responsible for
determining, on behalf of the Carbon Board of Directors, nominees for the
position of director of Carbon or persons to be elected by the Board of
Directors or shareholders to fill any vacancy in the Board of Directors. The
nominating committee shall be comprised of one Yorktown director, McDonald so
long as he is a director of Carbon and two independent directors. The Yorktown
director to serve on the nominating
7
<PAGE>
committee shall be selected by a majority vote of the Yorktown directors. A
majority of the independent directors shall designate the independent directors
to serve on the nominating committee. Any Yorktown or independent director may
select himself or herself to serve on the nominating committee. A quorum of the
nominating committee, which shall be required for any action of the nominating
committee, shall be all members of the nominating committee. The nominating
committee shall act by a majority vote of the entire nominating committee.
6.6 Nomination of Directors.
-----------------------
The directors of Carbon shall be nominated at all times from and after the
consummation of the BFC Closing as follows (a nomination includes any nomination
of an incumbent director to be reelected to the Board):
(a) The nominating committee shall nominate for director each Yorktown
director which Yorktown has the right to designate and has so designated;
(b) The nominating committee shall nominate McDonald if he is entitled to
be so nominated as provided in Section 6.4 above; and
(c) The nominating committee shall nominate the remaining directors and at
least two of the persons so nominated shall be independent directors unless the
size of the Board has been changed by a super majority vote of the Board and
there are not sufficient positions for the election of two independent directors
after taking into account Yorktown directors and the nomination of McDonald.
6.7 Vacancies.
---------
Upon the death, resignation, retirement, disqualification or removal from
office, with or without cause, of any independent director or Yorktown director,
the nominating committee (in the case of an independent director) and the
remaining Yorktown director (in the case of the vacancy relating to a Yorktown
director) shall have the right to designate any replacement to fill the vacancy.
Any vacancy on the Board of Directors caused by the death, resignation,
retirement, disqualification or removal of McDonald, shall be designated by the
nominating committee. The Board of Directors shall take any action necessary to
duly appoint or elect as a director each person so designated to fill a vacancy
on the Board.
6.8 Voting of Shares.
----------------
Each party shall take such actions as a shareholder of Carbon, or as is
otherwise reasonably in the party's control, to effectuate the election of
directors and the filling of vacancies as provided in this Article 6. In
addition, Carbon shall use all reasonable efforts to solicit from shareholders
of Carbon eligible to vote in the election of directors proxies in favor of the
nominees selected in accordance with this
8
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Article 6. In any election of directors or any meeting of shareholders for the
removal of directors, Yorktown and McDonald shall be present for purposes of
establishing a quorum and shall vote all of their voting stock in favor of any
nominee for director selected in accordance with this Article 6 and against the
removal of any director selected in accordance with this Article 6, except that
Yorktown and McDonald may vote for the removal of any Yorktown director for
which Yorktown has indicated approval of the removal and Yorktown and McDonald
may vote for the removal of any independent director as to which the nominating
committee has recommended removal.
6.9 Super Majority.
--------------
No action by Carbon shall be taken with respect to the following without
approval of the Board of Directors of Carbon which approval shall be by a super
majority vote of the Board: Any change in the size or composition of the Board
of Directors of Carbon or the nominating committee.
6.10 Termination of this Article.
---------------------------
This Article shall cease to be effective and shall not apply to any Carbon
matters (a) 10 years after the consummation of the BFC Closing or, if earlier,
(b) when and if Yorktown owns beneficially voting shares with less than 25% of
the outstanding votes in the election of directors and McDonald is no longer an
officer of Carbon.
Article 7
Representations and Warranties of Carbon
Carbon represents and warrants at the date hereof to Yorktown and CEC
Canada as follows:
7.1 Organization and Authority.
--------------------------
Carbon is a corporation duly organized, validly existing and in good
standing under the laws of the State of Colorado, is duly qualified to do
business and is in good standing in all jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and failure to be so qualified would have a material adverse effect on
the business, financial condition or results of operations (a "Material Adverse
Effect") of Carbon and has corporate power and authority to own its properties
and assets and to carry on its business as it is now being conducted. Carbon
has furnished Yorktown and CEC Canada true and correct copies of its articles of
incorporation and bylaws, as amended.
7.2 No Subsidiaries.
---------------
9
<PAGE>
Prior to the BFC Closing, Carbon has no subsidiaries.
7.3 Capitalization.
--------------
The authorized capital stock of Carbon consists of 10,000,000 shares of
preferred stock, no par value, of which no shares are outstanding, and
20,000,000 shares of common stock, no par value, of which as of the date of this
Agreement 100 shares issued to Yorktown were outstanding. Except for the
options required by Article 5 above, there are no outstanding subscriptions,
contracts, conversion privileges, options, warrants, calls, preemptive rights or
other rights obligating Carbon to issue, sell or otherwise dispose of, or to
purchase, redeem or otherwise acquire, any shares of capital stock of Carbon.
7.4 Authorization; No Conflict.
--------------------------
Carbon has the corporate power and authority to enter into this Agreement
and to carry out its obligations under this Agreement. The execution, delivery
and performance of this Agreement by Carbon and the consummation of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Carbon This Agreement is a valid and binding obligation of Carbon
enforceable against Carbon in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors and
contracting parties generally and except as enforceability may be subject to
general principles of equity.
Neither the execution, delivery and performance by Carbon of this
Agreement, nor the consummation of the transactions contemplated hereby, nor
compliance by Carbon with any of the provisions hereof, will (a) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event of which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration of,
or result in the creation of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Carbon under any of the terms,
conditions or provisions of (i) its articles of incorporation or bylaws or (ii)
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Carbon is a party or by which it may be
bound, or to which Carbon or any of the properties or assets of Carbon may be
subject, or (b) subject to compliance with the statutes and regulations referred
to in the next paragraph, to the knowledge of Carbon, violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation applicable
to Carbon or any of its properties or assets.
Other than in connection or in compliance with the provisions of the
Securities Act and the rules and
10
<PAGE>
regulations thereunder, the securities or blue sky laws of the various states or
Canadian provinces, no notice to, filing with, exemption or review by, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Carbon of the transactions contemplated by this
Agreement.
7.5 No Operations.
-------------
Carbon was incorporated in September, 1999 and has not conducted any active
business between its date of incorporation and the date of this Agreement,
except any actions to enter into this Agreement, complete the purchase of BFC
Stock under the Stock Purchase Agreement and make the Exchange Offer.
7.6 Brokers and Finders.
-------------------
Neither Carbon nor any of its officers, directors or employees has employed
any broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for Carbon in connection with this Agreement or the
transactions contemplated hereby.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES OF CEC CANADA
CEC Canada represents and warrants at the date hereof to Yorktown and
Carbon as follows:
8.1 Organization and Authority.
--------------------------
CEC Canada is a corporation duly organized, validly existing and in good
standing under the laws of the Province of Alberta, is duly qualified to do
business and is in good standing in all jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and failure to be so qualified would have a Material Adverse Effect on
CEC Canada and has corporate power and authority to own its properties and
assets and to carry on its business as it is now being conducted. CEC Canada
has furnished the other two parties true and correct copies of its articles of
incorporation and bylaws, as amended.
8.2 No Subsidiaries.
---------------
CEC Canada has no subsidiaries.
8.3 Capitalization.
--------------
The authorized capital stock of CEC Canada consists of an unlimited number
of shares of preferred stock, no par value, of which no shares are outstanding,
and an
11
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unlimited number of shares of common stock, no par value, of which as of the
close of business on August 31, 1999, 1,521,400, shares were outstanding. The
maximum number of shares of CEC Canada common stock (assuming for this purpose
that phantom shares and other share-equivalents constitute CEC Canada common
stock) that would be outstanding as of August 31, 1999, if all options,
warrants, conversion rights and other rights with respect thereto were exercised
is 1,785,900. All of the outstanding shares of capital stock of CEC Canada have
been duly and validly authorized and issued and are fully paid and
nonassessable. Except as set forth in Exhibit 3, there are no outstanding
---------
subscriptions, contracts, conversion privileges, options, warrants, calls,
preemptive rights or other rights obligating CEC Canada to issue, sell or
otherwise dispose of, or to purchase, redeem or otherwise acquire, any shares of
capital stock of CEC Canada. Since May 31, 1999, no shares of CEC Canada common
stock have been purchased, redeemed or otherwise acquired, directly or
indirectly, by CEC Canada, and no dividends or other distributions have been
declared, set aside, made or paid to the shareholders of CEC Canada.
8.4 Authorization; No Conflict.
--------------------------
CEC Canada has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The execution, delivery
and performance of this Agreement by CEC Canada and the consummation of this
Agreement by CEC Canada have been duly authorized by the Board of Directors of
CEC Canada. This Agreement is a valid and binding obligation of CEC Canada
enforceable against CEC Canada in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors and
contracting parties generally and except as enforceability may be subject to
general principles of equity.
Except as set forth on Exhibit 4 attached hereto, neither the execution,
---------
delivery and performance of CEC Canada of this Agreement, nor the consummation
of the transactions contemplated hereby, nor compliance by CEC Canada with any
of the provisions hereof, will (a) violate, conflict with, or result in a breach
of any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination or acceleration of, or result in the creation of, any lien,
security interest, charge or encumbrance upon any of the properties or assets of
CEC Canada under any of the terms, conditions or provisions of (i) its articles
of incorporation or bylaws or (ii) any material note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which CEC Canada is a party or by which it may be bound, or to which CEC Canada
or any of the properties or assets of CEC Canada may be subject, or (b) subject
to compliance with the statutes and regulations referred to in the next
paragraph, to the knowledge of CEC Canada, violate any judgment, ruling, order,
12
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writ, injunction, decree, statute, rule or regulation applicable to CEC Canada
or any of its material properties or assets.
Other than in connection or in compliance with the provisions of the
Securities Act and the rules and regulations thereunder, the Exchange Act and
the rules and regulations thereunder, the securities or blue sky laws of the
various states or Canadian provinces, no notice to, filing with, exemption or
review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by CEC Canada of the transactions
contemplated by this Agreement.
8.5 Brokers and Finders.
-------------------
Neither CEC Canada nor any of its officers, directors or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder's fees, and no broker or
finder has acted directly or indirectly for CEC Canada in connection with this
Agreement or the transactions contemplated hereby.
8.6 SEC Reports.
-----------
Since December 1, 1998, CEC Canada has filed all reports, registrations and
statements, together with any required amendments thereto, that it was required
to file with the SEC, including, but not limited to, Forms 10-K, Forms 10-Q and
proxy statements. All such reports and statements filed with the SEC are
collectively referred to herein as the "CEC Canada Reports." As of their
respective dates the CEC Canada Reports complied in all material respects with
all the rules and regulations promulgated by the SEC, and as of their respective
dates, the CEC Canada Reports filed with the SEC did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Copies of all the
CEC Canada Reports have been made available to Yorktown and Carbon by CEC
Canada.
Article 9
Representations and Warranties of Yorktown
Yorktown represents and warrants at the date hereof to Carbon and CEC
Canada.
9.1 Organization and Authority.
--------------------------
Yorktown is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Delaware, is duly qualified to do
business and is in good standing in all jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and failure to be so qualified
13
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would have a Material Adverse Effect on Yorktown and has full power and
authority to own its properties and assets and to carry on its business as it is
now being conducted.
9.2 Authorization.
-------------
Yorktown has the full power and authority to enter into this Agreement and
to carry out its obligations hereunder. The execution, delivery and performance
of this Agreement by Yorktown and the consummation of the transactions
contemplated hereby have been duly authorized by the governing board of
Yorktown. No approval or consent by the members of Yorktown is necessary for
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement is a valid and binding
obligation of Yorktown enforceable against Yorktown in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors and contracting parties generally and except as enforceability may be
subject to general principles of equity.
Neither the execution, delivery and performance by Yorktown of this
Agreement nor the consummation of the transactions contemplated hereby, nor
compliance by Yorktown with any of the provisions hereof; will (a) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration of,
or result in the creation of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Yorktown under any of the terms,
conditions or provisions of (i) its organizational documents or operating
agreements or (ii) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Yorktown is
a party or by which it may be bound, or to which Yorktown or any of the
properties or assets of Yorktown may be subject, or (b) subject to compliance
with the statutes and regulations referred to in the next paragraph, to the
knowledge of Yorktown, violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to Yorktown or any of its
properties or assets.
Other than in connection with or in compliance with the provisions of the
Securities Act and the rules and regulations thereunder, the Exchange Act and
the rules and regulations thereunder, the securities or blue sky laws of the
various states or Canadian provinces, no notice to, filing with, exemption or
review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Yorktown of the transactions
contemplated by this Agreement.
9.3 Brokers and Finders.
-------------------
14
<PAGE>
Neither Yorktown nor any of its respective managers, officers, directors,
partners, members or employees has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted directly or indirectly for
Yorktown in connection with this Agreement or the transactions contemplated
hereby.
9.4 Investment Matters.
------------------
Yorktown has substantial experience in evaluating and investing in private
placement transactions of securities in companies similar to Carbon so that it
is capable of evaluating the merits and risks of its investment in Carbon and
has the capacity to protect its own interests.
It is acquiring Carbon shares as provided in Article 2 for investment for
its own account, not as a nominee or agent, and not with the view to, or for
resale in connection with, any distribution thereof. It understands that Carbon
shares have not been, and will not be registered, under the Securities Act by
reason of a specific exemption from the registration provisions of the
Securities Act, the availability of which depends upon, among other things, the
bona fide nature of the investment intent and the accuracy of Yorktown's
representations as expressed in this Section.
Yorktown has had an opportunity to discuss Carbon's business, management
and financial affairs with Carbon's management and has had the opportunity to
review Carbon's existing and proposed properties and operations. It has also
had an opportunity to ask questions of officers of Carbon, which questions were
answered to its satisfaction.
Article 10
Covenants
10.1 Covenants of Carbon.
-------------------
Carbon covenants and agrees with CEC Canada and Yorktown as follows:
(a) From the date hereof until completion of the Exchange Offer, Carbon
will maintain its corporate existence in good standing; after acquisition of the
stock of BFC pursuant to the Stock Purchase Agreement, maintain the general
character of BFC's business and conduct BFC's business in its ordinary and usual
manner; maintain all books and records of Carbon and, after the purchase of
BFC's stock, of BFC, including all financial statements, in accordance with the
accounting principles and practices consistent with those used for CEC Canada
financial statements, except for changes in such principles and practices
required under generally accepted accounting principles or as to which Yorktown
and CEC Canada concur.
15
<PAGE>
(b) As promptly as practicable after the execution of this Agreement,
Carbon will file with the SEC the Registration Statement under the Securities
Act, the Schedule 14D-1 and any other applicable documents, relating to the
Exchange Offer and the shares of Carbon common stock to be delivered to the
stockholders of CEC Canada pursuant to this Agreement and the Exchange Offer,
and will use its best efforts to cause the Registration Statement to become
effective as soon as practicable. At the time the Registration Statement becomes
effective, the Registration Statement will comply in all material respects with
the provisions of the Securities Act and the published rules and regulations
thereunder, and will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not false or misleading, and at the times of making and
completing the Exchange Offer the prospectus included as part of the
Registration Statement, as amended or supplemented by any amendment or
supplement filed by Carbon (called the "Prospectus"), will not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein not false or misleading; provided, however, that
-------- -------
none of the provisions of this paragraph shall apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information furnished by Yorktown or CEC Canada for
use in the Registration Statement or the Prospectus. The Schedule 14D-1 shall
comply in all material respects with provisions of applicable law.
(c) Carbon will file all documents required to be filed to list Carbon
common stock to be issued pursuant to this Agreement and the Exchange Offer on
the American Stock Exchange and use its best efforts to effect said listing at
or prior to completion of the Exchange Offer.
(d) The shares of Carbon common stock to be issued by Carbon to the
shareholders of CEC Canada pursuant to this Agreement and the shares of Carbon
to be issued by Carbon to Yorktown will, upon such issuance and delivery to said
shareholders and Yorktown pursuant to this Agreement, be duly authorized,
validly issued, fully paid and nonassessable. The shares of Carbon common stock
to be delivered to the shareholders of CEC Canada and to Yorktown pursuant to
this Agreement are and will be free of any preemptive rights of any shareholders
of Carbon and free and clear of any liens, security interests or encumbrances
(other than transfer restrictions imposed by securities laws).
(e) Carbon will file all documents required to obtain, prior to commencing
the Exchange Offer, all necessary Blue Sky and Canadian Province permits and
approvals, if any, required to carry out the transactions contemplated by this
Agreement, will pay all expenses incident thereto and will use its best efforts
to obtain such permits and approvals.
16
<PAGE>
(f) Carbon will hold in confidence all documents and information
concerning CEC Canada and Yorktown furnished to it and its representatives in
connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law or in connection with the Exchange Offer or the Registration Statement and
except to its outside professional advisers in connection with this Agreement,
with the same undertaking from such professional advisers. If the transactions
contemplated by this Agreement shall not be consummated, such confidence shall
be maintained and, upon request, all such documents, copies thereof or extracts
therefrom shall immediately thereafter be returned to CEC Canada or Yorktown, as
the case may be.
(g) Carbon shall consult with CEC Canada and Yorktown as to the form and
substance of any proposed press release or other proposed public disclosure by
Carbon of matters related to this Agreement or any of the transactions
contemplated hereby, except Carbon may make any press release or statement
believed in good faith by Carbon to be required by law or under the rules and
regulations of any stock exchange on which its shares are listed.
(h) With respect to the indemnification of officers and directors and
officers' and directors' insurance, Carbon agrees as follows:
(i) Carbon shall ensure that all rights to indemnification and all
limitations of liability existing in favor of any person who is now, or has
been at any time prior to the date hereof, or who becomes prior to the
completion of the Exchange Offer, a director or officer of CEC Canada (an
"Indemnified Party" and, collectively, the "Indemnified Parties"), in CEC
Canada's Articles of Incorporation or Bylaws or similar governing documents
shall, with respect to claims arising from (A) facts or events that occurred
before the completion of the Exchange Offer, or (B) this Agreement or any of
the transactions contemplated by this Agreement, whether in any case
asserted or arising before or after the completion of the Exchange Offer,
survive the Exchange Offer and shall continue in full force and effect.
Nothing contained in this paragraph 10.1(h)(i) shall be deemed to preclude
the liquidation, consolidation or merger of CEC Canada, in which case all of
such rights to indemnification and limitations on liability shall be deemed
to survive and continue as contractual rights notwithstanding any such
liquidation or consolidation or merger; provided, however, that in the event
-------- -------
of liquidation or sale of substantially all of the assets of CEC Canada,
Carbon shall guarantee, to the extent of the net asset value of Carbon as of
the completion of the Exchange Offer, the indemnification obligations of CEC
Canada to the extent of indemnification obligations of Carbon described
above.
(ii) any Indemnified Party wishing to claim indemnification under
paragraph 10.1(h)(i), upon learning of any such claim, action, suit,
proceeding
17
<PAGE>
or investigation, shall promptly notify Carbon thereof, but the failure to
so notify shall not relieve Carbon of any liability it may have to such
Indemnified Party. In the event of any such claim, action, suit, proceeding
or investigation (whether arising before or after completion of the Exchange
Offer), (A) Carbon shall have the right to assume the defense thereof and
Carbon shall not be liable to any Indemnified Party for any legal expenses
of other counsel or any other expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof, except that if
Carbon elects not to assume such defense or counsel for the Indemnified
Party advises that there are issues which raise conflicts of interest
between Carbon and the Indemnified Party, the Indemnified Party may retain
counsel satisfactory to them, and Carbon shall pay the reasonable fees and
expenses of such counsel for the Indemnified Party promptly as statements
therefor are received; provided, however, that Carbon shall be obligated
-------- -------
pursuant to this subparagraph (ii) to pay for only one firm of counsel for
all Indemnified Parties in any jurisdiction unless the use of one counsel
for such Indemnified Parties would present such counsel with a conflict of
interest and (B) such Indemnified Party shall cooperate in the defense of
any such matter. In any event, Carbon shall not be liable for the settlement
of any claim, action, suit, proceeding or investigation unless Carbon
consents to the settlement, which consent shall not be unreasonably
withheld.
(iii) if Carbon or any of its successors or assigns (A) shall
consolidate with or merge into any other corporation or entity and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger or (B) shall transfer all or substantially all of its properties
and assets to any individual, corporation or other entity, then and in each
such case, proper provision shall be made so that the successors and assigns
of Carbon shall assume the obligations set forth in this paragraph 10.1(h).
(iv) the provisions of this paragraph 10.1(h) are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and his
or her heirs and representatives.
10.2 Covenants of CEC Canada.
-----------------------
CEC Canada covenants and agrees with Carbon and Yorktown as follows:
(a) Except as otherwise permitted or required by this Agreement, from the
date hereof until completion of the Exchange Offer, CEC Canada will: maintain
its corporate existence in good standing; maintain the general character of its
business and conduct its business in its ordinary and usual manner; maintain
proper business and accounting records in accordance with generally accepted
principles; maintain in all material respects presently existing insurance
coverage; use its reasonable efforts to preserve its business organization
intact, to keep the services of its present
18
<PAGE>
principal employees and to preserve its good will and the good will of its
suppliers, customers and others having business relationships with it; use its
reasonable efforts to obtain any approvals or consents required to maintain
existing leases and other contracts in effect following the Exchange Offer; and
furnish monthly financial reports, in the form submitted by CEC Canada to its
management, to Carbon and Yorktown.
(b) Except as otherwise contemplated or required by this Agreement, from
the date hereof until completion of the Exchange Offer, CEC Canada will not
(without the prior written consent of Carbon and Yorktown): amend or otherwise
change its articles of incorporation or association or Bylaws; issue or sell or
authorize for issuance or sale, or grant any options or make other agreements
with respect to the issuance or sale or conversion of, any shares of its capital
stock, phantom shares or other share-equivalents or any other of its securities,
except that CEC Canada may issue shares of CEC Canada common stock upon the
exercise of any outstanding options; authorize or incur any long-term debt
(other than borrowings under a revolving line of credit in the ordinary course
of business or borrowings to replace any existing borrowings or borrowings as to
which Yorktown and Carbon approve); mortgage, pledge or subject to lien or other
encumbrance any of its properties, except in the ordinary course of business or
in connection with borrowings permitted by this paragraph; amend or terminate
any employee plan except as required by law; make any contributions to any
employee plan except as required by the terms of such plan in effect as of the
date hereof except discretionary contributions made in the ordinary course of
business in accordance with past practices; declare, set aside, make or pay any
dividend or other distribution with respect to its capital stock; redeem,
purchase or otherwise acquire, directly or indirectly, any of the capital stock
of CEC Canada; increase the compensation of any officers, directors or executive
employees, except pursuant to existing compensation plans and practices; or sell
or otherwise dispose of any of its assets or properties other than in the
ordinary course of business.
(c) CEC Canada will furnish or cause to be furnished to Carbon all the
information concerning CEC Canada required for inclusion in the Registration
Statement or other Offer Documents. Any financial statement for any fiscal year
provided under this paragraph must include the audit opinion and the consent of
the relevant auditor to use such opinion in such Registration Statement. The
information regarding CEC Canada furnished by CEC Canada will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, not false or
misleading, at the time of any filing of the Registration Statement or other
Offer Documents with the SEC or any other regulatory authority, at the time of
making the Exchange Offer and throughout the making of the Exchange Offer. CEC
Canada shall correct promptly any information provided by CEC Canada for use in
the Registration Statement or other Offer Documents which is or shall become
false or misleading. All documents
19
<PAGE>
which CEC Canada is responsible for filing with the SEC in connection with the
Exchange Offer will comply as to form in all material respects with the
provisions of applicable law.
(d) CEC Canada will cooperate in obtaining and file any documents which
may be required to obtain all necessary Blue Sky and Canadian Province permits
and approvals, if any, required to carry out the transactions contemplated by
this Agreement.
(e) CEC Canada shall consult with Carbon and Yorktown as to the form and
substance of any proposed press release or other proposed public disclosure, by
CEC Canada or any of its representatives of matters related to this Agreement or
any of the transactions contemplated hereby, except that CEC Canada may make any
press release or statement believed in good faith by CEC Canada to be required
by law or under the rules and regulations of any stock exchange on which its
shares are listed.
(f) CEC Canada will take all action necessary or required to terminate or
amend, if requested by Carbon, all qualified pension and welfare benefit plans
to facilitate the merger of such plans with Carbon plans without gaps in
coverage for participants in the plans and without duplication of costs caused
by the continuation of such plans after coverage is available under Carbon
plans, [and all non-qualified benefit plans and compensation arrangements as of
the completion of the Exchange Offer].
10.3 Covenants of Yorktown.
---------------------
Yorktown covenants and agrees with Carbon and CEC Canada as follows:
(a) From the date hereof until completion of the Exchange Offer, Yorktown
will maintain its existence in good standing.
(b) Yorktown will furnish to Carbon all the information concerning
Yorktown required for inclusion in the Registration Statement or other Offer
Documents. Such information will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not false or misleading, at the time of filing
the Registration Statement or other Offer Document with the SEC or any other
regulatory authority, the making of the Exchange Offer and throughout the making
of the Exchange Offer. Yorktown shall correct promptly any information provided
by Yorktown for use in the Registration Statement or other Offer Documents which
is or shall become false or misleading.
(c) Yorktown will cooperate in obtaining and file any documents which may
be required to obtain all necessary Blue Sky and Canadian Province permits and
20
<PAGE>
approvals, if any, required to carry out the transactions contemplated by this
Agreement.
(d) Yorktown will hold in confidence all documents and information
concerning Carbon and CEC Canada furnished to it and its representatives in
connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to its outside professional advisers or its limited partners in
connection with this Agreement, with the same undertaking from such professional
advisers or limited partners, as the case may be. If the transactions
contemplated by this Agreement shall not be consummated, such confidence shall
be maintained (except to the extent that such information can be shown to be
previously known to Yorktown, in the public domain, or later acquired by
Yorktown from other legitimate sources) and, upon request, all such documents,
copies thereof or extracts therefrom shall immediately thereafter be returned by
Carbon or CEC Canada, as the case may be.
(e) Yorktown shall consult with Carbon and CEC Canada as to the form and
substance of any proposed press release or other proposed public disclosure of
matters related to this Agreement or any of the transactions contemplated hereby
except that Yorktown may make a press release or statement believed in good
faith to be required by law.
Article 11
Conditions
11.1 Conditions Precedent to Obligation of Carbon and CEC Canada.
-----------------------------------------------------------
The obligation of Carbon to make and complete the Exchange Offer and CEC
Canada to recommend favorably the Exchange Offer to its shareholders shall be
subject to the satisfaction of the following
(a) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(b) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order. Carbon shall have received all state securities law or blue sky and
Canadian Province authorizations necessary in any material respect to carry out
the transactions contemplated by this Agreement.
11.2 Condition Precedent to Obligation of Yorktown.
---------------------------------------------
The obligation of Yorktown to effect the purchase of Carbon common stock as
required by Article 2 shall be subject to the satisfaction at or before the
21
<PAGE>
consummation of the BFC Closing of the following condition, which may be waived
in writing by Yorktown: No court or governmental authority of competent
jurisdiction shall have issued an order restraining, enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this Agreement.
Article 12
Termination and Miscellaneous
12.1 Obligation to Make Exchange Offer.
---------------------------------
On and after the BFC Closing has been consummated, the parties shall
cause the Exchange Offer to be made subject only to the conditions stated
expressly in Article 11, whether or not there has been a breach of any provision
of this Agreement by any party. The obligations of the parties regarding the
Exchange Offer are independent of any other provisions of this Agreement, and
the remedy of any party for breach of any covenant or other provisions of this
Agreement shall be limited to damages or specific performance and shall not
include any right under this Agreement or applicable law to terminate this
Agreement.
12.2 Termination of Agreement.
------------------------
(a) This Agreement may be terminated at any time prior to the consummation
of the BFC Closing:
(i) by mutual written consent of the parties hereto;
(ii) by any of the parties hereto upon written notice to the other
parties if the BFC Closing shall not have been consummated by April 1, 2000
unless such failure of consummation shall be due to the failure of the
party seeking to terminate to perform or observe in all material respects
the covenants and agreements hereof to be performed or observed by such
party; or
(iii) by a party upon written notice to the other parties if any
court or governmental authority of competent jurisdiction shall have issued
a final order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(b) Termination of this Agreement under this Section 12.1 shall not
release, or be construed as so releasing, any party hereto from any liability or
damage to the other parties hereto arising out of the breaching party's willful
and material breach of the warranties and representations made by it, or willful
and material failure in performance of any of its covenants, agreements, duties
or obligations arising hereunder, and the obligations under paragraphs 10.1(f),
10.1(g), 10.2(d), 10.3(e) and 10.3(f) and Article 12 shall survive such
termination.
22
<PAGE>
12.3 HSR Act Filing
--------------
Carbon and Yorktown shall, as promptly as possible, make or cause to be
made any required filings under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and the rules and regulations thereunder (the "HSR Act") with respect to
the purchase of BFC shares and the Exchange Offer and shall cooperate with each
other regarding these matters. Each party shall promptly inform the other
parties of any material communication between the party and the Federal Trade
Commission, the Department of Justice or any other governmental authority
regarding any of the transactions contemplated by this Agreement. If any party
receives a request for additional information or documents from any such
governmental authority with respect to the transactions contemplated by this
Agreement, then the parties shall use its reasonable efforts, as soon as
reasonably practicable, and after consultation with the other parties, an
appropriate response in substantial compliance with the request. Each party
shall take all reasonable actions necessary to cause the expiration of the
waiting periods under the HSR Act as promptly as possible.
12.4 Expenses.
--------
All expenses in connection with this Agreement and the transactions
contemplated hereby, including without limitation legal and accounting fees,
incurred by a party shall be borne by the party, except that Carbon shall
reimburse CEC Canada for any and all expenses in connection with this Agreement,
the transactions contemplated hereby and the Stock Purchase Agreement upon
consummation of the BFC Closing and for those expenses incurred by CEC Canada
after consummation of the BFC Closing and except Carbon shall reimburse Yorktown
for all its reasonable out-of-pocket legal expenses (including, without
limitation, reasonable, attorneys fees), and any out-of-pocket expenses of
Yorktown relating to any filings under the HSR Act, in connection with this
Agreement and the transactions contemplated hereby.
12.5 Successors and Assigns.
----------------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, but shall not be
assignable by either party hereto without the prior written consent of the other
parties hereto. Notwithstanding the foregoing, Yorktown may assign this
Agreement to any party controlled by, under common control with or controlling
Yorktown with prior notice to Carbon and CEC Canada, and in that event Yorktown
shall nevertheless remain fully liable for all obligations of Yorktown contained
in this Agreement.
12.6 Third Party Beneficiaries.
---- -------------------------
23
<PAGE>
Each party hereto intends that except as otherwise expressly provided
herein, this Agreement shall not benefit or create any right or cause of action
in or on behalf of any person other than the parties hereto.
12.7 Notices.
---- -------
Any notice or other communication provided for herein or given hereunder to
a party hereto shall be in writing and shall be delivered in person or shall be
mailed by first class registered or certified mail, postage prepaid, addressed
as follows or may be delivered by fax or other electronic transmission to the
appropriate address:
If to Carbon:
Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, CO 80290-1101
Attention: President
Telephone Number: (303) 860-1575
Fax Number: (303) 860-9128
Email Address: [email protected]
If to CEC Canada:
CEC Resources Ltd.
1700 Broadway, Suite 1150
Denver, CO 80290-1101
Attention: President
Telephone Number: (303) 860-1575
Fax Number: (303) 860-9128
Email Address: [email protected]
If to Yorktown:
Yorktown Energy Partners III, L.P.
Attention: Peter A. Leidel
410 Park Avenue, Suite 1900
New York, NY 10025
Telephone Number: (212) 515-2113
Fax Number: (212) 515-2105
Email Address: [email protected]
or to such other address with respect to a party as such party shall notify the
other in writing as above provided.
24
<PAGE>
12.8 Complete Agreement.
---- ------------------
This Agreement contains the complete agreement between the parties hereto
with respect to the Exchange Offer and other transactions contemplated hereby
and supersede all prior agreements and understandings between the parties hereto
with respect thereto.
12.9 Captions.
---- --------
The captions contained this Agreement are for convenience of reference only
and do not form a part of this Agreement.
12.10 Waiver and Other Action.
----- -----------------------
Either party hereto may, by a signed writing, given any consent or waiver.
The waiver by any party of a breach of any term or provision of this Agreement
shall not construed as a waiver of any subsequent breach.
12.11 Amendment.
----- ---------
The parties hereto, by action taken by all of their respective Boards of
Directors or governing authorities or pursuant to authority delegated by all of
their respective Boards of Directors or governing authorities, may amend this
Agreement. Any amendment of this Agreement must be in writing signed by the
party against which enforcement of the amendment is sought.
12.12 Governing Law.
----- -------------
This Agreement shall be construed and enforced in accordance with the laws
of the State of Colorado.
12.13 Non-Survival of Representations and Warranties.
----- ----------------------------------------------
No representation or warranty contained in this Agreement shall survive the
consummation of the BFC Closing.
12.14 Attorneys' Fees.
----- ---------------
A prevailing party in any legal proceeding brought under or to enforce this
Agreement shall be entitled to recover court costs, reasonable costs of the
legal proceeding and reasonable attorneys' fees from the non-prevailing parties.
12.15 Counterparts.
----- ------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which shall constitute but one
instrument.
25
<PAGE>
The parties hereto have executed this Agreement as of the day and year
first above written.
CARBON ENERGY CORPORATION CEC RESOURCES LTD.
By: /s/ Patrick R. McDonald By: /s/ Patrick R. McDonald
------------------------ ------------------------
Name: Name:
------------------------ ------------------------
Title: President Title: President
----------------------- -----------------------
YORKTOWN ENERGY PARTNERS III, L.P.
By: /s/ Peter Leidel
-------------------------------
General Partner
By:
---------------------
Name:
-------------------
Title:
------------------
DENVER:0938621.08
26
<PAGE>
EXHIBIT 10.4
BY AND BETWEEN
BONNEVILLE PACIFIC CORPORATION,
AS SELLER,
AND
CEC RESOURCES LTD.
AS BUYER
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of August 11,
1999, is by and between Bonneville Pacific Corporation, a Delaware corporation
("Seller"), and CEC Resources Ltd., a company organized under the laws of the
Province of Alberta, Canada ("Buyer").
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, all of the issued and outstanding capital stock of Bonneville Fuels
Corporation, a Colorado corporation (the "Company"), a wholly owned subsidiary
of Seller, upon the terms and subject to the conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties hereto agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
-------------------
Section 1.1 Certain Defined Terms. Unless the context otherwise requires,
---------------------
the respective terms defined in Appendix A attached hereto and incorporated
herein shall, when used herein, have the respective meanings therein specified,
with each such definition to be equally applicable both to the singular and the
plural forms of the term so defined.
Section 1.2 References, Gender, Number. All references in this Agreement
--------------------------
to an "Article," "Section," or "subsection' shall be to an Article, Section, or
subsection of this Agreement, unless the context requires otherwise. Unless the
context otherwise requires, the words "this Agreement," "hereof," "hereunder,"
"herein," "hereby," or words of similar import shall refer to this Agreement as
a whole and not to a particular Article, Section, subsection, clause or other
subdivision hereof. Whenever the context requires, the words used herein shall
include the masculine, feminine and neuter gender, and the singular and the
plural.
ARTICLE 2
SALE AND PURCHASE OF STOCK
--------------------------
Section 2.1 Sale and Purchase. On and subject to the terms and conditions
-----------------
of this Agreement, Seller agrees to sell and convey to Buyer, and Buyer agrees
to purchase from Seller, all of the issued and outstanding Company Shares.
<PAGE>
ARTICLE 3
PURCHASE PRICE AND PAYMENT
--------------------------
Section 3.1 Purchase Price. The purchase price for the sale and
--------------
conveyance of the Company Shares to Buyer is Twenty-Three Million Eight Hundred
Fifty-Seven Thousand Nine Hundred Fifty-One Dollars and no/100 ($23,857,951.00)
(the "Purchase Price"), subject to adjustment in accordance with the terms of
this Agreement. The "Adjusted Purchase Price" shall be the Purchase Price (i) as
adjusted downward for any Environmental Defect pursuant to Section 5.5, (ii) as
adjusted downward for Title Defects, if any, in accordance with Section 6.2,
(iii) as adjusted for undisclosed gas imbalances, if any, pursuant to Section
3.3, (iv) as adjusted downward by the amount of the Deposit, and (v) as adjusted
downward for the amount of any loss of deduction pursuant to Section 8.15.
Section 3.2 Payment. Contemporaneously with the execution of this
-------
Agreement, Buyer shall deposit with Seller an amount equal to five percent (5%)
of the Purchase Price ($1,200,000) as a deposit hereunder (the "Deposit"). The
"Closing Payment" shall be an amount equal to the Adjusted Purchase Price. At
the Closing, Buyer shall wire transfer the Closing Payment in immediately
available funds to the account specified by Seller to Buyer. Seller shall be
entitled to all interest and other amounts earned on the Deposit and such
amounts shall not be applied to the Adjusted Purchase Price.
Section 3.3 Gas Imbalance Adjustments. The Purchase Price shall be:
-------------------------
(a) reduced by the product obtained by multiplying the aggregate amount of
Unscheduled (Negative) Imbalances by $2.00 per MMBtu; and
(b) increased by the product obtained by multiplying the aggregate amount
of Unscheduled (Positive) Imbalances by $2.00 per MMBtu;
provided, however, that there shall be no adjustment for Unscheduled (Negative)
Imbalances or for Unscheduled (Positive) Balances if the aggregate amount of net
adjustments under clauses (a) and (b) above is less than $50,000.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 4.1 Representations and Warranties of Seller. As of the date of
----------------------------------------
this Agreement, Seller represents and warrants to Buyer as follows:
(a) Organization and Qualification of Seller. Seller is a corporation
----------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
-2-
<PAGE>
(b) Organization and Qualification of the Company. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Colorado and has the requisite corporate power to carry on its
business as it is now being conducted. The Company is duly qualified to do
business, and is in good standing, in each jurisdiction in which the Assets
owned or leased by it makes such qualification necessary, except where the
failure to so qualify and be in good standing will not have a Material Adverse
Effect.
(c) Authority. Seller has all requisite corporate power and authority to
---------
execute and deliver this Agreement and to perform its obligations hereunder.
The execution, delivery and performance of this Agreement and the transactions
contemplated hereby have been duly and validly authorized by all requisite
corporate action on the part of Seller, except as provided in Section 9.1(g).
(d) Enforceability. This Agreement constitutes a valid and binding
--------------
agreement of Seller enforceable against Seller in accordance with its terms,
subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws of general application with respect to creditors, (ii)
general principles of equity and (iii) the power of a court to deny enforcement
of remedies generally based upon public policy.
(e) Company Shares. The Seller holds of record and owns beneficially all
--------------
outstanding Company Shares free and clear of any security interests, liens,
options, warrants, purchase rights, or other encumbrances (except as created by
this Agreement and restrictions on sales of stock under applicable securities
laws). Upon the purchase of the Company Shares as contemplated by this
Agreement, the Buyer will obtain good and valid title to the Company Shares free
and clear of all security interests, liens, options, warrants, purchase rights,
or other encumbrances (other than those created by, through or under Buyer and
restrictions on sales of stock under applicable securities laws). The Seller is
not a party to any option, warrant, purchase right, or other contract or
commitment (other than this Agreement) that could require the Seller to sell,
transfer, or otherwise dispose of any Company Shares. Except as created by this
Agreement, the Seller is not a party to any voting trust, proxy, or other
agreement or understanding with respect to the voting, holding or disposition of
any Company Shares.
(f) Company Capitalization. The entire authorized capital stock of the
----------------------
Company consists of 1,000 shares of common stock, of which only the 1,000
Company Shares held beneficially and of record by the Seller are issued and
outstanding. All of the issued and outstanding Company Shares have been duly
authorized and are validly issued, fully paid and nonassessable and were not
issued in violation of the preemptive rights of any person. Except for the
Company Shares, there are outstanding (i) no shares of capital stock or other
voting securities of the Company; (ii) no securities of the Company convertible
into or exchangeable for shares of capital stock or other voting securities of
the Company; and (iii) no options, warrants, calls, rights (including preemptive
rights), commitments or agreements to which the Company or Seller or any
Affiliate of Seller is a party or by which any of them is bound in any case
obligating the Company or Seller or any Affiliate of Seller to issue, deliver,
sell, purchase, redeem or acquire,
-3-
<PAGE>
or cause to be issued, delivered, sold, purchased, redeemed or acquired,
additional shares of capital stock or other voting securities of the Company, or
obligating the Company, the Seller or any Affiliate of Seller to grant, extend
or enter into any such option, warrant, call, right, commitment or agreement.
(g) Company Financial Statements. Attached hereto as Schedule 4.1(g) are
----------------------------
the following financial statements (collectively the "Financial Statements"):
(i) audited Consolidated Financial Statements for the Company and Subsidiaries,
including Consolidated Balance Sheets - December 31, 1998 and 1997; Consolidated
Statements of Operations - For the Years Ended December 31, 1998, 1997 and 1996;
Consolidated Statement of Stockholders Equity - For the Period From January 1,
1996 Through December 31, 1998; and Consolidated Statements of Cash Flows - For
the Years Ended December 31, 1998, 1997 and 1996; and (ii) unaudited
Consolidated Financial Statements for the Company and Subsidiaries, including
Consolidated Balance Sheet as of March 31, 1999 and 1998; Consolidated Statement
of Operations For the three months ended March 31, 1999; Consolidated Statement
of Stockholders Equity For the three months ended March 31, 1999, and the year
ended December 31, 1998; and Consolidated Statements of Cash Flows For the three
months ended March 31, 1999 and 1998 (the "Most Recent Financial Statements").
The Financial Statements present fairly, in all material respects and in
accordance with GAAP applied on a consistent basis throughout the periods
covered, the financial condition of the Company as of such dates and the results
of operations and cash flows of the Company for such periods; provided, however,
that (1) the Most Recent Financial Statements are subject to normal year-end
adjustments and lack footnotes and other presentation items and (2) no
representation or warranty is made under this subsection with respect to the
title of the Company to any Subject Interests, any matters addressed in any
Reserve Report or in Section 3.3, any pending or threatened Actions, any
Plugging and Abandonment Obligations, or the existence, non-existence or effect
of any Environmental Condition, Environmental Claims, Offsite Environmental
Matters, Environmental Liabilities, Environmental Defects or Environmental
Matters. With respect to Plugging and Abandonment Obligations, Seller does
represent and warrant that its estimates of the Company's share of the costs to
plug and abandon existing wells included in the Wells or Units are in accordance
with GAAP and reflect all notices received from any Governmental Authority or
any operator with respect to the plugging and abandonment of any such wells.
(h) No Conflict or Violation. Except for any exceptions set forth in
------------------------
Section 4.1(i) (or Schedule 4.l(i)) , neither the execution and delivery of this
Agreement nor the consummation of the transactions and performance of the terms
and conditions contemplated hereby by Seller will (i) conflict with or result in
a violation or breach of or default under any provision of the certificate of
incorporation, by-laws or other similar governing documents of Seller or the
Company, (ii) conflict with or result in a violation or breach of or default
under any agreement, indenture or other instrument under which Seller or the
Company is bound, other than such conflicts, breaches, violations or defaults as
will not have a Material Adverse Effect, or (iii) violate or conflict with any
Law applicable to Seller or the Company or the properties or assets of Seller or
the Company.
-4-
<PAGE>
(i) Consents. Except for the consents, filings, notices or preferential
--------
or preemptive rights expressly described and set forth in Schedule 4.1(i) (the
"Unobtained Consents") or the failure of which to obtain or with which to comply
will not have a Material Adverse Effect, no consent, approval, authorization or
permit of, or filing with or notification to, or waiver or non-exercise of any
preferential or preemptive rights by any Person (including, without limitation,
any consent under the Public Utility Holding Company Act of 1935, as amended) is
required for or in connection with the execution and delivery of this Agreement
by Seller or for or in connection with the consummation of the transactions and
performance of the terms and conditions contemplated hereby by Seller or the
Company.
(j) Actions. Except as set forth on Schedule 4.1(j), there is no Action
-------
pending against the Company or, to the knowledge of Seller, pending against the
Assets or threatened against the Company or the Assets, other than Actions which
are not reasonably likely to have a Material Adverse Effect.
(k) Compliance With Laws. To the knowledge of Seller and except as set
--------------------
forth on Schedule 4.l(k), the Company is not in violation of any Law, other than
violations of Law which are not reasonably likely to have a Material Adverse
Effect; provided that, Seller makes no representation or warranty, express or
implied with respect to any Environmental Law, any Tax Law or any employee
benefit plans or arrangements except as respectively set forth in Sections
4.1(p), 4.1(q) and 4.1(r).
(l) Advisors' and Brokers' Fees. Seller has engaged CIBC World Markets as
---------------------------
its financial advisor in connection with the transactions contemplated by this
Agreement. Neither Seller nor any Affiliate of Seller has retained any other
advisor or broker in respect of the transactions contemplated by this Agreement
for which Buyer or the Company are liable or shall incur any liability.
(m) Bankruptcy. There are no bankruptcy, reorganization or arrangement
----------
proceedings pending against, being contemplated by, or, to the knowledge of
Seller, threatened against Seller or the Company.
(n) Material Contracts. To the knowledge of Seller, Schedule 4.1(n) sets
------------------
forth a complete list of the following contracts, agreements or commitments to
which the Company is a party or by which the Company or its Assets are bound:
(1) any written or oral contract or agreement with Seller or any
Affiliate of Seller relating to the provision of goods or services which
will survive the Closing;
(2) any contract, agreement or commitment that commits the Company to
aggregate expenditures with respect to the Company's interest of more than
$100,000 in any calendar year, excluding (i) the Subject Interests and any
contracts or agreements creating interests in the Subject Interests or in
any Wells or Units, (ii) joint operating
-5-
<PAGE>
agreements, (iii) unitization or pooling agreements, and (iv) any
contracts, agreements or commitments listed pursuant to other clauses of
this Section 4.1(n);
(3) any lease, sublease, installment purchase or similar arrangement
for the use or occupancy of any land, building or other real property,
excluding (i) interests in the Subject Interests or in any Wells or Units,
(ii) surface leases not material to the operation of the Subject Interests,
and (iii) leases of real property which involve aggregate expenditures or
receipts by the Company of $100,000 or less in any calendar year;
(4) any indenture, trust agreement, loan agreement or note under which
the Company has outstanding indebtedness for borrowed money or with respect
to which the Company has guaranteed the obligations of any other Person for
borrowed money;
(5) any agreement of surety, guarantee or indemnification by the
Company outside of the ordinary course of the Company's business; and
(6) any covenant not to compete or area of mutual interest agreement
(collectively the "Material Contracts").
(o) Events Subsequent to Report Date. Except in each case as set forth in
--------------------------------
Schedule 4.1(o), Schedule 4.1(r) and Section 7.2(b), or as otherwise disclosed
in the Financial Statements, since the Report Date the Company has engaged in
business in a manner consistent with its past practices, and to the knowledge of
Seller there has not been any:
(1) destruction, damage to, or loss of any Assets of the Company that
(after giving effect to any insurance coverage with regard thereto) is
reasonably likely to have a Material Adverse Effect;
(2) change in accounting policies or practices (including, without
limitation, any change in depreciation or amortization policies) by the
Company, except as required under GAAP;
(3) sale or other disposition of any properties or assets of the
Company except (i) in the ordinary course of business having a value of
less than $50,000,. or (ii) any item of personal property or equipment
having a value of less than $25,000;
(4) employment agreement (not terminable at will) entered into by the
Company or any material increases in the compensation payable to any
officers or employees of the Company (other than increases for employees
who are not officers of the Company made in the ordinary course of business
and consistent with past practice);
-6-
<PAGE>
(5) (i) dividend or other distribution in respect of the Company
Shares or (ii) other transactions between the Company and the Seller or any
Affiliate of Seller;
(6) change in any Plan or Benefit Arrangement, except as required by
Law;
(7) labor dispute, strike or similar work stoppages or, to the
knowledge of Seller, threats thereof by or with respect to persons employed
by the Company; or
(8) settlement entered into or consent made to any order, decree or
judgment relating to or arising out of any Action relating to the Company
which is reasonably likely to have a Material Adverse Effect.
(9) notice from any Governmental Authority or any operator with
respect to the plugging and abandonment of any Well.
(10) material adverse change in the business or financial condition of
the Company. For purposes hereof a material adverse change means an
unfavorable or adverse change or occurrence, or the result thereof, which
causes the business, operations, financial condition, prospects or
properties of the Company and its Subsidiaries as a whole to be materially
impaired or reduced.
(p) Environmental Matters. Except as set forth in Schedule 4.1(p)),
---------------------
Seller has no knowledge of any Environmental Claim or Offsite Environmental
Matter, other than Environmental Claims and Offsite Environmental Matters which,
either individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect.
(q) Tax Matters. With respect to the Company, except as set forth in
-----------
Schedule 4.1(q), (i) all reports, returns, statements (including, without
limitation, estimated reports, returns, or statements), and other similar
filings required to be filed on or before the Closing Date by the Company (or
the common parent of the affiliated, consolidated, combined and/or unitary group
of which the Company is a member) (the "Tax Returns") with respect to any Taxes
have been or will be timely filed with the appropriate governmental agencies in
all jurisdictions in which such Tax Returns are required to be filed; (ii) the
Tax Returns are or will be true and correct in all material respects, and all
Taxes reported on such returns, and all other material Taxes of the Company that
are due on or prior to the Closing Date (except those Taxes that are being
disputed in good faith and for which adequate provision has been made in the
Company's Financial Statements to the extent required by GAAP), have been or
will be paid; (iii) the Company (or the common parent of the affiliated,
consolidated, combined and/or unitary group of which the Company is a member)
has not extended or waived the application of any statute of limitations of any
jurisdiction regarding the assessment or collection of any Tax; (iv) there are
no audits, claims, proposed or final deficiency notices, assessments, levies,
administrative proceedings, or lawsuits pending or, to the knowledge of Seller,
threatened against the Company by any taxing
-7-
<PAGE>
authority; (v) there are no liens for Taxes upon any of the Assets except liens
for Taxes not yet delinquent; (vi) the Company does not have any liability for
the Taxes of any Person other than the Company under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign tax law);
(vii) no agreements relating to the allocation or sharing of, or liability or
indemnification for, Taxes exist among the Company and any other Person; (viii)
all Taxes required by law to be withheld or collected by the Company (including,
but not limited to, Taxes required to be withheld with respect to amounts paid
or owing to any officer, employee, creditor, stockholder, independent contractor
or other person) have been timely withheld or collected and, to the extent
required by Law, have been timely paid, remitted or deposited to or with the
relevant taxing authority in all material respects; (ix) no closing agreement or
agreement pursuant to Section 7121 of the Code or any similar provision of any
state, local or foreign law has been entered into by or with respect to the
Company, and the Company has not agreed to make any adjustment pursuant to
Section 481(a) of the Code (or any predecessor provision) by reason of any
change in any accounting method of the Company, which requires the Company to
include any item of income in, or exclude any item of deduction from, any Tax
Return; (x) the Company has not filed a consent under Section 341(f) of the Code
concerning collapsible corporations; (xi) the Company has not made any material
payments nor is it obligated to make material payments, nor is it a party to any
agreement that under certain circumstances could obligate it to make any
material payments that will not be deductible under Section 280G of the Code;
(xii) except for Taxes resulting from any Section 338(h)(10) Election, the
unpaid income Taxes of the Company do not as of the Most Recent Financial
Statements for the Company, exceed the reserve for Tax liability (rather than
any reserve for deferred taxes established to reflect timing differences between
book and tax income) set forth on the face of the Most Recent Financial
Statements for the Company (rather than in any notes thereto) and will not
exceed that reserve as adjusted for operations and transactions through the
Closing Date in accordance with past custom and practice in the filing of the
Company's Tax returns; (xiii) the Company has not been a member of an affiliated
group of corporations filing a consolidated federal income Tax Return other than
a group the common parent of which is Seller; and (xiv) all material income
Taxes owed by any affiliated group with which Company has filed a consolidated
return have been or will be paid for each taxable period during which Company
was a member of such group.
(r) Employee Benefit Plans.
----------------------
(1) List of Plans. Except to the extent of obligations provided for
-------------
under Section 7.2(b), Schedule 4.1(r) includes a complete and accurate list
of all material employee benefit plans as defined in section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
("Plans"), and material benefit arrangements that are not Plans ("Benefit
Arrangements"), including, but not limited to any (A) incentive bonus or
deferred bonus arrangements, (B) arrangements providing termination
allowance, severance or similar benefits, (C) equity compensation plans,
(D)deferred compensation plans, (E) employee assistance programs, (F)
vacation policies, and (G) stock option plans that are currently in effect
or were maintained within three years of the Closing Date, or have been
approved before the Closing Date but are not yet
-8-
<PAGE>
effective, for the benefit of directors, officers, employees or former
employees (or their beneficiaries) of the Company or with respect to which
the Company would have any liability.
(2) Compliance. Except as otherwise disclosed in Schedule 4.1(r),
----------
with respect to each Plan listed on Schedule 4.1(r), (i) the plan is in
material compliance with ERISA in all respects, including but not limited
to the reporting and disclosure requirements of Part 1 of Subtitle B of
Title I of ERISA; (ii) there has been no transaction described in section
406 or 407 of ERISA or section 4975 of the Code relating to the plan unless
exempt under section 408 of ERISA or section 4975 of the Code, as
applicable; (iii) the bonding requirements of section 412 of ERISA have
been satisfied; and (iv) there is no litigation, action, proceeding,
investigation or claim asserted or, to the Seller's knowledge, threatened
(other than the payment of benefits in the normal course). All group
health plans maintained by the Company have been operated in material
compliance with section 4980B of the Code.
(3) Severance Pay and Medical Coverage. Except as provided under
----------------------------------
Section 7.2(b) or as disclosed on Schedule 4.1(r), no plan, arrangement or
agreement with any one or more employees will cause, and the execution,
delivery and performance of this Agreement by Seller will not cause, the
Company to have liability for severance pay as a result of the consummation
of the transactions described in this Agreement. The Company's liability
for severance pay will be funded exclusively through the Employee Benefits
Trust described in Section 7.2(b). Except as provided under Section 7.2(b)
or as disclosed on Schedule 4.1(r), the Company does not provide employee
post-retirement medical coverage or contribute to or maintain any plan or
arrangement that provides for medical coverage following termination of
employment except as is required by section 4980B(f) of the Code, nor has
it made any representations, agreements, covenants or commitments to
provide that coverage.
(4) Certain Pension Plans. The terms of all pension plans listed in
---------------------
Schedule 4.1(r) to this Agreement that are intended to qualify under
section 401(a) of the Code (i) have been determined by the IRS to be
qualified under section 401(a) of the Code or (ii) the applicable remedial
amendment periods will not have ended before the Closing Date. Except as
disclosed on Schedule 4.1(r), neither Seller nor the Company has any
knowledge of any event or circumstance that would jeopardize the tax
qualified status of the Plans listed in Schedule 4.1(r).
(5) No Multiemployer Pension Plans. Neither the Company nor any
------------------------------
entity (whether or not incorporated) that was at any time during the six
years before the Closing Date treated as a single employer together with
the Company under section 414 of the Code has ever maintained, had any
obligation to contribute to or incurred any liability with respect to a
pension plan that is or was subject to the provisions of Title IV of ERISA
or section 412 of the Code.
-9-
<PAGE>
(s) Subsidiaries. Except as set forth in Schedule 4.1(s), the Company
------------
does not have any Subsidiaries. Each such Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation and is duly qualified to do business, and is in good standing,
in each jurisdiction in which the properties owned or leased by it make such
qualification necessary, except where the failure to so qualify and be in good
standing will not have a Material Adverse Effect. The Company holds of record
and owns beneficially all outstanding shares issued and outstanding of such
Subsidiaries, free and clear of any security interests, liens, options,
warrants, purchase rights, or other encumbrances (except restrictions on sales
of stock under applicable securities laws), and there is no option, warrant,
purchase right, or other contract or commitment that could require the Company
to sell, transfer, or otherwise dispose of any of the shares of such
Subsidiaries, nor is the Company a party to any voting trust, proxy, or other
agreement or understanding with respect to the voting, holding or disposition of
such shares.
(t) No Default. To the knowledge of Seller, the Company is not in default
----------
under any term or provision of any of the Material Contracts in any material
respect.
(u) Royalties. Except (i) for matters which, individually or in the
---------
aggregate, are not reasonably likely to have a Material Adverse Effect, and (ii)
for matters which would not result in the cancellation or loss of title in a
Subject Interest, all royalties, overriding royalties and other similar payments
due and payable on production with respect to a Subject Interest have been
timely and fully paid, except amounts that are being held in suspense for title
and other reasons which are customary in the industry and which suspense will
not result in grounds for cancellation of the Company's rights in such Subject
Interest.
(v) Employees. The Company is not a party to or subject to any collective
---------
bargaining agreement. To the knowledge of Seller, no collective bargaining
agent has been certified as a representative of any of the employees or former
employees of the Company. To the knowledge of Seller, no union organizational
campaign is currently pending with respect to any of the employees or former
employees of the Company.
(w) Information Regarding Subject Interests.
---------------------------------------
(1) Except as set forth in Schedule 4.1(w), there is no contract,
commitment or agreement binding on the Subject Interests which provides for
the approval of specific capital expenditures by the Company or Seller and
under which the Company or Seller has approved future capital expenditures
in excess of $100,000.
(2) Except as set forth in Schedule 4.1(w), this Agreement and any
document executed in connection herewith, there are no agreements or
arrangements relating to the Subject Interests with Seller or any Affiliate
of Seller that will be binding on Buyer, the Company or the Subject
Interests after the Closing.
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<PAGE>
(3) Except as set forth in Schedule 4.1(w), there are no contracts,
commitments or agreements for the sale or other disposition of oil, natural
gas or natural gas liquids attributable to the Subject Interests having a
term in excess of one year that are not terminable without penalty on 90
days' notice or less.
(x) Wells and Units. Without representing or warranting the Company's
---------------
title therein, the Property Schedule sets forth in all material respects a
complete listing of all Wells and Units in which the Company owns an interest,
together with the locations thereof and the Company's Net Revenue Interests and
Working Interests therein.
(y) Permits. Except for those with respect to Environmental Laws, which
-------
are addressed exclusively in Sections 4.1(p) and 5.3, the Company has, and, to
the knowledge of Seller, each other Person who operates a Well or Unit has,
obtained all material permits, licenses, franchises, authorities, consents and
approvals necessary for owning and operating the Wells and Units as presently
operated, and all such permits, licenses, franchises, authorities, consents and
approvals are in full force and effect, except such failures as would not,
individually or in the aggregate, have a Material Adverse Effect.
(z) Personal Property. Subject to the repairs, maintenance and
-----------------
replacements contemplated by the capital expenditures referenced in Schedule
4.1(n), all equipment and all vehicles owned or leased by the Company and
currently used by the Company in connection with the operation of the Wells and
Units have been maintained in an operable state of repair adequate to maintain
normal operations in a manner consistent with the Company's past practices,
except such failures to maintain as would not, individually or in the aggregate,
have a Material Adverse Effect.
(aa) Public Utility Holding Company Act. Except as set forth in Schedule
----------------------------------
4.1(aa), neither the Company nor Seller nor any of the Subsidiaries is a
"holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of either a "holding company" or a "subsidiary company" of a
"holding company," in each case within the meaning of the Public Utility Holding
Company Act of 1935, as amended. Further, neither the Company nor any of the
Subsidiaries is a "public utility company" or an "electric utility company" or a
"gas utility company, " in each case within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
(bb) Investment Company Act. The Company is not an "investment company"
----------------------
within the meaning of the Investment Company Act of 1940, as amended, and the
Seller is not required to register under the Investment Company Act of 1940, as
amended.
(cc) Seller's Knowledge. Seller has no knowledge of any fact which results
------------------
in any representation or warranty of Buyer in Section 4.2 being breached. If
after the date of this Agreement, Seller obtains knowledge of any fact which
results in any representation or warranty of Buyer in Section 4.2 being
breached, Seller will immediately furnish Buyer written notice
-11-
<PAGE>
thereof. This Section 4.1(cc) shall not apply to Buyer's representation and
warranty in Section 4.2(i).
(dd) Representations and Warranties re Company. To the extent that the
-----------------------------------------
foregoing representations of Seller relate to the Company, such representations
and warranties are for the purpose of establishing whether Buyer's closing
conditions have been satisfied under Section 9.2 and shall not form the basis
for any claim, action, suit or proceeding based on a breach thereof.
(ee) Y2K Representation and Warranty. The Company has made inquiries of
-------------------------------
the suppliers and manufacturers of its computer systems, including equipment
supplied by third parties, and has been advised that such systems are Y2K
Compliant except in the case of the Company's property management software which
is currently under review regarding Y2K compliance. Except for costs associated
with the items set forth on Schedule 4.1(ee), the cost to the Company of the
reasonably foreseeable consequences of the failure of the Company's computer
systems to be Y2K Compliant cannot be reasonably expected to have a Material
Adverse Effect. For purposes hereof, "Y2K Compliant" means that the Company's
computer systems, including equipment supplied by third parties, will record,
process, calculate and present calendar dates falling on and after January 1,
2000 and calculate information dependent on or relating to such dates in the
same manner and with the same functionality, data integrity and performance as
such systems record, process, calculate and present calendar dates on or before
December 31, 1999 or calculate any information dependent on or relating to such
dates.
Section 4.2 Representations and Warranties of Buyer. Buyer represents
---------------------------------------
and warrants to Seller as follows:
(a) Organization and Qualification. Buyer is a corporation duly organized,
------------------------------
validly existing and in good standing under the laws of the Province of Alberta,
Canada, and has the requisite corporate power to carry on its business as it is
now being conducted.
(b) Authority. Buyer has all requisite corporate power and authority to
---------
execute and deliver this Agreement and to perform its obligations under this
Agreement. The execution, delivery and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized by all
requisite corporate action on the part of Buyer.
(c) Enforceability. This Agreement constitutes a valid and binding
--------------
agreement of Buyer enforceable against Buyer in accordance with its terms,
subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws of general application with respect to creditors, (ii)
general principles of equity and (iii) the power of a court to deny enforcement
of remedies generally based upon public policy.
(d) No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement nor the consummation of the transactions and performance of the terms
and conditions contemplated hereby by Buyer will (i) conflict with or result in
a violation or breach of any provision of the certificate of incorporation,
bylaws or other similar governing documents of
-12-
<PAGE>
Buyer or any material agreement, indenture or other instrument under which Buyer
is bound or (ii) violate or conflict with any Law applicable to Buyer or the
properties or assets of Buyer.
(e) Consents. No consent, approval, authorization or permit of, or filing
--------
with or notification to, any Person (including, without limitation, any consent
under the Public Utility Holding Company Act of 1935, as amended) is required
for or in connection with the execution and delivery of this Agreement by Buyer
or for or in connection with the consummation of the transactions and
performance of the terms and conditions contemplated hereby by Buyer, except for
such consents, approvals, authorizations, permits, filings and notifications the
failure of which to obtain or make are not reasonably likely to have a material
adverse effect on the ability of Buyer to consummate and perform the
transactions contemplated by this Agreement.
(f) Actions. There is no Action pending against Buyer or, to the knowledge
-------
of Buyer, threatened against Buyer, other than Actions which are not reasonably
likely to have a material adverse effect on the ability of Buyer to consummate
and perform the transactions contemplated by this Agreement.
(g) Advisors' and Brokers' Fees. Neither Buyer nor any Affiliate of Buyer
---------------------------
has retained any advisor or broker in respect of the transactions contemplated
by this Agreement for which Seller or the Company are liable or shall incur any
liability.
(h) Qualified Owner. The consummation of the transactions contemplated
---------------
hereby will not cause Buyer or the Company to be disqualified as an owner of any
federal or state oil, gas and mineral lease or to exceed any acreage limitation
imposed by any statute, rule, regulation or order of governmental authority.
(i) Funds. Buyer has, and at all times prior to Closing will have,
-----
sufficient funds available to enable Buyer to consummate the transactions
contemplated hereby and to pay the Closing Payment and all related fees and
expenses of Buyer.
(j) Buyer's Knowledge. Buyer has no knowledge of any fact which results
-----------------
in any representation or warranty of Seller in Section 4.1 being breached. If
after the date of this Agreement, Buyer obtains knowledge of any fact which
results in any representation or warranty of Seller in Section 4.1 being
breached, Buyer will immediately furnish Seller written notice thereof.
(k) No Distribution. Buyer is an experienced and knowledgeable investor in
---------------
the oil and gas business. Prior to entering into this Agreement, Buyer was
advised by its counsel and such other persons it has deemed appropriate
concerning this Agreement and has relied solely on an independent investigation
and evaluation of, and appraisal and judgment with respect to, the geologic and
geophysical characteristics of the Subject Interests, the estimated reserves
recoverable therefrom, and the price and expense assumptions applicable thereto.
Buyer is an "accredited investor," as such term is defined in Regulation D of
the Securities Act of 1933, as
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amended, and will acquire the Company Shares for its own account and not with a
view to a sale or distribution thereof in violation of the Securities Act of
1933, as amended, and the rules and regulations thereunder, any applicable state
blue sky laws or any other applicable securities laws.
(1) Bankruptcy. There are no bankruptcy, reorganization or arrangement
----------
proceedings pending against, being contemplated by, or to the knowledge of
Buyer, threatened against Buyer.
ARTICLE 5
ACCESS TO INFORMATION; ENVIRONMENTAL MATTERS; ETC.
--------------------------------------------------
Section 5.1 General Access. Subject to Section 5.4 (which shall govern
--------------
all environmental reviews, inspections and audits), promptly following the
execution of this Agreement and until the Closing Date (or earlier termination
of this Agreement), Seller shall cause the Company (i) to permit Buyer and its
representatives to have reasonable access at reasonable times in the Company's
offices, and in a manner so as not to interfere unduly with the business
operations of the Company, to the Company's books, records, contracts, abstracts
of title, title opinions, title files, ownership maps, lease files, assignments,
division orders, Reserve Reports and documents relating to the Assets or the
Company insofar as the same are in the Company's or Seller's possession and
insofar as the Company and Seller may do so without (a) violating legal
constraints or any legal obligation or (b) waiving any attorney/client, work
product or like privilege and (ii), subject to any required consent of any third
Person (other than an Affiliate of Seller), to permit Buyer and its
representatives at reasonable times and at Buyer's sole risk, cost and expense,
to conduct, in the presence of Company representatives, reasonable inspections
of the Assets; provided, however, Buyer shall repair any damage to the Assets
resulting from such inspections and Buyer does hereby indemnify and hold
harmless, release and agree to defend the Seller Indemnified Parties and the
Company from and against any and all losses, costs, damages, obligations,
claims, liabilities, expenses and causes of action to the extent arising from
Buyer's inspection of the Assets, including, without limitation, claims for
personal injuries, property damage and reasonable attorney's fees and expenses,
regardless of the form of claim whether at common law, strict liability
negligence under any statute or regulation. However, except to the extent such
inspections materially contribute to, materially aggravate or materially
adversely affect an Environmental Defect, such indemnification shall not extend
to any Environmental Defect discovered in the course of such inspections, shall
expire upon the Closing and shall not in any way affect or limit Seller's
liabilities or responsibilities with respect to any Environmental Defect.
Nothing in this Article V shall be construed to permit Buyer or its
representatives to have access to any files, records, contracts or documents of
Seller relating to this transaction, including, without limitation, any bids or
offers received by Seller or the Company for the sale of the Company or any of
the Company's assets in competition with the Buyer's bid or offer, it being
agreed that any such competing bids or offers shall be the sole property of the
Seller.
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<PAGE>
Section 5.2 Confidential Information. Unless and until the Closing
------------------------
occurs, Buyer agrees to maintain all information made available to it pursuant
to this Agreement confidential and to cause its officers, employees,
representatives, consultants and advisors to maintain all information made
available to them pursuant to this Agreement confidential, all as provided in
that certain confidentiality agreement dated May 10, 1999 (the "Confidentiality
Agreement"), by and between Seller and Buyer, the terms of which are
incorporated herein by reference and made a part of this Agreement.
Section 5.3 No Warranty or Representation. Except for Seller's warranty
-----------------------------
and representation in Section 4.1(p), Seller makes no warranty or
representation, express or implied, statutory or otherwise, with respect to any
Environmental Matters (including, without limitation, any Environmental
Condition, Environmental Claim or Offsite Environmental Matter) and Buyer hereby
acknowledges and agrees that Buyer's sole remedy for any Environmental Matter
(including, without limitation any Environmental Defect, Environmental
Condition, Environmental Claim or Offsite Environmental Matter) with respect to
any of the Assets or the Company shall be pursuant to the Seller's limited
warranty and representation in Section 4.1(p)) (which shall not survive the
Closing) and the procedures set forth in Sections 5.4 and 5.5. Furthermore,
without limiting the provisions of the Confidentiality Agreement (which shall
continue in full force and effect) and except for the express representations
and warranties contained in Section 4.1, Seller makes no warranty or
representation, express, implied, statutory or otherwise, with respect to the
accuracy or completeness of the information, records and data now, heretofore or
hereafter made available to Buyer in connection with this Agreement, including,
without limitation, any description of the Assets, pricing assumptions,
potential for production of oil, gas or other hydrocarbons from the Subject
Interests, projected development costs, projected plugging and abandonment costs
or any other matters contained in or related to the Reserve Reports, any
environmental information, or any other material furnished to Buyer by Seller,
the Company or any other source, including any of their respective directors,
officers, employees, counsel, agents or advisors.
Section 5.4 Environmental Review and Audit.
------------------------------
(a) Environmental Access. For a period of forty-five (45) days following
--------------------
the execution of this Agreement (the "Environmental Examination Period") and
subject to the restrictions contained in this Agreement and any required consent
or waiver of any third Person (other than an Affiliate of Seller), Seller shall
cause the Company (i) to permit Buyer and its representatives to have reasonable
access at reasonable times in the Company's offices, and in a manner so as not
to interfere unduly with the business operations of the Company, to Seller's and
the Company's environmental files and records in the Seller's or the Company's
possession relating to the Assets or any property formerly owned or operated by
the Company insofar as Seller and the Company may do so without waiving any
attorney/client, work product or like privilege and (ii) to permit Buyer and the
Environmental Consultant to have reasonable access to the Assets for the purpose
of allowing Buyer and the Environmental Consultant to inspect and/or
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<PAGE>
audit the Assets for any Environmental Defects (collectively, "Buyer's
Environmental Review"), all at Buyer's sole risk, cost and expense.
(b) Conduct of Review. Prior to conducting Buyer's Environmental Review,
-----------------
Buyer shall furnish Seller with a proposed scope of Buyer's Environmental
Review, including a description of the activities to be conducted and the
locations of such activities. No third Person, other than the Environmental
Consultant and Buyer's employees and attorneys, may conduct Buyer's
Environmental Review. Buyer shall not commence any activity proposed to be
included in Buyer's Environmental Review unless and until such activity
(including the location thereof) has been approved in writing by Seller, which
approval shall not be unreasonably withheld and shall be given or denied within
two Business Days after Buyer furnishes Seller with reasonably sufficient
information with respect to such activity. Seller or its representative shall
have the right to be present during any inspection (including Buyer's
Environmental Review) of the Assets and shall have the right, at its option and
expense, to split samples with Buyer.
(c) Buyer Responsibility for Review. In connection with Buyer's
-------------------------------
Environmental Review, Buyer agrees that Buyer, the Environmental Consultant and
Buyer's employees, agents and contractors shall comply with all Laws and shall
exercise due care with respect to the Assets and their condition, taking into
consideration the characteristics of any wastes or substances found thereon, and
in light of all relevant facts and circumstances. Specifically, but without
limitation, when handling solid waste or hazardous substances, if any,
discovered during the inspection of the Assets, Buyer, the Environmental
Consultant and Buyer's employees, agents and contractors shall handle such waste
or substances in accordance with all Laws. Any soil or water samples taken by
Buyer from the Assets shall be managed by Buyer consistent with the applicable
rules and regulations of the U.S. Environmental Protection Agency and applicable
state agencies with regulatory authority, provided, the Company shall be
identified as the generator of such samples. Promptly after completing Buyer's
Environmental Review, Buyer shall, at its sole cost and expense, restore the
Assets to substantially the same condition the Assets were in at the time of
Buyer's entry thereon, in accordance with good engineering practice, if changed
due to Buyer's Environmental Review. Failure by Buyer to comply with the
requirements of this subsection within a reasonable time period will entitle
(but shall not obligate) Seller or the Company to take any action deemed
necessary or appropriate by Seller or the Company to correct such failure after
written notice to Buyer, all at Buyer's expense. Buyer shall maintain and shall
cause its officers, employees, agents, representatives, contractors, consultants
(including the Environmental Consultant) and advisors to maintain all
information obtained by Buyer and the Environmental Consultant pursuant to the
Buyer's Environmental Review as strictly confidential and shall not disclose
same to any third Person without the prior written consent of Seller, except to
the extent required by Law. Buyer shall provide Seller's counsel with copies of
any final written reports prepared and analytical test results received by Buyer
or the Environmental Consultant promptly following Buyer's or the Environmental
Consultant's preparation or receipt of same. Buyer does hereby indemnify and
hold harmless, release and agree to defend the Seller Indemnified Parties and
the Company from and against any and all losses, costs, damages, obligations,
claims, liabilities, expenses and causes of action,
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<PAGE>
including all Environmental Liabilities, to the extent arising out of any
violation by Buyer or Buyer's officers, employees, agents, representatives,
contractors, consultants (including the Environmental Consultant) and advisors
of the provisions of this subsection or from the inspection or testing of the
Assets conducted by or on behalf of Buyer, including, without limitation, claims
for personal injuries, property damage and reasonable attorney's fees and
expenses, regardless of the form of claim whether at common law, strict
liability, negligence or under any statute or regulation. However, except to the
extent such inspections or testings materially contribute to, materially
aggravate or materially adversely affect an Environmental Defect, such
indemnification shall not extend to any Environmental Defect discovered in the
course of such inspections and testings, shall expire upon the Closing and shall
not in any way affect or limit Seller's liabilities or responsibilities with
respect to any Environmental Defect.
Section 5.5 Environmental Defects.
---------------------
(a) Buyer's Assertions of Environmental Defects. Prior to the expiration
-------------------------------------------
of the Environmental Examination Period, Buyer may notify Seller in writing of
any matters which, in Buyer's reasonable opinion, constitute Environmental
Defects. Buyer's written notice must include (i) a specific description of each
Asset (or portion thereof) that is affected by the alleged Environmental Defect,
(ii) a description of the alleged Environmental Defect and the facts and
circumstances giving rise thereto, including all evidence compiled by Buyer
which supports the existence of such alleged Environmental Defect, and (iii) a
calculation of the Remediation Amount (itemized in reasonable detail) that Buyer
asserts is attributable to such Environmental Defect. Buyer's calculation of
the Remediation Amount must describe the Remediation proposed for the
Environmental Condition that gives rise to the asserted Environmental Defect and
identify all material assumptions used by the Buyer in calculating the
Remediation Amount, including the standards the Buyer asserts must be met to
comply with Environmental Laws.
(b) Seller's Rights and Elections. If Buyer timely notifies Seller in
-----------------------------
writing of any Environmental Defect as required by Section 5.5(a), Seller shall
have the right to then or thereafter dispute the existence of such Environmental
Defect and/or the alleged Environmental Defect Amount asserted with respect
thereto in accordance with the provisions of Section 6.5 of this Agreement. In
addition, Seller, at its option, shall elect, at or prior to the Closing, one of
the following options with respect to the Assets affected by the alleged
Environmental Defect and, at Seller's option, any other Assets which form part
of any field or other economic operating unit which includes such affected
Assets (collectively, the "Environmental Defect Property"):
(i) leave such Environmental Defect Property in the Assets and assume
responsibility for the Remediation of such Environmental Defect; provided
that, all costs for Remediation shall first be borne by Buyer to the extent
Seller elects to apply any of the Environmental Defect Deductible to such
costs; or
(ii) leave such Environmental Defect Property in the Assets and reduce
the Purchase Price by the Environmental Defect Amount with respect to such
Environmental
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<PAGE>
Defect (taking into account any application of the Environmental Defect
Deductible which Seller elects to make with respect thereto).
If Seller elects the option set forth in clause (ii) above, Buyer shall be
deemed to have assumed responsibility for Remediation of such Environmental
Defect and such Environmental Defect shall be deemed to constitute a Company
Liability. If Seller elects the option set forth in clause (i) above, Seller
shall use commercially reasonable efforts to implement such Remediation in a
manner which is consistent with the requirements of Environmental Laws and the
provisions of any applicable lease, and Seller shall have access to the
Environmental Defect Property after the Closing Date to implement and complete
such Remediation in accordance with this section and an Access Agreement in
substantially the form attached hereto as Exhibit 5.5(b) (the "Access
Agreement"). Seller will be deemed to have adequately completed the Remediation
required in the immediately preceding sentence (a) (i) upon receipt of a
certificate or approval from the applicable state or federal authority that the
Remediation has been implemented to the extent necessary to comply with existing
regulatory requirements or (ii) upon receipt of a certificate from a licensed
professional engineer if the approval or certification specified in (i) cannot
be obtained because provision for such approval or certification is not provided
under federal or state law and (b) to the extent express approval from the
lessor is required under any applicable lease, upon receipt of such approval.
(c) Environmental Defect Amount. If Seller elects the option set forth in
---------------------------
Section 5.5(b)(ii) with respect to one or more Environmental Defects, then as
Buyer's sole and exclusive remedy with respect to such Environmental Defects,
Buyer shall be entitled to reduce the Purchase Price by the amount (the
"Environmental Defect Amount"), if any, by which the Remediation Amount with
respect to the Environmental Conditions giving rise to such Environmental
Defects exceeds that part, if any, of $500,000 (the "Environmental Defect
Deductible") which Seller elects to apply as an offset or deduction against such
Remediation Amount. Seller may also apply any part of the Environmental Defect
Deductible to the cost of any Remediation undertaken by Seller pursuant to the
option set forth in Section 5.5(b)(i). Any Remediation costs to which Seller
elects to apply the Environmental Defect Deductible shall be borne by the Buyer.
Seller shall have the right from time to time upon written notice to Buyer to
reallocate and change its application of the Environmental Defect Deductible,
except to the extent of Remediation costs already incurred or contracted for by
Buyer based on Seller's previous application thereof. It is expressly
understood and agreed that the Environmental Defect Deductible represents an
aggregate deductible for Environmental Defects which may be apportioned as
provided in this Section 5.5(c) rather than as a separate deductible for each
individual Environmental Claim.
(d) Waiver by Buyer. If, prior to the expiration of the Environmental
---------------
Examination Period, the Buyer has knowledge of an Environmental Defect and does
not notify Seller in writing of the existence thereof on or before the
expiration of the Environmental Examination Period (including, without
limitation, any Environmental Defect noted or described in any oral or written
report prepared by the Environmental Consultant), the Buyer shall be deemed to
have
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<PAGE>
waived such Environmental Defect and such Environmental Defect shall be deemed
to constitute a Company Liability. In addition, all conditions and matters of
which Buyer has knowledge prior to the expiration of the Environmental
Examination Period and which would have constituted Environmental Defects but
for the $50,000 threshold limitation set forth in the definition of
Environmental Defect shall be deemed to constitute Company Liabilities.
ARTICLE 6
TITLE ADJUSTMENTS
-----------------
Section 6.1 No Title Warranty or Representation. Without limiting
-----------------------------------
Buyer's right to adjust the Purchase Price by operation of Section 6.2, Seller
makes no warranty or representation, express, implied, statutory or otherwise,
with respect to the Company's title to any of the Assets and Buyer hereby
acknowledges and agrees that Buyer's sole remedy for any defect of title,
including any Title Defect, with respect to any of the Assets shall be pursuant
to the procedures set forth in this Article VI, which remedies shall cease, and
be deemed to be finally and conclusively satisfied, in all respects, upon the
Closing.
Section 6.2 Buyer's Title Review.
--------------------
(a) Buyer's Assertion of Title Defects. For a period of forty-five (45)
----------------------------------
days following the execution of this Agreement (the "Title Examination Period"),
Buyer shall have the right to furnish Seller written notice meeting the
requirements of this Section 6.2(a) (the "Title Defect Notice") setting forth
any matters which, in Buyer's reasonable opinion, constitute Title Defects and
which Buyer asserts as a Title Defect with respect to any Well or Unit pursuant
to this Article VI. For all purposes of this Agreement, Buyer shall be deemed
to have waived any Title Defect which Buyer fails to assert as a Title Defect by
a Title Defect Notice given to Seller on or before the expiration of the Title
Examination Period. To be effective, Buyer's Title Defect Notice of a Title
Defect must include (i) a brief description of the matter constituting the
asserted Title Defect, (ii) the claimed Title Defect Amount attributable
thereto, and (iii) supporting documents reasonably necessary for Seller (as well
as any title attorney or examiner hired by Seller) to verify the existence of
such asserted Title Defect. To give Seller an opportunity to commence reviewing
and curing Title Defects, on or before the end of each calendar week during the
Title Examination Period, Buyer agrees to give Seller written notice of all
Title Defects discovered by Buyer during such calendar week, which may be
preliminary in nature and supplemented prior to the end of the Title Examination
Period. At the same time, Buyer shall also furnish Seller with written notice
of any Seller Title Credit which is discovered during such calendar week by any
of Buyer's employees or representatives while conducting Buyer's title review,
due diligence or investigation with respect to any Well or Unit.
(b) Purchase Price Allocations. A portion of the Purchase Price has been
--------------------------
allocated to the various Wells and Units in the manner and in accordance with
the respective values set forth in the Property Schedule. If any adjustment is
made to the Purchase Price pursuant to this
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<PAGE>
Section 6.2, a corresponding adjustment shall be made to the portion of the
Purchase Price allocated to the affected Well or Unit in the Property Schedule.
(c) Seller's Rights and Opportunity to Cure. If Buyer timely gives Seller
---------------------------------------
Title Defect Notice(s) of one or more Title Defects, Seller shall have the right
to then or thereafter dispute the existence of such Title Defect and/or the
alleged Title Defect Amount asserted with respect thereto in accordance with the
provisions of Section 6.5 of this Agreement. In addition, the following terms
and conditions shall apply with respect to any Title Defect asserted by Buyer in
a timely Title Defect Notice:
(i) Seller shall have until two (2) days prior to the Closing Date,
at its cost and expense, if it so elects but without obligation, to cure
all or a portion of such asserted Title Defects. Any asserted Title
Defects which are waived by Buyer within such time shall be deemed
"Permitted Encumbrances" hereunder. Subject to Sections 6.2(c)(ii) and
6.2(c)(iii) and Seller's continuing right to dispute the existence of a
Title Defect and/or the Title Defect Amount asserted with respect thereto
under Section 6.5, if Seller within such time fails to cure any Title
Defect of which Buyer has given timely written notice as required above,
and Buyer has not and does not waive same on or before the day immediately
preceding the Closing Date, the Well or Unit affected by such uncured and
unwaived Title Defect shall be a "Title Defect Property."
(ii) If Buyer furnishes to Seller timely Title Defect Notice(s) of
one or more Title Defects and the same are not waived or cured as provided
in Section 6.2(c)(i), Seller may elect to delay the Closing for a period of
up to thirty (30) calendar days to afford Seller the opportunity, if it so
elects, to attempt to cure any of the properly asserted Title Defects prior
to the Closing. Subject to Section 6.2(c)(iii) and Seller's continuing
right to dispute the existence of a Title Defect and/or the Title Defect
Amount asserted with respect thereto under Section 6.5, if Seller within
such time period fails or refuses to cure any Title Defect of which Buyer
has given a timely Title Defect Notice and Buyer has not waived and does
not waive the same before the delayed Closing, the Well or Unit affected by
such uncured and unwaived Title Defect shall be a "Title Defect Property."
(iii) If Buyer furnishes to Seller timely Title Defect Notice(s) of
one or more Title Defects and the same are not waived or cured as provided
in Section 6.2(c)(i) or Section 6.2(c)(ii), as applicable, Seller may elect
to close the transactions contemplated hereby and retain the right to cure
any of such Title Defects after Closing (whether or not Seller elects to
delay Closing pursuant to Section 6.2(c)(ii) above). In such event, but
subject to Seller's continuing right to dispute the existence of a Title
Defect and/or the Title Defect Amount asserted with respect thereto under
Section 6.5, the Purchase Price shall be subject to reduction pursuant to
Section 6.2(d) taking into account all Title Defect Amounts attributable to
the Title Defect Properties affected by the Title Defects which Seller may
elect to cure after Closing. Seller shall have one hundred twenty (120)
calendar days after the Closing Date (as may be delayed pursuant to Section
6.2(c)(iii)
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<PAGE>
above) in which to attempt to cure any such Title Defects and to increase
or restore any Seller Title Credits. If Seller cures any such Title Defect,
then Buyer shall promptly pay Seller the Title Defect Amount with respect
to the Title Defect that is so cured, but not exceeding the aggregate
amount of the reductions in the Purchase Price which Buyer received as a
result of any Title Defects, together with interest on the amount due
Seller from the Closing Date through and including the date of payment at
the Agreed Rate. Furthermore, the Title Defect Deductible shall be restored
to the extent any portion of the Title Defect Deductible was applied as a
credit against the Title Defect Amount attributable to such cured Title
Defect. If a positive balance exists in the Available Deductible Amount
after any restorations or increases thereof pursuant to the foregoing, and
Seller has suffered a reduction in the Purchase Price as a result of any
one or more uncured Title Defects, Buyer shall pay to Seller an amount
(together with interest thereon from the Closing Date through and including
the date of payment at the Agreed Rate) equal to the lesser of (i) the
amount by which the Purchase Price was reduced as a result of such uncured
Title Defects and (ii) the then existing balance of the Available
Deductible Amount.
(d) Buyer's Title Adjustments. As Buyer's sole and exclusive remedy with
-------------------------
respect to Title Defects, Buyer shall be entitled to reduce the Purchase Price
by the amount, if any, by which the aggregate amount of Title Defect Amounts
with respect to all Title Defect Properties exceeds the sum (the "Available
Deductible Amount") of $500,000 (the "Title Defect Deductible") plus the
aggregate amount of Seller Title Credits with respect to all Wells or Units.
"Title Defect Amount" shall mean, with respect to a Title Defect Property, the
amount by which the value of such Title Defect Property is impaired as a result
of the existence of one or more uncured and unwaived Title Defects, which amount
shall be determined as follows and subject to the following conditions:
(1) If the Title Defect results from the Company having a lesser Net
Revenue Interest in such Title Defect Property than the Net Revenue
Interest specified therefor in the Property Schedule, the Title Defect
Amount shall be equal to the product obtained by multiplying the portion of
the Purchase Price allocated to such Title Defect Property in the Property
Schedule by a fraction, the numerator of which is the reduction in the Net
Revenue Interest and the denominator of which is the Net Revenue Interest
specified for such Title Defect Property in the Property Schedule.
(2) If the Title Defect results from the Company having a greater
Working Interest in a Title Defect Property than the Working Interest
specified therefor in the Property Schedule, the Title Defect Amount shall
be equal to the product obtained by multiplying the portion of the Purchase
Price allocated to such Title Defect Property in the Property Schedule by a
fraction, the numerator of which is the increase in the Working Interest
and the denominator of which is the Working Interest specified for such
Title Defect Property in the Property Schedule.
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<PAGE>
(3) If the Title Defect results from the existence of a lien, the
Title Defect Amount shall be an amount sufficient to discharge such lien.
(4) If the Title Defect results from any matter not described in
paragraphs (1), (2) or (3) above, the Title Defect Amount shall be an
amount equal to the difference between the value of the Title Defect
Property affected by such Title Defect with such Title Defect and the value
of such Title Defect Property without such Title Defect (taking into.
account the portion of the Purchase Price allocated in the Property
Schedule to such Title Defect Property); provided, that if such Title
Defect is reasonably susceptible of being cured, the Title Defect Amount
shall be the reasonable cost and expense of curing such Title Defect, if
less.
(5) If a Title Defect is not effective or does not affect a Title
Defect Property throughout the entire productive life of such Title Defect
Property, such fact shall be taken into account in determining the Title
Defect Amount.
(6) The Title Defect Amount with respect to a Title Defect Property
shall be determined without duplication of any costs or losses included in
another Title Defect Amount hereunder.
(7) The Title Defect Amount attributable to a Title Defect Property
shall not exceed the portion of the Purchase Price allocated to such Title
Defect Property in Section 6.2(b).
(8) No Title Defect Amount shall be allowed on account of and to the
extent that an increase in the Company's Working Interest in a Well or Unit
has the effect of proportionately increasing the Company's Net Revenue
Interest in such Well or Unit.
(9) With respect to any Well or Unit in which Buyer or an Affiliate
of Buyer likewise owned an undivided interest at the Effective Time, no
Title Defect Amount shall be allowed on account of a Title Defect affecting
such Subject Interest that also affected Buyer's or such Affiliate's
interest in such Well or Unit in the same manner at the Effective Time.
(10) Notwithstanding the foregoing, if the Title Defect Amount
determined pursuant to the foregoing with respect to a Title Defect
Property is $50,000 or less, after taking into account any curative work
performed by or on behalf of Seller, then the Title Defect Amount with
respect to such Title Defect Property shall be deemed zero.
Section 6.3 Determination of Title Defects. A Well or Unit shall not be
------------------------------
deemed to have a "Title Defect" if the following statements are true in all
material respects with respect to such Well or Unit as of the Closing Date:
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<PAGE>
(a) The Company has Defensible Title thereto.
(b) All rentals, Pugh clause payments, shut-in gas payments and other
similar payments (other than royalties, overriding royalties and other similar
payments on production) due with respect to such Well or Unit have been properly
and timely paid.
(c) Seller is not in default under the material terms of any leases,
farmout agreements or other contracts or agreements respecting such Well or Unit
which could (1) prevent the Company from receiving the proceeds of production
attributable to the Company's interest therein, or (2) result in cancellation of
the Company's interest therein.
Notwithstanding any other provision in this Agreement to the contrary, the
following matters shall not be asserted as, and shall not constitute Title
Defects: (i) defects in the chain of title such as minor name discrepancies, the
mere failure to recite marital status in a document, or omissions of successions
of heirship proceedings, unless Buyer provides affirmative evidence that such
failure or omission results in another Person's superior claim of title to the
relevant Subject Interest or portion thereof, (ii) defects arising out of lack
of survey, (iii) defects arising out of lack of corporate authorization, unless
Buyer provides affirmative evidence that such lack of authorization results in
another Person's superior claim of title to the relevant Subject Interest or
portion thereof, (iv) the failure to obtain or absence of any federal patent or
conveyance with respect to any lands over which any state has claimed ownership
and which have been covered by a state lease for more than ten years, (v)
defects that have been cured by possession under the applicable statutes of
limitations or statutes for prescription and (vi) other defects of a type
expected to be encountered in the area involved and customarily acceptable to
prudent operators and interest owners. Furthermore, in determining the
existence of a Title Defect, due consideration shall be given to the length of
time hydrocarbons have been produced from the affected property in an undisputed
"pay status" without any adverse claim even though such period may be less than
the period of possession or use required under applicable limitations or
prescription statutes. (As used herein, "pay status" shall mean payment is
being made by a third party for production from the affected Well or Unit
without indemnity from the Company except such indemnities as are customarily
included in division orders, transfer orders, product purchase agreements and
similar documents commonly used in connection with the payment of proceeds from
production.)
Section 6.4 Seller Title Credit. A "Seller Title Credit" shall mean,
-------------------
with respect to a Well or Unit, the amount by which the value of such Well or
Unit is enhanced by virtue of (a) the Company having a greater Net Revenue
Interest in such Well or Unit than the Net Revenue specified therefor in the
Property Schedule, (b) the Company having a lesser Working Interest in such Well
or Unit than the Working Interest specified therefor in the Property Schedule,
or (c) such Well or Unit being subject to a lien indebtedness which is less than
that used for the Purchase Price allocation in the Property Schedule, which
amount shall be determined as follows:
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(1) If the Seller Title Credit results from the Company having a
greater Net Revenue Interest in such Well or Unit than the Net Revenue
Interest specified therefor in the Property Schedule, the Seller Title
Credit shall be equal to the product obtained by multiplying the portion of
the Purchase Price allocated to such Well or Unit in the Property Schedule
by a fraction, the numerator of which is the increase in the Net Revenue
Interest and the denominator of which is the Net Revenue Interest specified
for such Well or Unit in the Property Schedule.
(2) If the Seller Title Credit results from the Company having a
lesser Working Interest in a Well or Unit than the Working Interest
specified therefor in the Property Schedule, the Seller Title Credit shall
be equal to the product obtained by multiplying the portion of the Purchase
Price allocated to such Well or Unit in the Property Schedule by a
fraction, the numerator of which is the decrease in the Working Interest
and the denominator of which is the Working Interest specified for such
Well or Unit in the Property Schedule.
(3) If the Seller Title Credit results from a Well or Unit being
subject to lesser lien indebtedness, the Seller Title Credit shall be equal
to the amount of the Company's proportionate share of the reduction in such
lien indebtedness; provided that, if lien indebtedness affects more than
one Well or Unit, the Seller Title Credits with respect to such Wells or
Units shall be determined without duplication (e.g., credit shall not be
given twice to the same reduction in indebtedness);and provided further, no
Seller Title Credit shall be allowed to the extent such lien indebtedness
is paid by the Company after the Report Date and is not reimbursed by
Seller.
(4) In determining the amount of Seller Title Credits, the principles
and methodology set forth in paragraphs (5), (6) and (7) of Section 6.2(d)
shall be applied, mutatis mutandis.
----------------
(5) No Seller Title Credit shall be allowed on account of and to the
extent that a decrease in the Company's Working Interest in a Well or Unit
has the effect of proportionately decreasing the Company's Net Revenue
Interest in such Well or Unit.
(6) Notwithstanding the foregoing, if the Seller Title Credit
determined pursuant to the foregoing with respect to any Well or Unit is
$50,000 or less, then the Seller Title Credit with respect thereto shall be
deemed zero.
The Title Defect Deductible shall be increased dollar for dollar by the
aggregate amount of all Seller Title Credits. In addition, the Title Defect
Deductible shall be restored to the extent that any portion thereof is applied
as a credit against a Title Defect Amount attributable to a Title Defect which
is subsequently cured by Seller or determined not to constitute a Title Defect.
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Section 6.5 Deferred Claims and Disputes. In the event that Buyer and
----------------------------
Seller have not agreed upon (i) the existence of one or more Title Defects or
Seller Title Credits or one or more adjustments, credits or offsets claimed by
Buyer or Seller pursuant to and in accordance with the requirements of this
Article VI, or (ii) the existence of one or more Environmental Defects, any
Remediation, Remediation Amount or plan therefor, or one or more adjustments,
credits or offsets claimed by Buyer or Seller pursuant to Section 5.5, any such
dispute or claim (a "Deferred Adjustment Claim") shall be settled pursuant to
this Section 6.5 and, except as provided in Sections 9.1(f), 9.2(f) and 9.4,
shall not prevent or delay Closing. In no event shall any Title Defect Amount,
Environmental Defect Amount or Remediation Amount asserted by Buyer, or any
Seller Title Credit asserted by Seller, as a Deferred Adjustment Claim exceed
the amount asserted by Buyer or Seller therefor prior to the end of the Title
Examination Period in accordance with Section 6.2 or the Environmental
Examination Period in accordance with Section 5.5, as applicable. With respect
to each potential Deferred Adjustment Claim, Buyer and Seller shall deliver to
the other a written notice describing each such potential Deferred Adjustment
Claim, the amount in dispute and a statement setting forth the facts and
circumstances that support such party's position with respect to such Deferred
Adjustment Claim. At Closing, the Purchase Price shall not be adjusted on
account of, and, except as provided in Sections 9.1(f) and 9.2(f), no effect
shall be given to, the Deferred Adjustment Claim. On or prior to the thirtieth
(30th) consecutive calendar day following the Closing Date or, if earlier, the
date which was the "Closing Date" before Closing was delayed under Section 9.4
(the "Deferred Matters Date"), the Seller and Buyer shall attempt in good faith
to reach agreement on the Deferred Adjustment Claims and, ultimately, to resolve
by written agreement all disputes regarding the Deferred Adjustment Claims. Any
Deferred Adjustment Claims which are not so resolved on or before the Deferred
Matters Date may be submitted by either party to final and binding arbitration
in accordance with the Arbitration Procedures; provided, however, that the
Seller may elect at any time to resolve all disputes relating to the Deferred
Adjustment Claims by the payment to Buyer of the amount by which the Purchase
Price would have been reduced at Closing on account of the Title Defects or
Environmental Defects which constitute Deferred Adjustment Claims if same did
not constitute Deferred Adjustment Claims, together with interest thereon from
the Closing Date to the date of such payment at the Agreed Rate.
Notwithstanding anything herein provided to the contrary, including Section
6.2(c), but without limiting Seller's rights under Sections 6.2(c)(ii) and
6.2(c)(iii), Seller shall be entitled to cure any Title Defect which constitutes
a Deferred Adjustment Claim at any time prior to the point in time when a final
and binding written decision of the board of arbitrators is made with respect
thereto in accordance with the Arbitration Procedures. The amount of any
reduction in the Purchase Price to which Buyer becomes entitled under the final
and binding written decision of the board of arbitrators shall be promptly
refunded by Seller to Buyer, together with interest thereon from the Closing
Date to the date of payment at the Agreed Rate.
Section 6.6 No Duplication. Notwithstanding anything herein provided to
--------------
the contrary, if a Title Defect results from any matter which could also result
in the breach of any representation or warranty of Seller set forth in Section
4.1, then Buyer shall only be entitled to
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assert such matter as a Title Defect pursuant to this Article VI and shall be
precluded from also asserting such matter as the basis of the breach of any such
representation or warranty.
ARTICLE 7
TAXES AND EMPLOYEE BENEFITS
---------------------------
Section 7.1 Tax Agreements.
--------------
(a) Tax Return Filings and Tax Payments for 1999. Seller shall include the
--------------------------------------------
Company in its consolidated federal income Tax Return, and in those state, local
and foreign income Tax Returns that are filed on a consolidated, combined,
unitary or nonunitary basis, for its tax period that includes the Closing Date,
and Seller shall be responsible for the payment of, and shall indemnify and hold
harmless the Buyer against, all Taxes required to be paid with respect to such
consolidated, combined, unitary or nonunitary Tax Returns. Such Tax Returns
shall include (a) the income and gains resulting from the purchase and sale of
the Company Shares, including, without limitation, any gain or loss recognized
pursuant to any Section 338(h)(10) Election made pursuant to Section 7.1(d)
below, (b) any deferred income and gain taken into income by reason of Treasury
Regulation Section 1.1502-13 or any similar provision of state, local or foreign
law, and (c) all other items of income, gain, loss, deduction and credit of the
Company for the period up to and including the Closing Date, as determined by
closing the books of the Company as of the end of the Closing Date; provided,
however, such Tax Return shall not include any income, gain, loss, deduction or
credit of the Company arising as a result of action of Buyer or the Company
taken after the Closing, and all such Tax Returns shall be prepared in a manner
consistent with past practice (including any Tax elections and methods of
accounting), unless a contrary treatment is required by a change in Law (or the
judicial or administrative interpretations thereof).
(b) Termination of Existing Income Tax Sharing Agreements. The Seller
-----------------------------------------------------
shall cause any existing income tax sharing agreements or arrangements disclosed
on Schedule 4.1(q) to be terminated as of the Closing Date. The Company shall
not be obligated to pay the Seller (or Seller's successor in interest) for any
tax benefit it receives from the utilization of net operating losses in Seller's
consolidated return filing for any period to and including the Closing Date.
The Company shall have no liability to Seller or Seller's Affiliates for any
income taxes with respect to any periods ending on or prior to the Closing Date.
(c) State and Local Taxes/Refunds. Buyer shall prepare or cause to be
-----------------------------
prepared with respect to Taxes other than income Taxes and file or cause to be
filed any Tax Returns of the Company for Tax periods which begin before the
Closing Date and end after the Closing Date. With respect to Taxes (other than
Taxes to be included by Seller in its Tax Returns as required in Section 7.1(a)
above) that are imposed on a periodic basis and are payable for a taxable period
that includes (but does not end on) the Closing Date, the Company has accrued as
of March 31, 1999, and is continuing to accrue reserves for Taxes through the
Closing Date. The parties agree
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that such accruals will be a final settlement as between the parties for all
liabilities relating to such taxes and that no adjustments or refunds will be
made with respect thereto.
(d) Section 338(h)(10) Election. At Buyer's option, Seller (or Seller's
---------------------------
successor in interest) (or if applicable, its ultimate parent corporation) will
join with Buyer in making an election under Section 338(h)(10) of the Code (and
any corresponding elections under state, local, or foreign tax law)
(collectively, a "Section 338(h)(10) Election") with respect to the purchase and
sale of the stock of the Company hereunder. Seller (or Seller's successor in
interest) will pay any Tax attributable to the making of the Section 338(h)(10)
Election and will indemnify the Buyer and the Company against any liability
arising out of any failure to pay such Tax. Seller will also pay any state,
local or foreign Tax (and indemnify Buyer and Company against any liability
arising out of any failure to pay such Tax) attributable to an election under
state, local, or foreign law similar to the election available under Section
338(g) of the Code (or which results from the making of an election under 338(g)
of the Code) with respect to the purchase and sale of stock of the Company
hereunder.
(e) Allocation of Purchase Price. The parties agree to negotiate in good
----------------------------
faith to agree upon an allocation of the Purchase Price for Tax purposes among
the Company's Assets as promptly as possible after Closing; and the parties
further agree that for all income and franchise tax purposes (and, where
applicable, financial accounting purposes), including but not limited to section
338 of the Code, they and their Affiliates will report consistently with such
allocation; provided if no such allocation is agreed upon within one (1) year
following Closing, the parties will not be required to report on a consistent
basis.
Section 7.2 Employee Matters.
----------------
(a) Maintenance of Health Benefit Program. From and after Closing, and
-------------------------------------
until a date not earlier than the expiration of the Trust provided for under
Section 7.2(b), Buyer agrees to cause the Company to (a) maintain equal or
greater medical benefit coverage under the same or better terms and conditions
as is provided under the Company's existing plans which plans are in effect
immediately prior to the Closing Date and which provide benefits to current and
former Company employees covered under such plans as of the date of this
Agreement and their covered dependents, and (b) fulfill the medical benefit
commitments described on Schedule 4.1(r).
(b) Employee Benefits Trust. Prior to Closing, the Company shall establish
-----------------------
a trust, pursuant to an Employee Benefits Trust Agreement substantially in the
form attached hereto as Exhibit "C," for the purpose of providing salary
continuation and benefits under the Company's insurance plans for the periods
provided and in accordance with the terms set forth in Exhibit "C." Prior to
Closing, the Company shall fund the Employee Benefits Trust with not more than
$1,730,000 to cover the obligations to such employees of the Company under the
terms of the Employee Benefits Trust Agreement, the letters describing severance
benefits dated March 30, 1999 and April 11, 1999, and each and every employment
agreement with an employee of the Company, and such funding shall not cause any
adjustment in the Purchase Price. Unutilized
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<PAGE>
funds in the trust shall be the property of the Company as set forth in the
Employee Benefits Trust Agreement. Prior to the Closing, no change in the
Employee Benefits Trust Agreement from the form attached hereto as Exhibit "C"
shall be made without the prior written consent of Buyer, which consent shall
not be unreasonably withheld. Any payment made pursuant to the terms of the
Employee Benefits Trust shall comply with ERISA regulation '2510.3.2(b).
(c) Company Employee Benefits. With respect to those employees of the
-------------------------
Company who continue their employment with the Company after the Closing Date or
are hired by the Buyer or an Affiliate of Buyer within the six (6) month period
following the Closing Date, Buyer shall, or shall cause the Company or the
Buyer's Affiliates to, take all action necessary to cause all such employees to
be covered under the employee benefit plans and fringe benefit arrangements of
the Company, Buyer or Buyer's Affiliates, as the case may be, on the same basis
as those provided to employees of Buyer or its Affiliates who hold comparable
positions, as determined by Buyer in its discretion; and further provided that
Buyer's or its Affiliates' health plans shall not impose any preexisting
condition or waiting period requirement on any such employee's participation in
such health plan with respect to conditions currently permitted to be covered
thereunder if such employee enrolls within thirty (30) days of beginning
employment with Buyer or Buyer's Affiliate. Buyer or Buyer's Affiliate shall
grant all such employees credit for purposes of eligibility and vesting under
Buyer's or its Affiliate's employee benefit plans (including vacation and
severance) for their service with the Company prior to the Closing Date. If
Buyer or its Affiliates give credit under their employee vacation plans for oil
and gas industry experience, such employees shall be given credit for their
years of industry experience prior to the Closing Date for vacation plan
purposes rather than for their years of service with the Company prior to the
Closing Date.
(d) Severance of Employment Relationship With Certain Employees. As of or
-----------------------------------------------------------
prior to the Closing Date, Seller shall cause the Company to sever its
employment relationship with any person who is designated by Buyer in accordance
with the provisions of this Section 7.2(d). No later than ten (10) Business
Days prior to Closing, Buyer shall provide Seller with irrevocable written
notice of which employees of Company will not continue to be employed by the
Company following the Closing Date. Buyer agrees to make its determination and
selection of such employees in compliance with applicable federal and state
laws. Within five (5) Business Days after Seller receives such written notice
regarding an employee, Seller will cause the Company to provide such employee
with written notice of the date of such employee's severance of employment with
the Company, which notice shall comply with the requirements of any employment
agreement, as applicable, and with the notice requirements of ERISA ''606 and
701.
ARTICLE 8
COVENANTS OF SELLER AND BUYER
-----------------------------
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Section 8.1 Conduct of Business Pending Closing. Subject to Section 8.2
-----------------------------------
and the constraints of applicable operating agreements and other existing
agreements with third Persons (other than any Affiliate of Seller) from the date
hereof through the Closing, except as disclosed in Schedule 8.1. or as otherwise
consented to or approved by Buyer (which consent or approval shall not be
unreasonably withheld or delayed), Seller covenants and agrees that:
(a) Changes in Business. The Company shall not:
-------------------
(1) make any material change in the conduct of its business or
operations;
(2) except in the ordinary course of business and consistent with
past practices, enter into, assign, terminate or amend, in any material
respect, any contract or agreement required to be disclosed pursuant to
Section 4.1(n);
(3) declare or pay any dividends, or make any distributions, in
respect of, or issue any of, its equity securities or securities
convertible into its equity securities, or repurchase, redeem or otherwise
acquire any such securities or make or propose to make any other change in
its capitalization;
(4) merge into or with or consolidate with any other corporation or
acquire all or substantially all of the business or assets of any
corporation or other Person;
(5) make any change in its articles of incorporation or by-laws;
(6) purchase any securities of or equity interests in any corporation
or other Person, except for investments in marketable securities made in
the ordinary course of business and consistent with prior practices;
(7) other than pursuant to the requirements of existing contracts or
commitments, sell, lease or otherwise dispose of any of the Assets, except
(i) Assets sold, leased or otherwise disposed of in the ordinary course of
business having a value of less than $50,000 and (ii) any item of personal
property or equipment having a value of less than $25,000;
(8) take any action or enter into any commitment with respect to or
in contemplation of any liquidation, dissolution, recapitalization,
reorganization or other winding up of its business or operations;
(9) enter into any settlement of any pending or threatened Action,
unless the settlement involves the payment of money damages of not more
than $50,000 individually or $500,000 in the aggregate (other than on
account of any insurance deductible of $50,000 or less) and does not impose
an injunction or similar equitable
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<PAGE>
relief upon the Company or materially impair the Company's defense of any
other Action then pending or threatened against the Company of which the
Company has knowledge;
(10) change its accounting policies or practices (including without
limitation, any change in depreciation or amortization policies), except as
required under GAAP;
(11) enter into any employment agreement not terminable at will or
grant any increases in the compensation of its officers and employees,
except increases to employees who are not officers made in the ordinary
course of business and consistent with past practices;
(12) create or change any Plan or any Benefit Arrangement except as
contemplated in Section 7.2(b);
(13) incur any indebtedness for borrowed money or guarantee the
indebtedness or obligations of any other Person for borrowed money except
for advances and payments in the ordinary course of business under the
Company's existing credit facility with U.S. Bank National Association, et.
al. (See Schedule 4.1(n));
(14) enter into any transactions, agreement or contract with Seller or
any Affiliate of Seller other than in the ordinary course of business and
consistent with prior practices pursuant to agreements disclosed in
Schedule 4.1(n);
(15) except in the ordinary course of business and consistent with
prior practices, enter into any material lease (whether such lease is an
operating or capital lease);
(16) make or rescind any material express or deemed election relating
to Taxes unless it is reasonably expected that such action will not
materially and adversely affect the Company or Buyer, settle or compromise
any material claim, action, suit, litigation, proceeding, arbitration,
investigation, audit or controversy relating to Taxes or change in any
material respect any of its methods of reporting income or deductions for
federal income tax purposes from those employed in the preparation of its
federal income tax returns for the taxable year ending December 31, 1998,
except as may be required by Law or except for such changes as are not
reasonably expected to materially and adversely affect the Company or
Buyer; or
(17) agree in writing to do any of the foregoing matters which are
prohibited by this Section 8.1(a).
(18) adopt, amend, modify or alter any Plan or Benefit Arrangement
listed in Schedule 4.1(r) or describe in Section 7.2 to increase the cost
or obligation of the Company thereunder.
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<PAGE>
(b) Liens. The Company shall not create any express lien or security
-----
interest on any Assets, except to the extent (i) required or permitted incident
to the exploration, operation or development of the Assets and the business of
the Company pursuant to this Section 8.1 or (ii) required or evidenced by any
contract or agreement required to be disclosed pursuant to Section 4.1(n).
(c) Operation of Assets. The Company shall:
-------------------
(1) cause the Assets to be maintained and operated in the ordinary
course of business in accordance with the Company's past practices
(including the repair or replacement of damaged, destroyed, obsolete,
depreciated, non-working or non-economical items of equipment or other
personal property without regard to the limitation of Section 8.1(c)(3)
below), maintain insurance now in force with respect to the Assets, and pay
or cause to be paid all costs and expenses in connection therewith promptly
when due;
(2) cause, or in the event the Company is not operator, use
reasonable efforts to cause, the Assets to be maintained and operated in
material compliance with all Laws;
(3) (a) not commit to participate in the drilling of any new well or
other new capital expenditure on the Assets the projected cost of which
(net to the Company's interest and without consideration of any cost
overruns) is in excess of $500,000 in any single instance, or (b) elect to
become a nonconsenting party with respect to any operation or capital
expenditure proposed by a third Person if the projected cost of such
operation or capital expenditure (net to the Company's interest and without
consideration of any cost overruns) is in excess of $500,000 in any single
instance, or if the Company's election not to participate in such operation
or capital expenditure would cause a permanent forfeiture of any Well or
Unit valued in excess of $500,000 in the Property Schedule, in both cases
without the advance written consent of Buyer, which consent shall not be
unreasonably withheld and which consent or non-consent must be given by
Buyer within the lesser of (x) ten (10) days of Buyer's receipt of the
notice from Seller or the Company or (y) one-half (2) of the applicable
notice period within which the Company is contractually obligated to
respond to third parties to avoid a deemed election by the Company
regarding such operation or capital expenditure (provided Seller or the
Company promptly gives such notice to Buyer after Seller or the Company
receives it), as specified in Seller's or the Company's notice to Buyer
requesting such consent which notice shall set forth the Company's
recommendation as to whether the Company should participate in such
operation or capital expenditure; provided that, failure by Buyer to
respond within the aforesaid applicable period shall constitute Buyer's
approval of the recommendation of the Company set forth in such notice with
respect to such operation or capital expenditure;
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<PAGE>
(4) maintain and keep the Assets in full force and effect, except
where such failure is due to (i) the failure to pay a delay rental,
royalty, shut in royalty or other payment by mistake or oversight
(including the Company's negligence) unless caused by the Company's gross
negligence or willful misconduct, or (ii) the failure to participate in an
operation due to the express or deemed nonconsent of Buyer; and
(5) use reasonable diligence to maintain its relationships with
suppliers, customers and others having material business relations with the
Company with respect to the Assets so that they will be preserved for Buyer
on and after the Closing Date.
(d) Contracts and Agreements. The Company shall not:
------------------------
(1) grant or create any Preference Right or Transfer Requirement with
respect to the Assets except (i) in connection with the performance by the
Company of an obligation or agreement existing on the date hereof or
pursuant to this Agreement or (ii) in connection with the acquisition of
Assets after the Effective Time if granting or creating such Preference
Right or Transfer Requirement is a condition of such acquisition;
(2) enter into any oil, gas or other hydrocarbon sales, exchange,
processing or transportation contract with respect to the Assets having a
term in excess of one year which is not terminable without penalty on
notice of ninety (90) days or less; or
(3) voluntarily relinquish the Company's position as operator with
respect to any of the Assets.
Section 8.2 Qualifications on Conduct.
-------------------------
(a) Emergencies; Legal Requirements. Seller or the Company may take (or
-------------------------------
not take, as the case may be) any of the actions mentioned in Section 8.1 above
if reasonably necessary under emergency circumstances (or if required or
prohibited (as the case may be) pursuant to Law) and provided, Buyer is notified
as soon thereafter as practicable.
(b) Non-Operated Properties. If the Company is not the operator of a
-----------------------
particular portion of the Assets, the obligations of the Company in Section 8.1
above with respect to such portion of the Assets which have reference to
operations or activities that pursuant to existing contracts are carried out or
performed by the operator, shall be construed to require only that the Company
use reasonable diligence (without being obligated to incur any expense or
institute any cause of action) to cause the operator of such portion of the
Assets to take such actions or render such performance within the constraints of
the applicable operating agreements and other applicable agreements.
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(c) Certain Operations.
------------------
(1) Should the Company not wish to pay any lease rental or other
payment or participate in any reworking, deepening, drilling, completion,
equipping or other operation on or with respect to any well or other Well
or Unit which may otherwise be required by Section 8.1 above, the Company
shall give Buyer written notice thereof at least fifteen (15) days prior to
the date such rental or other payment is due or, in the case of an
operation, promptly after the Company receives notice of such proposed
operation from the operator of such property (or if the Company is the
operator, at the same time the Company gives or is required to give notice
of such proposed operation to the non-operators of such property). The
Company shall not be obligated to make any such payment or to elect to
participate in any such operation which the Company does not wish to make
or participate in unless the Company receives from Buyer, within a
reasonable time prior to the date when such payment or election is required
to be made by the Company, (a) the written election and agreement of Buyer
(i) to require the Company to take such action and (ii) to pay all costs
and expenses of the Company with respect to such lease rental or other
payment or such operation and (b) the funds necessary for such payment or
operation as contained in the applicable AFE therefor or estimated by the
Company. Notwithstanding the foregoing, the Company shall not be obligated
to pay any lease rental or other payment or to elect to participate in any
operation if the operator of the property involved recommends that such
action not be taken.
(2) If a notice delivered to Buyer pursuant to Section 8.1(c)(3) sets
forth a recommendation that the Company participate in an operation or
capital expenditure the failure in which to participate will cause the
forfeiture of all or any portion of a Subject Interest (or any interest in
production attributable thereto) and the Buyer timely notifies Seller that
it does not desire the Company to participate in same, then the resulting
forfeiture shall not be a Title Defect nor shall the Subject Interest
affected be a Title Defect Property for purposes of this Agreement.
Section 8.3 Public Announcements. Prior to the Closing Date, no party
--------------------
hereto will issue, or permit any agent or Affiliate of it to issue, any press
releases or otherwise make, or cause any agent or Affiliate of it to make, any
public statements with respect to this Agreement and the transactions
contemplated hereby without first providing a copy to the other party and
allowing them the opportunity to comment on such press release or statement,
except where such release or statement is deemed in good faith by the releasing
party to be required by Law or under the rules and regulations of any stock
exchange on which the shares of such party or any of its Affiliates are listed.
In each case to which such exception applies, the releasing party will use
reasonable diligence to provide a copy of such release or statement to the other
party prior to releasing or making the same.
Section 8.4 Actions by Parties. Each of the parties agrees to use
------------------
reasonable diligence to satisfy the conditions to Closing set forth in Article
IX and to refrain from taking any action within its control which would cause a
breach by such party of a representation or warranty set
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forth herein; provided, however, that neither Seller nor any Affiliate of Seller
(other than the Company) shall be required to expend any funds or incur any
costs to prevent or cure a breach of the representations and warranties set
forth in Section 4.1 with respect to the Company.
Section 8.5 Further Assurances. Seller and Buyer each agrees that from
------------------
time to time after the Closing Date, each of them will execute and deliver or
cause their respective Affiliates (including the Company) to execute and deliver
such further instruments, and take (or cause their respective Affiliates,
including the Company, to take) such other action, as may be necessary to carry
out the purposes and intents of this Agreement.
Section 8.6 Records and Record Keeping System. Buyer agrees to maintain
---------------------------------
(or cause the Company to maintain) the Company Records until the fifth
anniversary of the Closing Date (or for such longer period of time as Seller
shall advise Buyer (or the Company) is necessary in order to have Company
Records available with respect to open years for tax audit purposes), or, if any
of the Company Records pertain to any claim or dispute pending on the fifth
anniversary of the Closing Date, Buyer shall maintain any of the Company Records
designated by Seller until such claim or dispute is finally resolved and the
time for all appeals has been exhausted. In addition, Buyer agrees to maintain
(or cause the Company to maintain) the financial record keeping system
(including the computer system) relating to the Company and Assets which exists
on the Closing Date (the "Record Keeping System") for a period of six months
from the Closing Date. Buyer shall provide (or cause the Company to provide)
Seller and its representatives reasonable access at reasonable times to and the
right to copy all or any portion of the Company Records and the Record Keeping
System (at Seller's sole expense) for the purposes of (i) preparing and
delivering any accounting provided for under this Agreement and adjusting,
prorating and settling the charges and credits provided for in this Agreement,
(ii) complying with any Law affecting Seller's interest in the Company Shares or
the Company's interest in the Assets prior to the Closing Date, (iii) preparing
any audit of the books and records of any third party relating to Seller's
interest in the Company Shares or the Company's interest in the Assets prior to
the Closing Date, or responding to any audit prepared by such third parties,
(iv) preparing Tax Returns, (v) responding to or disputing any Tax audit or (vi)
asserting, defending or otherwise dealing with any claim or dispute under this
Agreement or with respect to the Company or the Assets.
Section 8.7 Maintenance of Indemnification Provisions. In addition to
-----------------------------------------
and without limiting the Company's and Buyer's respective obligations under
Articles XII and XIII, from and after the Closing Date, Buyer shall indemnify
(or shall cause Company and its successors and assigns to indemnify) and hold
harmless each present and former director and officer of the Company as to all
claims, actions, suits, proceedings, or investigations arising out of or
pertaining to matters existing or occurring at or prior to the Closing Date to
the extent provided in the Company's certificate of incorporation and bylaws (or
similar governing documents) as in effect on the date hereof (to the extent
consistent with Law), which provisions shall survive the Closing Date and shall
continue in full force and effect for a period of not less than five years from
the Closing Date with respect only to the officers and directors of the Company
as of and
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prior to the Closing; Buyer shall not amend (or shall cause Company and its
successors and assigns not to amend) those provisions for such period to the
extent such amendment would affect the Company's indemnity obligations under
this Section 8.7 with respect to the period at or prior to the Closing Date; and
Buyer shall advance (or shall cause Company and its successors and assigns) to
advance expenses to each person indemnified hereunder to the fullest extent
permitted by Law and required by such certificate of incorporation and bylaws
(or similar governing documents). If any claim or claims are asserted or made as
to matters subject to the foregoing indemnity provisions within such five year
period, all rights to indemnification in respect of any such claim or claims
shall continue until the disposition thereof. Buyer shall take all steps
necessary to assure the Company's compliance with the foregoing covenants. This
Section 8.7 shall not prevent the dissolution, merger or reorganization of the
Company provided the indemnification obligations in this Section 8.7 are carried
forward to the Company's successor by merger or reorganization or are adequately
provided for in the event of a dissolution.
Section 8.8 Minimum Net Worth. In addition to and without limiting the
-----------------
Company's and Buyer's respective obligations under Section 8.7 and Articles XII
and XIII, from and after the Closing Date, Buyer agrees to cause Company and its
successors and assigns to maintain a minimum net worth of not less than 50% of
the net worth of the Company as of the Effective Time during the term of the
Employee Benefits Trust Agreement provided for under Section 7.2(b).
Section 8.9 Company Obligations. From and after Closing, Buyer agrees to
-------------------
cause the Company to perform and comply with each of the actions and obligations
required or stipulated in this Agreement to be performed or complied with by the
Company and not to take any action which would prevent such performance and
compliance by the Company; provided that, without limiting the representations,
warranties, covenants and agreements of the Buyer which are set forth in other
Sections of this Agreement or releasing the Buyer or any Affiliate of Buyer from
any duty, obligation or requirement under the Uniform Fraudulent Transfer Act or
any other Law, neither Buyer nor any Affiliate of Buyer (other than the Company)
shall be required to contribute any capital to the Company by virtue of Buyer's
obligations under this Section.
Section 8.10 Unobtained Consents. Seller agrees to provide all Unobtained
-------------------
Consents to Buyer on the Closing Date.
Section 8.11 Financial Statements and Reports. From time to time
--------------------------------
following the execution of this Agreement, Buyer shall provide Seller with
written notice identifying any financial and other information specifically
related to the Company that are in Seller's possession or under its control and
that Buyer reasonably believes it will need before or after the Closing. Seller
will use its reasonable best efforts to provide Buyer, at Buyer's expense, with
copies of the material requested at or prior to Closing, and will cooperate with
Buyer, at Buyer's expense, in connection with furnishing any additional
financial and other information that are in Seller's possession or under its
control specifically concerning the Company that Buyer may reasonably
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request from Seller within one year following Closing that Buyer reasonably
needs to prepare its financial statements, tax returns, or reports or
registrations required by federal or state securities laws. In addition, Seller
will provide Buyer at the Closing with written authorization for Seller's
accountants to release to Buyer, at Buyer's expense, any such information
concerning the Company needed to prepare Buyer's financial statements, tax
returns or reports or registrations required by federal or state securities
laws. Seller shall also obtain and provide to Buyer at Closing a covenant of any
successor to Seller or substantially all assets of Seller that the successor
will comply in full with this Section 8.11, as if the successor were the Seller,
for a period of one year from the date of the Closing.
Section 8.12 Salary Continuation and Other Employee Benefits. On or
-----------------------------------------------
before the Closing Date, Seller shall provide Buyer with copies of documentation
reasonably satisfactory to Buyer that any payments provided under the Employee
Benefits Trust Agreement to any employee of the Company by reason of the
termination of his or her employment during the term of the Employee Benefits
Trust Agreement include, and are not in addition to, severance pay and insurance
benefits payable under any employment agreement with such employee or under the
two letters referred to in Section 7.2(b). Nothing in this Section 8.12 or
elsewhere in this Agreement, including without limitation the Employee Benefits
Trust Agreement, shall limit or otherwise affect the Company's obligations under
the terms of any employment agreement disclosed in Schedule 4.1(r) with respect
to matters other than the payment of such severance pay and insurance benefits.
Section 8.13 Targeted Incentive Plan. The Seller shall provide the
-----------------------
Company with funds to make all payments to employees of the Company required
under Seller's Targeted Incentive Plan. The Company shall make all such
payments prior to Closing. In addition, prior to or at the Closing, Seller
shall provide evidence reasonably satisfactory to Buyer (i) that Seller has
provided the Company with all funds necessary to make all payments to employees
of the Company required under Seller's Targeted Incentive Plan and (ii) that the
Company has made all such payments.
Section 8.14. Approval by Buyer's Shareholders. If Buyer determines that
--------------------------------
approval of its shareholders is required in connection with the transactions
contemplated by this Agreement, Buyer may extend the Closing Date for up to 30
days after October 31, 1999, provided that (i) the approval by Buyer's
shareholders shall not be a condition to closing; and (ii) in no event shall the
Closing Date be extended by reason of this Section 8.14 beyond the date agreed
to by Seller in an agreement to be entered into concerning a sale or merger of
Seller as the target date for closing such sale or merger.
Section 8.15 Excess Parachute Payments. The Seller shall be responsible
-------------------------
for and shall make all payments to employees of the Company that are "Excess
Parachute Payments" within the meaning of Code Section 280G and that are
attributable to the vesting of options of the
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Seller, and shall be entitled to claim the deduction therefor. The Purchase
Price shall be adjusted downward at the Closing by an amount equal to the amount
of any loss of deduction for "Excess Parachute Payments" made to any employees
of the Company, calculated for each employee of the Company and totaled for all
employees, and borne by the Company calculated as follows at the Closing:
<TABLE>
<S> <C>
(Company Obligations under the Employee Benefits Trust and
Employment Agreements (Related to Payments in Lieu of Notice) x "Excess Parachute Payment"
--------------------------------------------------------------
Total Parachute Payment)
</TABLE>
Multiplied by an assumed combined federal and state income Tax rate of
40%.
An example of this calculation for an individual employee using estimated
figures available on the date hereof is attached hereto as Schedule 8.15.
ARTICLE 9
CLOSING CONDITIONS
------------------
Section 9.1 Seller's Closing Conditions. The obligation of Seller to
---------------------------
proceed with the Closing contemplated hereby is subject, at the option of
Seller, to the satisfaction on or prior to the Closing Date of all of the
following conditions:
(a) Representations, Warranties and Covenants. The (1) representations and
-----------------------------------------
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date, and (2) covenants and
agreements of Buyer to be performed on or before the Closing Date in accordance
with this Agreement shall have been duly performed in all material respects;
provided however, for purposes of this Section 9.1(a), in determining whether
this condition has been satisfied, any such representation, warranty, covenant
or agreement of Buyer contained in this Agreement which is qualified by
materiality shall be read and interpreted as if such qualification was not
included therein (it being the intent of the parties not to apply a double
materiality threshold in determining the satisfaction of this condition).
(b) Officer's Certificate. Seller shall have received a certificate dated
---------------------
as of the Closing Date, executed by a duly authorized officer of Buyer, to the
effect that to such officer's knowledge the conditions set forth in subsection
(a) of this Section 9.1 have been satisfied.
(c) Closing Documents. On or prior to the Closing Date, Buyer shall have
-----------------
delivered, or be standing ready to deliver at Closing, all agreements,
instruments and other documents required to be delivered by Buyer pursuant to
Section 10.3.
(d) No Action. On the Closing Date, no suit, action or other proceeding
---------
(excluding any such matter initiated by Seller or any of its Affiliates) shall
be pending or threatened before
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any court or governmental agency or body of competent jurisdiction seeking to
enjoin or restrain the consummation of the Closing or recover damages from
Seller or any Affiliate of Seller resulting therefrom.
(e) Opinion of Counsel. Buyer shall have delivered to Seller the written
------------------
opinion of counsel to Buyer, dated as of the Closing Date, which counsel shall
be reasonably acceptable to Seller, substantially in the form attached hereto as
Exhibit 9.1(e).
(f) Adjustments. The sum of (i) the reductions in the Purchase Price on
-----------
account of the aggregate (net) amount of all Environmental Defect Amounts and
Title Defect Amounts, and (ii) the aggregate amount of Environmental Defect
Amounts and Title Defect Amounts claimed by Buyer with respect to unresolved
Deferred Adjustment Claims shall not exceed $3,000,000.
(g) Seller Shareholder Approval. The transactions provided for under this
---------------------------
Agreement shall have been approved by Seller's shareholders, provided that
Seller may waive this condition based on Seller having obtained an opinion of
Delaware counsel to the effect that such approval is not required under the
General Corporation Law of Delaware, which opinion shall be from a firm and in a
form and substance reasonably satisfactory to Buyer and Buyer's counsel.
Section 9.2 Buyer's Closing Conditions. The obligation of Buyer to
--------------------------
proceed with the Closing contemplated hereby is subject, at the option of Buyer,
to the satisfaction on or prior to the Closing Date of all of the following
conditions:
(a) Representations, Warranties and Covenants. (1) The representations and
-----------------------------------------
warranties of Seller contained in this Agreement (i) which contain a Material
Adverse Effect qualifier shall be true and correct on and as of the Closing Date
as though made as of the Closing Date and (ii) which do not contain a Material
Adverse Effect qualifier shall be true and correct in all material respects on
and as of the Closing Date as though made as of the Closing Date, and (2) the
covenants and agreements of Seller to be performed on or before the Closing Date
in accordance with this Agreement shall have been duly performed in all material
respects.
If the Seller breaches any of the representations and warranties of the Seller
contained herein, which breaches individually would not have a Material Adverse
Effect, but that in the aggregate would exceed $1,000,000 (an "Aggregate
Material Adverse Effect"), on or before the Closing Date, the Buyer may notify
the Seller of such Aggregate Material Adverse Effect, and Seller shall have
right to (x) extend the Closing Date by no more than ten days and cure the
breaches underlying the Aggregate Material Adverse Effect to the satisfaction of
the Buyer within such ten-day period or (y) reduce the Purchase Price by the
estimated amount of such Aggregate Material Adverse Effect, it being understood
by the parties that if the Seller (x) cures such breaches to the satisfaction of
the Buyer within such ten-day period or (y) adjusts the Purchase Price
accordingly, the Buyer shall not have the right to terminate this Agreement
under this Section 9.2(a). Notwithstanding the foregoing, for purposes of
determining whether breaches of Seller's representations and warranties have an
"Aggregate Material Adverse Effect," any
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<PAGE>
breaches of any single representation and warranty which have an adverse effect
on the value of the Company of $200,000 or less will be treated as having a
value of zero. In addition, Buyer agrees to use diligent efforts to notify
Seller of any asserted breach of Seller's representations and warranties as soon
as reasonably possible so that Seller, at its option, can attempt to cure such
asserted breaches.
(b) Officer's Certificate. Buyer shall have received a certificate dated
---------------------
as of the Closing Date, executed by a duly authorized officer of the Seller and
the Company, to the effect that to such officers' knowledge the conditions set
forth in subsection (a) of this Section 9.2 have been satisfied.
(c) Closing Documents. On or prior to the Closing Date, Seller shall have
-----------------
delivered, or be standing ready to deliver at the Closing, all agreements,
instruments and documents required to be delivered by Seller pursuant to Section
10.2.
(d) No Action. On the Closing Date, no suit, action or other proceeding
---------
(excluding any such matter initiated by Buyer or any of its Affiliates) shall be
pending or threatened before any court or governmental agency or body of
competent jurisdiction seeking to enjoin or restrain the consummation of the
Closing or recover damages from Buyer or any Affiliate of Buyer resulting
therefrom.
(e) Opinion of Counsel. Seller shall have delivered to Buyer the written
------------------
opinion of counsel to Seller, dated as of the Closing Date, which counsel shall
be reasonably acceptable to Buyer, substantially in the form attached hereto as
Exhibit 9.2(e).
(f) Adjustments. The sum of (i) the reductions in the Purchase Price on
-----------
account of the aggregate (net) amount of all Environmental Defect Amounts and
Title Defect Amounts, and (ii) the aggregate amount of Environmental Defect
Amounts and Title Defect Amounts claimed by Buyer with respect to unresolved
Deferred Adjustment Claims shall not exceed $3,000,000.
Section 9.3 Regulatory Approvals. If Buyer or Seller determines that
--------------------
approval of a Governmental Authority is required to permit the Company or Buyer
to continue to use any governmental permits with respect to the Assets or the
Company after Closing, Buyer and Seller shall, as promptly as practicable after
the date of this Agreement, cooperate in filing the required applications and
notices with the appropriate Governmental Authorities seeking authorization to
confirm the Company's continued right to use such permits or to transfer or
assign such permits to Buyer (the "Regulatory Approvals") as necessary. To the
extent assignable and assignment to Buyer is necessary in the foregoing context,
Seller will cause the Company to assign such permits to Buyer at the Closing.
Each party agrees to use reasonable diligence to obtain the Regulatory Approvals
and the parties agree to cooperate fully with each other and with all
Governmental Authorities to obtain the Regulatory Approvals at the earliest
practicable date.
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Section 9.4 Deferred Adjustment Claims Extension. Notwithstanding
------------------------------------
Section 9.2(f), if Buyer elects not to proceed with the Closing as a result of
the non-satisfaction of the condition set forth in Section 9.2(f) and such
condition would have been satisfied but for the amount of Environmental Defect
Amounts and Title Defect Amounts claimed by Buyer with respect to unresolved
Deferred Adjustment Claims, Seller may elect to delay the Closing until the
tenth Business Day following the date when a sufficient amount of such Deferred
Adjustment Claims have been resolved pursuant to Section 6.5 to determine that
the condition set forth in Section 6.5 has been satisfied or has not been
satisfied. A Deferred Adjustment Claim will be deemed resolved pursuant to
Section 6.5 when a final and binding written decision of the board of
arbitrators is made with respect thereto in accordance with the Arbitration
Procedures.
Section 9.5 Failure to Disclose. The breach by Seller of its obligation
-------------------
to give notice to Buyer under Section 4.1(cc) and the breach by Buyer of its
obligation to give notice to Seller under Section 4.2(j) shall not constitute a
failure of the conditions to Closing under Sections 9.1 and 9.2. From and after
Closing, neither Buyer nor Seller shall have any obligation or liability under
this Agreement or in connection with the transaction contemplated in this
Agreement for any breach of a representation or warranty by such party prior to
Closing by reason of any fact or facts of which the other party had knowledge
prior to Closing if and to the extent such other party breached its obligation
to give notice of such fact or facts to the other party pursuant to Section
4.1(cc) or 4.2(j), as applicable. From and after Closing, this Section 9.5
shall constitute the sole remedy of Buyer and Seller for the other party's
breach of Section 4.1(cc) or 4.2(j), as the case may be.
ARTICLE 10
CLOSING
-------
Section 10.1 Closing. The Closing shall be held on the Closing Date at
-------
10:00 a.m., Mountain time, at the offices of the Company, Denver, Colorado, or
at such other time or place as Seller and Buyer may otherwise agree in writing.
Section 10.2 Seller's Closing Obligations. At Closing, Seller shall
----------------------------
execute and deliver, or cause to be executed and delivered, to Buyer the
following:
(a) The stock certificates representing all Company Shares, endorsed in
blank or accompanied by duly executed assignment documents;
(b) The officer's certificate referred to in Section 9.2(b);
(c) The legal opinion referred to in Section 9.2(e);
(d) Resignations or terminations of the officers and directors of the
Company from their status as officers or directors effective as of the Closing
that are requested by Buyer at least two Business Days prior to the Closing
Date; and
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<PAGE>
(e) A non-foreign affidavit, as such affidavit is referred to in Section
1445(b)(2) of the Code, in form attached hereto as Exhibit 10.2(e), dated as of
the Closing Date.
Section 10.3 Buyer's Closing Obligations. At Closing, Buyer shall (i)
---------------------------
deliver, or cause to be delivered, the Closing Payment to Seller in immediately
available funds to the bank account as provided in Section 3.2 and (ii) execute
and deliver, or cause to be executed and delivered, to Seller the following:
(a) The officer's certificate of Buyer referred to in Section 9.1(b);
(b) The legal opinion referred to in Section 9.1(e); and
(c) An Assumption Agreement executed by each officer of the Company whose
resignation or termination is not requested by Buyer pursuant to Section
10.2(d), in the form attached hereto as Exhibit 10.3(d).
ARTICLE 11
SURVIVAL
--------
Section 11.1 Survival. Except as provided in this Section 11.1, no
--------
representations, warranties, covenants and agreements made herein shall survive
the Closing. Each representation, warranty, covenant and agreement made herein
shall terminate and cease to be of further force and effect as of the Closing or
such later date after Closing as is expressly stipulated in this Section 11.1
for the survival thereof. Following the Closing or such later date stipulated
in this Section 11.1 for the survival thereof, such representation, warranty,
covenant or agreement shall not form the basis for or give rise to any claim,
demand, cause of action, counterclaim, defense, damage, indemnity, obligation or
liability which is asserted, claimed, made or filed following the Closing or
such later date stipulated for survival. It is expressly agreed that the terms
and provisions of Sections 5.3, 5.5, 6.5, 7.1, 7.2, 8.5, 8.6, 8.7, 8.8, 8.9,
8.11, 8.13 and 9.5, Articles VI, XI, XII, XIII and XV, and Buyer's indemnity and
hold harmless of the Seller Indemnified Parties under Sections 5.1 and 5.4 shall
survive the Closing indefinitely or for such shorter period of time as may be
stipulated in such provisions. In addition, the definitions set forth in
Appendix A to this Agreement or in any other provision of this Agreement which
are used in the representations, warranties, covenants and agreements which
survive the Closing pursuant to this Section 11.1 shall survive the Closing to
the extent necessary to give operative effect to such surviving representations,
warranties, covenants and agreements.
ARTICLE 12
LIMITATIONS
-----------
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<PAGE>
Section 12.1 Disclaimer of Warranties. NOTWITHSTANDING ANYTHING
------------------------
CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, IT IS THE
EXPLICIT INTENT OF EACH PARTY HERETO THAT SELLER IS NOT MAKING ANY
REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE,
BEYOND THOSE REPRESENTATIONS OR WARRANTIES EXPRESSLY GIVEN IN THIS AGREEMENT,
AND IT IS UNDERSTOOD THAT, SUBJECT TO SUCH EXPRESS REPRESENTATIONS AND
WARRANTIES, BUYER TAKES THE COMPANY AND THE ASSETS "AS IS" AND "WHERE IS."
WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER
HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A)THE
CONDITION OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF
CONFORMITY TO MODELS OR SAMPLES OF MATE, OR THE PRESENCE OR ABSENCE OF ANY
HAZARDOUS MATE IN OR ON, OR DISPOSED OF OR DISCHARGED FROM, THE ASSETS) OR (B)
ANY INFRINGEMENT BY SELLER OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY
RIGHT OF ANY THIRD PARTY, AND (II) NEGATES ANY RIGHTS OF BUYER UNDER STATUTES TO
CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY BUYER FOR DAMAGES BECAUSE OF
REDHIBITORY VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION
OF SELLER AND BUYER THAT THE ASSETS ARE TO BE ACCEPTED BY BUYER IN THEIR PRESENT
CONDITION AND STATE OF REPAIR.
Section 12.2 Damages. NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY
-------
IN ANY OTHER PROVISION OF THIS AGREEMENT, SELLER AND BUYER AGREE THAT, EXCEPT AS
PROVIDED IN SECTIONS 14.2 and 14.3, THE RECOVERY OF ANY DAMAGES SUFFERED OR
INCURRED AS A RESULT OF ANY BREACH BY ANY PARTY OR THE COMPANY OF ANY OF ITS
REPRESENTATIONS, WARRANTIES OR OBLIGATIONS UNDER THIS AGREEMENT SHALL BE LIMITED
TO THE ACTUAL DAMAGES SUFFERED OR INCURRED (WHICH SHALL INCLUDE ANY INDIRECT,
CONSEQUENTIAL, SPECIAL, EXEMPLARY OR PUNITIVE DAMAGES AWARDED AGAINST OR PAID BY
THE INDEMNIFIED PARTY SEEKING INDEMNITY HEREUNDER TO ANY THIRD PERSON WHO IS NOT
AFFILIATED WITH SUCH INDEMNIFIED PARTY) AS A RESULT OF THE BREACH BY THE
BREACHING PARTY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER AND
IN NO EVENT SHALL THE BREACHING PARTY BE LIABLE TO THE NON-BREACHING PARTY OR
ANY INDEMNIFIED PARTY FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL, EXEMPLARY OR
PUNITIVE DAMAGES (INCLUDING, WITHOUT LIMITATION, ANY DAMAGES ON ACCOUNT OF LOST
PROFITS OR OPPORTUNITIES OR LOST OR DELAYED PRODUCTION) SUFFERED OR INCURRED BY
THE NONBREACHING PARTY OR ANY INDEMNIFIED PARTY AS A RESULT OF THE
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<PAGE>
BREACH BY THE BREACHING PARTY OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR
OBLIGATIONS HEREUNDER. This Section 12.2 shall operate only to limit a party's
liability and shall not operate to increase or expand any contractual obligation
of a party hereunder or cause any contractual obligation of a party hereunder to
survive longer than provided in Section 11.1.
Section 12.3 Plugging and Abandonment Obligations. NOTWITHSTANDING
------------------------------------
ANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, IT
IS EXPRESSLY AGREED FOR ALL PURPOSES OF THIS AGREEMENT THAT (I) THE PLUGGING AND
ABANDONMENT OBLIGATIONS CONSTITUTE COMPANY LIABILITIES, (II) THE PLUGGING AND
ABANDONMENT OBLIGATIONS SHALL NOT CONSTITUTE ENVIRONMENTAL CONDITIONS,
ENVIRONMENTAL CLAIMS, OFFSITE ENVIRONMENTAL MATTERS, ENVIRONMENTAL LIABILITIES,
ENVIRONMENTAL DEFECTS, OR ENVIRONMENTAL MATTERS, (III) SELLER MAKES NO WARRANTY
OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PLUGGING AND
ABANDONMENT OBLIGATIONS, AND (IV) SELLER SHALL HAVE NO LIABILITIES OR
OBLIGATIONS WITH RESPECT TO PLUGGING AND ABANDONMENT OBLIGATIONS.
Section 12.4 Environmental Release. From and after Closing, Buyer shall
---------------------
have no rights to recovery or indemnification for Environmental Liabilities or
any Environmental Matters under this Agreement or Law, and all rights or
remedies which Buyer may have at or under Law with respect to any Environmental
Liabilities or Environmental Matters are expressly waived. FROM AND AFTER
CLOSING BUYER HEREBY AGREES, WARRANTS AND COVENANTS TO RELEASE, ACQUIT AND
FOREVER DISCHARGE SELLER AND ALL SELLER INDEMNIFIED PARTIES FROM ANY AND ALL
CLAIMS, DEMANDS AND CAUSES OF ACTION OF WHATSOEVER NATURE, INCLUDING WITHOUT
LIMITATION ALL CLAIMS, DEMANDS AND CAUSES OF ACTION FOR CONTRIBUTION AND
INDEMNITY UNDER STATUTE OR COMMON LAW, WHICH COULD BE ASSERTED NOW OR IN THE
FUTURE AND THAT RELATE TO OR IN ANY WAY ARISE OUT OF ENVIRONMENTAL LIABILITIES
OR ENVIRONMENTAL MATTERS. FROM AND AFTER CLOSING, BUYER, THE COMPANY AND ALL
OTHER BUYER INDEMNIFIED PARTIES WARRANT, AGREE AND COVENANT NOT TO SUE OR
INSTITUTE ARBITRATION AGAINST THE SELLER OR ANY SELLER INDEMNIFIED PARTY UPON
ANY CLAIM, DEMAND OR CAUSE OF ACTION FOR INDEMNITY AND CONTRIBUTION THAT HAVE
BEEN ASSERTED OR COULD BE ASSERTED FOR ANY ENVIRONMENTAL LIABILITIES OR
ENVIRONMENTAL MATTERS.
ARTICLE 13
INDEMNIFICATION
---------------
Section 13.1 Indemnification By Buyer. From and after the Closing Date,
------------------------
the Company shall pay, perform, fulfill and discharge all Company Liabilities.
Buyer
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<PAGE>
shall indemnify and hold harmless the Seller and all Seller Indemnified Parties
(other than the Company), each of their respective past, present and future
directors, officers, employees, consultants and agents, each of the Company's
past and present (and, through the Closing, future) directors, officers,
employees, consultants and agents), and each of the directors, officers, heirs,
executors, successors and assigns of any of the foregoing (collectively, the
"Seller Indemnified Parties") from and against any and all (i) Company
Liabilities incurred by or asserted against any of the Seller Indemnified
Parties, INCLUDING, WITHOUT LIMITATION, ANY COMPANY LIABILITY BASED ON
NEGLIGENCE OR STRICT LIABILITY OF THE SELLER INDEMNIFIED PARTIES OR ANY OTHER
THEORY OF LIABILITY, WHETHER IN LAW (WHETHER COMMON OR STATUTORY) OR EQUITY BUT
NOT INCLUDING COMPANY LIABILITIES BASED ON GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE SELLER INDEMNIFIED PARTIES and (ii) subject to the limitations
of Section 11.1 and Article XII, any Covered Liability resulting from, arising
out of or on account of any breach, failure or nonfulfillment of any
representation, warranty, covenant or agreement on the part of Buyer which is
expressly set forth in this Agreement.
Section 13.2 Third Party Claims. If a claim by a third party is made
------------------
against a Seller Indemnified Party, and if such party (the "Indemnified Party")
intends to seek indemnity with respect thereto under Section 5.1, 5.4, 8.7, or
13.1, the Indemnified Party shall promptly furnish written notice to Buyer (the
"Indemnitor"), of such claims. The Indemnitor shall have thirty (30) days after
receipt of such notice to undertake, conduct and control, through counsel of its
own choosing and at its own expense, the settlement or defense thereof, and the
Indemnified Party shall cooperate with it in connection therewith; provided that
the Indemnitor shall permit the Indemnified Party to participate in such
settlement or defense through counsel chosen by such Indemnified Party, however,
the fees and expenses of such counsel shall be borne by such Indemnified Party.
So long as the Indemnitor, at Indemnitor's cost and expense, (1) has undertaken
the defense of, and assumed full responsibility for all indemnified liabilities
with respect to, such claim, (2) is reasonably contesting such claim in good
faith, by appropriate proceedings, and (3) has taken such action (including the
posting of a bond, deposit or other security) as may be necessary to prevent any
action to foreclose a lien against or attachment of the property of the
Indemnified Party for payment of such claim, the Indemnified Party shall not pay
or settle any such claim. Notwithstanding compliance by the Indemnitor with the
preceding sentence, the Indemnified Party shall have the right to pay or settle
any such claim, provided that in such event it shall waive any right to
indemnity therefor by the Indemnitor for such claim. If, within thirty (30) days
after the receipt of the Indemnified Party's notice of a claim of indemnity
hereunder, the Indemnitor does not notify the Indemnified Party that it elects,
at Indemnitor's cost and expense, to undertake the defense thereof and assume
full responsibility for all indemnified liabilities with respect thereto, or
gives such notice and thereafter fails to contest such claim in good faith or to
prevent action to foreclose a lien against or attachment of the Indemnified
Party's property as contemplated above, the Indemnified Party shall have the
right to contest, settle and/or compromise the claim and, to the extent the
actions, if any, taken by the Indemnified Party in settling or compromising such
claim are reasonable and in good faith, the Indemnified Party shall not thereby
waive any right to indemnity therefor pursuant to this Agreement.
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<PAGE>
Section 13.3 Seller's General Liability Limitation. Notwithstanding
-------------------------------------
anything herein provided to the contrary, Seller shall not have any liability to
Buyer, any Affiliate of Buyer, the Company, any of their respective past,
present and future directors, officers, employees, consultants and agents, or
the directors, officers, heirs, executors, successors or assigns of any of the
foregoing for any matter relating to the Company or arising in connection with
the transactions covered by this Agreement, including without limitation Company
Liabilities from and after the Closing, it being understood and agreed that all
such liabilities will be resolved, settled and fully disposed of (or allowances
made therefor) prior to Closing in accordance with the terms and conditions of
this Agreement.
ARTICLE 14
TERMINATION; REMEDIES; LIMITATIONS
----------------------------------
Section 14.1 Termination.
-----------
(a) Termination of Agreement. This Agreement and the transactions
------------------------
contemplated hereby may be terminated at any time prior to the Closing:
(1) By mutual written consent of Seller and Buyer; or
(2) If the Closing has not occurred by the close of business on March
31, 2000, then (i) by Seller if any condition specified in Section 9.1 has
not been satisfied on or before such close of business, and shall not
theretofore have been waived by Seller, or (ii) by Buyer if any condition
specified in Section 9.2 has not been satisfied on or before such close of
business, and shall not theretofore have been waived by Buyer, or if the
transactions provided for under this Agreement have not been approved by
Seller's shareholders and such condition has not been waived by Seller as
provided in Section 9.1(g); provided, in each case, that the failure to
consummate the transactions contemplated hereby on or before such date did
not result from the failure by the party or parties seeking termination of
this Agreement to fulfill any undertaking or commitment provided for herein
on the part of such party or parties that is required to be fulfilled on or
prior to Closing.
(b) Effect of Termination. Without limiting Seller's and Buyer's
---------------------
respective remedies and rights in regard to the Deposit under Section 14.2, in
the event of termination of this Agreement by Seller, on the one hand, or Buyer,
on the other hand, pursuant to Section 14. l(a), written notice thereof shall
forthwith be given by the terminating party or parties to the other party or
parties hereto, and this Agreement shall thereupon terminate; provided, however,
that following such termination Buyer will continue to be bound by its
obligations set forth in Sections 5.1, 5.2 and 5.4. If this Agreement is
terminated as provided herein all filings,
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<PAGE>
applications and other submissions made to any Governmental Authority shall, to
the extent practicable, be withdrawn from the Governmental Authority to which
they were made.
Section 14.2 Remedies.
--------
(a) Seller's Remedies. Notwithstanding anything herein provided to the
-----------------
contrary, upon the failure by Buyer to satisfy the conditions to Closing or the
Closing obligations, as the case may be, set forth in (i) item (1) of clause (a)
of Section 9.1 on account of breaches of the representations and warranties made
by Buyer on and as of the date of this Agreement, (ii) item (2) of clause (a) of
Section 9.1, (iii) clause (b) of Section 9.1 on account of breaches of the
representations and warranties made by Buyer on and as of the date of this
Agreement or the failure by Buyer to satisfy the condition set forth in item (2)
of clause (a) of Section 9.1, (iv) clause (e) of Section 9.1, or (v) clause (i)
or (ii)(c) of Section 10.3 on or prior to the Closing Date, Seller, at its sole
option, may (i) enforce specific performance of this Agreement or (ii) terminate
this Agreement and, without waiving or releasing Buyer's obligations under
Sections 5.1, 5.2 and 5.4, be paid the Deposit, together with all interest and
other amounts earned thereon as liquidated damages, as Seller's sole and
exclusive remedy for such failure, all other remedies being expressly waived by
Seller. Seller and Buyer agree upon the Deposit amount together with all
interest and other amounts earned thereon, as liquidated damages due to the
difficulty and inconvenience of measuring actual damages and the uncertainty
thereof, and Seller and Buyer agree that such amount is a reasonable estimate of
Seller's loss in the event of any such failure by Buyer.
(b) Buyer's Remedies. Notwithstanding anything herein provided to the
----------------
contrary, upon failure of the Seller to satisfy the conditions to Closing or the
Closing obligations, as the case may be, set forth in (i) item (1) of clause
(a) of Section 9.2 on account of breaches of the representations and warranties
made by Seller on and as of the date of this Agreement, (ii) item (2) of clause
(a) of Section 9.2, (iii) clause (b) of Section 9.2 on account of breaches of
the representations and warranties made by Seller on and as of the date of this
Agreement or the failure by Seller to satisfy the condition set forth in item
(2) of clause (a) of Section 9.2, (iv) clause (e) of Section 9.2, or (v) clauses
(a), (d) or (e) of Section 10.2 on or prior to the Closing Date, Buyer, at its
sole option, may (i) enforce specific performance of this Agreement or (ii)
terminate this Agreement and receive back the Deposit, together with all
interest and other amounts earned thereon, as Buyer's sole and exclusive remedy
for such failure, all other remedies being expressly waived by Buyer.
Section 14.3 Break-Up Fee. If, as of the Closing Date, Seller has
------------
failed to obtain approval of this Agreement (and the transactions contemplated
hereby) by the shareholders of Seller as required by Section 9.1(g) and this
Agreement is thereafter terminated, Seller shall promptly (but in no event later
than one business day after the occurrence of such event) pay to Buyer a fee in
the amount of $1,500,000 and receive back the Deposit, together with all
interest and other amounts earned thereon, which amounts shall be payable by
wire transfer in immediately available funds to an account designated by Buyer.
The parties hereto agree and
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<PAGE>
acknowledge that the $1,500,000 break-up fee payable pursuant to this Section
14.3 is not a penalty, and represents the parties' efforts to reasonably
estimate a fair compensation for the expenses that might be suffered by Buyer in
the event the transactions contemplated by this Agreement shall not be
consummated for the above reason.
ARTICLE 15
MISCELLANEOUS
-------------
Section 15.1 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
Section 15.2 Governing Law; Jurisdiction; Process.
------------------------------------
(a) THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE
GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW RULES
THAT WOULD DIRECT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION, EXCEPT TO
THE EXTENT THAT IT IS MANDATORY THAT THE LAW OF ANOTHER JURISDICTION, WHEREIN OR
ADJACENT TO WHICH THE ASSETS ARE LOCATED, SHALL APPLY.
(b) SUBJECT TO THE ARBITRATION AGREEMENT SET FORTH IN SECTION 15.10, BUYER
AND SELLER CONSENT TO PERSONAL JURISDICTION IN ANY LEGAL ACTION, SUIT OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT IN ANY COURT, FEDERAL OR STATE, WITHIN
THE CITY AND COUNTY OF DENVER, COLORADO, HAVING SUBJECT MATTER JURISDICTION AND
WITH RESPECT TO ANY SUCH CLAIM, BUYER AND SELLER IRREVOCABLY WAIVE, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY CLAIM, OR ANY OBJECTION THAT BUYER OR
SELLER MAY NOW OR HEREAFTER HAVE, THAT VENUE OR JURISDICTION IS NOT PROPER WITH
RESPECT TO ANY SUCH LEGAL ACTION, SUIT OR PROCEEDING BROUGHT IN SUCH COURT IN
THE CITY AND COUNTY OF DENVER, COLORADO, INCLUDING ANY CLAIM THAT SUCH LEGAL
ACTION, SUIT OR PROCEEDING BROUGHT IN SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM AND ANY CLAIM THAT BUYER OR SELLER IS NOT SUBJECT TO PERSONAL
JURISDICTION OR SERVICE OF PROCESS IN SUCH CITY AND COUNTY OF DENVER, COLORADO
FORUM.
Section 15.3 Entire Agreement. This Agreement (including the
----------------
Confidentiality Agreement) and the Appendices, Schedules and Exhibits hereto
contain the entire agreement
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between the parties with respect to the subject matter hereof and there are no
agreements, understandings, representations or warranties between the parties
other than those set forth or referred to herein.
Section 15.4 Expenses. Buyer shall be responsible for (i) all transfer,
--------
stamp, documentary and similar Taxes imposed on the parties hereto with respect
to the purchase and sale of the Company Shares contemplated pursuant to this
Agreement and (ii) all recording, filing or registration fees for any assignment
or conveyance delivered to Buyer under or pursuant to this Agreement. All other
costs and expenses incurred by each party hereto in connection with all things
required to be done by it hereunder, including attorney's fees, accountant fees
and the expense of environmental and title examination, shall be borne by the
party incurring same.
Section 15.5 Notices. All notices hereunder shall be sufficiently given
-------
for all purposes hereunder if in writing and delivered personally, sent by
documented overnight delivery service or, to the extent receipt is confirmed, by
United States Mail, telecopy, telefax or other electronic transmission service
to the appropriate address or number as set forth below. Notices to Seller shall
be addressed as follows:
Bonneville Pacific Corporation
50 West 300 South, Suite 300
Salt Lake City, Utah 84101
Attention: Clark M. Mower
Tel: (801) 363-2520 ext. 101
Fax: (801) 359-1735
with copies to:
Bonneville Pacific Corporation
50 West 300 South, Suite 300
Salt Lake City, Utah 84101
Attention: Steven H. Stepanek
Tel: (801) 363-2520 ext. 111
Fax: (801) 363-9557
and to:
Welborn Sullivan Meck & Tooley, P.C.
1775 Sherman Street, Suite 1800
Denver, Colorado 80203
Attention: John F. Meck
Tel: (303) 830-2500
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<PAGE>
Fax: (303) 832-2366
and through Closing to the Company at:
Bonneville Fuels Corporation
1660 Lincoln Street, Suite 2200
Denver, Colorado 80264
Attention: Jim Cable
Tel: (303) 863-1555 ext.217
Fax: (303) 863-1558
or at such other address and to the attention of such other Person as Seller may
designate by written notice to Buyer. Notices to Buyer shall be addressed to:
CEC Resources Ltd.
1700 Broadway, Suite 1150
Denver, Colorado 80290
Attention: Patrick R. McDonald
Tel: (303 860-1575
Fax: (303) 860-9128
with copies to:
Holland & Hart, L.L.P.
555 Seventeenth Street, Suite 3200
Denver, Colorado 80201-8749
Attention: Dennis M. Jackson
Tel: (303) 298-8115
Fax: (303) 295-8261
or at such other address and to the attention of such other Person as Buyer may
designate by written notice to Seller.
Section 15.6 Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. This Agreement may not be assigned by any
party hereto except with the prior written consent of the other party hereto,
which consent shall not be unreasonably withheld or delayed, and any such
assignment shall be void and of no force or effect; provided, however, that
-------- -------
Buyer may assign this Agreement to any Affiliates of Buyer or of an entity
providing equity financing to Buyer for the purchase of the Company Shares with
prior notice to Seller, and in that event, that Buyer shall remain fully liable
for all obligations of Buyer contained herein."
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<PAGE>
Section 15.7 Amendments and Waivers. This Agreement may not be modified
----------------------
or amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing, waive compliance by another
party hereto with any term or provision of this Agreement on the part of such
other party hereto to be performed or complied with. The waiver by any party
hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach.
Section 15.8 Appendices, Schedules and Exhibits. All Appendices,
----------------------------------
Schedules and Exhibits hereto which are referred to herein are hereby made a
part hereof and incorporated herein by such reference.
Section 15.9 Interpretation. It is expressly agreed that this Agreement
--------------
shall not be construed against any party, and no consideration shall be given or
presumption made, on the basis of who drafted this Agreement or any particular
provision hereof or who supplied the form of Agreement. Each party agrees that
it has been purposefully drawn and correctly reflects their understanding of the
transaction that it contemplates. In construing this Agreement:
(a) examples shall not be construed to limit, expressly or by implication,
the matter they illustrate;
(b) the word "includes" and its derivatives means "includes, but is not
limited to" and corresponding derivative expressions;
(c) a defined term has its defined meaning throughout this Agreement and
each Appendix, Exhibit and Schedule to this Agreement, regardless of whether it
appears before or after the place where it is defined;
(d) each Exhibit and Schedule to this Agreement is a part of this
Agreement, but if there is any conflict or inconsistency between the main body
of this Agreement (including Appendices A and B which shall be considered part
of the main body of this Agreement) and any Exhibit or Schedule, the provisions
of the main body of this Agreement shall prevail; and
(e) the headings and titles herein are for convenience only and shall have
no significance in the interpretation hereof.
Section 15.10 Arbitration. It is agreed, as a severable and independent
-----------
arbitration agreement separately enforceable from the remainder of this
Agreement, that if the parties hereto, the Company, the Indemnified Parties or
their respective successors, assigns, heirs or legal representatives of any of
the foregoing are unable to amicably resolve any dispute or difference arising
under or out of, in relation to or in any way connected with this Agreement
(whether contractual, tortious, equitable, statutory or otherwise) after
endeavoring for a period of at least 30 days to resolve any such dispute through
good faith negotiations among officers of the
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<PAGE>
disputing parties (except as provided in Section 6.5 or with respect to
arbitration instituted prior to Closing), such matter shall be finally and
exclusively referred to and settled by arbitration under the Commercial
Arbitration Rules of the American Arbitration Association pursuant and subject
to the arbitration procedures set forth in the Arbitration Procedures; provided
that, the foregoing shall not prevent Seller, the Company or their Affiliates
from seeking specific performance, an injunction or other equitable relief with
respect to their rights under the Confidentiality Agreement through judicial
means in any jurisdiction. In the event of any conflict between the Commercial
Arbitration Rules of the American Arbitration Association and the Arbitration
Procedures, the Arbitration Procedures shall govern and control.
Section 15.11 Agreement for the Parties' Benefit Only. Subject to the
---------------------------------------
limitations of this Section 15.11, Sections 5.1, 5.4, 6.5 and 8.7 and Article
XIII are intended to benefit and to be enforceable by any of the Indemnified
Parties thereunder as third party beneficiaries of this Agreement. Except for
the limited rights of the Indemnified Parties, this Agreement is not intended to
confer upon any Person not a party hereto any rights or remedies hereunder, and
no Person, other than the parties hereto, is entitled to rely on any
representation, warranty, covenant or agreement contained herein. Any
Indemnified Party which is (i) an assignee of an Indemnified Party, (ii) a
consultant or agent of an Indemnified Party, (iii) a director, officer,
employee, consultant or agent of an assignee of an Indemnified Party, or (iv) a
Person which is a director, officer, heir, executor, successor or assign of any
Person in clauses (i), (ii) or (iii) above (a "Special Indemnitee") shall not be
entitled to enforce this Agreement or any term hereof and shall be indemnified
under the terms of this Agreement only to the extent that a party hereto elects
to exercise such right of indemnity on behalf of such Special Indemnitee. No
party hereto shall have any direct liability or obligation to any Special
Indemnitee for any election or non-election or any act or failure to act under
or in regard to any term of this Agreement. Any claim for indemnity hereunder on
behalf of a Special Indemnitee must be made and administered by a party to this
Agreement. Subject to the foregoing limitations on Special Indemnitees, any such
third party beneficiary of this Agreement may only bring suit against the
defaulting party or parties.
Section 15.12 Attorneys' Fees. The prevailing party in any legal
---------------
proceeding brought under or to enforce this Agreement shall be additionally
entitled to recover court costs, reasonable costs of arbitration and reasonable
attorneys' fees from the nonprevailing party.
Section 15.13 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any adverse
manner to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible.
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<PAGE>
Section 15.14 No Recordation. Without limiting any party's right to file
--------------
suit to compel arbitration to enforce its rights under this Agreement, Buyer and
Seller expressly covenant and agree not to record or place of record this
Agreement or any copy or memorandum hereof.
Section 15.15 Time of Essence. Time is of the essence in this Agreement.
---------------
If the date specified in this Agreement for giving any notice or taking any
action is not a Business Day (or if the period during which any notice is
required to be given or any action taken expires on a date which is not a
Business Day), then the date for giving such notice or taking such action (and
the expiration date of such period during which notice is required to be given
or action taken) shall be the next day which is a Business Day.
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each
of the parties as of the day first above written.
SELLER:
BONNEVILLE PACIFIC CORPORATION
Attest:_________________ By:______________________________
Name: Clark M. Mower
Title: President and CEO
BUYER:
CEC RESOURCES LTD.
Attest:_________________ By:_____________________________
Name: Patrick R. McDonald
Title: President
STOCK PURCHASE AGREEMENT
DATED AS OF AUGUST 11, 1999
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<PAGE>
Exhibit 10.5
Form of
INDEMNIFICATION AGREEMENT
-------------------------
Carbon Energy Corporation
1. EFFECTIVE DATE: October 14, 1999
2. PARTIES: Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, CO 80290-1101
a Colorado corporation ("Corporation")
-------------------------
-------------------------
-------------------------
("*****")
3. RECITALS/AGREEMENT:
(a) At the request of the Corporation, ***** currently serves as a
director and/or officer (as defined below) of the Corporation.
(b) ***** has indicated that it was and is a condition of *****'s
acceptance and continuing in such service that, among other things, the
Corporation agree to (i) indemnify ***** against liabilities, expenses and costs
incurred in connection with any claims, suits or proceedings related to *****'s
service to or for the Corporation and (ii) advance to him such expenses and
costs incurred in connection with such claims, suits or proceedings, all in
accordance with, and to the fullest extent permitted by, the Colorado Business
Corporation Act.
(c) The Corporation's Articles of Incorporation and the Colorado Business
Corporation Act contemplate that contracts may be made between the Corporation
and members of its Board of Directors and officers with respect to
indemnification and advancement of expenses and costs.
(d) In consideration of *****'s acceptance and continuation of service as
a director of the Corporation after the date of this Agreement, and in
consideration of the mutual covenants stated herein, the parties agree as
follows.
4. DEFINITIONS: As used in this Agreement, the following terms have the
following meanings:
(a) Act. The term "Act" means the Colorado Business Corporation Act as it
exists on the date of this Agreement and as it may be hereafter amended from
time to time. In the case of any amendment of the Colorado Business Corporation
Act after the
<PAGE>
date of this Agreement, when used in reference to an act or omission occurring
prior to effectiveness of such amendment, the term "Act" shall include such
amendment only to the extent that the amendment can apply to a prior act or
omission and the amendment permits the Corporation to provide broader
indemnification rights than the Colorado Business Corporation Act permitted the
Corporation to provide at the date of this Agreement and prior to the amendment.
(b) Director. The term "director and/or officer" means an individual who
is or was a director or an officer, or both, of a corporation or an individual
who, while a director and/or officer of a corporation, is or was serving at the
corporation's request as a director, an officer, an agent, an associate, an
employee, a fiduciary, a manager, a member, a partner, a promoter, or a trustee
of, or to hold any similar position with, another corporation or other person or
of an employee benefit plan. A director or officer is considered to be serving
an employee benefit plan at the corporations' request if the director's or
officer's duties to the corporation also impose duties on, or otherwise involve
services by, the director or officer to the plan or to participants in or
beneficiaries of the plan. The term "director and/or officer" includes (i)
unless the context requires otherwise, the estate or personal representative of
a director or officer and (ii) any broader definition as may be provided in the
Act from time to time.
(c) Expenses. The term "expenses" includes counsel fees.
(d) Liability. The term "liability" means the obligation incurred with
respect to a proceeding to pay a judgment, settlement, penalty, fine, including
an excise tax assessed with respect to an employee benefit plan, or reasonable
expenses.
(e) Party. The term "party" includes a person who was, is, or is
threatened to be made a defendant or respondent in a proceeding.
(f) Proceeding. The term "proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, and whether formal or informal.
5. AGREEMENT TO INDEMNIFY: The Corporation shall indemnify and hold harmless
***** in accordance with, and to the fullest extent permitted and/or required
by, the express provisions of the Act from and against any liability, judgment,
penalty, fine (including but not limited to excise taxes with respect to an
employee benefit plan), amounts paid in settlement and reasonable expenses
(including but not limited to expenses of investigation and preparation and fees
and disbursements of *****'s counsel, accountants or other experts) actually
incurred by ***** in connection with any proceeding in which ***** was or is
made a party or was or is involved (for example, as a witness) because ***** is
or was a director or an officer of the Corporation.
6. INSURANCE: So long as ***** may be subject to any possible proceeding by
reason of the fact that ***** is or was a director or officer of the
Corporation, to the extent the Corporation maintains an insurance policy or
policies providing directors' and
2
<PAGE>
officers' liability insurance, ***** shall be covered by such policy or
policies, in accordance with its or their terms, to the maximum extent of the
coverage applicable to any then current director or officer of the Corporation.
7. ADVANCES: In the event of any proceeding in which ***** is a party or is
involved and which may give rise to a right of indemnification from the
Corporation pursuant to this Agreement, following written request to the
Corporation by *****, the Corporation shall pay to *****, in accordance with and
to the fullest extent permitted and/or required by express provisions of the
Act, amounts to cover reasonable expenses incurred by ***** in such proceeding
in advance of its final disposition upon (a) receipt by the Corporation of (i) a
written affirmation by ***** of *****'s good faith belief that ***** has met any
applicable standard of conduct described in the Act and (ii) a written
undertaking executed by or on behalf of ***** to repay the advance if it shall
ultimately be determined that ***** did not meet such standard of conduct and
(b) the making of a determination on behalf of the Corporation (in the manner
prescribed in the Act) that, based on the facts then known to the persons making
the determination would not preclude indemnification under the Act. If a
requested is made by ***** to the Corporation for advancement of any expenses
incurred in connection with any claim, suit or proceeding for which ***** has
claimed indemnification under this Agreement, ***** shall furnish to the
Corporation satisfactory evidence as to the amount of such expenses. The
undertaking required by clause (a) must be an unlimited general obligation of
*****, but it need not be secured, and it shall be accepted without reference to
the financial ability of ***** to make repayment.
8. BURDEN OF PROOF: If under applicable law, the entitlement of ***** to be
indemnified by the Corporation or to receive the advancement of expenses
hereunder depends upon whether a standard of conduct has been met, the
Corporation shall have the burden of proof of establishing that ***** did not
act in accordance with such standard. ***** shall be presumed to have acted in
accordance with such standard and to be entitled to indemnification or the
advancement of expenses (as the case may be) unless, based upon a preponderance
of the evidence, it shall be determined that ***** has not met such standard.
Such determination and any evaluation as to the reasonableness of amounts
claimed by ***** shall be made by the Board of Directors of the Corporation, or
such other body or persons as may be permitted by the Act, acting in good faith.
For purposes of this Agreement, unless otherwise expressly stated, the
termination of any proceeding by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption, and is not determinative, that *****
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
9. NOTICE TO THE CORPORATION: ***** shall notify the Secretary of the
Corporation in writing of any matter for which ***** intends to seek
indemnification hereunder as soon as reasonably practicable following the
receipt by ***** of written notice thereof; provided, however, that delay in so
notifying the Corporation shall not constitute a waiver or release by ***** or
rights hereunder.
3
<PAGE>
10. COUNSEL FOR PROCEEDING: In the event of any proceeding in which ***** is a
party or is involved and which may give rise to a right of indemnification
hereunder, the Corporation shall have the right to retain counsel reasonably
satisfactory to ***** to represent ***** and any others the Corporation may
designate in such proceeding. In any such proceeding, ***** shall have the right
to retain *****'s own counsel, but the fees and expenses of such counsel shall
be at the expense of ***** unless (a) the retention of such counsel has been
specifically authorized by the Corporation; (b) representation of ***** and
another party by the same counsel as proposed by the Corporation would be
inappropriate, in the reasonable judgment of *****, due to actual or potential
differing interests between (as might be the case for representation of both the
Corporation and ***** in a proceeding by or in the right of the Corporation);
(c) the counsel retained by the Corporation and satisfactory to ***** has
advised *****, in writing, that such counsel's representation of ***** would be
likely inappropriate due to actual or potential different interests, whether it
be a conflicting, inconsistent, diverse or other interest; or (d) the
Corporation shall fail to retain counsel for ***** in such proceeding.
Notwithstanding the foregoing, if an insurance carrier has supplied directors'
and officers' liability insurance covering the liability which is the subject of
a proceeding and is entitled to retain counsel for the defense of such
proceeding, then the insurance carrier shall retain counsel to conduct the
defense of such proceeding unless ***** and the Corporation concur in writing
that the insurance carrier's doing so is undesirable. The Corporation shall not
be liable under this Agreement for any settlement of any proceeding effected
without its written consent. The Corporation shall not settle any proceeding in
any manner which would impose any penalty or limitation on ***** without *****'s
prior written consent. Consent to a proposed settlement of any proceeding shall
not be unreasonably withheld or delayed by either the Corporation or *****.
11. ENFORCEMENT: The Corporation acknowledges that ***** is relying upon this
Agreement in serving as a director and/or officer of the Corporation, as well as
any serving in the future in any capacity as a director and/or officer of the
Corporation. If a claim for indemnification or advancement of expenses is not
paid in full by the Corporation within 30 days after a written claim has been
received from ***** by the Corporation, ***** may at any time bring suit against
the Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in such suit, ***** shall also be entitled to be paid all
reasonable fees and expenses (including without limitation fees of counsel) in
bringing and prosecuting such claim. Whether or not ***** has met any applicable
standard of conduct, the Court in such suit may order indemnification or the
advancement of expenses as the Court deems proper (subject to any express
limitation of the Act). Further, the Corporation shall indemnify ***** from and
against any and all expenses (including attorneys' fees) and, if requested by
*****, shall (within 10 business days of such request) advance such expenses to
*****, which are incurred by ***** in connection with any claim asserted against
or suit brought by ***** for recovery under any directors' and officers'
liability insurance policies maintained by the Corporation, regardless of
whether ***** is unsuccessful in whole or in part in such claim or suit.
4
<PAGE>
12. PROCEEDINGS BY *****: The Corporation shall indemnify ***** and advance
expenses to ***** in connection with any proceeding (or part thereof) initiated
by ***** only if such proceeding (or part thereof) was authorized by the Board
of Directors of the Corporation.
13. NONEXCLUSIVITY: The rights of ***** for indemnification and advancement of
expenses under this Agreement shall not be deemed exclusive of, or in limitation
of, any rights to which ***** may be entitled under any applicable law, the
Corporation's Articles of Incorporation or Bylaws, vote of stockholders or
otherwise.
14. MISCELLANEOUS:
(a) Effectiveness. This Agreement is effective for, and shall apply to,
(i) any claim which is asserted or threatened before, on or after the date of
this Agreement but for which no action, suit or proceeding has actually been
brought prior to the date of this Agreement and (ii) any proceeding which is
threatened before, on or after the date of this agreement but which is not
pending prior to the date of this Agreement. Thus, this Agreement shall not
apply to any action, suit or proceeding which has actually been brought before
the date of this Agreement. So long as the foregoing standard of effectiveness
has been satisfied, this Agreement shall be effective for and shall be applied
to acts or omissions prior to, on or after the date of this Agreement.
(b) Survival; Continuation. The rights of ***** hereunder shall inure to
the benefit of ***** (even after ***** ceases to be a director or officer),
*****'s personal representative, heirs, executors, administrators and
beneficiaries; and this Agreement shall be binding upon the Corporation, its
successors and assigns. The rights of ***** under this Agreement shall continue
so long as ***** may be subject to any possible proceeding because of the fact
that ***** was a director or officer of the Corporation. If the Corporation
sells, leases, exchanges or otherwise disposes of, in a single transaction or
series of related transactions, all or substantially all of its property and
assets, the Corporation shall, as a condition precedent to such transaction,
cause effective provision to be made so that the person or entity acquiring such
property and assets shall become bound by and replace the Corporation under this
Agreement.
(c) Governing Law. This Agreement shall be governed by the laws of the
State of Colorado.
(d) Severability. If any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be deemed
amended to accomplished the objectives of the provision as originally written
and to the fullest extent permitted by law and all other provisions shall remain
in full force and effect.
(e) Amendment. No amendment, termination or cancellation of this
Agreement shall be effective unless in writing signed by the Corporation and
*****.
5
<PAGE>
(f) Subrogation. In the event of payment under this Agreement the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of *****, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Corporation effectively to bring suit
to enforce such rights.
(g) Headings. The headings in this Agreement are for convenience only and
are not to be considered in construing this Agreement.
(h) Counterparts. This Agreement may be executed in counterparts, both of
which shall be deemed an original, and together shall constitute one document.
The parties have executed this Agreement as of the effective date first
above stated.
CARBON ENERGY CORPORATION [*****]
By:
------------------------------- -------------------------------
Patrick R. McDonald
President
6
<PAGE>
SCHEDULE 10.5
-------------
As of October 14, 1999, the following persons have entered into
Indemnification Agreements with Carbon Energy Corporation, the form of which is
attached as Exhibit 10.5, issued in the 1999 Exchange Offer:
Patrick R. McDonald
Kevin D. Struzeski
David H. Kennedy
Lambros J. Lambros
Bryan H. Lawrence
Peter A. Leidel
Harry A. Trueblood, Jr.
<PAGE>
9/30/99
EXHIBIT 10.6
- --------------------------------------------------------------------------------
FORM OF
EMPLOYMENT AGREEMENT
by and between
CARBON ENERGY CORPORATION
and
PATRICK R. McDONALD
Dated as of October 29, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Article I. Term of Employment .............................................................. 1
1.1 Position and Employment Period .................................................... 1
1.2 Appointment as Director ........................................................... 1
1.3 Change in Control ................................................................. 1
Article II. Duties ......................................................................... 4
2.1 Duties ............................................................................ 4
Article III. Compensation .................................................................. 4
3.1 Salary ............................................................................ 4
3.2 Options and Restricted Stock ...................................................... 4
3.3 Benefits; Life Insurance .......................................................... 5
3.4 Reimbursement of Expenses ......................................................... 5
Article IV. Death, Disability and Termination............................................... 5
4.1 Death ............................................................................. 5
4.2 Disability ........................................................................ 6
4.3 Disability Insurance .............................................................. 6
4.4 Determination of Disability ....................................................... 6
4.5 Termination ....................................................................... 6
Article V. Termination Benefits ............................................................ 7
5.1 Severance Payments ................................................................ 7
5.2 Termination for Cause ............................................................. 8
5.3 Certain Additional Payments by Company ............................................ 8
Article VI. Covenants of Executive ......................................................... 9
6.1 Confidential Information .......................................................... 9
Article VII. Miscellaneous ................................................................. 9
7.1 Disagreements ..................................................................... 9
7.2 Binding Effect; Benefits .......................................................... 9
7.3 Notices ........................................................................... 9
7.4 Entire Agreement .................................................................. 9
7.5 Amendments and Waivers ............................................................ 9
7.6 Section Headings .................................................................. 10
7.7 Severability ...................................................................... 10
7.8 Governing Law ..................................................................... 10
7.9 Counterparts; Facsimile ........................................................... 10
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated and effective as
of ______________________ (the "Effective Date"), by and between CARBON ENERGY
CORPORATION, a Colorado corporation, with offices at 1700 Broadway, Suite 1150,
Denver, Colorado 80290-1101 ("Company"), and PATRICK R. McDONALD, residing in
Colorado ("Executive").
RECITALS
WHEREAS, Company desires to acquire the services of Executive, and
Executive desires to be employed by Company upon the terms and conditions set
forth in this Agreement.
AGREEMENT
NOW THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
Article I.
Term of Employment
1.1 Position and Employment Period. Company hereby employs
------------------------------
Executive as its President and Chief Executive Officer, and Executive hereby
accepts employment with Company, all in accordance with the terms and conditions
hereof, for an initial three-year term commencing on the Effective Date and
ending three years from that date, unless otherwise terminated as provided in
Section 1.3 or Articles IV and V. This Agreement shall continue from year to
year thereafter unless Company gives written notice of termination to Executive
at least three months preceding the date of termination or Executive gives such
notice to Company on or at least three months preceding the date of termination
(the initial three-year term is referred to as the "Initial Employment Period,"
and together with any subsequent periods of employment pursuant hereto, the
"Employment Period").
1.2 Appointment as Director. Company agrees that for so long as
-----------------------
Executive is an officer of Company, Company shall nominate and endorse Executive
to serve as a director on Company's Board of Directors.
1.3 Change in Control.
-----------------
(a) Hostile Change in Control.
-------------------------
i. A Change in Control (as defined below) is hostile if it
is neither solicited by Company nor supported by a majority of Company's then-
existing Board of Directors ("Hostile Change in Control"). Notwithstanding
anything herein to
<PAGE>
the contrary, in the event that a Hostile Change in Control of Company occurs,
Company shall have the right to terminate this Agreement by paying Executive
400% of the Compensation (as defined below).
ii. In the event that a Hostile Change in Control of
Company occurs, Executive shall have the right to terminate this Agreement by
written notice to Company and Company shall immediately pay Executive 400% of
the Compensation.
(b) Friendly Change in Control.
--------------------------
i. A Change in Control (as defined below) is friendly if a
majority of Company's then existing Board of Directors supports such Change in
Control ("Friendly Change in Control"). Notwithstanding anything herein to the
contrary, in the event that a Friendly Change in Control of Company occurs,
Company shall have the right to terminate this Agreement by paying Executive
300% of the Compensation (as defined below).
ii. In the event that a Friendly Change in Control of
Company occurs, Executive shall have the right to terminate this Agreement by
written notice to Company and Company shall immediately pay Executive 200% of
the Compensation.
(c) In addition, upon the occurrence of either a Hostile Change
in Control of Company or a Friendly Change in Control of Company, the
restrictions on any outstanding incentive awards (including, but not limited to,
restricted stock and granted performance shares) granted to Executive under any
incentive plan or arrangement shall lapse and such incentive awards shall become
100% vested, and all stock options and stock appreciation rights granted to
Executive shall become immediately exercisable and shall become 100% vested.
(d) Any amounts required to be paid by Company pursuant to this
Section 1.3 shall be paid within five days of Executive's date of termination
(the "Termination Date").
(e) As used in this Agreement, the term "Compensation" shall be
the arithmetic average of Executive's annual base salary and incentive
compensation for the three years prior to the Termination Date or, if Executive
has been employed for less than three full years, such lesser number of calendar
years during any part of which Executive has been so employed, with his base
salary and incentive compensation taken into account at their full annualized
rates for any partial year or years. For any partial year, the incentive
compensation amount shall be deemed to be an amount equal to Executive's maximum
incentive compensation which could be awarded for the fiscal year in which the
Termination Date occurs had he continued in employment until the end of the
fiscal year, assuming all performance targets and goals (if applicable) had been
fully met by Company and by Executive, as applicable for that fiscal year.
2
<PAGE>
(f) "Change in Control" shall be deemed to have occurred:
i. At such time as a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended,
becomes the beneficial owner of shares of Company having 50% or more of the
total number of votes that may be cast for the election of Directors of Company;
or
ii. On the date on which the stockholders of Company
approve: (A) any agreement for a merger or consolidation of Company with another
entity, provided that there shall be no Change in Control if the persons and
entities who were the stockholders of Company immediately before such merger or
consolidation continue to own directly more than two-thirds of the outstanding
voting securities of the corporation resulting from such merger or consolidation
in substantially the same proportion as their ownership of the voting securities
of Company outstanding immediately before such merger or consolidation; or (B)
any sale, exchange or other disposition of all or substantially all of Company's
assets; or
iii. On the effective date of any sale, exchange or other
disposition of greater than 50% in fair market value of Company's assets, other
than in the ordinary course of business, whether in a single transaction or a
series of related transactions; or
iv. At such time that there is a change in more than a
majority of Company's Board of Directors as a result of a proxy contest waged by
a third person unaffiliated with Executive and not endorsed by Executive.
v. A person, for purposes of this section, means an
individual, corporation, partnership, joint venture, trust, unincorporated
association or any other form of organization.
In determining whether clause (i) of the preceding sentence has been satisfied,
the third person owning shares must be someone other than Yorktown Energy
Partners III, L.P., Yorktown Partners LLC, or entities controlled by Yorktown
Partners LLC. For this purpose, the term "controlled" means possession, direct
or indirect, of the power to direct or cause the direction of the management and
policies of a person, whether (1) through the ownership of more than 50% of the
outstanding voting securities of the person, (2) by contract or (3) by a
position such as a general partner or manager.
(g) After Executive's termination of employment as described in
this Section 1.3, Company shall continue to provide for a period of 24 months
from the Termination Date, medical, dental, disability and life insurance
coverage to Executive at the same levels of coverage as in effect immediately
prior to such date.
3
<PAGE>
Article II.
Duties
2.1 Duties. During the term hereof:
------
(a) Executive shall, subject to the succeeding sentence, devote
such time as is necessary to perform his duties and shall discharge such duties
to the best of his abilities. During the Employment Period, Executive may invest
his personal assets and his time in enterprises other than Company if: (i) such
enterprises do not compete with Company in Company's area of operations and do
not require Executive to devote substantial amounts of his time thereto, or (ii)
they are enterprises which Company has evaluated and in which it has elected not
to invest, subject to Executive's notification to Company's Board of Directors
of Executive's intention to so participate.
(b) Company shall not, without the written consent of Executive,
require Executive to perform services away from the Denver area at such
frequency or duration as might, in the reasonable opinion of Executive,
necessitate his moving his residence from the Denver area.
Article III.
Compensation
3.1 Salary. Company shall pay Executive a base salary of not less
------
than $200,000 per year plus an adjustment on each July 1 hereafter for all cost
of living increases (computed by dividing the preceding year's U.S. consumer
price index by the year preceding such year's U.S. consumer price index and
multiplying such percentage by the then base salary), to be paid at the usual
times for the payment of Company's executives, subject to adjustment as provided
herein. Executive's base salary shall be reviewed annually by the Board of
Directors of Company and may be increased, but not decreased. Incentive
compensation or bonuses (called in this Agreement incentive compensation) will
be determined by the Board of Directors at its discretion.
3.2 Options and Restricted Stock. As part of Executive's
----------------------------
compensation, Company shall issue to Executive an option to acquire 70,000
shares of Company's common stock with an exercise price of $5.50 per share. The
option shall be granted under Company's 1999 Stock Option Plan. The option shall
vest over three years, with the right to purchase one-third of the shares vested
one year from the date of grant and the right to purchase an additional one-
third of the shares vested on each of the second and third anniversaries of the
date of grant, and the option shall be an incentive stock option. The complete
terms of such option shall be as set forth in the option agreement which shall
follow the standard form of option agreement under the 1999 Stock Option Plan
and also reflect the Change in Control and other provisions of this Agreement
regarding vesting. In addition, as part of Executive's compensation, Company
shall grant to Executive 30,000 shares of Company common stock under Company's
1999 Restricted Stock Plan. This restricted stock shall vest over three years,
with one-third of the restricted stock vested one year from the date of grant
and an
4
<PAGE>
additional one-third of the restricted stock vested on each of the second and
third anniversaries of the date of grant. The restricted stock grant shall be
accompanied by the standard form of restricted stock agreement under Company's
1999 Restricted Stock Plan, and the restricted stock agreement shall reflect the
Change in Control and other provisions of this Agreement in regard to vesting.
The grants of the above-described option and restricted stock shall be made on
the Effective Date.
3.3 Benefits; Life Insurance. Executive shall be entitled to
------------------------
receive all benefits (such as medical, dental, disability and life insurance and
paid vacation (a maximum of four weeks)), as are currently being received by
Executive from CEC Resources Ltd. Executive shall be eligible to participate in
all incentive compensation, stock option, performance unit or similar plans or
programs as the Board of Directors of Company may determine in its reasonable
discretion based upon Company's compensation practices and Executive's
responsibilities and performance. Company shall provide without cost to
Executive the following: membership fees and dues relating to organizations to
which Executive has historically belonged and subscription costs for
publications relevant to Company's business which Executive has historically
received. So long as Executive is employed under this Agreement and during the
24 months specified in Section 5.1(b), Company shall maintain for the benefit of
Executive's estate, and pay the premiums for, a life insurance policy on
Executive's life in the amount of $1,000,000.
3.4 Reimbursement of Expenses. In addition, Company shall promptly
-------------------------
reimburse Executive for all reasonable and documented out-of-pocket expenses
incurred in the performance of his duties hereunder, including without
limitation, expenses for entertainment, travel, management seminars and the
like.
Article IV.
Death, Disability and Termination
4.1 Death. If Executive dies during the Employment Period, the
-----
Employment Period shall thereupon terminate for all purposes of this Agreement,
and Company's obligations hereunder shall terminate immediately, and Executive's
estate or legal representative shall be entitled only to the following:
(a) any arrearages of salary, through the date of Executive's
death;
(b) any unpaid incentive compensation or compensatory options
earned by Executive in respect of any calendar year prior to the calendar year
in which occurs the death of Executive;
(c) any incentive compensation or compensatory options to be
granted, as determined in accordance with this Agreement, earned by Executive in
respect of the year in which occurs the death of Executive; and
5
<PAGE>
(d) any reimbursable expenses incurred through the date of
Executive's death.
4.2 Disability. If Executive is unable to perform his duties as
----------
required under this Agreement by reason of mental or physical illness or
incapacity, Company agrees to continue all payments due hereunder, including
salary, for a period of 180 days from the date of disability. Notwithstanding
anything to the contrary contained herein, Executive shall be considered
disabled and Company may terminate this Agreement at any time Executive shall be
absent from employment as a result of mental or physical illness or incapacity
for a continuous period of 180 days, and all obligations of Company hereunder
shall cease upon any such termination. Upon any such termination, Executive
shall be entitled only to the following:
(a) any arrearages of salary, through the date of such
termination, including that which is payable as a result of the first sentence
of this Section 4.2;
(b) any unpaid incentive compensation or any options earned by
Executive in respect of any calendar year prior to the calendar year in which
occurs the disability of Executive;
(c) any incentive compensation or options earned by Executive in
respect of the year in which occurs the disability of Executive; and
(d) any reimbursable expenses incurred by Executive.
4.3 Disability Insurance. While Executive is employed under this
--------------------
Agreement, during the period specified in Section 5.1(b) and after the period
described in Section 5.1(b) if this Agreement is terminated because of
Executive's disability, Company shall provide, for the benefit of Executive, a
disability insurance policy, with mutually agreeable terms determined within 60
days of the Effective Date, the premiums of which shall be paid by Company.
4.4 Determination of Disability. For purposes of this Agreement, if
---------------------------
at any time a question arises as to the disability of Executive, then Company
and Executive shall agree on one physician who is a member of the American
Medical Association to examine Executive and determine if his physical and/or
mental condition is such as to render him incapable of performing the usual
duties of his employment with Company.
4.5 Termination. In addition to the foregoing provisions, the
-----------
Employment Period and Executive's employment with Company may be terminated by:
(a) Company for cause (as defined in Section 5.2), immediately
upon determination by the Board of Directors and providing Executive with
written notice of termination;
6
<PAGE>
(b) Executive following a change in position with Company from
that described in Section 1.1 or because of any other material breach of this
Agreement by Company, provided Executive does not voluntarily accept the change
in position and notifies Company of his non-acceptance thereof and provided, in
the case of any other material breach, Executive gives a written notification to
Company of the material breach and the material breach is not cured within 20
business days of Company's receipt of the notification; or
(c) either party upon 30 days prior written notice from the
terminating party to the other party.
Article V.
Termination Benefits
5.1 Severance Payments. Subject to the provisions of Section 1.3
------------------
hereof, (i) if Executive's employment shall be terminated by the Board of
Directors of Company for any reason other than "for cause" or upon the death or
disability of Executive, or (ii) if Executive voluntarily terminates employment
in accordance with Section 4.5(b) following a change in position with Company
from that described in Section 1.1 or because of any other material breach of
this Agreement by Company, then Company shall pay Executive a termination
benefit as follows:
(a) Company shall pay Executive in a single lump sum payment in
an amount equal to 300% of the Compensation (as defined above) (the "Severance
Payments"). The Severance Payments shall be paid regardless of whether Executive
is able to secure alternative employment. In the event Executive should die
before payment of all amounts due under this Article V, the remaining amounts
shall be paid to Executive's designated beneficiary, if any, and otherwise to
Executive's estate.
(b) Company shall continue to provide for a period of 24 months
from the Termination Date, medical, dental, disability and life insurance
coverage to Executive at the same levels of coverage as in effect immediately
prior to such date.
(c) Notwithstanding anything to the contrary in this or any
other agreement, immediately upon termination under the circumstances described
in this Section 5.1, all Executive's options shall become immediately
exercisable and shall become 100% vested, all of Executive's restricted stock
shall become immediately 100% vested, and all performance incentives granted to
Executive shall become 100% vested.
(d) Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to Executive in any subsequent employment
except as provided herein.
7
<PAGE>
(e) The Severance Payments and benefits provided in this
Agreement shall be in lieu of any other severance pay to which Executive may be
entitled under any Company severance plan, program or arrangement.
5.2 Termination for Cause. If Executive is terminated for cause,
---------------------
then he shall receive no further benefits hereunder. "Cause" shall mean a
termination on account of (1) repeated refusal to obey written directions of the
Board of Directors or a superior officer (so long as such directions do not
involve illegal or immoral acts); (2) repeated acts of substance abuse which are
materially injurious to Company or any of its subsidiaries, (3) fraud or
dishonesty that is materially injurious to Company or any of its subsidiaries,
(4) breach of any material obligation of nondisclosure or confidentiality owed
to Company or any of its subsidiaries, (5) commission of a criminal offense
involving money or other property of Company (excluding any traffic violations
or similar violations), or (6) commission of a criminal offense that constitutes
a felony in the jurisdiction in which the offense is committed.
5.3 Certain Additional Payments by Company. Notwithstanding
--------------------------------------
anything to the contrary in this Agreement, in the event that any payment or
distribution by Company to or for the benefit of the Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest or
penalties, are hereinafter collectively referred to as the "Excise Tax"),
Company shall pay to Executive an additional payment (a "Gross-up Payment") in
an amount such that after payment by Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up
Payment equal to the Excise Tax imposed upon the Payments. Company and Executive
shall make an initial determination as to whether a Gross-up Payment is required
and the amount of any such Gross-up Payment. Executive shall notify Company
immediately in writing of any claim by the Internal Revenue Service which, if
successful, would require such Gross-up Payment (or a Gross-up Payment in excess
of that, if any, initially determined by Company and Executive) within five days
of the receipt of such claim. Company shall notify Executive in writing at least
five days prior to the due date of any response required with respect to such
claim if it plans to contest the claim. If Company decides to contest such
claim, Executive shall cooperate fully with Company in such action; provided,
however, Company shall bear and pay directly or indirectly all costs and
expenses (including additional interest and penalties) incurred in connection
with such action and shall indemnify and hold Executive harmless, on an after-
tax basis, for any Excise Tax or income tax, including interest and penalties
with respect thereto, imposed as a result of Company's action. If, as a result
of Company's action with respect to a claim, Executive receives a refund of any
amount paid by Company with respect to such claim, Executive shall promptly pay
such refund to Company. If Company fails to timely notify Executive whether it
will contest such claim or Company determines not to contest such claim, then
Company shall immediately pay to Executive the portion of such claim, if any,
which it has not previously paid to Executive.
8
<PAGE>
Article VI.
Covenants of Executive
6.1 Confidential Information. Executive covenants and agrees that
------------------------
he will not at any time during or after the termination of his employment,
whether under this Agreement, or otherwise, reveal, divulge or make known to any
person any confidential or proprietary information ("Confidential Information")
whatsoever made known to Executive by reason of his employment by Company. This
Section 6.1 shall not apply to information made known to Executive by reason of
his outside personal business interests or personal investments made in
accordance with this Agreement. In the event of a breach or threatened breach by
Executive of the provisions of this Section 6.1, Company shall be entitled, in
addition to any remedy hereunder or under any applicable law, to an injunction
restraining Executive from disclosing or using, in whole or in part, any
Confidential Information. The covenants contained in this Section 6.1 shall
survive the termination or expiration of this Agreement for a period of 24
months.
Article VII.
Miscellaneous
7.1 Disagreements. In the event that Company and Executive shall
-------------
disagree as to their respective rights and obligations hereunder, then Company
shall pay reasonable counsel fees incurred by Executive in connection with such
disagreement, if Executive prevails in his position.
7.2 Binding Effect; Benefits. This Agreement shall inure to the
------------------------
benefit of, and shall be binding upon, the parties hereto and their respective
successors, assigns, heirs and legal representatives. Insofar as Executive is
concerned, this contract may not be assigned.
7.3 Notices. All notices and other communications which are
-------
required or permitted hereunder shall be in writing and shall be sufficient if
mailed by registered or certified mail, postage prepaid to the address specified
herein in the case of Company, Executive's residential address, or such other
address as any party hereto shall have specified by notice in writing to the
other party hereto. All such notices and communications shall be deemed to have
been received on the date of delivery thereof or the fifth business day after
the mailing thereof, whichever is the earlier.
7.4 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties hereto and supersedes all prior agreements and
understandings, oral or written, between the parties hereto with respect to the
subject matter hereof.
7.5 Amendments and Waivers. This Agreement may not be modified or
----------------------
amended except by an instrument or instruments in writing signed by the party
against whom enforcement or any such modification or amendment is sought. Either
party hereto may, by an instrument in writing, waive compliance by the other
party with any term or provision of this Agreement on the part of such other
party hereto to be
9
<PAGE>
performed or complied with. The waiver by any party hereto of a breach of any
term or provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
7.6 Section Headings. The section and other headings contained in
----------------
this Agreement are for reference purposes only and shall not be deemed to be a
part of this Agreement or to control or affect the meaning or construction of
any provision of this Agreement.
7.7 Severability. If any term or provision of this Agreement is
------------
held or deemed to be invalid or unenforceable, in whole or in part, by a court
of competent jurisdiction, this Agreement shall be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement.
7.8 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of Colorado
without regard to its principals regarding conflicts of law.
7.9 Counterparts; Facsimile. This Agreement may be executed in any
-----------------------
number of counterparts, each of which shall be deemed an original, and all of
which together shall be deemed one and the same instrument. This Agreement may
be delivered by facsimile.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
COMPANY: CARBON ENERGY CORPORATION
By:________________________________
Its:___________________________
EXECUTIVE: ___________________________________
Patrick R. McDonald
10
<PAGE>
9/30/99
EXHIBIT 10.7
- --------------------------------------------------------------------------------
FORM OF EMPLOYMENT AGREEMENT
by and between
CARBON ENERGY CORPORATION
and
KEVIN D. STRUZESKI
Dated as of October 29, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Article I. Term of Employment............................................................... 1
1.1 Position and Employment Period ................................................... 1
1.2 Change in Control ................................................................ 1
Article II. Duties.......................................................................... 3
2.1 Duties............................................................................ 3
Article III. Compensation................................................................... 4
3.1 Salary............................................................................ 4
3.2 Benefits.......................................................................... 4
3.3 Reimbursement of Expenses......................................................... 4
Article IV. Death and Disability............................................................ 4
4.1 Death............................................................................. 4
4.2 Disability........................................................................ 5
4.3 Determination of Disability....................................................... 5
4.4 Termination....................................................................... 5
Article V. Termination Benefits............................................................. 6
5.1 Severance Payments................................................................ 6
5.2 Termination for Cause............................................................. 6
Article VI. Covenants of Executive.......................................................... 7
6.1 Confidential Information.......................................................... 7
Article VII. Miscellaneous.................................................................. 7
7.1 Disagreements..................................................................... 7
7.2 Binding Effect; Benefits.......................................................... 7
7.3 Notices........................................................................... 7
7.4 Entire Agreement.................................................................. 8
7.5 Amendments and Waivers............................................................ 8
7.6 Section Headings.................................................................. 8
7.7 Severability...................................................................... 8
7.8 Governing Law..................................................................... 8
7.9 Counterparts; Facsimile........................................................... 8
</TABLE>
i
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated and effective as
of _________________, 1999 (the "Effective Date"), by and between CARBON ENERGY
CORPORATION, a Colorado corporation, with offices at 1700 Broadway, Suite 1150,
Denver, Colorado 80290-1101 ("Company"), and Kevin D. Struzeski, residing in
Colorado ("Executive").
RECITALS
WHEREAS, Company desires to acquire the services of Executive, and
Executive desires to be employed by Company upon the terms and conditions set
forth in this Agreement.
AGREEMENT
NOW THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
Article I.
Term of Employment
1.1 Position and Employment Period. Company hereby employs
------------------------------
Executive as its Chief Financial Officer, and Executive hereby accepts
employment with Company, all in accordance with the terms and conditions hereof,
for an initial two-year term commencing on the Effective Date and ending two
years from that date, unless otherwise terminated as provided in Section 1.2 or
Articles IV and V. This Agreement shall continue from year to year thereafter
unless Company gives written notice of termination to Executive at least three
months preceding the date of termination or Executive gives such notice to
Company on or at least three months preceding the date of termination (the
initial two-year term is referred to as the "Initial Employment Period," and
together with any subsequent periods of employment pursuant hereto, the
"Employment Period").
1.2 Change in Control.
-----------------
(a) Hostile Change in Control.
-------------------------
i. A Change in Control (as defined below) is hostile if it
is neither solicited by Company nor supported by a majority of Company's then
existing Board of Directors ("Hostile Change in Control"). Notwithstanding
anything herein to the contrary, in the event that a Hostile Change in Control
of Company occurs, Company shall have the right to terminate this Agreement by
paying Executive 300% of the Compensation (as defined below), which he would
have received if this Agreement had not been terminated.
<PAGE>
ii. In the event that a Hostile Change in Control of
Company occurs, Executive shall have the right to terminate this Agreement by
written notice to Company and Company shall immediately pay Executive 300% of
the Compensation, which he would have received if this Agreement had not been
terminated.
(b) Friendly Change in Control.
--------------------------
i. A Change in Control (as defined below) is friendly if a
majority of Company's then existing Board of Directors supports such Change in
Control ("Friendly Change in Control"). Notwithstanding anything herein to the
contrary, in the event that a Friendly Change in Control of Company occurs,
Company shall have the right to terminate this Agreement by paying Executive
200% of the Compensation (as defined below), which he would have received if
this Agreement had not been terminated.
ii. In the event that a Friendly Change in Control of
Company occurs, Executive shall have the right to terminate this Agreement by
written notice to Company and Company shall immediately pay Executive 100% of
the Compensation, which he would have received if this Agreement had not been
terminated.
(c) In addition, upon the occurrence of either a Hostile Change
in Control of Company or a Friendly Change in Control of Company, the
restrictions on any outstanding incentive awards (including restricted stock and
granted performance shares) granted to Executive under any incentive plan or
arrangement shall lapse and such incentive awards shall become 100% vested, and
all stock options and stock appreciation rights granted to Executive shall
become immediately exercisable and shall become 100% vested.
(d) Any amounts required to be paid by Company pursuant to this
Section 1.2 shall be paid within five days of Executive's date of termination
(the "Termination Date").
(e) As used in this Agreement, the term "Compensation" shall be
determined by averaging the total value of Executive's annual base salary and
incentive compensation for the two years prior to the Termination Date (pro
rated on a monthly basis) or, if Executive has been employed for less than two
full years, such lesser number of calendar years during any part of which
Executive has been so employed, with his base salary and incentive compensation
taken into account at their full annualized rates for any partial year or years
(pro rated on a monthly basis), and multiplying that amount by the remaining
months of the Initial Employment Period, which for purposes of this Article I
shall be deemed to be no less than 12 months, or if such Compensation is
determined in reference to a period of employment subsequent to the expiration
of the Initial Employment Period, it shall be the annualized amount of such
Compensation during such period as calculated above (pro rated on a monthly
basis), multiplied by 12. The annualized amount of the average base salary and
incentive compensation described
2
<PAGE>
in this paragraph is to be pro rated to a monthly amount before multiplying by
the remaining months of the Initial Employment Period or by 12, as the case may
be.
(f) "Change in Control" shall be deemed to have occurred:
i. At such time as a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended,
becomes the beneficial owner of shares of Company having 50% or more of the
total number of votes that may be cast for the election of Directors of Company;
or
ii. On the date on which the stockholders of Company
approve: (A) any agreement for a merger or consolidation of Company with another
entity, provided that there shall be no Change in Control if the persons and
entities who were the stockholders of Company immediately before such merger or
consolidation continue to own directly more than two-thirds of the outstanding
voting securities of the corporation resulting from such merger or consolidation
in substantially the same proportion as their ownership of the voting securities
of Company outstanding immediately before such merger or consolidation; or (B)
any sale, exchange or other disposition of all or substantially all of Company's
assets; or
iii. On the effective date of any sale, exchange or other
disposition of greater than 50% in fair market value of Company's assets, other
than in the ordinary course of business, whether in a single transaction or a
series of related transactions; or
iv. At such time that there is a change in more than a
majority of Company's Board of Directors as a result of a proxy contest waged by
a third person unaffiliated with Executive and not endorsed by Executive.
v. A person, for purposes of this section, means an
individual, corporation, partnership, joint venture, trust, unincorporated
association or any other form of organization.
In determining whether clause (i) of the preceding sentence has been satisfied,
the third person owning shares must be someone other than Yorktown Energy
Partners III, L.P., Yorktown Partners LLC, or entities controlled by Yorktown
Partners LLC. For this purpose, the term "controlled" means possession, direct
or indirect, of the power to direct or cause the direction of the management and
policies of a person, whether (1) through the ownership of more than 50% of the
outstanding voting securities of the person, (2) by contract or (3) by a
position such as a general partner or manager.
Article II.
Duties
2.1 Duties. During the term hereof, Executive shall, subject to the
------
succeeding sentence, devote all of his available working time to perform his
duties and
3
<PAGE>
shall discharge such duties to the best of his abilities. Executive may invest
his personal assets and his time in enterprises other than Company if such
enterprises do not compete with Company in Company's area of operations and do
not require Executive to devote substantial amounts of his time thereto.
Article III.
Compensation
3.1 Salary. Company shall pay Executive a base salary of not less
------
than $100,000 per year to be paid at the usual times for the payment of
Company's executives, subject to adjustment as provided herein. Executive's base
salary shall be reviewed annually by the Board of Directors of Company.
Incentive compensation or bonuses (called in this Agreement incentive
compensation) will be determined by the Board of Directors at its discretion.
3.2 Benefits. Executive shall be entitled to receive all benefits
--------
(such as medical, dental, disability and life insurance, paid vacation (a
maximum of three weeks)) offered by the Company to its employees generally.
Executive shall be eligible to participate in all incentive compensation, stock
option, performance unit or similar plans or programs as the Board of Directors
of Company may determine in its reasonable discretion based upon Company's
compensation practices and Executive's responsibilities and performance.
3.3 Reimbursement of Expenses. In addition, Company shall promptly
-------------------------
reimburse Executive for all reasonable and documented out-of-pocket expenses
incurred in the performance of his duties hereunder, including expenses for
entertainment and travel.
Article IV.
Death and Disability
4.1 Death. If Executive dies during the Employment Period, the
-----
Employment Period shall thereupon terminate for all purposes of this Agreement,
and Company's obligations hereunder shall terminate immediately, and Executive's
estate or legal representative shall be entitled only to the following:
(a) any arrearage of salary through the date of Executive's
death;
(b) any unpaid incentive compensation or compensatory options
earned by Executive in respect of any calendar year prior to the calendar year
in which occurs the death of Executive;
(c) any incentive compensation or compensatory options to be
granted earned by Executive in respect of the year in which occurs the death of
Executive; and
4
<PAGE>
(d) any reimbursable expenses incurred through the date of
Executive's death.
4.2 Disability. If Executive is unable to perform his duties as
----------
required under this Agreement by reason of mental or physical illness or
incapacity, Company agrees to continue all payments due hereunder, including
salary, for a period of 180 days from the date of disability. Notwithstanding
anything to the contrary contained herein, Executive shall be considered
disabled and Company may terminate this Agreement at any time Executive shall be
absent from employment as a result of mental or physical illness or incapacity
for a continuous period of 180 days, and all obligations of Company hereunder
shall cease upon any such termination. Upon any such termination, Executive
shall be entitled only to the following:
(a) any arrearages of salary, through the date of such
termination, including that which is payable as a result of the first sentence
of this Section 4.2;
(b) any unpaid incentive compensation or any options earned by
Executive in respect of any calendar year prior to the calendar year in which
occurs the disability of Executive;
(c) any incentive compensation or options earned by Executive in
respect of the year in which occurs the disability of Executive; and
(d) any reimbursable expenses incurred by Executive.
4.3 Determination of Disability. For purposes of this Agreement, if
---------------------------
at any time a question arises as to the disability of Executive, then Company
and Executive shall agree on one physician who is a member of the American
Medical Association to examine Executive and determine if his physical and/or
mental condition is such as to render him incapable of performing the usual
duties of his employment with Company.
4.4 Termination. In addition to the foregoing provisions, the
-----------
Employment Period and Executive's employment with Company may be terminated by:
(a) Company for cause (as defined in Section 5.2), immediately
upon determination by the Board of Directors and providing Executive with
written notice of termination;
(b) Executive following a change in position with Company if the
new position is not a comparable position to that described in Section 1.1,
provided Executive does not voluntarily accept the change in position and
notifies Company of his non-acceptance thereof; or
(c) either party upon 30 days prior written notice from the
terminating party to the other party.
5
<PAGE>
Article V.
Termination Benefits
5.1 Severance Payments. Subject to the provisions of Section 1.2
------------------
hereof, (i) if Executive's employment shall be terminated by the Board of
Directors of Company for any reason other than "for cause" or upon the death or
disability of Executive, or (ii) if Executive voluntarily terminates employment
in accordance with Section 4.5(b) following a change in position with Company if
the new position is not a comparable position to that described in Section 1.1,
then Company shall pay Executive a termination benefit as follows:
(a) Company shall pay Executive an amount equal to Executive's
Compensation (pro rated on a monthly basis) multiplied by the remaining months
of this Agreement, which for purposes of this Article V shall be deemed to be no
less than 12 months (the "Severance Payments"). The Severance Payments shall be
paid in 12 equal monthly installments payable on or before the first day of
each calendar month following the Termination Date and shall be paid regardless
of whether Executive is able to secure alternative employment. In the event
Executive should die before payment of all of the installments due hereunder,
the remaining installments shall be paid to Executive's designated beneficiary,
if any, and otherwise to Executive's estate.
(b) Company shall continue to provide for a period of six months
from the Termination Date, medical, dental, disability and life insurance
coverage to Executive at the same levels of coverage as in effect immediately
prior to such date.
(c) Immediately upon termination under the circumstances
described in this Section 5.1, all Executive's options shall become immediately
exercisable and shall become 100% vested, and all performance incentives granted
to Executive shall become 100% vested.
(d) Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to Executive in any subsequent employment
except as provided herein.
(e) The severance pay and benefits provided in this Agreement
shall be in lieu of any other severance pay to which Executive may be entitled
under any Company severance plan, program or arrangement.
5.2 Termination for Cause. If Executive is terminated for cause,
---------------------
then he shall receive no further benefits hereunder. "Cause" shall mean a
termination on account of (1) repeated refusal to obey written directions of the
Board of Directors or a superior officer (so long as such directions do not
involve illegal or immoral acts); (2) repeated acts of substance abuse which are
materially injurious to Company or any of its
6
<PAGE>
subsidiaries, (3) fraud or dishonesty that is materially injurious to Company or
any of its subsidiaries, (4) breach of any material obligation of nondisclosure
or confidentiality owed to Company or any of its subsidiaries, (5) commission of
a criminal offense involving money or other property of Company (excluding any
traffic violations or similar violations), or (6) commission of a criminal
offense that constitutes a felony in the jurisdiction in which the offense is
committed.
Article VI.
Covenants of Executive
6.1 Confidential Information. Executive covenants and agrees that
------------------------
he will not at any time during or after the termination of his employment,
whether under this Agreement, or otherwise, reveal, divulge or make known to any
person any confidential or proprietary information ("Confidential Information")
whatsoever made known to Executive by reason of his employment by Company. This
Section 6.1 shall not apply to information made known to Executive by reason of
his outside personal business interests or personal investments made in
accordance with this Agreement. In the event of a breach or threatened breach by
Executive of the provisions of this Section 6.1, Company shall be entitled, in
addition to any remedy hereunder or under any applicable law, to an injunction
restraining Executive from disclosing or using, in whole or in part, any
Confidential Information. The covenants contained in this Section 6.1 shall
survive the termination or expiration of this Agreement for a period of 24
months.
Article VII.
Miscellaneous
7.1 Disagreements. In the event that Company and Executive shall
-------------
disagree as to their respective rights and obligations hereunder, then Company
shall pay reasonable counsel fees incurred by Executive in connection with such
disagreement, if Executive prevails in his position.
7.2 Binding Effect; Benefits. This Agreement shall inure to the
------------------------
benefit of, and shall be binding upon, the parties hereto and their respective
successors, assigns, heirs and legal representatives. Insofar as Executive is
concerned, this contract may not be assigned.
7.3 Notices. All notices and other communications which are
-------
required or permitted hereunder shall be in writing and shall be sufficient if
mailed by registered or certified mail, postage prepaid to the address specified
herein in the case of Company, Executive's residential address, or such other
address as any party hereto shall have specified by notice in writing to the
other party hereto. All such notices and communications shall be deemed to have
been received on the date of delivery thereof or the fifth (5th) business day
after the mailing thereof, whichever is the earlier.
7
<PAGE>
7.4 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties hereto and supersedes all prior agreements and
understandings, oral or written, between the parties hereto with respect to the
subject matter hereof.
7.5 Amendments and Waivers. This Agreement may not be modified or
----------------------
amended except by an instrument or instruments in writing signed by the party
against whom enforcement or any such modification or amendment is sought. Either
party hereto may, by an instrument in writing, waive compliance by the other
party with any term or provision of this Agreement on the part of such other
party hereto to be performed or complied with. The waiver by any party hereto of
a breach of any term or provision of this Agreement shall not be construed as a
waiver of any subsequent breach.
7.6 Section Headings. The section and other headings contained in
----------------
this Agreement are for reference purposes only and shall not be deemed to be a
part of this Agreement or to control or affect the meaning or construction of
any provision of this Agreement.
7.7 Severability. If any term or provision of this Agreement is
------------
held or deemed to be invalid or unenforceable, in whole or in part, by a court
of competent jurisdiction, this Agreement shall be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement.
7.8 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of Colorado
without regard to its principals regarding conflicts of law.
7.9 Counterparts; Facsimile. This Agreement may be executed in any
-----------------------
number of counterparts, each of which shall be deemed an original, and all of
which together shall be deemed one and the same instrument. This Agreement may
be delivered by facsimile.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
COMPANY: CARBON ENERGY CORPORATION
By:________________________________
Its:___________________________
EXECUTIVE: ___________________________________
Kevin D. Struzeski
8
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated October 21, 1999 (and to all references to our Firm) included in or made a
part of this Registration Statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
October 22, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Registration Statement and Prospectus of Carbon
Energy Corporation of our report dated February 26, 1999, accompanying the
consolidated financial statements of Bonneville Fuels Corporation contained in
such Registration Statement, and to the use of our name and the statements with
respect to us, as appearing under the heading "Experts" in the Prospectus.
Hein + Associates LLP
Denver, Colorado
October 26, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Carbon Energy Corporation of our report
dated February 16, 1999 relating to the financial statements of CEC Resources
Ltd., which appears in such Prospectus. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
PRICEWATERHOUSECOOPERS, LLP
Calgary, Canada
October 26, 1999
<PAGE>
Exhibit 23.5
Consent of Person About to Become Director
As a person who has not signed this registration statement of Carbon Energy
Corporation but who is named herein as about to become a director, I hereby
consent to the inclusion of such information and my name in this registration
statement.
/s/ Harry A. Trueblood
--------------------------
Harry A. Trueblood, Jr.
<PAGE>
EXHIBIT 23.6
[REED W. FERRILL & ASSOCIATES LETTERHEAD]
October 13, 1999
CEC Resources, Ltd.
1700 Broadway, Suite 1150
Denver, CO 80290
Reed W. Ferrill & Associates, Inc. consents to the use of its name and its
reports dated February 24, 1997 entitled "CEC Resources, Ltd. Reserve and
Revenue Forecast as of November 30, 1996, Constant Prices and Costs" and
February 7, 1998 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 Carbon Energy Corporation's Form S-4 Registration Statement
to the SEC.
For and on behalf of
Reed W. Ferrill & Associates, Inc.
/s/ Reed W. Ferrill
Reed W. Ferrill
President
RWF/mlb
<PAGE>
EXHIBIT 23.7
[SPROULE ASSOCIATES LIMITED LETTERHEAD]
October 1, 1999
CEC Resources, Ltd.
1700 Broadway, Suite 1150
Denver, CO 80290
Re: Carbon Energy Corporation's Form S-4, Registration Statement to the SEC
Dear Sirs:
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 Carbon Energy Corporation's Form S-4, Registration
Statement to the SEC.
Sincerely,
/s/ Paul B. Jung
Paul B. Jung, P. Eng.
Senior Petroleum Engineer
PBJ;db
<PAGE>
EXHIBIT 23.8
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
The undersigned hereby consents to the incorporation by reference by CEC
Resources in the Carbon Energy Corporation Form S-4 Registration Statement to
the SEC of data derived from our reserve reports dated February 19, 1999
relating to the oil and gas reserves of Bonneville Fuels Corporation at December
31, 1998, March 4, 1998 relating to the oil and gas reserves of Bonneville Fuels
Corporation at December 31, 1997, and February 18, 1997 relating to the oil and
gas reserves of Bonneville Fuels Corporation at December 31, 1996. We also
consent to the reference to this firm under the caption "Experts" and elsewhere
in such registration statement.
Very truly yours,
/s/ Ryder Scott Company, L.P.
RYDER SCOTT COMPANY, L.P.
Denver, Colorado
October 20, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned directors and officers of Carbon Energy Corporation
(the "Company") hereby authorizes Patrick R. McDonald and Kevin D. Struzeski and
each of them as their true and lawful attorneys-in-fact and agents: (1) to sign
in the name of each such person and file with the Securities and Exchange
Commission a Registration Statement on an appropriate form, and any and all
amendments (including post-effective amendments) to such Registration
Statement, for the registration under the Securities Act of 1933, as amended, of
comon stock of the Company issuable in the exchange offer by the Company for
shares of CEC Resources Ltd. (in which exchange offer each holder of shares of
CEC Resources Ltd. will be offered shares of the Company); and (2) to take any
and all actions necessary or required in connection with such Registration
Statement and amendments to comply with the Securities Act of 1933, as amended,
and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David H. Kennedy Director September 27, 1999
- -----------------------------
David H. Kennedy
/s/ Bryan H. Lawrence Director September 27, 1999
- -----------------------------
Bryan H. Lawrence
/s/ Peter A. Leidel Director September 27, 1999
- -----------------------------
Peter A. Leidel
/s/ Lambros J. Lambros Director September 27, 1999
- -----------------------------
Lambros J. Lambros
/s/ Patrick R. McDonald Director and President September 27, 1999
- -----------------------------
Patrick R. McDonald
/s/ Kevin D. Struzeski Chief Financial Officer September 27, 1999
- ----------------------------- and Treasurer
Kevin D. Struzeski
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 15,067,000
<TOTAL-REVENUES> 15,067,000
<CGS> 9,005,000
<TOTAL-COSTS> 11,101,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 272,000
<INCOME-PRETAX> 3,694,000
<INCOME-TAX> 1,422,000
<INCOME-CONTINUING> 2,272,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,788,000
<CHANGES> 0
<NET-INCOME> 4,060,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 2,742,000 544,000
<SECURITIES> 0 0
<RECEIVABLES> 4,972,000 2,818,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,489,000 3,666,000
<PP&E> 32,921,000 28,870,000
<DEPRECIATION> 18,891,000 16,863,000
<TOTAL-ASSETS> 22,840,000 16,054,000
<CURRENT-LIABILITIES> 7,677,000 2,175,000
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 9,313,000 9,591,000
<TOTAL-LIABILITY-AND-EQUITY> 22,840,000 16,054,000
<SALES> 21,092,000 16,539,000
<TOTAL-REVENUES> 21,092,000 16,539,000
<CGS> 16,815,000 11,829,000
<TOTAL-COSTS> 22,970,000 15,445,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 238,000 83,000
<INCOME-PRETAX> 0 0
<INCOME-TAX> (175,000) 279,000
<INCOME-CONTINUING> (1,941,000) 732,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,941,000) 732,000
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,652,931
<SECURITIES> 0
<RECEIVABLES> 2,482,273
<ALLOWANCES> 0
<INVENTORY> 113,452
<CURRENT-ASSETS> 0
<PP&E> 36,524,693
<DEPRECIATION> 20,155,003
<TOTAL-ASSETS> 20,924,268
<CURRENT-LIABILITIES> 2,760,582
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 9,463,676
<TOTAL-LIABILITY-AND-EQUITY> 20,924,268
<SALES> 14,728,228
<TOTAL-REVENUES> 14,728,228
<CGS> 11,671,578
<TOTAL-COSTS> 14,374,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,165
<INCOME-PRETAX> 150,176
<INCOME-TAX> 0
<INCOME-CONTINUING> 150,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,176
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
