<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
SCHEDULE 14D-1
TENDER OFFER STATEMENT
(Pursuant to Section 14(d)(1) of the Securities Exchange Act of 1934)
CEC RESOURCES LTD.
(Name of Subject Company)
Carbon Energy Corporation
(Bidder)
Common Stock, No par value
(Title of Class of Securities)
124980 10 3
(CUSIP Number of Class of Securities)
Patrick R. McDonald
Carbon Energy Corporation
1700 Broadway
Suite 1150
Denver, CO 80290-1101
(303) 860-1575
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications on Behalf of Bidder)
with copies to:
Mark R. Levy, Esq.
Holland & Hart LLP
555 Seventeenth Street
Suite 3200
Denver, CO 80202
(303) 295-8000
(Continued on following page(s))
Page 1 of 9 pages.
Exhibit Index is located on Page 9.
<PAGE>
Calculation of Filing Fee
============================================================================
Transaction valuation* Amount of filing fee**
$8,608,762.50 $1,721.75
============================================================================
* For purposes of calculating the fee only. This amount assumes the issuance
of an estimated maximum number of 1,765,900 shares of Carbon Energy
Corporation common stock in exchange for shares of CEC Resources Ltd. common
stock and is based on the market value of the common shares of CEC Resources
Ltd. which had a closing price of $4.875 per share as reported on the
American Stock Exchange on January 5, 2000.
** The amount of the filing fee, calculated in accordance with Rule 0-11(d)
under the Securities Exchange Act of 1934, as amended, equals 1/50/th/ of
one percent of the aggregate value of CEC Resources Ltd. common shares to be
received by the bidder.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: $2,332 Filing Party: Carbon Energy Corporation
Form or Registration No.: 333-89783 Date Filed: October 27, 1999
================================================================================
Page 2 of 9 pages
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SCHEDULE 14D-1
CUSIP No. 124980 10 4
-----------
- --------------------------------------------------------------------------------
(1) Names of Reporting Persons, S.S. or I.R.S.
Identification Nos. Of Above Persons
- --------------------------------------------------------------------------------
(2) Check the Appropriate Box if a Member of a Group (See Instructions)
(a)[_]
(b)[_]
-------------------------------------------------------------------------------
(3) SEC Use Only
- --------------------------------------------------------------------------------
(4) Sources of Funds
- --------------------------------------------------------------------------------
(5) Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(e) or 2(f)
[_]
- --------------------------------------------------------------------------------
(6) Citizenship or Place of Organization
Colorado
- --------------------------------------------------------------------------------
(7) Aggregate Amount Beneficially Owned by Each Reporting Person
- --------------------------------------------------------------------------------
(8) Check if the Aggregate Amount in Row (7) Excludes Certain Shares
(See Instructions)
[_]
- --------------------------------------------------------------------------------
(9) Percent of Class Represented by Amount in Row (7)
- --------------------------------------------------------------------------------
(10) Type of Reporting Person (See Instructions)
- --------------------------------------------------------------------------------
Page 3 of 9 pages
<PAGE>
EXCHANGE OFFER
This Statement on Schedule 14D-1 (this "Statement") relates to the offer by
Carbon Energy Corporation, a Colorado corporation ("Carbon"), to exchange
authorized shares of Carbon common stock, no par value per share ("Carbon
Shares"), at a one-for-one exchange rate, for shares of common stock of CEC
Resources Ltd., an Alberta corporation ("CEC"), no par value ("CEC Shares") upon
the terms and subject to the conditions set forth in the Prospectus dated
January 18, 2000 constituting part of Registration Statement No. 333-89783 filed
under the Securities Act of 1933 (the "Prospectus"), a copy of which is attached
hereto as Exhibit (a)(1), and in the related Letter of Transmittal, a copy of
which is attached hereto as Exhibit (a)(2) (which, as amended or supplemented
from time to time, together constitute the "Offer"). Capitalized terms used in
this Schedule 14D-1 and not otherwise defined herein shall have the meanings set
forth in the Prospectus attached hereto as Exhibit (a)(1).
ITEM 1. SECURITY AND SUBJECT COMPANY.
(a) The name of the subject company is CEC Resources Ltd., a company
organized under the laws of Alberta, Canada, and the address of its principal
executive offices is 1700 Broadway, Suite 1150, Denver, Colorado 80290-1101.
(b) Information concerning the exact title and number of outstanding CEC
Shares and the consideration being offered therefor is set forth in "The
Exchange Offer - General" of the Prospectus and is incorporated herein by
reference.
(c) Information concerning the principal market in which the CEC Shares
are traded and certain high and low sales prices for the CEC Shares for each
quarterly period during the past three fiscal years of CEC is set forth in
"Prospectus Summary - CEC Per Share Market Information" of the Prospectus and is
incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a) - (d) and (g) This Statement is being filed by Carbon Energy
Corporation, a Colorado corporation. The name, business address, present
principal occupation or employment, and the material occupations, positions,
offices or employments during the past five years of each director and executive
officer of Carbon is set forth under "Our Management - Executive Officers and
Directors" and "Principal Shareholders of Our Company" in the Prospectus and is
incorporated herein by reference. All of the directors and executive officers
of Carbon are citizens of the United States. Information regarding Carbon's
principal business and the address of its principal office is set forth under
"Prospectus Summary - Carbon Energy Corporation" and "Information About Carbon"
in the Prospectus and is incorporated herein by reference. Information
concerning Carbon's controlling shareholder, Yorktown Energy Partners III, L.P.
("Yorktown"), Yorktown's managing partner, Yorktown Partners LLC, a Delaware
limited liability company ("Yorktown Partners") and Messrs. Bryan H. Lawrence
and Peter A. Leidel, managers of Yorktown Partners, is set forth under
"Prospectus Summary-Yorktown Energy Partners III, L.P." and "Our Management" in
the Prospectus and is incorporated herein by reference. Messrs. Lawrence and
Leidel are citizens of the United States.
Page 4 of 9 pages
<PAGE>
(e) and (f) Neither Carbon nor, to the best knowledge of Carbon, Yorktown,
Yorktown Partners or any of the persons listed in "Our Management - Executive
Officers and Directors" and "Principal Shareholders of Our Company" in the
Prospectus, has during the last five years, been (i) convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or (ii) a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting activities
subject to, federal or state securities laws or finding any violation of such
laws.
ITEM 3. PAST CONTRACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY.
(a) and (b) The information set forth in "The Exchange Offer - Background
Of The Exchange Offer/Exchange Agreement," "The Exchange Offer - Description Of
The Exchange Agreement," "The Exchange Offer - Interests Of Certain Persons In
The Exchange Offer" and "Certain Relationships and Transactions" of the
Prospectus is incorporated herein by reference.
ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) Information concerning the source and the consideration for the
acquisition of the CEC Shares under the Offer is set forth under "The Exchange
Offer - General" and "The Exchange Offer - Background Of The Exchange
Offer/Exchange Agreement" in the Prospectus is incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER.
(a) - (e) Information concerning the purpose of the Offer and the plans
or proposals of Carbon is set forth under "The Exchange Offer - Background of
the Exchange Offer/Exchange Agreement," "The Exchange Offer - CEC's Reasons For
Recommending The Exchange Offer," "The Exchange Offer - Our Reasons For The
Exchange Offer," "The Exchange Offer - Second Step Merger" and "The Exchange
Offer - Possible Effects of the Exchange Offer" in the Prospectus and is
incorporated herein by reference.
(f) Information concerning the possible delisting of CEC Shares from the
American Stock Exchange is set forth under "Risk Factors - CEC Shareholders Will
Not Have A Readily Available Market For CEC Shares After The Exchange Offer,"
"The Exchange Offer - Possible Effects Of The Exchange Offer" and "The Exchange
Offer - Second Step Merger" in the Prospectus and is incorporated herein by
reference.
(g) Information concerning the possible termination of registration of CEC
Shares pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934 (the
"Exchange Act") is set forth under "The Exchange Offer - Possible Effects Of The
Exchange Offer" in the Prospectus and is incorporated herein by reference.
Page 5 of 9 pages
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ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
(a) and (b) Certain directors and executive officers of Carbon own
securities of CEC as set forth under "Principal Shareholders Of CEC" of the
Prospectus, which information is incorporated herein by reference.
ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE SUBJECT COMPANY'S SECURITIES.
The information set forth in "The Exchange Offer - Background Of The
Exchange Offer/Exchange Agreement," "The Exchange Offer - Intentions Of The
Directors And Officers Of CEC," "The Exchange Offer - Interests Of Certain
Persons In The Exchange Offer," "The Exchange Offer - Description of Exchange
Agreement," "Principal Shareholders Of CEC," and "Certain Relationships and
Transactions" of the Prospectus is incorporated herein by reference.
ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in "The Exchange Offer - Fees And Expenses" in
the Prospectus is incorporated herein by reference.
ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS.
The financial statements of Carbon Energy Corporation and its predecessor
Bonneville Fuels Corporation are contained in pages F-2 through F-28 of the
Prospectus and are incorporated herein by reference.
ITEM 10. ADDITIONAL INFORMATION.
(a) The information set forth in "The Exchange Offer - Interests Of
Certain Persons In The Exchange Offer" of the Prospectus is incorporated herein
by reference.
(b) - (c) The information set forth in "The Exchange Offer - Regulatory
Matters" of the Prospectus is incorporated herein by reference.
(e) None.
(f) Reference is hereby made to the Prospectus and the related Letter of
Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2),
respectively, and which are incorporated herein in their entirety by reference.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Prospectus dated January 18, 2000.
(a)(2) Form of Letter of Transmittal.
Page 6 of 9 pages
<PAGE>
(a)(3) Form of Notice of Guaranteed Delivery.
(a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
(a)(5) Form of Letter to Clients to be used by Brokers, Dealers,
Commercial Banks, Trust Companies and other Nominees.
(a)(6) Form of Letter to DTC Participants Regarding the Tender For
Exchange of Shares of Common Stock.
(a)(7) Joint Press Release, dated January 21, 2000, of Carbon Energy
Corporation and CEC Resources Ltd. regarding the Offer.
**(c)(1) Exchange and Financing Agreement Among Carbon Energy Corporation,
CEC Resources Ltd., and Yorktown Energy Partners III, L.P., dated
October 14, 1999 (Exhibit 10.3 to Registration Statement No. 333-
89783).
**(c)(2) Employment Agreement By and Between CEC Resources Ltd. and Patrick
R. McDonald, dated June 30, 1998 (Exhibit 10(a) to Form 8-K of CEC
Resources Ltd., dated July 7, 1998).
**(c)(3) Stock Purchase Agreement by and between McDonald Energy, LLC and
CEC Resources Ltd., dated June 24, 1998 (Exhibit 10(b) to Form 8-K
of CEC Resources Ltd., dated July 7, 1998).
**(c)(4) Restricted Stock Option Agreement, dated July 22, 1999 between CEC
Resources Ltd. and Patrick R. McDonald.
**(c)(5) Employment Agreement By and Between CEC Resources Ltd. and Kevin D.
Struzeski, dated November 16, 1998.
**(c)(6) Employee Incentive Share Option Plan (Exhibit 10(c) to
Registration Statement No. 33-86996).
*(d)(1) Opinion of Holland & Hart LLP, dated January 17, 2000, regarding
United States federal income tax consequences of the Offer (Exhibit
8.1 to Registration Statement No. 333-89783).
*(d)(2) Opinion of Bennett Jones, dated December 29, 1999, regarding
Canadian federal tax consequences of the Offer (Exhibit 8.2 to
Registration Statement No. 333-89783).
______________________
* Incorporated by reference
** Previously filed
Page 7 of 9 pages
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Date: January 19, 2000 Carbon Energy Corporation
By: /s/ Patrick R. McDonald
--------------------------
Name: Patrick R. McDonald
Title: President
Page 8 of 9 pages
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
(a)(1) Prospectus dated January 18, 2000.
(a)(2) Form of Letter of Transmittal.
(a)(3) Form of Notice of Guaranteed Delivery.
(a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
(a)(5) Form of Letter to Clients to be used by Brokers, Dealers,
Commercial Banks, Trust Companies and other Nominees.
(a)(6) Form of Letter to DTC Participants Regarding the Tender For
Exchange of Shares of Common Stock.
(a)(7) Joint Press Release, dated January 21, 2000, of Carbon Energy
Corporation and CEC Resources Ltd. regarding the Offer.
**(c)(1) Exchange and Financing Agreement Among Carbon Energy
Corporation, CEC Resources Ltd., and Yorktown Energy Partners
III, L.P., dated October 14, 1999 (Exhibit 10.3 to Registration
Statement No. 333-89783).
**(c)(2) Employment Agreement By and Between CEC Resources Ltd. and
Patrick R. McDonald, dated June 30, 1998 (Exhibit 10(a) to Form
8-K of CEC Resources Ltd., dated July 7, 1998).
**(c)(3) Stock Purchase Agreement by and between McDonald Energy, LLC and
CEC Resources Ltd., dated June 24, 1998 (Exhibit 10(b) to Form
8-K of CEC Resources Ltd., dated July 7, 1998).
**(c)(4) Restricted Stock Option Agreement, dated July 22, 1999 between
CEC Resources Ltd. and Patrick R. McDonald.
**(c)(5) Employment Agreement By and Between CEC Resources Ltd. and Kevin
D. Struzeski, dated November 16, 1998.
**(c)(6) Employee Incentive Share Option Plan (Exhibit 10(c) to
Registration Statement No. 33-86996).
*(d)(1) Opinion of Holland & Hart LLP, dated January 17, 2000 regarding
United States federal income tax consequences of the Offer
(Exhibit 8.1 to Registration Statement No. 333-89783).
*(d)(2) Opinion of Bennett Jones, dated December 29, 1999, regarding
Canadian federal tax consequences of the Offer (Exhibit 8.2 to
Registration Statement No. 333-89783).
____________________________
* Incorporated by reference
** Previously filed
Page 9 of 9 pages
<PAGE> Exhibit (a)(1)
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., New York City time on February 17,
2000, 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. ("CEC"). 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 January 18, 2000, the closing price for CEC's common shares
was $4.6875. Carbon's common stock is not currently traded on a national
securities exchange or other public trading market. Carbon has made
application to list its common stock on the American Stock Exchange and
anticipates that the listing of its common stock will be approved by the
American Stock Exchange upon completion of the exchange offer. Carbon has
reserved the trading symbol "CRB."
Because directors and executive officers of CEC holding approximately 40%
of the outstanding shares of CEC have stated their intention to accept the
exchange offer, we anticipate that CEC common stock will be delisted from the
American Stock Exchange. It also contemplated that after the exchange offer
CEC will be a subsidiary of Carbon.
You have until 5:00 p.m., New York City time, on February 17, 2000 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.
The Carbon common stock we are offering involves a high degree of risk. See
"Risk Factors" beginning on page 13 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 January 18, 2000.
<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................................................................ 13
SOURCES OF INFORMATION ABOUT CARBON AND CEC................................. 15
FORWARD-LOOKING STATEMENTS.................................................. 15
THE EXCHANGE OFFER.......................................................... 16
General.................................................................... 16
Background Of The Exchange Offer/Exchange Agreement........................ 16
CEC's Reasons For Recommending The Exchange Offer.......................... 21
Valuation of CEC and BFC................................................... 22
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
Book-Entry Transfer Procedures............................................. 27
Exchange Agent............................................................. 27
Guaranteed Delivery Procedures............................................. 28
Condition To The Exchange.................................................. 28
Termination Of The Exchange Offer.......................................... 28
Withdrawal Rights.......................................................... 29
Fees And Expenses.......................................................... 29
Regulatory Matters......................................................... 30
Accounting Treatment....................................................... 30
Possible Effects of the Exchange Offer..................................... 30
Second Step Merger......................................................... 31
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES............................... 31
Scope and Limitation Advice................................................ 31
Taxation of U.S. Shareholders.............................................. 32
Basic Treatment of Exchange Transaction for U.S. Shareholders.............. 32
Passive Foreign Investment Company Considerations for U.S. Shareholders.... 33
Taxation of Non-U.S. Shareholders.......................................... 34
Estate Tax for Non-U.S. Shareholders....................................... 35
Information Reporting and Backup Withholding............................... 35
CANADIAN FEDERAL INCOME TAX CONSEQUENCES.................................... 36
Holders Resident in Canada................................................. 36
Holders Not Resident in Canada............................................. 38
</TABLE>
i
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<TABLE>
<S> <C>
UNAUDITED PRO FORMA FINANCIAL INFORMATION.................................. 39
INFORMATION ABOUT CEC...................................................... 45
Overview of Business...................................................... 45
CEC Selected Financial Data............................................... 46
CEC Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 47
Properties................................................................ 54
Legal Proceedings......................................................... 60
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 60
Quantitative and Qualitative Disclosures about Market Risk................ 61
INFORMATION ABOUT CARBON................................................... 63
Business.................................................................. 63
Carbon Selected Financial Data............................................ 64
Our Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 64
Properties................................................................ 70
Legal Proceedings......................................................... 77
Charges in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 77
Quantitative and Qualitative Disclosures about Market Risk................ 77
OUR MANAGEMENT............................................................. 79
Executive Officers and Directors.......................................... 79
Committees of the Board of Directors...................................... 80
Executive Compensation.................................................... 81
Stock Option Grants and Exercises......................................... 81
1999 Stock Option and Restricted Stock Plans.............................. 82
Directors' Compensation................................................... 83
Indemnification and Limitation of Liability............................... 83
Employment Agreement...................................................... 84
PRINCIPAL SHAREHOLDERS OF OUR COMPANY...................................... 85
PRINCIPAL SHAREHOLDERS OF CEC.............................................. 86
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 87
DESCRIPTION OF OUR CAPITAL STOCK........................................... 88
Common Stock.............................................................. 88
Preferred Stock........................................................... 88
Certain Effects of Authorized but Unissued Stock.......................... 89
American Stock Exchange Listing........................................... 89
Transfer Agent............................................................ 89
COMPARISON OF SHAREHOLDERS' RIGHTS......................................... 90
LEGAL MATTERS.............................................................. 101
EXPERTS.................................................................... 101
WHERE YOU CAN FIND MORE INFORMATION........................................ 101
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. On October 28, 1999,
CEC assigned to Carbon the rights of CEC to acquire all outstanding shares of
BFC. Yorktown Energy Partners III, L.P. ("Yorktown") and CEC 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.
Yorktown Energy Partners III, L.P.
410 Park Avenue, Suite 1900
New York, New York 10025
(212) 515-2113
Yorktown Energy Partners III, L.P. was formed in 1997 with $253.7 million of
commmitted capital. Yorktown has invested in companies in different sectors of
the energy industry. The manager of Yorktown is Yorktown Partners LLC
("Yorktown Partners") which manages two predecessor partnerships which invested
$75 million from February 1991 through June 1997. Yorktown's equity investment
in Carbon provided the funds for our purchase of BFC. Yorktown owns almost all
of Carbon shares outstanding prior to the exchange offer and will continue to
own at least 74% of outstanding Carbon shares after the exchange offer.
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
condition of the exchange offer. We will promptly return any shares of CEC
common stock if the condition of the exchange offer are not met. The exchange
offer does not require any minimum number of shares of CEC common stock to be
tendered and does not have a maximum amount of CEC common stock that can be
tendered and accepted.
3
<PAGE>
Expiration Date
You have until 5:00 p.m., New York City time, on February 17, 2000 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. New York City 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.
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 February 17, 2000.
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 condition 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.
4
<PAGE>
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. AMEX will normally consider delisting a stock if:
. the number of shares publicly held (other than those held by officers,
directors, controlling shareholders or other family or concentrated
holdings) is less than 200,000; or
. the 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.
Either the AMEX or CEC may initiate the delisting of CEC common stock from the
AMEX. CEC intends to consider initiating this process if CEC does not meet any
one of these requirements for continued listing after the exchange offer.
Because holders of approximately 40% of the outstanding shares of CEC have
stated their intentions to accept the exchange offer, we anticipate that CEC
common stock will be delisted from the AMEX, whether initiated by the AMEX or
CEC. 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.
If we acquire control of CEC upon completion of the exchange offer, we
intend to conduct its business in substantially the same manner as currently
conducted. We expect that CEC will be able to finance its exploration and
development programs from cash generated by its operations and existing bank
financings. CEC's activities will be primarily limited to Canada. However, CEC
has acquired leases covering approximately 51,000 acres in Nebraska on which it
plans to drill an exploratory well in early 2000.
Carbon and CEC expect that Patrick R. McDonald and Kevin D. Struzeski will
continue as President and Chief Financial Officer of CEC, respectively, after
completion of the exchange offer. Carbon has not determined whether, after
completion of the exchange offer, it will decrease the size of the Board of
Directors of CEC or change any of the persons on the Board of Directors of CEC.
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. Patrick R. McDonald, the
President of Carbon, is the President of CEC and a member of CEC's Board of
Directors.
5
<PAGE>
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.
This exchange offer results from an acquisition of BFC, originally proposed
by CEC and completed by Carbon. In order to combine with BFC, obtain financing
for the combination with BFC and avoid adverse income tax consequences to CEC,
the following actions were taken:
. CEC entered into an agreement to purchase the shares of BFC from
Bonneville Pacific Corporation ("BPC");
. CEC assigned the agreement to Carbon on Carbon's agreement to make this
exchange offer and comply with other terms of an exchange and financing
agreement;
. Carbon closed an equity financing of $24,750,000 from Yorktown for the
purpose of Carbon's purchase of all BFC shares;
. Carbon completed the purchase of the BFC shares; and
. Carbon has made this exchange offer.
The overall goal of CEC and Carbon is to provide each CEC shareholder with
the opportunity to own shares in a company that consists of both BFC and CEC.
In early May, 1999, CEC learned that 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. As
a result, Yorktown Partners indicated that a partnership managed by Yorktown
Partners was willing to purchase common stock of CEC or economically equivalent
shares for a total of $24,750,000 at $5.50 per share in order to provide equity
financing for the purchase of BFC shares. Yorktown Partners also stated that it
wished to have this investment made through a United States corporation.
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 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
6
<PAGE>
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 terms and
anticipated benefits of the acquistion of BFC, the opportunity for CEC's
shareholders to participate in Carbon by accepting the exchange offer, the tax
consequences of the exchange offer, and other factors. For a more complete
description of the factors considered by CEC's Board, see "The Exchange Offer--
CEC's Reasons for Recommending the Exchange Offer."
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
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 will constitute a tax-free B reorganization, assuming that
Carbon acquires at least 80% of the outstanding stock of CEC pursuant to the
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." 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. Therefore, you are
urged to consult your tax advisor regarding the United States federal income
tax consequences unique to your situation.
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."
7
<PAGE>
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 its common stock. CEC paid
bonuses in October, 1999, to Mr. McDonald and Mr. Struzeski in recognition of
their role in the purchase of BFC and the exchange offer. 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, it is possible that we may merge CEC with a
wholly-owned Canadian subsidiary of Carbon. We will not make any decision as to
whether to do a second-step merger until after completion of the exchange
offer. Whether we decide to proceed with the merger depends on a number of
factors which cannot be ascertained at the present time, including the number
of CEC shares acquired in our offer, the relative attractiveness of the merger
compared to other possible investments, the availability of financing to fund
any cash payments required to effect the merger and the U.S. and Canadian tax
consequences of the merger. 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. CEC shareholders will be entitled to dissenters' rights in
connection with such a merger.
We do not currently intend to engage in a second step merger. If we
eventually decide to merge CEC with a wholly-owned Canadian subsidiary of
Carbon, we will not engage in such a transaction without informing, and
receiving approval from, our tax counsel, so that there will be no adverse tax
effect on shareholders who have accepted the exchange offer.
For a U.S. Shareholder (as defined in "United States Federal Income Tax
Consequences--Scope and Limitation Advice") whose CEC common stock is not
exchanged under the exchange offer and is disposed of in connection with a
second step merger, the United States federal income tax consequences would
depend on the circumstances of the second step merger including, without
limitation, the consideration received by such U.S. Shareholder in the second
step merger.
For a Canadian Holder (as defined in "Canadian Federal Tax Consequences--
Holders Resident in Canada") whose CEC common stock is not exchanged under the
exchange offer and is disposed of in connection with a second step merger, the
consequences under the Canadian Tax Act would depend on the circumstances of
the second step merger including, without limitation, the consideration
received by such Canadian Holder in the second step merger.
However, it is possible that both a U.S. Shareholder and a Canadian Holder
will have a taxable event as a result of a second step merger. For example,
this would be the case if cash were to be paid in the second step merger.
8
<PAGE>
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 64.
<TABLE>
<CAPTION>
As of or for
the
Nine Months
Ended September As of or for the Year
30, Ended December 31,
---------------- -------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue............... $18,254 $12,595 $21,092 $16,539 $15,067 $12,675 $14,956
Net income (loss)..... 933 114 (2,191) 732 4,060 172 (2,950)
Cash Flow Data:
Cash provided by (used
in) operating
activities........... $ (734) $ 2,587 $ 4,696 $ 3,193 $ 4,136 $ 3,016 $ 3,091
Cash used in investing
activities........... (4,654) (3,828) (5,948) (4,442) (1,025) (859) (1,181)
Cash provided by (used
in) financing
activities........... 2,950 1,300 3,450 1,019 (2,760) (2,090) (2,046)
Balance Sheet Data:
Total assets.......... $21,627 $18,726 $22,840 $16,054 $14,524 $13,177 $16,321
Working capital....... 1,603 688 562 1,491 1,725 628 405
Long term debt........ 8,800 3,700 5,850 2,400 1,700 4,760 6,850
Stockholder's
equity(1)............ 9,997 9,709 9,063 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.
9
<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-29 and "Information About CEC--
CEC Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 47.
<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 39 of
this prospectus.
<TABLE>
<CAPTION>
As of or for the As of or for the
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
(In thousands)
<S> <C> <C>
Operating Data:
Revenues........................... $24,332 $20,671
Net loss........................... (1,145) (13)
Balance Sheet Data:
Total assets....................... $49,089
Working capital.................... 2,648
Long term debt..................... 12,042
Stockholders' equity............... 31,493
</TABLE>
10
<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
nine months ended year ended
September 30, 1999(1) December 31, 1998(1)
---------------------- --------------------
<S> <C> <C>
Unaudited Carbon pro forma data:
Net income (loss) per common
share--basic.................... $ .00 $(.19)
Net income (loss) per common
share--diluted.................. $ .00 $(.19)
Cash dividends paid per common
share........................... -- --
Book value per common share...... $5.22 $5.16
</TABLE>
- --------
(1) Net income (loss) per common share data assumes that the acquisition of BFC
was consummated on January 1, 1998 and the exchange offer of Carbon shares
for CEC shares was consummated on December 1, 1997. The book value per
common share data assumes that the acquisition of BFC was consummated on
September 30, 1999 and the exchange offer of Carbon shares for CEC shares
was consummated on August 31, 1999.
<TABLE>
<CAPTION>
As of or for the As of or for the
nine months year ended
ended August 31, 1999 November 30, 1998
---------------------- -----------------
<S> <C> <C>
CEC historical equivalent pro forma
data (translated to US$):
Net income (loss) per common
share--basic...................... $(.08) $ .11
Net income (loss) per common
share--diluted.................... $(.08) $ .11
Cash dividends paid per common
share............................. -- --
Book value per common share........ $ 3.68 $3.71
</TABLE>
11
<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.......................................... 5.1250 4.2500
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 January 18, 2000 the reported closing sales price of CEC common stock
was $4.6875 per share.
As of January 18, 2000, there were approximately 60 holders of record of CEC
common stock and an estimated 430 or more beneficial owners who hold their
shares in brokerage accounts.
12
<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. We also face risks common to companies engaged in the
exploration, development and production of oil and gas. 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.
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. Currently we and CEC use
different accounting and computer systems. We plan to integrate these systems
but we have not established a definitive time table for integration of such
systems or determined the capital required for such integration. In addition,
there may be adverse short-term effects on our reported operating results
caused by severance payments to certain terminated employees, acquisition
costs including legal and accounting fees, difficulties with retention, hiring
and training of key employees and risks associated with unanticipated problems
or legal liabilities. 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 still likely),
and depends on whether Yorktown's contribution of cash to Carbon and CEC
shareholders' subsequent exchange of CEC common stock for Carbon common stock
constitute transfers pursuant to the same plan or arrangement for purposes of
a tax-free Section 351 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.
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.
13
<PAGE>
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 if
all of CEC's shareholders accept the exchange offer and a greater percentage
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 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.
The listing of our common stock on the AMEX is conditioned upon satisfying
certain standards, including those relating to the public distribution of our
shares. If we do not meet the standards, we would need to arrange for trading
of our common stock on another public securities market. We have not inquired
about the eligibility of our shares for inclusion on other markets because we
expect to meet the AMEX's requirements.
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.
We expect to be able to finance our development and exploration programs
for the next twelve months from cash generated by our operations and from bank
financing. We will seek and evaluate opportunities for the acquisition of oil
and gas businesses and properties. Although there are presently no agreements
or understandings for any significant acquisitions, future acquisitions may
require additional capital investment and bank financing. We cannot assure you
as to the availability or terms of any additional capital investment or bank
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 us, our ability to make acquisitions may be
curtailed, which could have a material adverse effect upon our results of
operations and financial condition.
14
<PAGE>
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. If Carbon's property management software is not Year
2000 compliant, Carbon believes that the cost of replacing such software would
not exceed $25,000.
Carbon has not reviewed all Year 2000 issues with third parties of business
importance to Carbon such as 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. If any of these
third parties have Year 2000 issues, Carbon believes that the most serious
effect on Carbon would be delays in receiving payment for oil and gas sold to
its purchasers. This could have a material adverse effect upon the results of
operations and financial condition of Carbon.
Subsequent to January 1, 2000, Carbon has not experienced any significant
operating issues relating to Year 2000 compliance and has not been informed of
any Year 2000 compliance issues occurring at third parties with which Carbon
has relationships.
Carbon may experience a net loss in 1999 and in 2000 because of an increase in
depletion expense.
Carbon uses in its financial statements the purchase method of accounting
for the purchase of BFC, which eliminates the historical net book value of
BFC's oil and gas properties and replaces it with the portion of the purchase
price allocated to those assets. With a higher net book value carried for
those assets, the depletion rate per barrel of oil equivalent ("boe")
increases from that used previously by BFC. As a result, the pro forma
consolidated income statement of Carbon for the nine months ended September
30, 1999 shows a relatively small net loss (see "Unaudited Pro Forma Financial
Information"), and Carbon may report a loss for its year ended December 31,
1999. Carbon may also experience a loss in the year 2000 because of this
increase in the depletion rate unless the amount of the increase is offset by
other factors. These other factors include, among others, the prices at which
the Company's natural gas and oil are sold, any increases in reserves
resulting from exploration and development projects of Carbon or any decrease
in general and administrative expenses as a result of the combination of BFC
and CEC.
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.
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.
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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. Based upon
actions on Carbon's application to the American Stock Exchange, we anticipate
that the listing of our common stock will be approved by the American Stock
Exchange upon completion of the exchange offer, under the trading symbol
"CRB." 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 January 20, 2000. On that
date, there were 1,521,400 shares of CEC common stock outstanding, which were
held of record by approximately 60 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
CEC furnished 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.
This exchange offer results from an acquisition of Bonneville Fuels
Corporation, originally proposed by CEC and completed by Carbon. In order to
combine with BFC, obtain financing for the acquisition of BFC and avoid
adverse income tax consequences to CEC and its shareholders, the following
actions were taken:
. CEC entered into an agreement to purchase the shares of BFC from
Bonneville Pacific Corporation ("BPC");
. CEC assigned the agreement to Carbon in return for Carbon's agreement to
make this exchange offer and comply with other terms of an exchange and
financing agreement;
. Carbon closed an equity financing of $24,750,000 from Yorktown for the
purpose of Carbon's purchase of all BFC shares;
. Carbon completed the purchase of the BFC shares; and
. Carbon has made this exchange offer.
The overall goal of CEC and Carbon is to provide each CEC shareholder with
the opportunity to own shares in a company that consists of both BFC and CEC.
The background information stated below explains the long-standing desire
of CEC to increase its size through a business combination. It also describes
negotiations for the acquisition of BFC from BPC and the separate, although
concurrent, discussions by CEC's President with Yorktown Partners for a
financing of the purchase of the BFC shares. Prior to the purchase of the BFC
shares and this exchange offer, CEC, BPC and Yorktown (including its manager,
Yorktown Partners) did not have any affiliations or relationships.
CEC's Prior Efforts for a Business Combination
CEC was acquired by the former parent of Columbus Energy Corp. ("Columbus")
in 1969 and was acquired by Columbus on July 31, 1984. In February, 1995,
Columbus spun off CEC by means of a rights offering. As stated in public
reports, since becoming a public company by this spin-off, CEC has pursued a
potential business combination. CEC publicly stated that it preferred a
company directed by Canadian-based enterpreneurial management who would manage
the surviving entity. CEC's management believed that it may be desirable for
the surviving entity, if there was sufficient Canadian ownership, to have a
dual listing by continuing a listing of common stock on the American Stock
Exchange and adding a listing on the Toronto Stock
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Exchange. In the spring and fall of 1996, CEC assembled information about
CEC's business and properties and spoke with five Canadian oil and gas
companies selected by CEC's management about a possible combination. None of
these contacts went beyond preliminary discussions for several reasons,
including lack of interest on the part of two companies and in one case a
differing view of valuations. CEC then put on hold further efforts for a
combination until CEC could assign a reasonable asset value to an oil
discovery in Canada involving at least several oil-bearing sand formations. In
the spring of 1997, CEC restarted its efforts. CEC discussed for approximately
four months in 1997 a potential business combination with a Canadian private
company whose size was approximately five times that of CEC. The management of
CEC deferred discussions with other prospective companies because of the
likelihood of reaching a possible transaction with that party. The private
company made continuous sales of shares in private placements for the
acquistions of properties; and these activities would have made difficult the
preparation of necessary filings with the Province of Alberta and the United
States Securities and Exchange Commission relating to a combination with CEC.
In the view of CEC's management, the focus of the private company on such
other acquistions, together with their effects on any necessary filings,
prevented the parties from reaching a final agreement.
In February, 1998, CEC resumed its search for a business combination and
also expanded the search to include a sale of a substantial equity interest to
one or more potential investors. In the spring of 1998, McDonald Energy, LLC
("McDonald Energy"), a limited liability company owned solely by Patrick R.
McDonald, contacted CEC about a potential investment. After negotiations, CEC
entered into a stock purchase agreement with McDonald Energy. Under this
agreement, McDonald Energy purchased from CEC 70,000 shares of newly issued
CEC common stock, representing approximately 4.5% of the outstanding common
stock of CEC, for US$5.50 per share.
In connection with the stock purchase agreement, McDonald Energy was
granted a one year option to purchase 250,000 shares of CEC common stock at
US$6.00 per share, which was not exercised by McDonald Energy. In accordance
with other provisions of the stock purchase agreement, McDonald Energy,
through a related entity called CEC Resources Holdings, Inc., acquired 73,800
shares on the open market. Mr. McDonald also entered into an employment
agreement with CEC. As required by the employment agreement, Mr. McDonald was
granted an option to purchase 78,000 shares of CEC common stock at an exercise
price of $5.50 per share.
In July, 1998, after acquiring CEC shares, Mr. McDonald became President,
Chief Executive Officer and a member of the Board of Directors of CEC. Under
the stock purchase agreement, he was granted the right to nominate a Canadian
resident as a director to stand for election at the 1998 annual shareholders
meeting. Loyola Keough was that nominee and was elected as a director at the
1998 annual meeting of CEC. Pursuant to the stock purchase agreement, Harry A.
Trueblood, Jr. resigned as President and Chief Executive Officer of CEC in
July 1998. Mr. Trueblood continued to serve as Chairman of CEC until the 1998
annual meeting, at which time Mr. Trueblood stood for a re-election as a
director, but not as Chairman.
Mr. McDonald was previously Chairman, President, founder and a substantial
shareholder of Interenergy Corporation, which had operated profitably for ten
years and was sold in 1997. One of the significant investors in Interenergy
Corporation was a partnership managed by Yorktown Partners.
With Mr. McDonald as its President, CEC adopted a strategy of increasing
its natural gas and oil reserves through acquisitions and exploration and
development. 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. During 1998
and 1999, CEC management also reviewed and evaluated oil and gas acquisition
opportunities in the Rocky Mountain region of the United States.
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In 1998 and early 1999, CEC, through visits by Mr. McDonald as its
President, approached institutional investors about providing capital to CEC.
CEC is a small oil and gas, exploration and development company with most of
its assets in Canada and all of its operations in Canada. CEC has a
significant portion of its shares owned by its Board of Directors, a
relatively small public float of shares and inactive trading in its common
stock on the American Stock Exchange. Potential institutional investors in the
United States and Canada expressed to Mr. McDonald disinterest in making a
capital investment in CEC because of one or more of these attributes. For
example, United States investors expressed concern about the size of CEC and
the location of its properties in Canada; Canadian investors expressed concern
that CEC was small, that trading of its public stock was in the United States,
and that most holders were United States persons. Potential investors were
also concerned about a lack of liquidity in the shares.
Purchase of BFC Shares
In early May, 1999, an employee of CEC contacted an employee of BFC for
advice about an unrelated matter and learned that BPC planned to sell the
stock of its Denver-based 100% owned subsidiary, BFC. The CEC employee
provided this information to Mr. McDonald, and Mr. McDonald contacted an
investment banking firm which represented BPC and was conducting the sale of
BFC. As part of the process established by BPC, 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 proposals and that BPC would conduct a sale process
designed to result in a transaction with the most preferred buyer. BPC also
informed CEC that parties who would participate in the next phase of the sales
process would be notified between May 19 and May 21, 1999, that the potential
bidders could participate in due diligence presentations and a review of
information in a data room from May 26 to June 9, 1999, and that final binding
bids were due on June 21, 1999.
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.
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 proposal 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.
BPC informed CEC in early July that BPC had decided 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 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
CEC 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
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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 and BPC signed the BFC stock purchase agreement.
CEC issued a press release on August 12, 1999 announcing the execution of that
agreement. The press release also described the terms of the financing and
overall structure involved in the purchase of the BFC shares.
Yorktown Financing
CEC realized prior to making any proposed bid that it needed to obtain
external financing for its proposed purchase of BFC. Because of Mr. McDonald's
past dealings with Yorktown Partners, Mr. McDonald apprised Yorktown Partners
of CEC's interest in BFC at the time of CEC's receiving initial information
about BFC, and he requested that Yorktown Partners consider providing
financing for the transaction. Prior to contacting Yorktown, Mr. McDonald
discussed the proposed acquisition of BFC with Harry A. Trueblood, Jr., a
director of CEC and a significant shareholder of CEC. At about the same time
as contacting Yorktown Partners, Mr. McDonald also discussed with several
directors of CEC the interest of CEC in acquiring BFC and seeking financing
from Yorktown Partners. Mr. McDonald did not contact the entire Board prior to
talking with Yorktown because he believed that a viable possibility of
financing was necessary before discussing the BFC transaction with the entire
Board.
All discussions between Yorktown and CEC were conducted by Mr. McDonald
with managers of Yorktown Partners. Mr. McDonald informed Yorktown Partners of
significant steps being taken by CEC to acquire BFC. In July, 1999 and early
August, 1999, Yorktown Partners indicated that a partnership managed by
Yorktown Partners was willing to purchase common stock of CEC or economically
equivalent shares for a total of $24,750,000 at $5.50 per share in order to
provide equity financing for the purchase of BFC shares.
Yorktown Partners also stated that it wished to have this investment made
through a United States corporation. In late July and August, 1999, advisors
of CEC reviewed possible transactions for CEC's acquiring BFC through a United
States corporation. They concluded that a merger of CEC into a United States
corporation would have materially adverse Canadian income tax consequences for
CEC and that the exchange offer now being made was the best form for the
transaction. The formation of a new Colorado corporation and the assignment of
the BFC stock purchase agreement to the new corporation would allow the
investment by Yorktown in a United States corporation, Carbon; the exchange
offer would permit CEC shareholders to become shareholders of Carbon; and the
exchange offer should be tax-free for shareholders of CEC, except for a small
number of shareholders who reside in Canada.
CEC informed BPC that its financing may require that the purchase of BFC
stock be made by a United States corporation. As a result, the parties
provided in the BFC stock purchase agreement for the possible assignment of
the stock purchase agreement to an entity controlled by CEC or a party
providing financing for the purchase of the BFC shares.
CEC did not seriously consider financing sources other than Yorktown
Partners for the BFC purchase. Mr. McDonald and the Board of Directors had
confidence in the ability and willingness of Yorktown to provide the
financing. Yorktown Partners indicated that it was receptive to the idea of a
Rocky Mountain based oil and gas exploration and development company, with
both Canadian and United States operations. Mr. McDonald and the Board of
Directors believed that having Yorktown Partners as the financing party had a
number of advantages, including: Yorktown's willingness to provide the
financing in the form of common stock; Yorktown's long-term view of
investments in businesses like CEC and BFC; Yorktown Partners' focus on energy
companies, with all investments made by entities controlled by Yorktown
Partners in these types of companies; Yorktown's track record of successes in
these investments; Yorktown's successful dealings in the past with Mr.
McDonald; and intangible benefits from association with Yorktown Partners.
These intangible benefits include enhancing the reputation of Carbon and CEC
in the oil and gas industry, because of Yorktown Partners' past successes in
investing in energy companies, and thereby improving Carbon's access to
opportunities to acquire oil and gas properties.
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Board Actions
The Board of CEC was advised of actions taken by CEC in discussing and
negotiating the acquisition of BFC and requesting and obtaining financing from
Yorktown Partners.
On July 22, 1999, the Board of Directors of CEC met at a regularly
scheduled Board meeting. Among items discussed at the meeting, Mr. McDonald
explained the then current status of the proposed purchase of BFC stock,
including the history of the BFC transaction. The Board reviewed the status of
a proposed financing of the BFC purchase by Yorktown Partners, including
Yorktown Partners' general willingness to go forward with the financing on the
basis of acquiring common stock at $5.50 per share and Yorktown Partners'
desire for a United States corporation in which to make the equity financing.
The Board discussed the nature of BFC's oil and gas properties, including the
location of most of BFC's properties in the Rocky Mountain region where the
management of CEC has experience and which is geologically similar to
properties in the southern part of Alberta, Canada, the fact that BFC has
principally natural gas properties as is the case with CEC, BFC's undeveloped
acres where additional reserves may be discovered, and opportunities for
recompletion or workover of some existing wells of BFC. CEC's Board directed
Mr. McDonald to continue discussions with BPC and Yorktown Partners and to
report back to the Board as to the results of those discussions.
On August 11, 1999, CEC conducted a special Board of Directors meeting
during which the BFC transaction and the Yorktown financing were discussed and
the purchase of BFC was approved. The Board considered the factors described
in "--CEC's Reasons For Recommending The Exchange Offer."
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 the Board's view of
valuation methods generally used in the industry.
Exchange Agreement
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.
BFC Closing
On October 28, 1999, CEC assigned the BFC stock purchase agreement to
Carbon. On October 29, 1999, Carbon completed the purchase of BFC for
$23,581,000 in cash.
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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 and accounting advisors, and considered the
following factors:
. The acquisition of BFC and the exchange offer would result in Carbon
being led by the existing management team which has a strong track
record in the oil and gas industry. The Board of Directors of CEC
believes that the management is a significant component for the future
success of Carbon.
. 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. CEC is currently a small independent oil and
gas company, with operations in Canada, United States shareholders and
limited access to outside capital.
. 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 business combination, which
was conducted prior to Patrick R. McDonald's becoming a significant
shareholder, and resulted in no offers.
. Valuation methods applicable to CEC and BFC, including:
(1)The value of the discounted future net revenues of the estimated oil and
gas reserves after deduction of royalties, production taxes,
operating expenses and capital costs, but before general and
administrative expenses;
(2) values based on multiples of EBITDA (earnings before interest, taxes
and depreciation, depletion and amortization); and
(3) public stock market values for oil and gas exploration and
production companies.
. Current financial market conditions, historical market prices since
1996, volatility and trading information with respect to CEC's common
stock. CEC's stock has been inactively traded since CEC became a
publicly-held corporation, resulting in illiquid shares. Securities
analysts have not followed the common stock of CEC.
. 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.
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.
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Valuation of CEC and BFC
Before approving the purchase of BFC and the exchange offer, the Board of
Directors of CEC reviewed valuations of CEC and BFC. The Board decided not to
engage an investment banker for a fairness opinion regarding the equity
financing proposed by Yorktown Partners because of the expense and because of
the experience of CEC's directors in the valuation of oil and gas properties,
the valuation of oil and gas exploration and production companies and the
buying and selling of oil and gas companies. The Board of Directors considered
three valuation methods in regard to CEC and BFC.
The first method concerned the value of discounted future net revenues of
the estimated oil and gas reserves after deduction of royalties, production
taxes, operating expenses and capital costs, but before general and
administrative expenses. The Board knew the discounted future net revenue of
CEC's estimated reserves as publicly reported and as set forth in "Information
About CEC--Properties" as of November 30, 1998. The Board also knew an
estimate of CEC's discounted future net revenues as of November 30, 1998, and
from significant acquisitions after that date, prepared for internal use by an
independent engineering firm using expected future oil and gas prices and
expected operating expenses and capital costs. The Board discussed the
discounted future net revenue of BFC's estimated reserves, including the
amount publicly reported and set forth in "Information About Carbon--
Properties" as of December 31, 1998 and the estimate by CEC's management of
BFC's future net revenues using expected future oil and gas prices, operating
expenses and capital costs and including estimates of reserves which had been
established by BFC through exploration and production activities conducted in
the first two quarters of 1999.
Second, CEC's Board of Directors was aware of multiples of EBITDA as
another method commonly used in valuing oil and gas businesses, but did not
discuss multiples used in specific comparable transactions. Third, in regard
to public market prices, the price of $5.50 per share offered by Yorktown was
a premium of 26% over the market price for CEC common stock on August 11,
1999, the date prior to announcing the proposed BFC acquisition. Further, the
Board recognized that Yorktown's investment in Carbon or CEC had other
benefits, as described above under "Background of the Exchange Offer/Exchange
Agreement."
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.
In October, 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
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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
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.
In October, 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
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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.
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.
Messrs. McDonald and Struzeski negotiated with Yorktown for their
employment agreements with Carbon and for their stock options and restricted
stock grants from Carbon, and each of these items was approved by Carbon's
full Board. The discussions with Yorktown on these items were held after CEC
had entered into the agreement with BFC for the purchase of BFC shares and
after Yorktown had stated the general terms for its investing in Carbon common
stock. The employment agreements are similar to agreements existing with CEC,
except that Mr. McDonald receives a base annual salary of $200,000 from Carbon
(compared to $120,000 which he has received from CEC) and Mr. Struzeski
receives a base salary of $100,000 from Carbon (compared to $75,000 from CEC).
Messrs. McDonald and Struzeski also participate in a group life insurance
program and a disability program for all employees of Carbon and BFC, which
were not available from CEC.
In recognition of Mr. McDonald's role in the purchase of BFC by Carbon and
the exchange offer, the Board of Directors of CEC paid in October, 1999 to Mr.
McDonald a bonus of $200,000 Canadian (approximately $134,000 U.S.).
Similarly, Mr. Struzeski was paid a bonus of $30,000 Canadian (approximately
$20,000 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, a person who
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passed away and was replaced by Cortlandt S. Dietler, Bryan H. Lawrence, Peter
A. Leidel and Patrick R. McDonald. Upon completion of the exchange offer, if
Harry A. Trueblood, Jr. 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 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., New York City time, on February 17, 2000 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. New York City 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. Alternatively, you may comply with the procedures for book-entry
transfer or guaranteed delivery described below.
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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 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
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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. In
the case of shares delivered by book-entry transfer within Depository Trust
Company ("DTC"), CEC shares which are properly tendered will be credited to
the account of the exchange agent in DTC.
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.
Book-Entry Transfer Procedures
The exchange agent will establish a new account or utilize an existing
account with respect to the CEC common stock at DTC promptly after the date of
this prospectus, and any financial institution that is a participant in DTC's
system may make book-entry delivery of the CEC common stock by causing DTC to
transfer these outstanding shares into the exchange agent's account in
accordance with DTC's procedures for transfer. However, the exchange for the
CEC common stock so tendered will only be made after timely confirmation of
the book-entry transfer of the shares into the exchange agent's account, and
timely receipt of an agent's message and all other documents required by the
letter of transmittal. The term "agent's message" means a message transmitted
by DTC to, and received by, the exchange agent and forming a part of a book-
entry confirmation, that states that DTC has received an express
acknowledgement from a participant in DTC tendering outstanding securities
that are the subject of the book-entry confirmation stating:
.the number of shares of CEC common stock that have been tendered by such
participant,
.that such participant has received and agrees to be bound by the terms of
the letter of transmittal, and
.that we may enforce such agreement against the participant.
Although delivery of outstanding securities may be effected through book-
entry transfer into the exchange agent's account at DTC, the letter of
transmittal, properly completed and validly executed, with any required
signature guarantees, or an agent's message in lieu of the letter of
transmittal, and any other required documents, must be delivered to and
received by the exchange agent at one of its addresses listed below before
5:00 p.m. New York City time, on the expiration date or the guaranteed
delivery procedure described below must be properly utilized.
Delivery of documents to DTC in accordance with this procedure does not
constitute delivery to the exchange agent.
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:
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By Registered or
Certified Mail:
By Hand Delivery:
By Overnight Delivery:
Harris Trust and Savings Harris Trust and Savings Harris Trust and Savings
Bank Bank Bank
Wall Street Station Receive Window Receive Window
P.O. Box 1023 Wall Street Plaza Wall Street Plaza
New York, NY 10268-1023 88 Pine Street, 19th 88 Pine Street, 19th
Floor Floor
New York, NY 10005 New York, NY 10005
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 or who cannot complete the procedure for book-
entry transfer on a timely basis, 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 or confirmation
of book-entry transfer of the CEC common stock to be tendered into the
exchange agent's account at DTC, 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 or confirmation of book-entry transfer of the
CEC common stock to be tendered into the exchange agent's account at
DTC, and all other necessary documents are received by the exchange
agent within three business days after the expiration date.
Condition 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 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.
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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.
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
$300,000. 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
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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 will be, and the purchase of BFC by Carbon has been, 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 preliminary allocation of the purchase prices to the
assets of BFC and CEC does not result in any excess of the purchase prices
over the fair market value of the assets acquired. 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.
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
Either the AMEX or CEC may initiate the delisting process if any one of the
above-listed conditions exists after completion of the exchange offer. In
applying the criteria for delisting to CEC, CEC will have less than 200,000
shares publicly held if holders with 87% of the outstanding common stock of
CEC accept the exchange offer, and CEC will have less than 300 public holders
if approximately 30% of the estimated number of public shareholders accept the
exchange offer. We currently believe that CEC common stock will likely be
delisted from the AMEX after completion of the exchange offer.
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,
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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.
Upon completion of the exchange offer, if CEC becomes a majority-owned
subsidiary, Carbon will have the ability to elect all directors of CEC and may
decrease the size of the Board of Directors as well as change the persons who
are directors of CEC. However, Carbon has not made any decision in regard to
the composition of the Board of Directors of CEC after the exchange offer.
Second Step Merger
After the exchange, it is possible that 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 currently intend to engage in a second step merger. If we
eventually decide to merge CEC with a wholly-owned Canadian subsidiary of
Carbon, we will not engage in such a transaction without informing, and
receiving approval from, our tax counsel, so that there will be no adverse tax
effects on persons who accept the exchange offer.
For a U.S. Shareholder (as defined in "United States Federal Income Tax
Consequences--Scope and Limitation Advice") whose CEC common stock is not
exchanged under the exchange offer and is disposed of in connection with a
second step merger, the United States federal income tax consequences would
depend on the circumstances of the second step merger including, without
limitation, the consideration received by such U.S. Shareholder in the second
step merger.
For a Canadian Holder (as defined in "Canadian Federal Tax Consequences--
Holders Resident in Canada") whose CEC common stock is not exchanged under the
exchange offer and is disposed of in connection with a second step merger, the
consequences under the Canadian Tax Act would depend on the circumstances of
the second step merger including, without limitation, the consideration
received by such Canadian Holder in the second step merger.
However, it is possible that both a U.S. Shareholder and a Canadian Holder
will have a taxable event as a result of a second step merger. For example,
this would be the case if cash were to be paid in the second step merger.
CEC's shareholders will be entitled to dissenters' rights in connection
with any such merger.
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
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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 January 17, 2000, 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.
This discussion and the opinion of Holland & Hart LLP are subject to the
accuracy of certain factual representations made by Carbon and CEC to Holland
& Hart LLP.
The following does not address all aspects of United States federal income
taxation that may be relevant to you in light of your individual circumstances
and tax situation. Therefore, you are urged to consult your tax advisor
regarding the United States federal income tax consequences unique to your
situation.
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" 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.
Basic Treatment of Exchange Transaction for U.S. Shareholders
The following represents Holland & Hart LLP's opinion regarding the United
States federal income tax consequences of the exchange of CEC common shares
for Carbon common stock.
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 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 will
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
32
<PAGE>
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.
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. If Section 351 applies to the exchange of CEC common
stock for Carbon common stock, the exchange will qualify for tax-free
treatment. 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, it is the opinion of Holland & Hart LLP that the following will
be the material United States federal income tax consequences of the exchange
of CEC common shares for Carbon common shares:
. You will 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 will be the same as
the basis of the CEC common shares constructively surrendered in
exchange therefor; and
. The holding period for the shares of Carbon common stock will include
the holding period of CEC common shares surrendered in exchange
therefor.
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.
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
33
<PAGE>
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;
. 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
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<PAGE>
. 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).
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
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<PAGE>
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 are 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 discussion:
(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 discussion 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 discussion 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 following does not address all aspects of Canadian federal income
taxation that may be relevant to you in light of your individual circumstances
and tax situation. 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 discussion 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").
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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.
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
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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 discussion 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").
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
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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 discussion
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 September 30,
1999 has been prepared assuming that the acquisition of BFC was consummated on
September 30, 1999 and the exchange offer of Carbon shares for CEC shares was
consummated on August 31, 1999. The Carbon Unaudited Pro Forma Statements of
Income for the twelve months ended December 31, 1998 and for the nine months
ended September 30, 1999 have 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 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 August 31, 1999 and statements of income
for the year ended November 30, 1998 and the nine months ended August 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 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 CEC exchange will differ from the
preliminary estimates because the final allocation will be based on the level
of acceptance of the exchange offer and the estimated fair values of the CEC
assets and liabilities assumed upon the consummation of the exchange offer.
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.
39
<PAGE>
CARBON ENERGY CORPORATION
PRO FORMA BALANCE SHEET
September 30, 1999
(in US dollars, unless otherwise indicated, in thousands)
<TABLE>
<CAPTION>
Carbon
Yorktown Acquisition Exchange
BFC CDN $ CEC CEC Investment of BFC Offer Carbon
09/30/99 08/31/99 (a) 08/31/99 (b) Adjustments Adjustments Adjustments Pro Forma
-------- ------------ ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash.................. $ 304 $ -- $ -- $24,805 (c) $(23,581)(d) $ -- $ 1,528
Accounts receivable... 2,213 973 650 -- -- -- 2,863
Amount due from
broker............... 1,761 -- -- -- -- -- 1,761
Prepaid expenses and
other................ 155 -- -- -- -- -- 155
------- ------- ------- ------- -------- ------ -------
Total current
assets............. 4,433 973 650 24,805 (23,581) -- 6,307
Property and equipment:
Oil and gas
properties........... 37,115 21,358 14,280 -- (6,833)(d) (4,327)(e)(f)(g) 40,235
Liquids extraction
plant................ -- 1,477 987 -- -- (592)(e) 395
Compression/gathering. -- 665 445 -- -- (125)(e) 320
Furniture, equipment
and other............ 499 200 134 -- (273)(d) (44)(e) 316
------- ------- ------- ------- -------- ------ -------
37,614 23,700 15,846 -- (7,106) (5,088) 41,266
DD&A.................. (20,721) (10,556) (7,057) -- 20,721 (d) 7,057 (e) --
------- ------- ------- ------- -------- ------ -------
Property and
equipment, net..... 16,893 13,144 8,789 -- 13,615 1,969 41,266
Other assets:
Deposits and other.... 270 1,864 1,246 -- -- -- 1,516
Deferred loan costs,
net.................. 31 -- -- -- (31)(d) -- --
------- ------- ------- ------- -------- ------ -------
Total other assets.. 301 1,864 1,246 -- (31) -- 1,516
------- ------- ------- ------- -------- ------ -------
Total assets............ $21,627 $15,981 $10,685 $24,805 $ (9,997) $1,969 $49,089
======= ======= ======= ======= ======== ====== =======
Current liabilities:
Accounts payable and
accrued expenses..... $ 1,838 $ 284 $ 190 $ -- $ -- $ 300 (g) $ 2,328
Accrued production
taxes payable........ 415 -- -- -- -- -- 415
Undistributed revenue. 577 507 339 -- -- -- 916
------- ------- ------- ------- -------- ------ -------
Total current
liabilities........ 2,830 791 529 -- -- 300 3,659
Long-term debt.......... 8,800 4,850 3,242 -- -- -- 12,042
Future site restoration
costs.................. -- 221 148 -- -- -- 148
Deferred income taxes... -- 1,739 1,163 -- -- 584 (f) 1,747
Stockholders' equity:
Share capital......... -- 1,512 1,011 -- -- (1,011)(e) --
Paid in capital....... 3,475 24,805 (c) (3,475)(d) 6,688 (e) 31,493
Retained earnings..... 6,522 6,868 4,592 -- (6,522)(d) (4,592)(e) --
------- ------- ------- ------- -------- ------ -------
Total stockholders'
equity............. 9,997 8,380 5,603 24,805 (9,997) 1,085 31,493
------- ------- ------- ------- -------- ------ -------
Total liabilities and
stockholders' equity... $21,627 $15,981 $10,685 $24,805 $ (9,997) $1,969 $49,089
======= ======= ======= ======= ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
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CARBON ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
Nine Months Ended September 30, 1999
(in US dollars, unless otherwise indicated, in thousands)
<TABLE>
<CAPTION>
CEC
BFC CDN $ CEC CEC Acquisition Acquisition Carbon
09/30/99 08/31/99(a) 08/31/99(b) 08/31/99(j) Adjustments Pro Forma
-------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales..... $ 6,730 $3,386 $2,254 $112 $ -- $ 9,096
Field services........ -- 75 50 -- -- 50
Gas marketing and
transportation....... 11,059 -- -- -- -- 11,059
Electricity sales..... -- -- -- -- -- 0
Other................. 465 2 1 -- -- 466
------- ------ ------ ---- ------ -------
18,254 3,463 2,305 112 -- 20,671
Expenses:
Oil and gas production
costs................ 2,451 585 389 43 -- 2,883
Field services........ -- 65 43 -- -- 43
Gas marketing and
transportation....... 11,009 -- -- -- -- 11,009
Costs of electricity.. -- -- -- -- -- --
DD&A.................. 1,789 1,597 1,063 72 1,545 (h) 4,469
Exploration expense... 681 -- -- -- (681)(i) --
Impairment expense.... 60 -- -- -- (60)(i) --
General and
administrative....... 985 1,522 1,013 -- -- 1,998
Interest expense...... 346 136 91 27 -- 464
------- ------ ------ ---- ------ -------
17,321 3,905 2,599 142 804 20,866
Income (loss) before
taxes.................. 933 (442) (294) (30) (804) (195)
Tax expense:
Current............... -- 2 1 -- -- 1
Deferred.............. -- (256) (170) (17) 4 (183)
------- ------ ------ ---- ------ -------
-- (254) (169) (17) 4 (182)
------- ------ ------ ---- ------ -------
Net income (loss)....... $ 933 $ (188) $ (125) $(13) $ (808) $ (13)
======= ====== ====== ==== ====== =======
Earnings per share:
Basic................. $(0.12) $(0.08) $ 0.08 $ 0.00
Fully diluted......... (0.12) (0.08) 0.08 0.00
Average number of common
shares outstanding:
Basic................. 1,529 1,529 4,510 6,039
Fully diluted......... 1,529 1,529 4,510 6,039
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
CARBON ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED INCOME SHEET
Year Ended December 31, 1998
(in US dollars, unless otherwise indicated, in thousands)
<TABLE>
<CAPTION>
CEC
BFC CEC Acquisitions
Year Ended CDN $ CEC Year Ended Year Ended Acquisition Carbon
12/31/98 11/30/99(a) 11/30/98(b) 11/30/98(j) Adjustments Pro Forma
---------- ----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales..... $ 6,758 2,958 $2,007 $1,033 $ -- $ 9,798
Field services........ -- 246 167 -- -- 167
Gas marketing and
transportation....... 12,610 -- -- -- -- 12,610
Electricity sales..... 1,331 -- -- -- -- 1,331
Other................. 393 49 33 -- -- 426
------- ----- ------ ------ ------- -------
21,092 3,253 2,207 1,033 -- 24,332
Expenses:
Oil and gas production
costs................ 3,254 710 482 433 -- 4,169
Field services........ -- 148 100 -- -- 100
Gas marketing and
transportation....... 12,674 -- -- -- -- 12,674
Costs of electricity.. 1,137 -- -- -- -- 1,137
DD&A.................. 2,086 1,087 737 602 1,370 (h) 4,795
Exploration expense... 556 -- -- -- (556)(i) --
Impairment expense.... 1,858 -- -- -- (1,858)(i) --
General and
administrative....... 1,655 988 671 -- -- 2,326
Interest expense...... 238 -- -- 212 -- 450
------- ----- ------ ------ ------- -------
23,458 2,933 1,990 1,247 (1,044) 25,651
Income (loss) before
taxes.................. (2,366) 320 217 (214) 1,044 (1,319)
Tax expense (benefit):
Current............... (225) 19 13 (13) -- (225)
Deferred.............. 50 61 41 (40) -- 51
------- ----- ------ ------ ------- -------
(175) 80 54 (53) -- (174)
------- ----- ------ ------ ------- -------
Net income (loss)....... $(2,191) 240 $ 163 $ (161) $ 1,044 $(1,145)
======= ===== ====== ====== ======= =======
Earnings per share:
Basic................. $0.16 $ 0.11 $(0.30) $ (0.19)
Fully diluted......... 0.16 0.11 (0.30) (0.19)
Average number of common
shares outstanding:
Basic................. 1,545 1,545 4,510 6,055
Fully diluted......... 1,549 1,549 4,506 6,055
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(a) CEC historical financial statements, prepared in accordance with
Canadian generally accepted accounting principles, stated in Canadian dollars.
(b) CEC's historical financial statements have been translated from
Canadian dollars to U.S. dollars as follows:
CEC's assets and liabilities were translated to U.S. dollars using the
exchange rate in effect at August 31, 1999 of $1 Canadian to $.6685 U.S.
CEC's revenues and expenses for the year ended November 30, 1998 and the
nine months ended August 31, 1999 were translated to U.S. dollars using the
weighted average exchange rate for the period of $1 Canadian to $.6785 U.S.
and $1 Canadian to $.6657 U.S., respectively.
(c) To reflect the purchase of Carbon stock by Yorktown for $24,750,000 and
one Yorktown Board member for $55,000.
(d) To eliminate the historical book value of BFC's assets and liabilities
and to reflect the purchase of BFC stock by Carbon. The following table recaps
the net pro forma adjustments to eliminate the historical book value of BFC's
assets and liabilities and the allocation of the purchase price paid for BFC
to the assets received and the liabilities assumed.
<TABLE>
<CAPTION>
Elimination Purchase Net Pro
of BFC Purchase Price Forma
Historical Price Allocation Adjustment
----------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Cash paid N/A $23,581 -- $(23,581)
Current assets....................... (4,433) -- 4,433 --
Oil & gas properties................. (37,115) -- 30,282 (6,833)
FF&E................................. (499) -- 226 (273)
DD&A................................. 20,721 -- -- 20,721
Other assets......................... (301) -- 270 (31)
-------- ------- ------- --------
$(21,627) $23,581 $35,211 $ (9,997)
======== ======= ======= ========
Current liabilities.................. $ (2,830) $ 2,830 -- -
Long-term debt....................... (8,800) 8,800 -- --
Paid-in capital...................... (3,475) -- -- (3,475)
Retained earnings.................... (6,522) -- -- (6,522)
-------- ------- ------- --------
$(21,627) $11,630 -- $ (9,997)
======== ======= ======= ========
The following table reflects the calculation of the purchase price for BFC:
Current liabilities assumed.......... $ 2,830
Long-term debt assumed............... 8,800
Cash paid............................ 23,581
--------
$ 35,211
========
</TABLE>
The allocation of purchase price to the assets received was based on the
estimated relative fair value of each asset. Carbon estimated the fair value
of BFC's current assets, furniture, equipment and other to be equivalent to
BFC's historical net book value for such assets. Carbon estimated the fair
value of BFC's oil and gas properties to be greater than the $30,282,000
allocated to oil and gas properties. However, given the inexact nature of oil
and gas reserve estimation, Carbon determined it would be appropriate to
initially allocate the purchase price to BFC's current assets, furniture,
equipment and other assets and limit the amount allocated to oil and gas
properties to the amount of purchase price remaining after such allocation.
43
<PAGE>
(e) To eliminate the historical book value of CEC's assets and liabilities
and to reflect the allocation of the exchange offer value paid by Carbon for
the stock of CEC. The following table recaps the net pro forma adjustments to
eliminate the historical book value of CEC's assets and liabilities and the
allocation of the exchange offer value paid by Carbon to the assets received
and the liabilities assumed.
<TABLE>
<CAPTION>
Elimination Exchange Exchange Net Pro
of CEC Offer Offer Forma
Historical Valuation Allocation Adjustment
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Cash paid N/A -- -- --
Current assets...................... (650) -- 650 0
Oil & gas properties................ (14,280) -- 9,069 (5,211)
Liquids extraction plant............ (987) -- 395 (592)
Compression/gathering............... (445) -- 320 (125)
FF&E................................ (134) -- 90 (44)
DD&A................................ 7,057 -- -- 7,057
Other assets........................ (1,246) -- 1,246 0
-------- ------- ------- -------
$(10,685) -- $11,770 $ 1,085
======== ======= ======= =======
Current liabilities................. $ (529) $ 529 -- --
Long-term debt...................... (3,242) 3,242 -- --
Future site restoration costs....... (148) 148 -- --
Deferred income taxes............... (1,163) 1,163 -- --
Share capital....................... (1,011) -- -- (1,011)
Paid in capital..................... -- 6,688 -- 6,688
Retained earnings................... (4,592) -- -- (4,592)
-------- ------- ------- -------
$(10,685) $11,770 -- $ 1,085
======== ======= ======= =======
</TABLE>
The following table reflects the calculation of the exchange offer value
for CEC:
<TABLE>
<S> <C>
Current liabilities assumed............................................ $ 529
Long-term debt assumed................................................. 3,242
Future site restoration costs.......................................... 148
Deferred income taxes.................................................. 1,163
Equity value........................................................... 6,688
-------
$11,770
=======
</TABLE>
The exchange offer value was calculated based on 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. Those prices were
$4.250, $4.125, $4.375, $4.250, $4.625 and $4.75, which average $4.396.
Multiplying this average price by 1,521,400 (the number of CEC shares
outstanding at August 31, 1999), produces an equity value of approximately
$6,688,000 for CEC. The allocation of exchange offer value to the assets
received was based on the estimated relative fair value of each asset. Carbon
estimated the fair value of CEC's current assets, furniture, equipment,
liquids extraction plant, compression/gathering facilities and other assets to
be equivalent to CEC's historical net book value for such assets. Carbon
estimated the fair value of CEC's oil and gas properties to be greater than
the $9,069,000 allocated to the oil and gas properties. However, given the
inexact nature of oil and gas reserve estimation, Carbon determined it would
be appropriate to initially allocate the purchase price to CEC's current
assets, furniture, equipment, liquids extraction plant, compression/gathering
facilities and other and limit the amount allocated to oil and gas properties
to the amount of exchange offer value remaining after such allocation.
(f) Adjustment to reflect an increase in oil and gas properties and
deferred taxes of $584,000 resulting from the exchange of CEC shares for
Carbon shares. The allocation of exchange offer value to oil and gas
properties resulted in a difference between book basis and tax basis of the
CEC assets of approximately $1,085,000. The
44
<PAGE>
formula used to recognize deferred taxes is as follows: [(1/Inverse of the tax
rate)-1]Xdifference in book and tax basis. Using CEC's historical effective
tax rate of 35% the increase in deferred taxes was calculated as follows:
[(1/.65)-1)]X1,085,000=584,000.
(g) Adjustment to reflect the estimated legal, accounting and printing
costs incurred in the exchange offer. Pro forma oil and gas properties were
increased by $300,000 to reflect costs of the exchange offer.
(h) 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 August 31, 1999 oil and gas
prices for CEC and September 30, 1999 prices for BFC. Accordingly, the
accompanying pro forma financial statements do not reflect any ceiling test
write down for the CEC and BFC properties. Depreciation on the extraction
plant and compression/gathering equipment are calculated using the straight-
line method with an estimated useful life of 15 years while furniture,
equipment, and other assets are depreciated on a straight line basis with an
estimated useful life of 5 years.
(i) 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. 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 August 31, 1999 oil and gas prices for CEC and September 30,
1999 prices for BFC. Accordingly, the accompanying pro forma financial
statements do not reflect any ceiling test write down for the CEC and BFC
properties.
(j) 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.
(k) An estimated bonus of $200,000 was paid to certain Carbon employees in
the fourth quarter of 1999 related in large part to the acquisition of BFC and
the exchange offer for CEC. These estimated expenditures are not reflected in
the pro forma financial statements.
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
45
<PAGE>
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. CEC has previously evaluated acquisitions and merger
opportunities in Canada and the United States. If the exchange offer is
completed with Carbon owning more than 50% of the shares of CEC, Carbon
contemplates that activities of CEC will primarily be in Canada.
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. See pages F-43 and F-55 for a
discussion regarding comparisons between U.S. and Canadian Generally Accepted
Accounting Principles. For purposes of the table below, there were no
differences in presentation between Canadian generally accepted accounting
principles and U.S. generally accepted accounting principles. Currency amounts
are in Canadian dollars unless otherwise indicated. 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(4) 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........ 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.
46
<PAGE>
(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.
(4) Between December 1998 and April 1999 CEC purchased producing oil and gas
properties and natural gas gathering and compression facilities in
Alberta, Canada. As such, revenues and expenses presented in 1999 may not
be comparable to those recorded in previous periods. See "CEC Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
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 $268,000 in the first nine months of 1998. The decrease was
primarily due to increased general and administrative expenses, increased
depletion, depreciation and amortization expenses partially offset by higher
oil, natural gas and plant liquid revenues.
Oil and Gas Revenues. The following table shows comparative revenue, sales
volume, average prices and percentage changes between periods, for natural
gas, oil, and plant liquids for the first nine months of 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
--------------------
%
1999 1998 Change
------ ------ ------
<S> <C> <C> <C>
Natural gas revenue M$............................... 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.
47
<PAGE>
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.
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, an 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
48
<PAGE>
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.
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.
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
49
<PAGE>
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 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.
50
<PAGE>
CEC completed 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, operators
of its oil and gas properties, financial institutions and vendors providing
payroll and medical benefits and services. CEC did not send a questionnaire to
equipment and service providers. Based upon this review, CEC did not prepare
any contingency plans.
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 also has personal computer based software
programs and files that may contain some historical information and that may
not be Year 2000 compliant.
Subsequent to January 1, 2000, CEC has not experienced any significant
operation issues relating to Year 2000 compliance. CEC has also not been
informed by any third party having a relationship with CEC that the third
party has experienced any significant Year 2000 issues.
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.
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.
51
<PAGE>
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.
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.
52
<PAGE>
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 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.
53
<PAGE>
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>
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. Proved developed oil and gas reserves are
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and gas expected to
be obtained through the application of fluid injection or other improved
recovery techniques for supplementing the natural forces and mechanisms of
primary recovery should be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be
achieved.
Proved undeveloped reserves. Proved undeveloped oil and gas reserves are
reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion. Reserves on undrilled acreage shall be limited to
those drilling units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved
recovery technique is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.
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
54
<PAGE>
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.
55
<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 and discoveries........................ 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 and discoveries........................ 7 331
Production........................................ (46) (1,217)
---- ------
November 30, 1997................................... 370 16,274
Revision to previous estimates.................... (56) (9,965)
Extensions and discoveries........................ 57 400
Production........................................ (49) (1,123)
---- ------
November 30, 1998................................... 322 5,586
==== ======
Proved developed reserves:
November 30, 1996................................... 513 16,068
November 30, 1997................................... 287 13,180
November 30, 1998................................... 285 4,439
</TABLE>
Proved Developed Reserves
At November 30, 1998, CEC had approximately 4.4 billion cubic feet of
proved developed gas reserves representing 79% of CEC's total proved gas
reserves and 285,000 barrels of oil and natural gas liquids representing 89%
of CEC's total proved oil reserves. Approximately 3.9 of the 4.4 billion cubic
feet of proved developed gas reserves and 225,000 of the 285,000 barrels of
proved developed oil reserves are presently being provided from completion
intervals open for production in existing wells. The remainder of the proved
developed reserves are primarily 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
1.1 billion cubic feet of gas, or 21% of its total proved gas reserves, and
approximately 38,000 barrels of oil and liquids, or 11% of its total proved
oil reserves.
These reserves are attributable to undrilled locations offsetting
production in the Carbon, East Carbon, Harmon and Rowley areas of Alberta.
56
<PAGE>
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......................................... 287 13,180
Proved undeveloped....................................... 83 3,094
--- ------
Total.................................................. 370 16,274
=== ======
November 30, 1998
Proved developed......................................... 285 4,439
Proved undeveloped....................................... 37 1,147
--- ------
Total.................................................. 322 5,586
=== ======
</TABLE>
On a BOE basis, approximately 18% of the decrease in November 30, 1998
proved reserves compared to November 30, 1997 is due to 1998 production. The
majority of the remainder of the decrease in proved 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.
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>
57
<PAGE>
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.......................... $19,260 $31,984 $59,858
Future cost:
Production cost................................... (4,351) (7,620) (10,521)
Crown royalty..................................... (1,646) (5,515) (9,982)
Development cost.................................. (536) (1,260) (1,712)
Future income taxes................................. (2,368) (3,039) (9,144)
------- ------- -------
Future net cash flows............................... 10,359 14,550 28,499
Discount at 10%..................................... (2,334) (4,584) (10,800)
------- ------- -------
Standardized measure of discounted future net cash
flows.............................................. $ 8,025 $ 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.
Change in Standardized Measure of Discounted Future
Net Cash Flows from Estimated Proved Oil and Gas Reserves
For the Three Years Ended November 30, 1998
(thousands of dollars)
<TABLE>
<CAPTION>
November 30,
-------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Standardized measure--beginning of year............. $ 9,966 $17,699 $9,286
Sale of oil and gas net of production costs......... (2,248) (2,482) (2,250)
Net changes in prices, crown royalty and production
costs ............................................. 8,662 (8,672) 11,238
Extensions and discoveries.......................... 787 358 4,936
Sales and abandonments.............................. -- 0 (129)
Revisions to previous estimates..................... (11,804) (2,207) (3,590)
Previously estimated development costs incurred
during the period ................................. -- 90 411
Changes in development costs........................ 771 316 (49)
Accretion of discount............................... 1,131 2,242 1,066
Other............................................... 844 (758) 133
Change in future income tax......................... (84) 3,380 (3,353)
-------- ------- ------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
November 30,
-----------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Net increase (decrease)................................ (1,941) (7,733) 8,413
====== ====== =======
Standardized measure--end of year...................... $8,025 $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>
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>
59
<PAGE>
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 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.
Acquisition Activities. See "CEC Management's Discussion and Analysis of
Financial Condition and Results of Operations"--"Acquisitions."
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
60
<PAGE>
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
Market risk is estimated as the potential change in fair value resulting
from an immediate hypothetical change in interest rates. The sensitivity
analysis presents the change in fair value of these instruments and changes in
Company's earnings and cash flows assuming an immediate one percentage change
in floating interest rates. As the Company presently only has floating rate
debt, interest rate changes would not affect the fair value of these
instruments but would impact future earnings and cash flows assuming all other
factors are held constant. The carrying amount of the Company's floating rate
debt approximates its fair value. At November 30, 1998, the Company did not
have any debt. At August 31, 1999, the Company had floating rate debt of
$4,850,000. Assuming constant debt levels, earnings and cash flow impacts for
the next twelve-month period due to a one percentage change in interest rates
would be approximately $49,000 before taxes.
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
Oil and gas commodity markets are influenced by global as well as regional
supply and demand. Worldwide political events can also impact commodity
prices. 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. These tools include, but are
not limited to: commodity futures and option contracts; fixed-price swaps;
basis swaps; and term sales contracts. 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.
61
<PAGE>
The following table summarizes the Company's derivative financing
instrument position on its natural gas production as of August 31, 1999 and
November 30, 1998. The fair value of these instruments reflect the estimated
amount that the Company would receive (or pay) to settle these contracts as of
August 31, 1999 and November 30, 1998. Actual settlement of these instruments
upon maturity will differ from the estimates listed in the table.
Commodity Price Risk as of August 31, 1999
<TABLE>
<CAPTION>
Fixed price Fair
Year GigaJoules per GigaJoule value
---- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1999 391,315 $2.62 $(255,000)
2000 919,880 2.76 (381,000)
2001 320,720 2.57 (170,000)
--------- ---------
1,631,915 $(806,000)
========= =========
Commodity Price Risk as of November 30, 1998
<CAPTION>
Fixed price Fair
Year GigaJoules per GigaJoule value
---- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1998 65,410 $2.70 $ 12,000
1999 705,666 2.55 72,000
2000 385,075 2.57 35,000
2001 321,775 2.57 29,000
--------- ---------
1,477,926 $ 148,000
========= =========
</TABLE>
62
<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. The total cash purchase
price after adjustments was $23,581,000. 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 $23,858,000 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 is 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 business strategy is to grow through exploitation of existing oil and
gas properties by development of proved undeveloped reserves; acquisitions of
complementary working interests in existing and adjacent properties; and
optimization of gathering, compression and processing facilities. We will also
conduct oil and gas exploration activities and evaluate acquisition and merger
opportunities. Our activities will be conducted in the United States primarily
through BFC and in Canada through CEC.
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.
63
<PAGE>
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.
Southwestern Kansas
The main exploratory efforts of Carbon 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 acquiring 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 nine months ended September 30, 1998 and September 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
Nine Months Ended As of or for the
September 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............... $ 18,254 $ 12,595 $21,092 $16,539 $15,067 $12,675 $14,956
Net earnings (loss).... 933 114 (2,191) 732 4,060 172 (2,950)
Cash Flow Data:
Cash provided by (used
in) operating
activities............ $ (734) $ 2,587 $ 4,696 $ 3,193 $ 4,136 $ 3,016 $ 3,091
Cash used in investing
activities............ (4,654) (3,828) (5,948) (4,442) (1,025) (859) (1,181)
Cash provided by (used
in) financing
activities............ 2,950 1,300 3,450 1,019 (2,760) (2,090) (2,046)
Balance Sheet Data:
Total assets........... $21,627 $18,726 $22,840 $16,054 $14,524 $13,177 $16,321
Working capital........ 1,603 688 562 1,491 1,725 628 405
Long-term debt......... 8,800 3,700 5,850 2,400 1,700 4,760 6,850
Stockholder's
equity(1)............. 9,997 9,709 9,063 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.
64
<PAGE>
Results of Operations- Nine Months Ended September 30, 1999 Compared to the
Nine Months Ended September 30, 1998.
Oil and gas production revenue increased $1,545,000 or 30% to $6,730,000 in
the nine months ended September 30, 1999 compared to $5,185,000 in the nine
months ended September 30, 1998. Natural gas volumes produced in the first
nine months of 1999 increased 643,000 mcf or 26% to 3,128,000 mcf from
2,485,000 mcf in the nine months ended September 30, 1998. Oil volumes
produced decreased 2,900 bbls or 5% to 49,900 bbls in the nine months ended
September 30, 1999 from 52,800 bbls in the nine months ended September 30,
1998. The average realized price received for oil production increased 15% to
$15.79 per bbl in the first nine months of 1999 from $13.76 per bbl in the
nine months of 1998. The average realized price received for gas production
increased 6% to $1.90 per mcf in the first nine months of 1999 from $1.79 per
mcf in the first nine months of 1998. Prices received for gas production are
net of hedging gains and/or losses in the respective periods.
The production increases in natural gas production resulted from successful
drilling and recompletion results in various basins, particularly in western
Kansas and in the Permian Basin of New Mexico. Some of these increases were
partially offset by production declines on previously existing properties.
Production volume realized in the first nine months of 1999 related to the
successful drilling efforts were: Oil production--13,800 bbls; and gas
production--822,000 mcf. The sales related to this production was $1,772,000.
Gas marketing revenue increased 54% in the first nine months of 1999 to
$11,059,000 from $7,157,000 in the first nine months of 1998. Gas marketing
related expenses increased 54% to $11,009,000 in the first nine months of 1999
from $7,133,000 in the first nine months of 1998. BFC entered into a
management agreement in September 1998 with an unrelated party for a period
which included the first four months of 1999. The contract called for BFC to
provide gas marketing management services to customers of the unrelated party.
In exchange for providing the service, BFC received 35% of the net profits on
the related business. Total sales recorded under the agreement for the period
January through April 1999 were $5,700,000 with net profits of $19,000.
Net income in the first nine months of 1999 was $933,000 compared to net
income of $114,000 in the first nine months of 1998. The increase in net
income is primarily due to increased oil, gas, and other revenues, and
decreased general and administrative expense, partially offset by an increase
in lease operating, DD&A, exploration and interest expense.
Oil and Gas Revenues. The following table shows comparative revenues, sales
volumes, average prices and percentage changes between periods, for natural
gas and oil for the first nine months of 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998 % Change
------ ------ --------
<S> <C> <C> <C>
Natural gas revenues M$........................... 5,942 4,459 33%
Oil revenues M$................................... 788 726 9%
Natural gas sales volumes:
Millions of cubic feet.......................... 3,128 2,485 26%
MCF/day......................................... 11,500 9,100
Oil sales volumes:
Barrels......................................... 49,900 52,800 (5)%
Barrels/day..................................... 183 194
Average price received:
Natural gas--$/Mcf.............................. 1.90 1.79 6%
Oil--$/Barrel................................... 15.79 13.76 15%
</TABLE>
Natural gas revenues for the first nine months of 1999 increased 33% over
the first nine months of 1998 because of a 6% price increase and a 26%
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
65
<PAGE>
and in the Permian Basin of New Mexico, partially offset by production
declines on existing properties. Oil revenues were 9% higher for the first
nine months of 1999 compared to the first nine months of 1998 because of a 15%
price increase partially offset by a 5% decline in sales volumes.
Average daily oil and gas production for the first nine months of 1999
totaled 183 barrels of oil per day and 11,500 mcf of gas per day, an increase
of 22% 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
nine months of 1999. Exploitation and drilling activities are expected to
continue for the balance of 1999.
Average oil prices increased 15% from $13.76 per barrel in the first nine
months of 1998 to $15.79 in 1999. Average natural gas prices increased 6% from
$1.79 per mcf for the first nine months of 1998 to $1.90 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 nine months of 1999 were 36% as a percentage of oil and gas sales
compared to 43% for the first nine months of 1998. Oil and gas production
costs for the first nine months of 1999 and 1998 were $4.29 and $4.75
respectively, per boe.
Gas and Electrical Marketing. Gas and electrical marketing revenue
increased 54% in the first nine months of 1999 compared to the first nine
months of 1998. Gas and electrical marketing related expenses increased 54% in
the first nine months of 1999 compared to the first nine 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.
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 decreased by $159,000 for the first nine months of
1999, compared to 1998.
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 nine months of 1999 the depletion rate was $3.13 per boe
(6:1) compared to $3.44 per boe for the first nine months of 1998. As
indicated under "Unaudited Pro Forma Financial Information," Carbon's
depletion rate per boe will increase as a result of our purchase of BFC. This
amount will be based upon the value of oil and gas assets resulting from an
allocation of the purchase price of BFC.
For the first nine months of 1999 impairment losses related to a property
drilled in Oklahoma in 1998 at a cost to BFC of $60,000. Early reserve
estimates in 1999 indicated that this well had no value and the amount was
considered impaired at that time. There were no impairment losses recorded for
the first nine months of 1998.
Interest Expense. For the first nine months of 1999, interest expense was
$418,000 compared to $143,000 for the first nine 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 nine months of 1999 which
related to calendar year 1998 interest charges and $44,000 of interest in the
first nine 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 nine months of 1999 exploration expense was $681,000 compared
to $276,000 for the first nine months of 1998. Unsuccessful drilling costs
amounted to $199,000 for the first nine months of 1999 compared to $49,000 for
the first nine months of 1998. G&G cost for the first nine months of 1999 were
$433,000 compared to $141,000 for the first nine months of 1998.
66
<PAGE>
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 National Association.
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 BFC 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 September
30, 1999 with interest at a variable rate that approximated 7.15% at September
30, 1999. BFC has issued letters of credits totaling $2.3 million which
further reduce the amount available for borrowing under the base. The Company
currently has approximately 41% of its proved reserves pledged against this
loan.
The principal sources of our funds are cash flows from operating activities
and available borrowings under our existing credit facility. We expect to be
able to fund our development and exploration programs for the next twelve
months from cash generated by our operations and from existing bank financing.
Although there are presently no agreements or understandings for any
significant acquisitions of oil and gas businesses and properties, future
acquisitions may require additional capital investment and bank financing.
In October, 1999, we sold 4,500,000 shares of our common stock to Yorktown
for $24,750,000 of which $23,581,000 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 nine months ended September 30, 1999, net cash used in operating
activities was $734,000 compared to net cash provided by operating activities
of $2,587,000 for the same period in 1998. This decrease is due to changes in
operating assets and liabilities. Cash used in investing activities was
$4,654,000 for the nine months ended September 30, 1999 compared to $3,828,000
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 nine
months ended September 30, 1999 was $2,950,000 due to an increase in net bank
borrowings used to fund capital expenditures.
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 nine months ended
September 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.
67
<PAGE>
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. If Carbon's property management software is not Year 2000
compliant, Carbon believes that the cost of replacing such software would not
exceed $25,000.
Management expects costs for Carbon to become Year 2000 compliant will not
be significant. However, despite Carbon's efforts to identify and remedy Year
2000 problems, there may be related failures that disrupt Carbon's business
temporarily. Carbon has not reviewed all Year 2000 issues with third parties
of business importance to Carbon such as its natural gas purchasers, gathering
system and plant operators, downstream pipeline operators, equipment and
service providers, operators of its oil and gas properties, financial
institutions and vendors providing payroll and medical benefits and services.
If any of these third parties have Year 2000 issues, Carbon believes that the
most serious effect on Carbon would be delays in receiving payment for oil and
gas sold to its purchasers. This could have a material adverse effect upon the
results of operations and financial condition of Carbon.
Subsequent to January 1, 2000, Carbon has not experienced any significant
operations issues relating to Year 2000 compliance and has not been informed
of any Year 2000 issues occurring at third parties with which Carbon has
relationships.
Results of Operations--1998 Compared to 1997 and 1997 Compared to 1996
Oil and Gas Revenues. The following table shows comparative revenue, sales
volumes, average prices and the percentage change between periods for natural
gas and oil for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year ended December Year ended December
31, 31,
--------------------- ---------------------
1998 1997 %Change 1997 1996 %Change
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Natural gas revenues M$(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>
- --------
(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 48% 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 $5.33,
$5.16
68
<PAGE>
and $4.92 respectively, per boe. The 1998 production costs of $5.33 per boe
includes an accrual of $250,000 for the estimated liability under a well
connection reimbursement agreement. The 1998 production costs per boe would
have been $4.92 per boe without these well connection costs. 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.
Impairments taken in 1998 are as follows: South Humble City Field (SE New
Mexico)--$931,000; Taiga Mountain (Western Colorado)--$713,000; Other--
$214,000.
The major assumptions used for determining impairment losses were as
follows: Prices were year-end 1998 prices for gas, $15.00/bbl for oil;
estimates of declining production were based on estimates by independent 3rd
party engineers; estimated operating cost and severance taxes were based on
past experience.
Impairment losses in 1998 were generally calculated by: Comparing the cost
basis of proved properties with the undiscounted cash flows based on
unescalated pricing. If the unamortized cost on a property was higher than the
net undiscounted cash flow projected, the property was deemed to be possibly
impaired. A further test was done at this point to determine the amount (if
any) to impair. A subsequent test compared unamortized cost to the estimated
fair market value. This test looked at the price of the commodity used in the
initial test, and assessed whether it was representative of fair market value.
Both tests described above used estimates by independent third party engineers
to determine estimates of declining production. Additional considerations
included in-house assessment of reserves attributable to a property. After the
above tests, if a property was still deemed to require an impairment
allowance, impairment was then taken to reduce the carrying value to the
estimated fair value.
Technical reasons for impairments taken in 1998 are pressure declines in
the reservoir for the South Humble City field and unsuccessful offset drilling
which indicated a smaller reservoir than originally forecast for the Taiga
Mountain field.
69
<PAGE>
Reserve categories used in the impairment test include all categories of
proven reserves. There were no categories of reserves used other than proved
(i.e. no probable or possible).
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.
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 $84,000 in 1998 compared to $599,000 in 1997, while G&G costs
increased in 1998 to $390,000 compared to $89,000 in 1997 because of increased
exploration activities. The amount related to unsuccessful drilling was
$599,000 in 1997 compared to $229,000 in 1996, and G&G costs decreased to
$89,000 in 1997 compared to $130,000 in 1996.
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.
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.
70
<PAGE>
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. Proved developed oil and gas reserves are
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and gas expected to
be obtained through the application of fluid injection or other improved
recovery techniques for supplementing the natural forces and mechanisms of
primary recovery should be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be
achieved.
Proved undeveloped reserves. Proved undeveloped oil and gas reserves are
reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion. Reserves on undrilled acreage shall be limited to
those drilling units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved
recovery technique is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.
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.
71
<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 and discoveries......................... 44 935
Purchase of minerals in place...................... -0- 506
Production......................................... (58) (2,744)
---- ------
December 31, 1996.................................... 227 26,512
Revision to previous estimates..................... 3 (1,569)
Extensions and discoveries......................... 32 427
Purchase of minerals in place...................... 99 916
Production......................................... (63) (3,146)
---- ------
December 31, 1997.................................... 298 23,140
Revision to previous estimates..................... (101) 976
Extensions and discoveries......................... 34 5,011
Purchase of minerals in place...................... -0- -0-
Production......................................... (65) (3,272)
---- ------
December 31, 1998.................................... 166 25,855
==== ======
Proved developed reserves:
December 31, 1996.................................... 188 25,483
December 31, 1997.................................... 298 22,623
December 31, 1998.................................... 166 25,855
</TABLE>
Proved Developed Reserves
At December 31, 1998, BFC had approximately 25.4 billion cubic feet of
proved developed gas reserves representing 98% of BFC's total proved gas
reserves and 166,000 barrels of oil and natural gas liquids representing 100%
of BFC's total proved oil reserves. Approximately 16.8 of the 25.4 billion
cubic feet of proved developed gas reserves and 162,000 of the 166,000 barrels
of proved developed oil reserves are presently being produced from completion
intervals open for production in existing wells. The remainder of the proved
developed reserves 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 required to place them in 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 primarily attributable to undrilled locations offsetting
production in various fields.
72
<PAGE>
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..................... 298 22,623
Proved undeveloped................... -- 517
--- ------
Total.............................. 298 23,140
=== ======
December 31, 1998
Proved developed..................... 166 25,338
Proved undeveloped................... 0 517
--- ------
Total.............................. 166 25,855
=== ======
</TABLE>
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.
73
<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.
74
<PAGE>
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>
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 December
31,
--------------------
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.
75
<PAGE>
Disclosure of Capitalized Costs Relating to Oil and Gas Producing Activities
BFC's oil and gas producing activities are all located in the Western
United States. The aggregate amount of capitalized cost of oil and gas
properties at December 31 for the year indicated was comprised of the
following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(in thousands)
<S> <C> <C> <C>
Proved developed and undeveloped properties........ $29,521 $26,519
Unproved oil and gas properties.................... 2,745 1,900
Gas transportation system.......................... 158 158
------- -------
Total.............................................. 32,424 28,577
Accumulated depreciation, depletion and
amortization...................................... (18,681) (16,709)
------- -------
Total net properties........................... $13,743 $11,868
======= =======
</TABLE>
Costs Incurred in Property Acquisition, Exploration and Development
Activities
<TABLE>
<CAPTION>
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Acquisition of properties:
Proved properties.................................. $ 95 $2,230 $ 63
Unproved properties................................ 473 -- --
Exploration.......................................... 1,932 599 299
Development.......................................... 3,784 1,812 959
------ ------ ------
Total costs incurred............................. $6,284 $4,641 $1,321
====== ====== ======
</TABLE>
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>
76
<PAGE>
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>
Current Operations Activity
See "Information About Carbon--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 has engaged 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
Market risk is estimated as the potential change in fair value resulting
from an immediate hypothetical change in interest rates. The sensitivity
analysis presents the change in fair value of these instruments and changes in
Company's earnings and cash flows assuming an immediate one percentage change
in floating interest rates. As the Company presently only has floating rate
debt, interest rate changes would not affect the fair value of these
instruments but would impact future earnings and cash flows assuming all other
factors are held constant. The carrying amount of the Company's floating rate
debt approximates its fair value. At September 30, 1999 and December 31, 1998,
the Company had a floating rate debt of $8,800,000 and $5,850,000,
respectively. Assuming constant debt levels, earnings and cash flow impacts
for the next twelve-month period from September 30, 1999 and December 31, 1998
due to a one percentage change in interest rates would be approximately
$88,000 and $58,500, respectively, before taxes.
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.
77
<PAGE>
Commodity Price Risk
Oil and gas commodity markets are influenced by global as well as regional
supply and demand. Worldwide political events can also impact commodity
prices. 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 7 to the September 30, 1999, and December 31, 1998 Financial
Statements of BFC. These tools include, but are not limited to: commodity
futures and option contracts; fixed-price swaps; basis swaps; and term sales
contracts. 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.
The following tables summarized the Company's derivative financial
instrument position on its natural gas production as of September 30, 1999 and
December 31, 1998. The fair value of the instruments reflect the estimated
amount that the Company would receive (or pay) to settle these contracts as of
September 30, 1999 and December 31, 1998. Actual settlement of these
instruments upon maturity will differ from the estimates listed in the table.
Commodity Price Risk as of September 30, 1999
<TABLE>
<CAPTION>
Fixed price
Year MMBTU's per MMBTU Fair value
---- --------- ----------- ----------- ---
<S> <C> <C> <C> <C> <C>
1999 532,000 $2.00 $ (272,000)
2000 2,317,000 1.99 (943,000)
2001 1,543,000 2.02 (540,000)
--------- -----------
4,392,000 $(1,755,000)
========= =========== ===
Commodity Price Risk as of December 31, 1998
<CAPTION>
Fixed price
Year MMBTU's per MMBTU Fair value
---- --------- ----------- ----------- ---
<S> <C> <C> <C> <C> <C>
1999 2,547,500 $2.04 $ 602,000
2000 2,077,500 2.00 64,000
2001 1,343,000 2.03 35,000
--------- -----------
5,968,000 $ 701,000
========= =========== ===
</TABLE>
78
<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
Cortlandt S. Dietler.................. 78 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, other than Mr. Dietler, has served since his
appointment on September 14, 1999. Mr. Dietler was elected to the Board on
December 20, 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.
Cortlandt S. Dietler. Mr. Dietler has served as a director of Carbon since
December 20, 1999. Mr. Dietler has been the Chairman of TransMontaigne, Inc.,
which owns and operates terminals and pipelines for the transportation of oil,
gas and other petroleum products, since April 1995. Mr. Dietler was Chief
Executive Officer of TransMontaigne from April 1995 through September 30,
1999. He was the founder, Chairman and Chief Executive Officer of Associated
Natural Gas Corporation, a natural gas gathering, processing and marketing
company, prior to its 1994 merger with PanEnergy Corporation, on whose Board
he served as an Advisory Director, prior to its merger with Duke Energy
Corporation. Mr. Dietler also serves as a director of Hallador Petroleum
Company, Key Production Company, Inc., and Forest Oil Corporation.
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.
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
79
<PAGE>
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 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 Dietler. 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 Dietler.
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 Dietler.
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<PAGE>
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. $100,000 in salary and bonus in fiscal 1998 from either
CEC or BFC.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Number of
Securities
Underlying
Fiscal Salary Bonus Options
Name and Principal Position Year (U.S.$) (U.S.$) Granted
- --------------------------- ------ -------- -------- ------------
<S> <C> <C> <C> <C>
Patrick R. McDonald, President......... 1999 $122,638 $134,000 20,000
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. We also granted in October, 1999 to Mr. McDonald 30,000 shares of
restricted Carbon common stock under our restricted stock plan, with a value
of $165,000 (based on $5.50 per share) and granted an option to Mr. McDonald
for 70,000 shares.
Stock Option Grants And Exercises
The following table sets forth information concerning individual grants of
stock options made by CEC during fiscal 1999 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 1999
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Number of % of Total Appreciation
Securities Options for Option Term
Underlying Granted to (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..... 20,000 29.6 $4.25 7/21/02 $13,398 $28,136
</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.
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<PAGE>
No options were exercised by CEC's President and Chief Executive Officer
during fiscal 1999. The following table summarizes information with respect to
the value of that officer's unexercised stock options at November 30, 1999:
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 98,000(1) $7,500 0
</TABLE>
- --------
(1) Options were granted by CEC to acquire its common stock. These options are
to be 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, 1999 over the
per share exercise price multiplied by the number of unexercised options.
However, the per share exercise price for options not currently
exercisable was higher than the market price of CEC's stock at fiscal year
end.
Carbon granted on October 14, 1999 to Mr. McDonald a stock option to
purchase 70,000 shares of our common stock at $5.50 per share, which was
believed to be the fair market value of our common stock on that date. This
option remains outstanding, was 70% of the total options granted by us to
employees in 1999, has an expiration date of October 13, 2009 and has
potentially realizable values of $242,000 and $614,000 if it is hypothetically
assumed, as is done pursuant to SEC rules, that our common stock appreciates
at a 5% and 10% compound annual rate over the term of the option.
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
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<PAGE>
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 ownership of our voting securities before the merger or
consolidation) or any sale or other disposition of all or substantially all of
our assets; (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 Cortlandt Dietler, who are considered to be independent directors,
each were granted on October 14, 1999 and January 3, 2000, respectively, a
nonqualified stock option to purchase 20,000 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.
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<PAGE>
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."
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<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 December 31, 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
Cortlandt S. Dietler...... 0 (1) 0 (1)
2750 Republic Plaza
370 17th Street
Denver, CO 80202
David H. Kennedy.......... 10,000 (1) 10,000 (1)
18 Pasture Lane
Darien, CT 06820
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-third of which vests in
October, 2000, one-third of which vests in October, 2001 and the remaining
one-third which vests in October, 2002.
(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 30, 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%
3408 Booneville Road
Waukee, IA 50263
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, each of our two independent
directors has purchased shares from us. In October, 1999, Mr. Kennedy
purchased 10,000 shares from us at a cash price of $5.50 per share, and in
January, 2000, Mr. Dietler purchased 10,000 shares from us at a cash price of
$5.50 per share.
On June 30, 1998, CEC entered into a three-year employment contract with
Mr. McDonald, effective as of July 1, 1998, which provides for a base salary
of U.S. $120,000 per year along with other usual benefits such as medical and
dental coverage and industry-related dues and subscriptions. The employment
contract with Mr. McDonald provides for the ability of either CEC or Mr.
McDonald to terminate the contract if there is a change in control of CEC.
Change in control includes (1) the acquisition by a party of 50% or more of
the combined voting power of CEC's outstanding shares within a 12-month
period, or (2) the acquisition of CEC by merger, sale or purchase of assets,
liquidation or other means as a result of which existing stockholders of CEC
own less than 50.1% of the surviving entity, or (3) there is a change in more
than a majority of the Company's Board of Directors as a result of a
transaction or proxy contest with a third party unaffiliated with Mr. McDonald
and not endorsed by Mr. McDonald. In the event of a change in control not
supported by a majority of CEC's 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 the
then existing Board of CEC, Mr. McDonald is to be paid 200% of his
"Compensation" upon termination of the employment agreement. For this purpose,
the term "Compensation" means the average of Mr. McDonald's annual base pay
salary and bonus for two years prior to the termination date (or such lesser
period of employment), prorated to be a monthly amount, multiplied by the
remaining months during the term of employment contract (or multiplied by 12
if the initial term has expired). In addition, any incentive awards become
100% vested upon the occurrence of a change in control. Mr. McDonald's
employment agreement also provides for a severance payment upon termination by
CEC of his employment for any reason other than for cause or if Mr. McDonald
voluntarily terminates employment following a change in position that is not
comparable to his current position. In that event, the severance payment is an
amount equal to his Compensation (prorated to a monthly basis) multiplied by
the remaining months of the agreement but in any event no less than 12 months.
As part of the compensation stated in his employment contract, Mr. McDonald
was granted options to acquire 78,000 shares of CEC's common stock.
Kevin Struzeski is an executive officer of Carbon and has been also the
Chief Financial Officer of CEC. When Mr. Struzeski joined CEC in November,
1998, he entered into a two-year employment contract with CEC. His agreement
provides for an annual base salary of $75,000 per year along with medical,
dental and other benefits available to other employees. His employment
agreement provides for the ability of either CEC or Mr. Struzeski to terminate
the agreement if there is a change in control of CEC. A change in control is
defined in the same manner as in the employment agreement of Mr. McDonald as
described above, except there is no reference to Mr. McDonald. In the event of
a change in control not supported by a majority of CEC's 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 the then existing Board of CEC, Mr. Struzeski is to be paid 200%
of his "Compensation" upon termination of the employment agreement.
Compensation is also defined in the same manner as in Mr. McDonald's
employment agreement. In addition, any incentive awards become 100% vested
upon occurrence of a change in control. The employment agreement requires a
severance payment upon termination of Mr. Struzeski's employment by CEC for
any reason other than for cause or if Mr. Struzeski voluntarily terminates
following a change in position in CEC. The severance payment is an amount
equal to the Compensation multiplied by the remaining months of the agreement
but in no event less than six months. As part of the compensation stated in
the employment agreement, Mr. Struzeski was also granted options to acquire
20,000 shares of CEC common stock.
Harry A. Trueblood, Jr. is a proposed director of Carbon, is a director and
more than 10% shareholder of CEC, previously served as President of CEC, and
is a director, executive officer and more than 10% shareholder of Columbus
Energy Corp. ("Columbus"). CEC entered into a written agreement in 1995 with
Columbus to
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<PAGE>
provide management services until new management was retained, either by
merger, acquisition or direct employment. CEC paid no direct cash compensation
to the officers of Columbus for the period that they served as officers of CEC.
CEC was charged by Columbus on a monthly basis for the specific time each
Columbus officer or employee devoted to the Company. As a result of Mr.
McDonald's investment in CEC in July, 1998, and the election of new executive
officers in fiscal 1998, the management agreement with Columbus was terminated
in March, 1999. CEC paid to Columbus the following amounts for providing
management services pursuant to the management agreement: $296,000 in 1996,
$255,000 in 1997, and $218,000 in 1998.
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 December 31, 1999, there were 4,550,000 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.
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<PAGE>
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 13,988,600 shares of common stock and 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
We have made application to list our common stock on the American Stock
Exchange, and we anticipate that the listing of our common stock on the
American Stock Exchange will be approved upon completion of the exchange
offer. We have reserved the trading symbol CRB.
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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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
Rights of Common Shareholders. CEC's Shareholders. Carbon's Articles of
Articles of Amendment provide that Incorporation provide that the
the holders of Common Shares: 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. The
CBCA provides that preferred stock
as a class or a series of preferred
stock, if outstanding, is entitled
to vote as a separate voting group
on certain amendments to the
Articles of Incorporation, share
exchanges or mergers of Carbon with
other corporations which affect the
class or series of 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.
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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, or unless the Articles
unless required by the ABCA, be of Incorporation or provisions of
determined by the majority of the the Bylaws adopted by shareholders
votes cast on the question. require a greater vote, 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. The CBCA
requires approval by the majority of
the votes entitled to be cast by the
voting group for the issuance of
shares of one class or series as a
share dividend in respect of shares
of another class or series, the sale
of substantially all assets of
Carbon requiring shareholder
approval, mergers of Carbon with
other corporations requiring
shareholder approval, and the
voluntary dissolution of Carbon.
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.
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CEC CARBON
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.
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. Any
General Inspection Rights. The Carbon shareholder who has been a
directors and shareholders of CEC, shareholder for at least three
their agents and legal months, or who holds at least 5% of
representatives may examine the the outstanding shares of any class,
following records during the usual may inspect and copy the following
business hours of CEC free of records of Carbon upon delivery of a
charge: 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
records of actions taken by the
Board;
. any USA and any amendments;
. minutes of meetings and . accounting records; and
resolutions of shareholders;
. the names and addresses of
. copies of all notices shareholders.
. the securities register The requesting shareholder must
describe with reasonable
particularity the purpose and the
records which the shareholder
desires to inspect. The records must
be directly connected with the
described purpose.
. copies of the financial
statements,
. reports and information
. a register of disclosures in
relation to material contracts
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CEC CARBON
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.
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
generally not personally liable for Limited Liability. Shareholders are
the acts or debts of CEC. generally not personally liable for
the acts or debts of Carbon.
No Capital Assessment: A shareholder
is required to pay the consideration No Capital Assessment. A shareholder
stated by the Board of Directors for is required to pay the consideration
shares issued to that person. A stated by the Board of Directors for
shareholder of CEC is not liable to shares issued to that person. (In
CEC or its creditors for capital the case of the exchange offer, the
assessments or calls. consideration for each Carbon share
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.
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CEC CARBON
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.
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
on the Board of Directors are filled Vacancies in General. Any vacancies
by: on the Board of Directors are filled
by:
. the Board of Directors, if a
quorum is present, by a simple . the shareholders; or
majority.
. the Board of Directors, or a
. a vote of the shareholders. simple majority vote of the
remaining directors if their
number is insufficient to
constitute quorum.
Any vacant directorship held by a
director elected by a particular
class of shareholders may be filled
by either:
Any vacant directorship held by a
director elected by a particular
shareholder voting group may be
filled by either:
. the shareholders of that
particular class if there are no
remaining directors of that class;
or
. shareholders of that voting group
entitled to vote; or
. the directors elected by that
class.
. a simple majority of any one or
more remaining directors elected
by that same voting group.
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CEC CARBON
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.
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
of the Corporation; . any breach of the director's duty
of loyalty to the corporation or
. any breach where a director did its shareholders,
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
. the unlawful purchase, redemption . unlawful dividends or other dis-
or other acquisitions of shares; tributions; or
. the unlawful commission on the . any transaction from which the di-
sale of shares; rector directly or indirectly de-
rived an improper personal bene-
. the unlawful payment of any divi- fit.
dends;
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CEC CARBON
. any unlawful financial assistance; Pursuant to the Carbon Articles of
Incorporation, Carbon directors are
. any unlawful payment of an indem- not personally liable to the corpo-
nity to a director or officer of ration or its shareholders, either
the Corporation; directly or indirectly, for monetary
damages for the breach or breaches
. any unlawful payment to a share- of fiduciary duty as a director to
holder; and the full extent permitted by law.
. 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.
A court may nevertheless order
indemnification as the court deems
proper, except that indemnification
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.
CEC Bylaws and Indemnification Carbon Bylaws and Indemnification
Agreement. CEC's bylaws permit Agreements. Carbon's bylaws and
indemnification subject to the above indemnification agreements with each
as set out in the ABCA. 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
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CEC CARBON
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.
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
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CEC CARBON
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 shareholders
regard to any "surviving of any surviving corporation in a
corporation" in the ABCA. 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
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 cast
voting group entitled to vote within each voting group entitled to
separately on the plan. vote separately on the plan.
Dissolution. The Board of Directors Dissolution. The Board of Directors
recommends to the CEC shareholders recommends to the Carbon shareholders
approval of any proposal for approval of any proposal for
voluntary dissolution of the voluntary dissolution of the
Corporation, and by corporation, and the
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CEC CARBON
special resolutions of each plan must be approved by a majority
shareholder class, the plan must be of the outstanding votes entitled to
approved by 2/3 of the outstanding be cast within each voting group
votes entitled to be cast within entitled to vote separately on the
each 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. However,
respect of a corporation or any of shareholders have legal and equitable
its affiliates: 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
a meeting by 2/3 of the votes cast 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;
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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.
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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. The financial statements of Bonneville Fuels Corporation
as of December 31, 1998 and 1997 and for each of the years in the three-year
period ended December 31, 1998, included in this prospectus and elsewhere in
the registration statement have been audited by Hein + Associates LLP,
independent certified 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. 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.
101
<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 September 30, 1999 and 1998 (unaudited).... F-18
Consolidated Statement of Operations for the nine months ended September
30, 1998 and 1998 (unaudited)............................................ F-20
Consolidated Statements of Cash Flows for the nine months ended September
30, 1999 (unaudited)..................................................... F-21
Consolidated Statement of Stockholders' Equity and Retained Earnings for
the nine months ended September 30, 1999 (unaudited)..................... F-22
Notes to Consolidated Financial Statements................................ F-23
CEC Resources Ltd.
Auditors' Report.......................................................... F-29
Balance Sheets at November 30, 1998 and 1997.............................. F-30
Statements of Income for the years ended November 30, 1998, 1997 and 1996. F-32
Statements of Stockholders' Equity for the years ended November 30, 1998,
1997 and 1996............................................................ F-33
Statements of Cash Flows for the years ended November 30, 1998, 1997 and
1996..................................................................... F-34
Notes to the Financial Statements......................................... F-35
Balance Sheets at August 31, 1999 (unaudited) and November 30, 1998....... F-46
Statements of Income for nine months ended August 31, 1999 and 1998
(unaudited).............................................................. F-47
Statement of Stockholders' Equity for the nine months ended August 31,
1999 (unaudited)......................................................... F-48
Statements of Cash Flow for the nine months ended August 31, 1999 and
August 31, 1998 (unaudited).............................................. F-49
Notes to Financial Statements............................................. F-50
</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.
(4) Accounting for Derivative Investments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument including
certain derivative instruments embedded in other contracts be recorded on the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Carbon is required
to adopt SFAS No. 133 as of January 1, 2001, but may implement SFAS No. 133 as
of the beginning of any fiscal quarter prior to that date. SFAS No. 133 cannot
be applied retroactively. Carbon has not yet quantified the impacts of
adopting SFAS No. 133 or determined the timing or method of adoption. However,
SFAS No. 133 could increase the volatility of Carbon's earnings and
comprehensive income.
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.
As discussed in Note 5, subsequent to the issuance of the 1998 financial
statements, the Company's estimate of a contingent liability changed.
Accordingly, the accompanying financial statements have been restated, which
resulted in an increase in the net loss for 1998 of $250,000.
Hein + Associates LLP
Denver, Colorado
February 26, 1999, except for the last paragraph of Note 5, as to which the
date is May 25, 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
Amounts due from broker............................ 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.............. $ 7,116,000 $ 1,470,000
Accrued production taxes payable................... 335,000 257,000
Undistributed revenue.............................. 476,000 448,000
------------ ------------
Total current liabilities...................... 7,927,000 2,175,000
------------ ------------
Long-term Debt....................................... 5,850,000 2,400,000
Taxes Payable to BPC................................. -- 1,888,000
Commitments and Contingencies (Notes 2, 5, and 7)
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.................................. 5,588,000 7,779,000
------------ ------------
Total stockholder's equity..................... 9,063,000 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............ 3,254,000 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
----------- ----------- -----------
23,458,000 15,528,000 11,373,000
----------- ----------- -----------
Income (Loss) Before Extraordinary Items
and Taxes.............................. (2,366,000) 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................ (2,366,000) 1,011,000 5,482,000
Tax Expense (Benefit):
Current................................. (225,000) 279,000 1,422,000
Deferred................................ 50,000 -- --
----------- ----------- -----------
Net Income (Loss)......................... $(2,191,000) $ 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............... -- -- -- (2,191,000) (2,191,000)
----- ---- ---------- ----------- -----------
Balances, December 31,
1998.................... 1,000 $-- $3,475,000 $ 5,588,000 $ 9,063,000
===== ==== ========== =========== ===========
</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).................... $(2,191,000) $ 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)
Amount due from broker......... (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...................... 5,646,000 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
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. 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.
Amounts due from Broker--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 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 Company
also periodically assesses impairment on unproved oil and gas properties by
analyzing factors that may affect the fair market value of the property. 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
F-12
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
impairments of $1,858,000, $312,000, and $-0-, respectively. Factors causing
the impairment of oil and gas properties in 1998 were the 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.
Revenue Recognition - The Company recognizes revenue for oil and gas
production upon delivery of the commodity to the purchaser.
The Company records sales and related cost of sales on gas and electricity
marketing transactions using the accrual method of accounting (i.e., the
transaction is recorded when the commodity is purchased and/or delivered).
Undistributed Revenue - Represents amounts due to other owners of jointly
owned oil and gas properties for their share of revenue from the properties.
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 records 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.
F-13
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Impact of Recently Issued Accounting Pronouncements--In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Statement requires companies to report all
derivatives at fair value as either assets or liabilities and bases the
accounting treatment of the derivatives on the reasons an entity holds the
instrument. The Company is currently reviewing the effects this Statement will
have on the financial statements in relation to the Company's hedging
activities.
SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits and SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise were issued in 1998 and are not expected to
impact the Company regarding future financial statement disclosures, results
of operations and financial position.
In November 1998, the Emerging Issues Task Force reached a consensus on
Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk
Management Activities. This consensus will not have a material impact on the
Company.
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.
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.
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
F-14
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
There were no expenses incurred by Bonneville Pacific Corporation on behalf
of Bonneville Fuels Corporation, nor by Bonneville Fuels Corporation on behalf
of Bonneville Pacific Corporation.
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
$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.
4. Exploration Expense:
Exploration expense consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Annual rental payments on unproved properties...... $ 82,000 $ 84,000 $ 60,000
Geological and geophysical cost.................... 390,000 89,000 130,000
Dry hole costs and abandonments.................... 84,000 599,000 229,000
-------- -------- --------
$556,000 $772,000 $419,000
======== ======== ========
</TABLE>
F-15
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. 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>
Well Connection Reimbursement--The Company entered into a contract with an
unrelated party in 1997 to connect certain wells to sales pipelines. The
Company is obligated to reimburse the unrelated party for the difference
between the gathering fees generated by these wells and the cost of
connection. The accompanying 1998 financial statements have been restated to
reflect an accrual of $250,000, representing management's current estimate of
the potential liability under the agreement.
6. 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.
7. 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.
F-16
<PAGE>
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.
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.
8. 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 7 for a discussion
regarding the fair value of energy financial instruments.
9. 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.
10. Tax Credit Sale:
In December 1995, the Company entered into a transaction to sell 99% of its
interest in 14 coal gas wells located in the San Juan field in Northwestern
New Mexico that qualified for Section 29 tax credits. All properties sold were
proved producing properties. The Company received cash in the amount of
$47,000, a volumetric production payment equal to 99% of the net cash flow
related to the underlying properties, and a percentage of the value of the
related tax credits. Due to the Company's continuing involvement with the
property and the limited cash received by the Company at the time of the sale,
the gain on the sale was deferred until the payments received were sufficient
to recover the carrying value on the property. All additional tax credit
receipts are being recorded as other income and the additional production
payments are recorded as oil and gas production income.
11. 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-17
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30
--------------------------
ASSETS 1999 1998
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash
Unrestricted................................... $ 304,000 $ 604,000
Accounts receivable
Due from broker................................ 1,761,000 448,000
Gas marketing.................................. 634,000 1,752,000
Oil and gas sales.............................. 1,169,000 475,000
Joint interest, net of allowance for doubtful
accounts...................................... 403,000 632,000
Other.......................................... 7,000 7,000
------------ ------------
Total accounts receivable.................... 3,974,000 3,314,000
Prepaid expenses, inventories and other.......... 155,000 199,000
------------ ------------
Total current assets......................... 4,433,000 4,117,000
------------ ------------
Property and Equipment, at cost
Oil and gas properties........................... 37,115,000 32,264,000
Furniture and equipment.......................... 499,000 473,000
Less depreciation, depletion and amortization.... (20,721,000) (18,448,000)
------------ ------------
Total property and equipment................. 16,893,000 14,289,000
------------ ------------
Other Assets:
Deposits and other............................... 270,000 270,000
Deferred loan cost, net.......................... 31,000 50,000
------------ ------------
Total other assets........................... 301,000 320,000
------------ ------------
Total Assets....................................... $ 21,627,000 $ 18,726,000
============ ============
</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 BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30
-----------------------
LIABILITIES AND STOCKHOLDER EQUITY 1999 1998
---------------------------------- ----------- -----------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses................... $ 1,838,000 $ 2,730,000
Accrued production taxes payable........................ 415,000 321,000
Undistributed revenue, taxes and other.................. 577,000 378,000
----------- -----------
Total current liabilities........................... 2,830,000 3,429,000
----------- -----------
Long Term Liabilities:
Long term debt.......................................... 8,800,000 3,700,000
Accrued income taxes due parent......................... 0 1,888,000
----------- -----------
Total long term liabilities......................... 8,800,000 5,588,000
----------- -----------
Stockholder's Equity:
Common stock............................................
Additional paid in capital.............................. 3,475,000 1,812,000
Retained earnings....................................... 6,522,000 7,897,000
----------- -----------
Total stockholder's equity.......................... 9,997,000 9,709,000
----------- -----------
Total Liabilities and Stockholder's Equity.......... $21,627,000 $18,726,000
=========== ===========
</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 STATEMENT OF OPERATIONS
For the nine months ended September 30
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Operating Revenue
Sales:
Oil and gas.......................................... $ 6,730,000 $5,185,000
Marketing services................................... 11,059,000 7,157,000
Other................................................ 465,000 253,000
----------- ----------
Total operating income............................. 18,254,000 12,595,000
----------- ----------
Operating Expenses
Lease operations..................................... 1,957,000 1,803,000
Severance taxes...................................... 494,000 413,000
Marketing service cost............................... 11,009,000 7,133,000
DD & A............................................... 1,789,000 1,606,000
Impairment of proved and unproved properties......... 60,000 0
General and administrative........................... 984,000 1,143,000
Provision for uncollectibles......................... 1,000 2,000
Exploration expense.................................. 681,000 276,000
----------- ----------
Total operating expenses........................... 16,975,000 12,376,000
----------- ----------
Income Before Interest and Other....................... 1,279,000 219,000
Interest:
Income............................................... 72,000 38,000
(Expense)............................................ (418,000) (143,000)
----------- ----------
Income Before Income Taxes............................. 933,000 114,000
Provision for income taxes............................. 0 0
----------- ----------
Net Income............................................. $ 933,000 $ 114,000
=========== ==========
</TABLE>
See accompanying notes to these financial statements.
F-20
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A wholly-owned subsidiary of Bonneville Pacific Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income......................................... $ 933,000 $ 114,000
Adjustment to reconcile net income to cash provided
by operating activities:
Depreciation, depletion and amortization......... 1,775,000 1,592,000
Gain on debt extinguishment......................
Amortization of loan cost........................ 14,000 14,000
Other............................................
Changes in operating assets and liabilities:
(Increase) decrease in:
Amount due from broker........................... (1,226,000) (385,000)
Accounts receivable.............................. 2,759,000 (45,000)
Prepaid expenses, inventories and other.......... 42,000 39,000
Increase (decrease) in:
Accounts payable and undistributed revenue....... (5,031,000) 1,258,000
----------- -----------
Net cash provided by operations.................. (734,000) 2,587,000
Cash Flows from Investing Activities:
Additions to oil and gas properties................ (4,691,000) (3,688,000)
Other net property and equipment (additions)
disposals......................................... (1,000) (180,000)
(Increases) decreases in other assets.............. 38,000 40,000
----------- -----------
Net cash used in investing activities.............. (4,654,000) (3,828,000)
Cash Flows from Financing Activities:
Net bank borrowings (payments)..................... 2,950,000 1,300,000
----------- -----------
Net cash used in financing activities.............. 2,950,000 1,300,000
----------- -----------
Net Increase (decrease) in Unrestricted Cash......... (2,438,000) 59,000
Unrestricted Cash Balance at Beginning of Period..... 2,742,000 545,000
----------- -----------
Cash Balance at End of Period........................ $ 304,000 $ 604,000
=========== ===========
</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)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND RETAINED EARNINGS
For the nine months ended September 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 $ -- $1,812,000 $ 7,779,000 $ 9,591,000
Intercompany payables
converted to Equity by
Parent..................... 1,663,000 1,663,000
Net income (loss)........... (2,190,000) (2,190,000)
----- ----- ---------- ----------- -----------
Balance December 31, 1998... 1,000 -- 3,475,000 5,589,000 9,064,000
Net income.................. 933,000 933,000
----- ----- ---------- ----------- -----------
Balance September 30, 1999.. 1,000 $ -- $3,475,000 $ 6,522,000 $ 9,997,000
===== ===== ========== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-22
<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 September 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.
Amounts Due from Broker--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 $150,000 and $-0-, for the periods ended
September 30, 1999 and 1998, respectively.
F-23
<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 nine 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.
Revenue Recognition--The Company recognizes revenue for oil and gas
production upon delivery of the commodity to the purchaser.
The Company records sales and related cost of sales on Gas and Electricity
Marketing transactions using the accrual method of accounting (i.e., the
transaction is recorded when the commodity is purchased and/or delivered).
Undistributed Revenue - Represents amounts due to other owners of jointly
owned oil and gas properties for their revenue from the properties.
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
records, 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
F-24
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Contingent Liabilities--The Company accrued a liability in the amount of
$250,000 for well connect fees in the nine months ended September 30, 1999.
The estimated liability arose as a result of a 1997 well connect agreement as
it was determined in the current year that a liability under this agreement
was reasonably possible.
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. There were no expenses
incurred by Bonneville Pacific Corporation on behalf of Bonneville Fuels
Corporation, nor by Bonneville Fuels Corporation on behalf of Bonneville
Pacific Corporation.
F-25
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 is
$16,556,667 on September 30, 1999. Outstanding borrowings amounted to
$8,800,000, with interest at a variable rate that approximated 7.15% at
September 30, 1999. The Company has issued letters of credit totaling
$2,300,000 which 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
September 30, 1999 amounted to $0. This facility bears interest at prime
(8.25% at September 30, 1999). This facility is collateralized by certain
trade receivables of BFC and has a maturity date of July 1, 2001.
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. Exploration Expense
Bonneville Fuels -- Exploration expense
<TABLE>
<CAPTION>
As of September
30,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Rentals................................................ $ 49,000 $ 61,000
Geological & Geophysical............................... 433,000 141,000
Dry holes and abandonments............................. 199,000 74,000
-------- --------
$681,000 $276,000
======== ========
</TABLE>
5. Commitments:
Office Lease--The Company leases office space under a noncancellable
operating lease. Total rental expense was approximately $110,000 and $100,000
for the periods ended September 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).......................................... $ 37,000
2000............................................................ 153,000
2001............................................................ 159,000
2002............................................................ 166,000
--------
$515,000
========
</TABLE>
F-26
<PAGE>
BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Bonneville Pacific Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. 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 nine months
ending September 30, 1999 due to the availability of intangible drilling costs
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.
7. Concentrations of Credit Risk and Price Risk Management:
Concentrations of Credit Risk--Substantially all of the Company's accounts
receivable at September 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 option 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 September 30, 1999 and 1998, BFC has financial and
physical contracts which hedge 4.4 bcf (billion cubic feet) and 5.5 bcf of
production, respectively, through December 2001.
The difference between the current market value of the hedging contracts
and the original market value of the hedging contracts was an unfavorable
$1,755,000 and a favorable $48,000 as of September 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.
F-27
<PAGE>
8. 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.
9. Subsequent Event:
On October 29, 1999, Carbon Energy Corporation acquired BFC in its
entirety. The purchase price for all of the stock of BFC was $23,581,000 plus
debt, net of working capital, of approximately $6,500,000 that remains at BFC.
F-28
<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-29
<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-30
<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-31
<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>
F-32
<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-33
<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-34
<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. The functional currency of the Company is
Canadian dollars.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term investments that are low risk, highly liquid and readily
convertible to known amounts of cash, 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
CEC records natural gas revenues on the entitlement method based on its
percentage ownership of current production. Each working interest owner in a
well generally has the right to a specific percentage of production, although
actual production sold may differ from an owner's ownership percentage. Under
entitlement accounting, a receivable is recorded when underproduction occurs
and a payable when overproduction occurs. At November 30, 1998, Resources was
neither underproduced or overproduced relative to its percentage ownership in
its 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.
F-35
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Estimated future site abandonment and restoration costs are provided using
the unit of production method over the life of proven reserves with the
current year provision included in depreciation, depletion and amortization
expense. Site abandonment and restoration expenditures incurred are recorded
as a reduction of the accumulated accrual.
Income Taxes
The liability method is used in measuring income taxes based on temporary
differences including both timing differences and other differences between
the tax basis of an asset or liability and its carrying amount in the
financial statements. This method uses the tax rate and tax law expected to
apply to taxable income in the periods in which the future income tax asset or
liability is expected to be realized. The Company is subject to tax under
applicable Canadian tax law.
Field Services
The Company recognizes revenue for field services provided to third parties
from its one-third ownership in the Carbon area liquids extraction plant as
well as from facilities in other fields at the time the services are rendered.
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>
F-36
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(4) Statements of Cash Flows
The Company elected to adopt Canadian Institute of Chartered Accountants
(CICA) 1540, Cash Flow Statements for fiscal 1998. This statement requires a
business enterprise to provide a statement of cash flows in place of a
statement of changes in financial position. Application of this statement is
required for fiscal years beginning on or after August 1, 1998, and earlier
application is encouraged. Cash flow information for earlier years that is
presented with corresponding information for the initial year of application
is restated to conform to the requirements of CICA 1540 as follows:
<TABLE>
<CAPTION>
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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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. The functional currency of the Company is
Canadian dollars.
Cash Equivalents
For purposes of the statements of cash flow, the Company considers all
short-term investments that are low risk, highly liquid and readily
convertible to known amounts of cash 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
CEC records natural gas revenues on the entitlement method based on its
percentage ownership of current production. Each working interest owner in a
well generally has the right to a specific percentage of production, although
actual production sold may differ from an owner's ownership percentage. Under
entitlement accounting, a receivable is recorded when the underproduction
occurs and a payable when overproduction occurs. At August 31, 1999, CEC was
neither underproduced or overproduced relative to its percentage ownership in
its 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.
F-50
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
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. Field services
revenues are recognized at the time the services are rendered.
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:
F-51
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<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>
(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):
F-52
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<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.
(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.
F-53
<PAGE>
CEC RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(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 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. On October 8, 1999, the commitment was increased
to $6.5 million. The commitment will be reduced to $5.75 million upon closing
of the BFC Acquisition. 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 consecutive monthly principal payments over a
period not to exceed 36 months. Outstanding borrowings amounted to $4.5
million at August 31, 1999. The repayment schedule would be based on the
technical review of the assets and the bank's determination of a reasonable
cash flow to be available for principal reductions. The repayment mechanism
requires the borrowing base to be reduced by a calculated amount and if
current draws are not in excess of the reduced borrowing base there are no
requirements for principal repayments. Based upon the most recent technical
review by the bank, the estimated required repayments (or borrowing base
reduction) required over the next twelve months would not exceed current
draws, consequently there are no borrowings classified as current liabilities.
F-54
<PAGE>
(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-55
<PAGE>
LETTER OF TRANSMITTAL Exhibit (a)(2)
--------------
FOR TENDERS OF
Common Stock of CEC Resources Ltd.
by
CARBON ENERGY CORPORATION
Pursuant to the Prospectus
dated January 18, 2000 of Carbon Energy Corporation
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON FEBRUARY 17, 2000 (THE "EXPIRATION DATE"), UNLESS THE OFFER IS EXTENDED.
TENDERED CEC RESOURCES LTD. COMMON STOCK MAY BE WITHDRAWN AT ANY TIME ON OR
PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
Deliver to: Harris Trust and Savings Bank (the "Exchange Agent")
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Hand Delivery: By Overnight Delivery:
Wall Street Station Receive Window Receive Window
P.O. Box 1023 Wall Street Plaza Wall Street Plaza
New York, NY 10268-1023 88 Pine Street, 19/th/ Floor 88 Pine Street, 19/th/ Floor
New York, NY 10005 New York, NY 10005
</TABLE>
By Facsimile Transmissions (for Eligible Institutions only):
(212) 701-7636
For Information (call collect):
(212) 701-7624
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
Ladies and Gentlemen:
The undersigned (the "Holder") acknowledges that the Holder has received
the Prospectus, dated January 18, 2000 (the "Prospectus"), of Carbon Energy
Corporation, a Colorado corporation ("Carbon"), and this Letter of Transmittal,
which may be amended from time to time (the "Letter of Transmittal"), which
together constitute Carbon's offer (the "Offer") to exchange one share of Carbon
common stock (the "Carbon Shares"), for each outstanding share of CEC Resources
Ltd. ("CEC") common stock (the "CEC Shares"). The Carbon Shares have been
registered under the Securities Act of 1933 (the "Securities Act") pursuant to a
Registration Statement, and the Prospectus is part of that Registration
Statement. For each CEC Share accepted for exchange, the Holder of the CEC
Share will receive one Carbon Share on the terms and subject to the condition
of the Offer. Holders of CEC Shares whose CEC Shares are accepted for exchange
will not receive any dividends or other form of payment on such CEC Shares
otherwise payable, the record date for which occurs on or after consummation of
the Offer.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
BOX A:
- ------------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF TENDERED CEC SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Name(s) and Address(es) of Registered Holder(s) CEC Common Certificate(s) Enclosed
(Please fill in exactly as Name(s) appear(s) on certificates) (Please List Below - Attach Additional List if Necessary)
- ------------------------------------------------------------------------------------------------------------------------------------
Certificate Number(s) Total Number of Shares Number of Shares
Represented by Tendered /(2)/
Certificates /(1)/
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
Total CEC Shares
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Need not be completed by stockholders tendering by book-entry transfer.
(2) Unless otherwise stated, it will be assumed that all CEC Shares above are
being tendered.
<PAGE>
Use of Letter of Transmittal; Documents to Be Delivered
This Letter of Transmittal is to be used either (a) if CEC Shares are to be
forwarded to the Exchange Agent or (b) unless an agent's message (as defined
below) is utilized, if delivery of CEC Shares is to be made by book-entry
transfer pursuant to the procedures set forth in the section of the Prospectus
entitled "The Exchange Offer - Book-Entry Transfer Procedures." Certificates
for all physically delivered CEC Shares, or a confirmation of a book-entry
transfer into the Exchange Agent's account at the Depository Trust Company
("DTC") of all CEC Shares delivered electronically, as well as a properly
completed and duly executed Letter of Transmittal (or facsimile thereof or, in
the case of a book-entry transfer, an agent's message) and any other documents
required by the Letter of Transmittal, must be received by the Exchange Agent at
one of its addresses set forth on the front page of this Letter of Transmittal
prior to the Expiration Date (as defined in the Prospectus).
The term "agent's message" means a message transmitted by DTC to, and
received by, the Exchange Agent that states that DTC has received an express
acknowledgment from a participant in DTC tendering outstanding securities that
are subject of the book entry confirmation and stating other matters listed
under "The Exchange Offer - Book-Entry Transfer Procedures" in the Prospectus.
Guaranteed Delivery Procedures
Shareholders who cannot deliver their CEC Shares and all other required
documents to the Exchange Agent by the Expiration Date must tender their CEC
Shares pursuant to the guaranteed delivery procedures set forth in the section
of the Prospectus entitled "The Exchange Offer - Guaranteed Delivery
Procedures." Pursuant to such procedure: (a) such tender must be made by or
through an Eligible Institution (as defined in Instruction 3), (b) a properly
completed and duly executed Notice of Guaranteed Delivery substantially in the
form provided by Carbon must be received by the Exchange Agent prior to the
Expiration Date, and (c) the certificates for all physically delivered CEC
Shares or a confirmation of a book-entry transfer into the Exchange Agent's
account at DTC of all CEC Shares delivered electronically, as well as a properly
completed and duly executed Letter of Transmittal (or facsimile thereof or, in
the case of a book-entry delivery, an agent's message) and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
within three business days after the Expiration Date, all as provided in the
section of the Prospectus entitled "The Exchange Offer - Guaranteed Delivery
Procedures."
Delivery Method
The method of delivery of CEC Shares and all other required documents is at
the option and risk of the tendering Holder. CEC Shares will be deemed
delivered only when actually received by the Exchange Agent (including, in the
case of a book-entry transfer, by book-entry confirmation). If certificates for
CEC Shares are sent by mail, registered mail with return receipt requested,
properly insured, is recommended.
No Conditional Tenders
No alternative, conditional or contingent tenders of CEC Shares will be
accepted, and no fractional CEC Shares will be accepted for exchange.
Authorization to Transfer CEC Shares for Carbon Shares; Delivery of Shares
Except as otherwise requested in special instructions in Boxes B or C, the
undersigned requests that the Carbon Shares to which the undersigned is entitled
be issued in the name and mailed to the address set forth above.
Subject to and effective upon acceptance for exchange of the CEC Shares
tendered herewith in accordance with the terms and subject to the condition of
the Exchange Offer, the undersigned hereby sells, assigns, and transfers to, or
upon the order of, Carbon all right, title and interest in and to all the CEC
Shares that are being tendered hereby (and any and all other CEC Shares or other
securities issued or issuable in respect thereof on or after January 20, 2000)
and irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned with respect to such CEC Shares
(and all such other CEC Shares or securities), with full power of substitution
(such power of attorney being deemed to be an irrevocable power coupled with an
interest), to (a) deliver certificates for such CEC Shares (and all such other
CEC Shares or securities), or transfer
2
<PAGE>
ownership of such CEC Shares (and all such other CEC Shares or securities) on
the account books maintained by Harris Trust and Savings Bank, together, in
either such case with all accompanying evidences of transfer and authenticity,
to or upon the order of Carbon and (b) to deliver as the undersigned's agent the
Carbon Shares to which the undersigned is entitled upon the surrender of the CEC
Shares.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, assign and transfer the CEC Shares tendered
hereby (and any and all other CEC Shares or other securities issued or issuable
in respect thereof on or after January 20, 2000), and that when the same are
accepted for exchange by Carbon, Carbon will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claims. The undersigned will, upon request, execute
and deliver any additional documents deemed by the Exchange Agent or Carbon to
be necessary or desirable to complete the assignment and transfer of the CEC
Shares tendered hereby (and all such other CEC Shares or securities). The
undersigned has read and agrees to all of the terms of the Offer.
The name(s) and address(es) of the registered Holder(s) should be printed
in Box A under "Description of Tendered CEC Shares" exactly as they appear on
the CEC Shares tendered hereby. The certificate number(s) and the total number
of CEC Shares represented by the certificate(s), together with the number of
such CEC Shares that the undersigned wishes to tender, should be indicated in
the appropriate boxes in Box A under "Description of Tendered CEC Shares."
Unless otherwise requested in special instructions in Box B: "Special
Issuance Instructions" or Box C: "Special Delivery Instructions," please issue
the Carbon Shares to which the undersigned is entitled in the name indicated in
Box A: "Description of Tendered CEC Shares" and send such Carbon Shares to the
undersigned at the address(es) appearing in Box A: "Description of Tendered CEC
Shares." If Box B: "Special Issuance Instructions" is completed, please issue
the Carbon Shares to which the undersigned is entitled in the name indicated in
Box B: "Special Issuance Instructions" and send such Carbon Shares to the
address appearing in Box B: "Special Issuance Instructions." If Box C: "Special
Delivery Instructions" is completed, please issue the Carbon Shares in the name
indicated in Box A: "Description of Tendered CEC Shares" and send such Carbon
Shares to the address(es) so indicated in Box C: "Special Delivery
Instructions."
Other Provisions
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall not be affected by, and shall survive, the death or incapacity
of the undersigned, and any obligation of the undersigned hereunder shall be
binding upon the successors, personal representatives, assigns, heirs,
executors, administrators, trustees in bankruptcy, personal and legal
representatives of the undersigned. Except as stated in the Offer, this tender
is irrevocable, provided that CEC Shares tendered pursuant to the Offer may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer - Withdrawal Rights" section of the Prospectus and the instructions
contained in this Letter of Transmittal. See Instruction 11 hereto.
The undersigned understands that tenders of CEC Shares pursuant to the
Offer and the instructions hereto will constitute a binding agreement between
the undersigned and Carbon upon the terms and subject to the condition of the
Offer. The undersigned recognizes that the Offer is not conditioned upon any
minimum amount of CEC Shares being tendered for exchange. However, the Offer is
subject to a certain condition. Please see the Prospectus under the section
titled "The Exchange Offer - Condition To The Exchange" and "The Exchange Offer
- - Termination Of The Exchange Offer."
The Offer is not being made to, nor will tenders be accepted from or on
behalf of, Holders of CEC Shares in any jurisdiction in which the making or
acceptance of the Offer would not be in compliance with the laws of such
jurisdiction.
The instructions included with this Letter of Transmittal must be followed
in their entirety. Questions and requests for assistance or for additional
copies of the Prospectus or this Letter of Transmittal may be directed to the
Exchange Agent at the address listed above.
3
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- -----------------------------------------------------
Box B: Box C:
- ---------------------------------------------------- -----------------------------------------------------
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 2, 3, 4 and 5) (See Instructions 2 and 4)
To be completed ONLY if the Carbon Shares are to To be completed ONLY if the Carbon Shares to be
be issued in the name of and sent to someone issued should be sent to someone other than the
other than as set forth in Box A. undersigned or to the undersigned at an address other
than as set forth in Box A.
Issue Carbon Shares to:
Name _____________________________________ Mail or deliver Carbon Shares to:
(Please Print)
Name _________________________________
(Please Print)
Address __________________________________
___________________________________________ Address ______________________________
___________________________________________ _______________________________________
(Include Zip Code) _______________________________________
(Include Zip Code)
___________________________________________
(Tax Identification or Social Security No.)
Is this a permanent address change?
Yes [_] No [_]
- ---------------------------------------------------- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BOX D:
- --------------------------------------------------------------------------------
SIGN HERE
(See Instructions 4 and 13)
________________________________________________________________________________
_________________________________________________________________
(Signature of Shareholder)
Date: _____________________, 2000
(Must be signed by the registered Holder(s) exactly as name(s) appear(s) on
CEC Shares or by person(s) authorized to become registered Holder(s) by CEC
Shares and documents transmitted herewith. If signature is by trustee,
executors, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, please provide the following
information. See Instruction 13.)
Name(s)_________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________
(Please Print)
Capacity (full title)_____________________________________________________
Address___________________________________________________________________
__________________________________________________________________________
(Include Zip Code)
Area Code and Telephone No. (__________) ________________________________
Tax Identification or Social Security No. _______________________________
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
BOX E:
SIGNATURE GUARANTEE
- --------------------------------------------------------------------------------
To be completed ONLY if required by Instruction 3.
The undersigned hereby guarantees the signature(s) which appear(s) on this
Letter of Transmittal and the CEC Shares and any stock powers surrendered
pursuant to this Letter of Transmittal.
__________________________________________________________________________
(Name of Firm Issuing Guarantee)
__________________________________________________________________________
(Signature of Officer)
__________________________________________________________________________
(Title of Officer Signing this Guarantee)
__________________________________________________________________________
(Address of Guaranteeing Firm)
- --------------------------------------------------------------------------------
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A MANUALLY SIGNED FACSIMILE
HEREOF), TOGETHER WITH ALL REQUIRED DOCUMENTS, OR A NOTICE OF GUARANTEED
DELIVERY, MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
5
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Offer
1. Use of Letter of Transmittal. This Letter of Transmittal, properly
completed and duly executed, together with the surrender of CEC Shares and any
other documents required by this Letter of Transmittal, should be sent by mail
or delivered by hand to the Exchange Agent, in each case at the appropriate
address set forth on the front page of the Letter of Transmittal, in order to
make an effective surrender. Until all necessary steps have been taken to
surrender the CEC Shares, no exchange shall be made. The method of delivery of
all documents is at the option and risk of the undersigned and the delivery will
be deemed made only when actually received. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. A return
envelope is enclosed for your convenience.
2. Special Issuance and Delivery Instructions. If the Carbon Shares are
to be issued to someone other than the person named in Box A of this Letter of
Transmittal or mailed to an address other than shown in Box A, then Boxes B
and/or C of this Letter of Transmittal should be completed.
3. Medallion Guarantee of Signatures. No signature guarantee on this
Letter of Transmittal is required (a) if this Letter of Transmittal is signed by
the registered Holder of CEC Shares surrendered herewith, unless such Holder has
completed Box B, or (b) if such CEC Shares are surrendered for the account of an
eligible guarantor institution pursuant to Rule 17Ad-15 promulgated under the
Securities Exchange Act of 1934, as amended (an "Eligible Institution"). IN ALL
OTHER CASES, ALL SIGNATURES ON THIS LETTER OF TRANSMITTAL MUST BE GUARANTEED
WITH A MEDALLION OF GUARANTEE BY AN ELIGIBLE INSTITUTION IN BOX E. See
Instruction 4. Public notaries cannot execute acceptable guarantees of
signatures.
4. Signatures on this Letter of Transmittal, Stock Powers and
Endorsements. If this Letter of Transmittal is signed by the registered
Holder(s) of the CEC Shares surrendered hereby, the signature(s) on Box D must
correspond with the name(s) as written on the face of the CEC Shares without
alteration, enlargement or any change whatsoever.
If any of the CEC Shares surrendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any surrendered CEC Shares are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of CEC
Shares.
If this Letter of Transmittal or any CEC Shares or stock powers are signed
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
Carbon of such person's authority to so act must be submitted.
When this Letter of Transmittal is signed in Box D by the registered
Holder(s) of the CEC Shares listed and transmitted hereby, no endorsements of
CEC Shares or separate stock powers are required. If this Letter of Transmittal
is signed by a person other than the registered Holder(s) of the CEC Shares
listed, the CEC Shares must be endorsed in blank or accompanied by appropriate
stock powers, in either case signed exactly as the name(s) of the registered
Holder(s) appear(s) on such CEC Shares. Signatures on such CEC Shares or stock
powers must be guaranteed by an Eligible Institution in Box E.
5. Stock Transfer Taxes. Except as set forth in this Instruction 5,
Carbon will pay any stock transfer taxes with respect to the exchange and tender
of CEC Shares to it or its order pursuant to the Offer. If, however, issuance
of Carbon Shares is to be made in the name of a person other than the registered
Holder(s) of CEC Shares, or if the CEC Shares are registered in the name of any
person other than the person(s) signing this Letter of
6
<PAGE>
Transmittal, and a transfer tax is imposed for any reason other than the
exchange of Carbon Shares for CEC Shares, then the amount of any transfer taxes
will be payable by the registered Holder(s) tendering the CEC Shares. 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 registered Holder(s) tendering the CEC Shares.
6. Inadequate Space. If the space provided herein under Box A:
"Description of Tendered CEC Shares" is inadequate, the CEC Share certificate
numbers and/or the number of CEC Shares should be listed on a separate schedule
attached hereto.
7. Partial Tenders (not applicable to stockholders who tender by book-
entry transfer). If fewer than all the CEC Shares represented by any
certificate delivered to the Exchange Agent are to be tendered, fill in the
number of CEC Shares which are to be tendered in the box entitled "Number of
Shares Tendered". In such case, a new certificate for the remainder of the CEC
Shares represented by the old certificate will be sent to the person(s) signing
this Letter of Transmittal, unless otherwise provided in the appropriate box on
this Letter of Transmittal, as promptly as practicable following the expiration
or termination of the Offer. All CEC Shares represented by certificates
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
8. Mutilated, Lost or Destroyed CEC Shares. If the CEC Shares which the
registered Holder(s) want(s) to surrender have been mutilated, lost, stolen or
destroyed, that fact should be indicated on the face of this Letter of
Transmittal which should be delivered to the Exchange Agent after being
otherwise properly completed and duly executed. In such event, the Exchange
Agent will forward additional documentation necessary to be completed in order
to surrender effectively such mutilated, lost or destroyed CEC Shares.
9. Validity of Surrender: Irregularities. All questions as to validity,
form and eligibility of or surrender of CEC Shares will be determined by
Carbon, and such determination shall be final and binding. Carbon reserves the
right to waive any irregularities or defects in the surrender of any CEC Shares,
and its interpretation of the terms and conditions of this Letter of Transmittal
with respect to such irregularities or defects shall be final and binding. A
surrender will not be deemed to have been made until all irregularities have
been cured or waived. Carbon and the Exchange Agent are not obligated to give
notice of defects or irregularities in any transmittal, and shall not incur any
liability for failure to give such notice.
10. Inquiries. Questions and requests for assistance with respect to the
surrender and exchange of CEC Shares and this Letter of Transmittal, as well as
request for additional copies hereof, may be directed to the Exchange Agent at
the addresses provided on page 1 hereof, or by telephone at (212) 701-7624.
11. Withdrawal of Tender. Tenders of CEC Shares may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
12. Waiver of Condition. Carbon reserves the absolute right to waive the
specified condition in the Offer, in whole at any time or in part from time to
time, in the case of any CEC Shares tendered hereby. See "The Exchange Offer -
Condition To The Exchange" in the Prospectus.
13. Supporting Evidence. In case any Letter of Transmittal, CEC Shares,
endorsement or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee or in any other fiduciary or representative
capacity, or by an officer of a corporation on behalf of the corporation, such
persons should so indicate when signing and there should be submitted with this
Letter of Transmittal, surrendered CEC Shares and/or stock power documentary
evidence of appointment and authority to act in such capacity (including court
orders and corporate resolutions where necessary), as well as evidence of the
authority of the person making such execution to transfer CEC Shares. Such
documentary evidence of authority must be in a form satisfactory to the Exchange
Agent.
YOU ARE URGED TO COMPLETE AND RETURN THIS LETTER OF TRANSMITTAL PROMPTLY.
7
<PAGE>
IMPORTANT TAX INFORMATION
Under current federal income tax law, a person whose CEC Shares are
surrendered for exchange and who may later receive a distribution or dividend as
a Holder of Carbon Shares is required to provide the Exchange Agent with his or
her correct taxpayer identification number ("TIN") on Substitute Form W-9 or
otherwise establish a basis for exemption from backup withholding. If such
person is an individual, the TIN is such person's social security number. If
the Exchange Agent is not provided with the correct taxpayer identification
number, the Holder may be subject to a $50 penalty imposed by the Internal
Revenue Service. In addition, if a stockholder makes a false statement that
results in no imposition of backup withholding, and there was no reasonable
basis for such statement, a $500 penalty may be imposed by the Internal Revenue
Service.
Certain Holders of CEC Shares (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that stockholder must submit a statement, signed under
penalties of perjury, attesting to that individual's exempt status. Such
statements may be obtained from the Exchange Agent. Exempt stockholders, other
than foreign individuals, should furnish their TIN, write "Exempt" in Part II of
the Substitute Form W-9 below and sign, date and return the Substitute Form W-9
to the Exchange Agent. See the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 for additional
instructions. A stockholder should consult his or her tax advisor as to such
stockholder's qualification for exemption from backup withholding and the
procedure for obtaining such exemption.
If backup holding applies, the Exchange Agent is required to withhold 31%
of any payments made to the stockholder. Backup withholding is not an additional
tax. Rather, the tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent federal income tax backup withholding on payments of cash that
are made to a stockholder with respect to Carbon Shares acquired pursuant to the
Offer, the stockholder must provide the Exchange Agent with such stockholder's
correct TIN by completing the form below certifying under penalties of perjury
(i) that the TIN provided on Substitute Form W-9 is correct (or that such
stockholder is awaiting a TIN) and (ii) that (a) such stockholder has not been
notified by the Internal Revenue Service that such stockholder is subject to
backup withholding as a result of a failure to report all interest or dividends
or (b) the Internal Revenue Service has notified such stockholder that such
stockholder is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The stockholder is required to give the Exchange Agent the social security
number or employer identification number of the record Holder of the CEC Shares
tendered hereby. If the CEC Shares are in more than one name or are not in the
name of the actual owner, consult the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 for additional guidance on
which number to report. If the tendering stockholder has not been issued a TIN
and has applied for a number or intends to apply for a number in the near
future, the stockholder should write "Applied For" in the space provided for the
TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For" is
written in Part I and the Exchange Agent is not provided with the TIN within 60
days, the Exchange Agent will withhold 31% of all payments on the purchase
price, if any, until a TIN is provided to the Exchange Agent.
8
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE Part I - Please provide your TIN _________________________
Form W-9 in the box at right and certify Social Security Number
by signing and dating below.
Department of the Treasury OR _____________________________
Internal Revenue Service Employer Identification Number
(if awaiting TIN write "Applied
For")
----------------------------------------------------------------------------
Part II - For Payees Exempt from Backup Withholding, see enclosed
Guidelines for Certification of Taxpayer Identification Number on
Payer's Request for Taxpayer Substitute Form W-9, write "Exempt" in this Part II and sign this
Identification Number (TIN) form.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
CERTIFICATION - Under the penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number
(or a Taxpayer Identification Number has not been issued to me) and either (i) I
have mailed or delivered an application to receive a Taxpayer Identification
Number to the appropriate Internal Revenue Service ("IRS") or Social Security
Administration office or (ii) I intend to mail or deliver an application in the
near future. (I understand that if I do not provide a Taxpayer Identification
Number within 60 days, 31% of all reportable payments to me thereafter will be
withheld until I provide a number); and
(2) I am not subject to backup withholding either because I have not been
notified by the IRS that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the IRS has notified me that I
am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS - You must cross out item (2) above if you have been
notified by the IRS that you are subject to backup withholding because of
underreporting interest or dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup withholding you received
another notification from the IRS that you are no longer subject to backup
withholding, do not cross out item (2). (Also see instructions to the enclosed
Guidelines).
Signature ___________________________________ Date __________________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THIS EXCHANGE OFFER.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
9
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
A. TIN - The Taxpayer Identification Number for most individuals is your
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Give the EMPLOYER
Give the SOCIAL IDENTIFICATION
For this type of account SECURITY Number of For this type of account Number of
----------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
1. Individual The individual 7. A valid trust, estate Legal entity /(4)/
or pension trust
2. Two or more individuals The actual owner of the
(joint account) account or, if combined 8. Corporate The corporation
funds, the first
individual on the
account /(1)/
9. Association, club, The organization
3. Custodian account of a The minor /(2)/ religious, charitable,
minor (Uniform Gift to educational or other
Minors Act) tax-exempt organization
4. a. The usual revocable The grantor-trustee /(1)/
savings trust 10. Partnership The partnership
(grantor is also
trustee)
b. So-called trust The actual owner /(1)/
account that is not 11. A broker or registered The broker or nominee
a legal or valid nominee
trust under state
law
12. Account with the The public entity
5. Sole proprietorship The owner /(3)/ Department of
Agriculture
6. Sole proprietorship The owner /(3)/
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. See item 5 or 6. You may also enter your
business name.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
Note: If no name is circled where there is more than one name, the number will
be considered to be that of the first name listed.
B. Exempt Payees - The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to
establish that you are exempt. Write "Exempt" in Part II of the form, sign
and date the form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under Section 501(a), or an individual
retirement plan (IRA) or a custodial account under Section 403(b)(7); (3)
The United States or any of its agencies or instrumentalities; (4) A state,
the District of Columbia, a possession of the United States, or any of
their political subdivisions or instrumentalities; (5) A foreign government
or any of its political subdivisions, agencies or instrumentalities; (6) An
international organization or any of its agencies or instrumentalities; (7)
A foreign central bank of issue; (8) A dealer in securities or commodities
required to register in the U.S. or a possession of the U.S.; (9) A futures
commission merchant registered with the Commodity Futures Trading
Commission; (10) A real estate investment trust; (11) An entity registered
at all times during the tax year under the Investment Company Act of 1940;
(12) A common trust fund operated by a bank under Section 584(a); (13) A
financial institution; and (14) A person registered under the Investment
Advisors Act of 1940 who regularly acts as a broker.
10
<PAGE>
Exhibit (a)(3)
--------------
Notice of Guaranteed Delivery
for
Tender of Common Shares
of
CEC Resources Ltd.
(Not to Be Used for Signature Guarantees)
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to accept the Offer (as defined below) if certificates
representing common shares (the "CEC Shares") of CEC Resources Ltd. ("CEC") are
not immediately available or time will not permit all required documents to
reach Harris Trust and Savings Bank (the "Exchange Agent") on or prior to the
Expiration Date (as defined in the Prospectus), or the procedures for delivery
of book-entry transfer cannot be completed on a timely basis. This Notice of
Guaranteed Delivery may be delivered by hand or sent by facsimile or mailed to
the Exchange Agent. See the sections entitled "The Exchange Offer - Guaranteed
Delivery Procedures" and "The Exchange Offer - The Exchange Agent" of the
Prospectus.
The Exchange Agent for the Offer is:
HARRIS TRUST AND SAVINGS BANK
By Mail: By Hand and Overnight Carrier:
Wall Street Station Receive Window
P.O. Box 1023 Wall Street Plaza
New York, NY 10268-1023 88 Pine Street, 19/th/ Floor
New York, NY 10005
By Facsimile Transmissions:
(for Eligible Institutions only)
(212) 701-7636
For Information (call collect):
(212) 701-7624
Delivery of this Notice of Guaranteed Delivery to an address other than as
set forth above or transmission of instructions via facsimile transmission to a
number other than as set forth above will not constitute a valid delivery.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided in the
signature box on the Letter of Transmittal.
The Eligible Institution that completes this form must communicate the
guarantee to the Exchange Agent and must deliver the Letter of Transmittal and
certificates for CEC Shares to the Exchange Agent within the time period shown
herein. Failure to do so could result in a financial loss to such Eligible
Institution.
The guarantee on the following page must be completed.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Carbon Energy Corporation, a Colorado
corporation, upon the terms and subject to the conditions of the exchange offer
set forth in the Prospectus, dated January 18, 2000 (the "Prospectus") and in
the related Letter of Transmittal (which, together with any amendments or
supplements thereto, collectively constitute the "Offer"), receipt of each of
which is hereby acknowledged, the number of CEC Shares indicated below pursuant
to the guaranteed delivery procedures set forth in "The Exchange Offer -
Guaranteed Delivery Procedures" and "The Exchange Offer - The Exchange Agent" of
the Prospectus.
- ------------------------------------------------------------------------------
Number of CEC Shares: _____________________________________
Certificate No(s). (if available): _________________________
If CEC Share(s) will be tendered by book-entry transfer, check the box. [ ]
Account Number: ____________________________________
Date: ____________________ Area Code and Telephone Number(s): _____________
Name(s) of Record Holder(s): ________________________________________________
(Please Print)
Signature(s): _______________________________________________________________
Address(es): ________________________________________________________________
(Zip Code)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(Not to Be Used for Signature Guarantee)
The undersigned, a firm that is a bank, broker, dealer, credit union,
savings association or other entity which is a member in good standing of the
Securities Transfer Agents Medallion Program, hereby guarantees to deliver to
the Exchange Agent at one of its addresses set forth above either the
certificates representing all tendered CEC Shares, in proper form for transfer,
a book-entry confirmation (as defined in the Offer), together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees, or, in the case of book-entry delivery of
Shares, an agent's message (as defined in the Offer), and any other documents
required by the Letter of Transmittal within three business days after the date
of execution of this Notice of Guaranteed Delivery.
Name of Firm: ______________________________________________________________
Authorized Signature
Address: ____________________________ Name: ________________________________
Print Type or Print
______________________________________ Title:________________________________
Zip Code
Area Code and Tel. No: _______________ Dated _________________________ , 2000
Note: Do not send Certificates for CEC Shares with this Notice of Guaranteed
Delivery. Certificates for CEC Shares should be sent with your Letter of
Transmittal.
- ------------------------------------------------------------------------------
<PAGE>
Exhibit (a)(4)
--------------
LETTER TO BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES REGARDING THE
TENDER FOR EXCHANGE OF SHARES OF COMMON STOCK
of
CEC RESOURCES LTD.
PURSUANT TO THE PROSPECTUS DATED JANUARY 18, 2000
of
CARBON ENERGY CORPORATION
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON FEBRUARY 17, 2000 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
- --------------------------------------------------------------------------------
January 21, 2000
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Carbon Energy Corporation, a Colorado corporation ("Carbon"), is
offering to exchange one share of its common stock, no par value, for each share
of the outstanding shares of common stock, no par value (the "Shares"), of CEC
Resources Ltd., an Alberta corporation, ("CEC"), upon the terms and subject to
the condition set forth in the Prospectus dated January 18, 2000 (the "Offer to
Exchange"), and in the related Letter of Transmittal (which, as amended and
supplemented from time to time, together constitute the "Offer") enclosed
herewith. All capitalized terms used but not defined herein shall have the
meaning ascribed to them in the Letter of Transmittal.
Please furnish copies of the enclosed materials to those of your
clients for whose accounts you hold Shares in your name or in the name of your
nominee.
Enclosed herewith for your information and forwarding to your clients
are copies of the following documents:
1. The Prospectus dated January 18, 2000.
2. The Letter of Transmittal to tender Shares for your use and
for the information of your clients, along with Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9. Facsimile copies of the
Letter of Transmittal (with manual signatures) may be used to tender Shares.
3. A letter to stockholders of CEC from Patrick R. McDonald,
President of CEC, together with a Solicitation/Recommendation Statement on
Schedule 14D-9 filed with the Securities and Exchange Commission by CEC and
mailed to
<PAGE>
stockholders of CEC, each recommending that CEC's stockholders accept the Offer
and tender their Shares.
4. The Notice of Guaranteed Delivery to be used to tender Shares
pursuant to the Offer if none of the procedures for tendering Shares set forth
in the Offer to Exchange can be completed on a timely basis.
5. A printed form of letter which may be sent to your clients for
whose accounts you hold Shares registered in your name or in the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Offer.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS
AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY 17, 2000, UNLESS THE
OFFER IS EXTENDED.
--------------------------------
Please note the following:
1. The Offer is to exchange one share of Carbon common stock for
each outstanding share of CEC common stock. The Offer results from the
acquisition of Bonneville Fuels Corporation, originally proposed by CEC and
completed by Carbon. In order to combine with Bonneville Fuels Corporation,
obtain financing for the combination with Bonneville Fuels and avoid adverse
income tax consequences to CEC, the following occurred:
. CEC entered into an agreement to purchase the shares of Bonneville Fuels
Corporation from a third party;
. CEC assigned the agreement to Carbon on Carbon's agreement to make this
Offer and comply with other terms of an exchange and financing agreement;
. Carbon closed an equity financing for the purpose of purchasing all of the
shares of Bonneville Fuels Corporation;
. Carbon completed the purchase of shares of Bonneville Fuels Corporation;
and
. Carbon commenced the Offer.
The overall goal of CEC and Carbon is to provide each CEC shareholders with the
opportunity to own shares in a company that consists of both Bonneville Fuels
Corporation and CEC.
2. The Offer is being made for any and all of the outstanding
Shares.
3. Except as set forth in the Letter of Transmittal, tendering
stockholders will not be obligated to pay stock transfer taxes on the transfer
of Shares pursuant to the Offer. Carbon will not pay any fee or commission to
any broker or dealer or to any other person (other than Harris Trust and Savings
Bank, as Exchange Agent (the "Exchange Agent") in connection with the
solicitation of tenders of Shares for exchange pursuant to the Offer.
2
<PAGE>
Upon the terms and subject to the conditions of the Offer (including,
if the Offer is extended or amended, the terms and conditions of any such
extension or amendment), Carbon will accept for exchange all Shares which are
validly tendered and not properly withdrawn on or prior to the Expiration Date.
In order to take advantage of the Offer, (i) a duly executed and properly
completed Letter of Transmittal (or a manually signed facsimile thereof) and any
required signature guarantees or, in the case of a book-entry transfer, an
Agent's Message, and any other required documents should be sent to the Exchange
Agent and (ii) certificates representing the tendered Shares (the "Share
Certificates") or a timely Book-Entry Confirmation should be delivered to the
Exchange Agent in accordance with the instructions set forth in the Offer to
Exchange and the Letter of Transmittal.
Holders of Shares whose Share Certificates are not immediately
available or who cannot deliver their Share Certificates and all other required
documents to the Exchange Agent or complete the procedures for book-entry
transfer prior to the Expiration Date must tender their Shares according to the
guaranteed delivery procedures set forth under the caption "The Exchange Offer--
Guaranteed Delivery Procedures" in the Offer to Exchange and in the Letter of
Transmittal.
Neither Carbon nor any officer, director, stockholder, agent or other
representative of Carbon will pay any fees or commissions to any broker, dealer
or other person (other than the Exchange Agent as described in the Offer to
Exchange) for soliciting tenders of Shares for exchange pursuant to the Offer.
Carbon will, however, upon request, reimburse you for customary mailing and
handling expenses incurred by you in forwarding any of the enclosed materials to
your clients. Carbon will pay or cause to be paid any stock transfer taxes
payable on the transfer of Shares to it, except as otherwise provided in
Instruction 5 to the Letter of Transmittal.
Any inquiries you may have with respect to the Offer should be
addressed to Kevin D. Struzeski, Chief Financial Officer of Carbon Energy
Corporation, c/o Bonneville Fuels Corporation, 1700 Lincoln Street, Suite 1150,
Denver, Colorado 80290, telephone number (303) 863-1555.
Requests for copies of the enclosed materials may be directed to the
Assistant Secretary at the above address and telephone number.
Very truly yours,
Carbon Energy Corporation
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE
YOU OR ANY OTHER PERSON THE AGENT OF CARBON, THE EXCHANGE AGENT OR ANY AFFILIATE
OF ANY OF THE FOREGOING, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE
OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
3
<PAGE>
Exhibit (a)(5)
--------------
LETTER TO CLIENTS
REGARDING THE TENDER FOR EXCHANGE OF
SHARES OF COMMON STOCK
of
CEC RESOURCES LTD.
PURSUANT TO THE PROSPECTUS DATED JANUARY 18, 2000
of
CARBON ENERGY CORPORATION
_______________________________________________________________________________
THIS OFFER AND YOUR WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M. NEW YORK CITY
TIME ON FEBRUARY 17, 2000 (THE "EXPIRATION DATE") UNLESS EXTENDED.
________________________________________________________________________________
January 21, 2000
To Our Clients:
Enclosed for your consideration are the Prospectus, dated January 18, 2000
(the "Offer to Exchange"), and the related Letter of Transmittal (which, as
amended and supplemented from time to time, together constitute the "Offer")
relating to an offer by Carbon Energy Corporation, a Colorado corporation
("Carbon"), to exchange one share of its Common Stock, no par value, for each
share of the outstanding shares of common stock, no par value (the "Shares") of
CEC Resources Ltd., an Alberta corporation ("CEC"), upon the terms and subject
to the condition set forth in the Offer.
This material is being forwarded to you as the beneficial owner of Shares
carried by us in your account but not registered in your name.
A TENDER OF SHARES FOR EXCHANGE CAN ONLY BE MADE BY US AS THE HOLDER OF
RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED
TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER YOUR
BENEFICIAL OWNERSHIP OF SHARES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish to tender any
or all of the Shares held by us for your account, upon the terms and subject to
the conditions set forth in the Offer.
Please note the following:
1. The Offer is to exchange one share of Carbon common stock for each
outstanding share of CEC common stock.
<PAGE>
2. The Offer is being made for any and all of the outstanding Shares.
3. Except as set forth in the Letter of Transmittal, tendering
stockholders will not be obligated to pay stock transfer taxes on the transfer
of Shares pursuant to the offer. Carbon will not pay any fee or commission to
any broker or dealer or to any other person (other than the Exchange Agent) in
connection with the solicitation of tenders of Shares pursuant to the Offer.
If you wish to have us tender for exchange any or all of your Shares,
please so instruct us by completing, executing, detaching and returning to us
the instruction form contained in this letter. An envelope to return your
instructions to us is enclosed. If you authorize the tender exchange of your
Shares, all such Shares will be tendered for exchange unless otherwise indicated
in your instruction form. PLEASE FORWARD YOUR INSTRUCTIONS TO US AS SOON AS
POSSIBLE TO ALLOW US AMPLE TIME TO TENDER FOR EXCHANGE YOUR SHARES ON YOUR
BEHALF PRIOR TO THE EXPIRATION OF THE OFFER.
The Offer is made solely pursuant to the Offer to Exchange and the related
Letter of Transmittal and any supplements or amendments thereto. The Offer is
not being made to, nor will tenders be accepted from or on behalf of, holders of
Shares residing in any jurisdiction in which the making of the Offer or
acceptance thereof would not be in compliance with the securities laws of such
jurisdiction.
2
<PAGE>
INSTRUCTIONS WITH RESPECT TO THE TENDER OF
SHARES OF COMMON STOCK OF
CEC RESOURCES LTD.
PURSUANT TO THE PROSPECTUS DATED JANUARY 18, 2000
of
CARBON ENERGY CORPORATION
The undersigned acknowledge(s) receipt of your letter and the enclosed
Prospectus dated January 18, 2000 (the "Offer to Exchange"), and the related
Letter of Transmittal (which, as amended and supplemented from time to time,
together constitute the "Offer"), relating to an offer by Carbon Energy
Corporation, a Colorado corporation ("Carbon"), to exchange one share of its
common stock, no par value, for each share of the outstanding shares of common
stock, no par value (the "Shares"), of CEC Resources Ltd., an Alberta
corporation, upon the terms and conditions set forth in the Offer.
This will instruct you to tender to Carbon the number of Shares indicated
below (or if no number is indicated below, all Shares) which are held by you for
the account of the undersigned, upon the terms and subject to the conditions set
forth in the Offer.
Number of Shares of Common Stock SIGN HERE
to be Tendered:
______________________ Shares * _________________________________________
_________________________________________
Signature(s)
Dated:________________, 2000
_________________________________________
_________________________________________
Print Name(s)
_________________________________________
_________________________________________
Print Address(es)
_________________________________________
Area Code and Telephone Number(s)
_________________________________________
Tax Identification or Social Security
Number(s)
_______________
* Unless otherwise indicated, it will be assumed that all Shares held by us for
your account are to be tendered.
<PAGE>
Exhibit (a)(6)
--------------
LETTER TO DTC PARTICIPANTS
REGARDING THE TENDER FOR EXCHANGE OF
SHARES OF COMMON STOCK
of
CEC RESOURCES LTD.
PURSUANT TO THE PROSPECTUS DATED JANUARY 18, 2000
of
CARBON ENERGY CORPORATION
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON FEBRUARY 17, 2000 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
- -------------------------------------------------------------------------------
January 21, 2000
To The Depository Trust Corporation Participants:
Carbon Energy Corporation, a Colorado corporation ("Carbon"), is offering
to exchange one share of its common stock, no par value, for each share of the
outstanding shares of common stock, no par value (the "Shares"), of CEC
Resources Ltd., an Alberta corporation, ("CEC"), upon the terms and subject to
the condition set forth in the Prospectus, dated January 18, 2000 (the "Offer
to Exchange"), and in the related Letter of Transmittal (which, as amended and
supplemented from time to time, together constitute the "Offer") enclosed
herewith. All capitalized terms used but not defined herein shall have the
meaning ascribed to them in the Letter of Transmittal.
Please furnish copies of the enclosed materials to those of your clients
for whose accounts you hold Shares in your name or in the name of your nominee.
Enclosed herewith are copies of the following documents:
1. The Prospectus dated January 18, 2000.
2. The Letter of Transmittal to tender Shares for your use and for
the information of your clients, along with Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9. Facsimile copies of the
Letter of Transmittal (with manual signatures) may be used to tender Shares.
3. A letter to stockholders of CEC from Patrick R. McDonald,
President of CEC, together with a Solicitation/Recommendation Statement on
<PAGE>
Schedule 14D-9 filed with the Securities and Exchange Commission by CEC and
mailed to the stockholders of CEC, each recommending that CEC's stockholders
accept the Offer and tender their Shares for exchange.
4. The Notice of Guaranteed Delivery to be used to tender Shares
pursuant to the Offer if none of the procedures for tendering Shares set forth
in the Offer to Exchange can be completed on a timely basis.
5. A printed form of letter which may be sent to your clients for
whose accounts you hold Shares registered in your name or in the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Offer.
To participate in the Offer, a beneficial holder must either (i) cause to
be delivered to Harris Trust and Savings Bank, as Exchange Agent (the "Exchange
Agent") at the address set forth in the Letter of Transmittal Shares in proper
form for transfer together with a properly executed Letter of Transmittal or
(ii) cause a DTC Participant to tender such holder's Shares to the Exchange
Agent's account maintained at The Depository Trust Company ("DTC") for the
benefit of the Exchange Agent through DTC's Automated Tender Offer Program
("ATOP"), including transmission of a computer-generated message that
acknowledges and agrees to be bound by the terms of the Letter of Transmittal.
By complying with DTC's ATOP procedures with respect to the Offer, the DTC
Participant confirms on behalf of itself and the beneficial owners as fully as
if it completed, executed and returned the Letter of Transmittal to the Exchange
Agent itself.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY 17, 2000, UNLESS THE OFFER IS
EXTENDED.
________________________________
Please note the following:
1. The Offer is to exchange one share of Carbon common stock for each
outstanding share of CEC common stock.
2
<PAGE>
2. The Offer is being made for any and all of the outstanding Shares.
3. Except as set forth in the Letter of Transmittal, tendering
stockholders will not be obligated to pay stock transfer taxes on the transfer
of Shares pursuant to the Offer. Carbon will not pay any fee or commission to
any broker or dealer or to any other person (other than Harris Trust and Savings
Bank, as Exchange Agent (the "Exchange Agent") in connection with the
solicitation of tenders of Shares for exchange pursuant to the Offer.
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), Carbon will accept for exchange all Shares which are validly
tendered and not properly withdrawn on or prior to the Expiration Date. In order
to take advantage of the Offer, (i) a duly executed and properly completed
Letter of Transmittal (or a manually signed facsimile thereof) and any required
signature guarantees or, in the case of a book-entry transfer, an Agent's
Message, and any other required documents should be sent to the Exchange Agent
and (ii) certificates representing the tendered Shares (the "Share
Certificates") or a timely book-entry confirmation should be delivered to the
Exchange Agent in accordance with the instructions set forth in the Offer to
Exchange and the Letter of Transmittal.
Holders of Shares whose Share Certificates are not immediately available or
who cannot deliver their Share Certificates and all other required documents to
the Exchange Agent or complete the procedures for book-entry transfer prior to
the Expiration Date must tender their Shares according to the guaranteed
delivery procedures set forth under the caption "The Exchange Offer--Guaranteed
Delivery Procedures" in the Offer to Exchange and in the Letter of Transmittal.
Neither Carbon nor any officer, director, stockholder, agent or other
representative of Carbon will pay any fees or commissions to any broker, dealer
or other person (other than the Exchange Agent as described in the Offer to
Exchange) for soliciting tenders of Shares for exchange pursuant to the Offer.
Carbon will, however, upon request, reimburse you for customary mailing and
handling expenses incurred by you in forwarding any of the enclosed materials to
your clients. Carbon will pay or cause to be paid any stock transfer taxes
payable on the transfer of Shares to it, except as otherwise provided in
Instruction 5 to the Letter of Transmittal.
Any inquiries you may have with respect to the Offer should be addressed to
Kevin D. Struzeski, Chief Financial Officer of Carbon Energy Corporation, c/o
Bonneville Fuels Corporation, 1700 Broadway, Suite 1150, Denver, Colorado 80290,
telephone number (303) 863-1555.
3
<PAGE>
Requests for copies of the enclosed materials may be directed to the
Assistant Secretary at the above address and telephone number.
Very truly yours,
Carbon Energy Corporation
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF CARBON, THE EXCHANGE AGENT OR ANY AFFILIATE OF
ANY OF THE FOREGOING, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT
OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER
THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
4
<PAGE>
Exhibit 4
CEC Resources Ltd.
Suite 1150
1700 Broadway
Denver, Colorado 80290
303-860-1575
303-860-9128 Fax
FOR IMMEDIATE RELEASE - January 21, 2000
Confirmation: Patrick R. McDonald, President
CEC Resources Ltd.
303-863-1555
CARBON ENERGY COMMENCES EXCHANGE OFFER
FOR CEC RESOURCES SHARES
Denver, Colorado, January 21, 2000 - CEC Resources Ltd., Alberta, Canada
(AMEX: CGS) and Carbon Energy Corporation announced today that Carbon Energy
has commenced its exchange offer for shares of CEC Resources. The exchange
offer is the last step in transactions to combine Bonneville Fuels Corporation
and CEC Resources.
In the exchange offer each share of CEC Resources may be exchanged for one
share of Carbon Energy. The exchange offer will expire at 5:00 p.m., New York
time, on February 17, 2000 unless extended by Carbon Energy.
CEC Resources' Board of Directors recommends that CEC Resources'
shareholders accept the exchange offer. Directors and executive officers of CEC
Resources who own approximately 38% of CEC Resouces' outstanding shares have
stated that they intend to accept the exchange offer. The exchange offer is for
any and all CEC Resources' shares.
The exchange offer results from the acquisition of Bonneville Fuels,
originally proposed by CEC Resources and completed by Carbon Energy. Carbon
Energy purchased Bonneville Fuels with equity financing of $24,750,000 from
Yorktown Energy Partners, III, L.P. ("Yorktown"). Yorktown purchased 4,500,000
shares of Carbon Energy at a price of $5.50 per share. Bonneville Fuels is
currently a subsidiary of Carbon Energy. It is contemplated that after the
exchange offer, CEC Resources will also be a subsidiary of Carbon Energy. By
accepting the exchange offer, shareholders of CEC Resources have the opportunity
to own shares in Carbon Energy which will consist of both Bonneville Fuels and
CEC Resources. If all of CEC Resources' shareholders accept the exchange offer,
Carbon Energy will have 6,000,000 shares outstanding. We anticipate that upon
completion of the exchange offer, the shares of Carbon Energy will become listed
on the American Stock Exchange under the trading symbol CRB and we also
anticipate that shares of CEC Resources will be delisted from the American Stock
Exchange.
Bonneville Fuels is an oil and gas exploration and production 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.
CEC Resources is engaged in the exploration, development and production of
oil and gas reserves in the provinces of Alberta and Saskatchewan, Canada.
Following the completion of the exchange offer for CEC Resources shares,
Carbon Energy will seek continued growth through the exploration of existing
assets by development of proved reserves, acquisitions of complementary
properties, optimization of gathering, compression and processing facilities,
exploration for oil and gas potential reserves in core areas, and identification
of acquisition opportunities in Canada and the United States.
Materials regarding the exchange offer are being mailed to all shareholders
of Carbon Energy as of January 20, 2000.
