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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 1)
CEC RESOURCES LTD.
(Name of Subject Company)
CEC RESOURCES LTD.
(Name of Person(s) Filing Statement)
COMMON STOCK WITHOUT PAR VALUE
(Title of Class of Securities)
124980 103
(CUSIP Number of Class of Securities)
Patrick R. McDonald
President and Chief Executive Officer
CEC Resources Ltd.
1700 Lincoln Street, Suite 1150
Denver, Colorado 80290-1101
(303) 860-1575
(Name, address and telephone number of person authorized to receive notice and
communications on behalf of the person(s) filing statement)
With a copy to:
Mark R. Levy, Esq.
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, Colorado 80202
(303) 295-8000
Page 1 of 5 Pages
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ITEM 1. Security and Subject Company
The name of the subject company is CEC Resources Ltd., an Alberta
corporation (the "Company"), and the address of the principal executive offices
of the Company is 1700 Lincoln Street, Suite 1150, Denver, Colorado 80290-1101.
The title of the class of equity securities to which this statement relates is
the common stock, without par value, of the Company (the "Common Stock").
ITEM 2. Tender Offer of the Bidder
This statement relates to an offer by Carbon Energy Corporation, a Colorado
corporation (the "Purchaser"), disclosed in a Tender Offer Statement on Schedule
14D-1 dated January 7, 2000, as amended by Amendment No. 1 dated January 19,
2000, (the "Schedule 14D-1"), to exchange one share of the Purchaser's Common
Stock for each outstanding share of the Company's Common Stock, upon the terms
and subject to the condition set forth in the Prospectus dated January 18, 2000
(the "Prospectus") and the related Letter of Transmittal (which together
constitute the "Exchange Offer").
The principal executive offices of the Purchaser are located at 1700
Lincoln Street, Suite 1150, Denver, Colorado 80290-1101.
The Exchange Offer is being made pursuant to an Exchange and Financing
Agreement, dated as of October 14, 1999 (the "Exchange Agreement"), among
Yorktown Energy Partners III, L.P. ("Yorktown"), the Purchaser and the Company.
A copy of the Exchange Agreement is filed as Exhibit 1 to this Schedule 14D-9
and is incorporated herein by reference. The Exchange Agreement is described
under the heading "The Exchange Offer - Description of Exchange Agreement" in
the portions of the Prospectus which makes the Exchange Offer (the
"Prospectus"), and is Exhibit 2 to this Schedule 14D-9.
ITEM 3. Identity and Background
(a) The name and business address of the Company, which is the person
filing this statement, are set forth in Item 1 above.
(b) Certain contracts, agreements, arrangements, and understandings, and
any actual or potential conflicts of interest, between the Company or its
affiliates and (i) the Company's executive officers, directors or affiliates, or
(ii) the Purchaser or its executive officers, directors or affiliates, are
described in the sections entitled "The Exchange Offer - Background of the
Exchange Offer/Exchange Agreement," "The Exchange Offer - Interests of Certain
Persons In The Exchange Offer," "The Exchange Offer - Description of Exchange
Agreement," "The Exchange Offer - Possible Effects of the Exchange Offer," "The
Exchange Offer - Second Step Merger," and "Certain Relationships and
Transactions" in the Prospectus, which are incorporated herein by reference.
Page 2 of 5 Pages
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Except as described or incorporated by reference herein, as of the date
hereof, there exists no material contract, agreement, arrangement or
understanding and no material actual or potential conflict of interest between
the Company or its affiliates and (i) the Company's executive officers,
directors or affiliates, or (ii) the Purchaser or its executive officers,
directors or affiliates.
ITEM 4. The Solicitation or Recommendation
The Company's Board of Directors believe that the terms of the Exchange
Offer are fair to and in the best interests of the Company and its shareholders.
In reaching its conclusion to approve the BFC stock purchase agreement, the
Exchange Agreement and the Exchange Offer, the Company's Board consulted with
management, as well as its legal and accounting advisors, and considered the
factors set forth in "The Exchange Offer - CEC's Reasons for Recommending the
Exchange Offer" and "The Exchange Offer-Valuation of CEC and BFC" in the
Prospectus, which information is incorporated herein by this reference.
ITEM 5. Persons Retained, Employed or to be Compensated
Neither the Company nor any person acting on its behalf currently intends
to employ, retain or compensate any other person to make solicitations or
recommendations to security holders on its behalf concerning the Exchange Offer.
ITEM 6. Recent Transactions and Intent with Respect to Securities
(a) No transactions in shares of the Company's Common Stock have been
effected during the past 60 days by the Company, or, to the best of the
Company's knowledge, by any executive officer, director, affiliate, or
subsidiary of the Company.
(b) The directors and executive officers of the Company who own, in the
aggregate, 580,346 Shares of the outstanding Common Stock, representing
approximately 38.1% of the Company's outstanding shares, have stated they
intend to accept the Exchange Offer.
ITEM 7. Certain Negotiations and Transactions by the Subject Company
(a) Except as described in Items 3 and 4 of this Schedule 14D-9, and as
described in the Prospectus in the sections entitled "The Exchange Offer -
Possible Effects of the Exchange Offer" and "The Exchange Offer--Second Step
Merger," which are incorporated herein by reference, the Company is not now
engaged in any discussions or negotiations in response to the Exchange Offer
which relate to, or would result in, (i) an extraordinary transaction such as a
merger or reorganization involving the Company or any subsidiary of Company,
(ii) a purchase, sale or transfer of a material amount of assets by Company or
any subsidiary of Company, (iii) a tender offer for or other acquisition or
securities by, or of, Company, or (iv) any material change in the present
capitalization or dividend policy of Company.
Page 3 of 5 Pages
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(b) Except as described in Items 3 and 4 of this Schedule 14D-9, and as
described in the Prospectus in the section entitled "The Exchange Offer--Second
Step Merger" which is incorporated herein by reference, there are no
transactions, board resolutions, agreements in principle or signed contracts in
response to the Exchange Offer which relate to or would otherwise result in one
or more of the matters referred to in paragraph (a) of this Item 7.
ITEM 8. Additional Information to be Furnished
Not applicable.
ITEM 9. Material to be Filed as Exhibits
* Exhibit 1 - Exchange and Financing Agreement, dated October 14, 1999, among
Yorktown Energy Partners III, L.P., CEC Resources Ltd. And Carbon Energy
Corporation (incorporated by reference to Exhibit 10.3 to Registration Statement
No. 333-89783).
Exhibit 2 - Portions of Prospectus, dated January 18, 2000, of Carbon
Energy Corporation.
Exhibit 3 - Letter of the President of CEC Resources Ltd. regarding the
Exchange Offer.
Exhibit 4 - Joint Press Release, dated January 21, 2000, of Carbon Energy
Corporation and CEC Resources Ltd. regarding the Exchange Offer.
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.
_________________________
* Previously filed
CEC RESOURCES LTD
Dated: January 19, 2000 By: /s/ Patrick R. McDonald
---------------------------------
Patrick R. McDonald, President and
Chief Executive Officer
Page 4 of 5 Pages
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Exhibit Index
* Exhibit 1 Exchange and Financing Agreement, dated October 14, 1999, by
and among Yorktown Energy Partners III, L.P., CEC Resources
Ltd., and Carbon Energy Corporation (incorporated by reference
to Exhibit 10.3 to Registration Statement No. 333-89783)
Exhibit 2 Portions of Prospectus, dated January 18, 2000 of
Carbon Energy Corporation
Exhibit 3 Letter of the President of CEC Resources Ltd. regarding the
Exchange Offer
Exhibit 4 Joint Press Release, dated January 21, 2000, of Carbon Energy
Corporation and CEC Resources Ltd. regarding the Exchange
Offer.
________________________
* Previously Filed
Page 5 of 5 Pages
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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.
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EXHIBIT 2
THE EXCHANGE OFFER
General
We are offering to exchange one share of our common stock for each share of
CEC common stock. If all CEC shareholders accept our offer, in the aggregate
we will issue approximately 1,521,400 shares of our common stock. Our common
stock has been approved for listing on the AMEX, upon issuance of the shares
after the exchange offer, under the symbol " ." CEC's Board of Directors
has approved this exchange offer.
The exchange offer is open to all holders of CEC common stock. We are
sending this prospectus and related exchange offer documents to persons who
held CEC common stock at the close of business on , 2000. On
that date, there were shares of CEC common stock outstanding, which
were held of record by approximately shareholders. We will also
furnish this prospectus and related exchange offer documents to brokers, banks
and similar persons whose names or the names of whose nominees appear on CEC's
shareholder list or, if applicable, who are listed as participants in a
clearing agency's security position listing for subsequent transmittal to
beneficial owners of CEC common stock.
Background Of The Exchange Offer/Exchange Agreement
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 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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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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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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EXHIBIT 3
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CEC RESOURCES LTD. LETTERHEAD
(303) 863-1555 (phone)
(303) 863-1558 (fax)
January 21, 2000
Re: Exchange Offer for Stock of CEC Resources Ltd.
To the Shareholders of CEC Resources Ltd.
We are enclosing materials relating to an exchange offer for your shares of
CEC Resources Ltd. The exchange offer allows you to exchange your shares of CEC
Resources Ltd. for shares of common stock of Carbon Energy Corporation
("Carbon"), on a one-for-one basis. As you may recall from reading our press
releases and quarterly reports, the exchange offer is the last step in our
efforts to combine Bonneville Fuels Corporation and CEC Resources Ltd.
The Board of Directors of CEC Resources Ltd. recommends that you accept the
exchange offer. In this letter, I want to list what materials you are receiving,
provide you some background information and also state some instructions for
completing a letter of transmittal.
Enclosures
Enclosed are the following items relating to the exchange offer:
(1) A Prospectus dated January 18, 2000, of Carbon which makes the
exchange offer for your CEC Resources shares;
(2) A letter of transmittal that must be completed for persons accepting
the exchange offer; and
(3) A Schedule 14D-9 which refers to the Prospectus and is a document
filed with the Securities and Exchange Commission in connection with
our Board's recommending the acceptance of the exchange offer.
<PAGE>
To the Shareholders of CEC Resources Ltd.
January 21, 2000
Page 2
Background Information
The exchange offer results from the acquisition of Bonneville Fuels
Corporation, originally proposed by CEC Resources and completed by Carbon. In
order to combine with Bonneville Fuels, obtain financing for the acquisition of
Bonneville Fuels and avoid adverse income taxes to CEC Resources and its
shareholders, the following steps were taken:
. CEC Resources entered into a stock purchase agreement for all
outstanding Bonneville Fuels shares;
. CEC Resources assigned the Bonneville Fuels stock purchase agreement
to Carbon in return for Carbon's agreement to make the exchange offer
and comply with other terms of an exchange and financing agreement;
. Carbon closed an equity financing of $24,750,000 from Yorktown Energy
Partners, III, on the basis of $5.50 per share of Carbon common stock,
for the purpose of Carbon's purchasing all of the Bonneville Fuels
shares;
. Carbon completed the purchase of the Bonneville Fuels shares; and
. Carbon has now commenced the exchange offer.
The overall goal is to provide each CEC Resources shareholder with the
opportunity to own shares in a company that consists of both Bonneville Fuels
and CEC Resources. In the exchange offer, each share of your CEC Resources stock
can be exchanged for one share of Carbon.
Some Exchange Offer Terms
The terms of the exchange offer are explained in the enclosed Prospectus.
At the front of the Prospectus is a summary of the exchange offer, and there is
more detail about the exchange offer in a section entitled "The Exchange Offer."
All shares of CEC Resources common stock properly tendered and not withdrawn can
be exchanged on a one-for-one basis for Carbon common stock. The exchange offer
will expire at 5:00 p.m., New York City time, on February 17, 2000 unless
extended by Carbon.
You may withdraw tenders of your shares of CEC Resources common stock at
any time before the exchange offer expires.
<PAGE>
To the Shareholders of CEC Resources Ltd.
January 21, 2000
Page 3
Procedures for Accepting the Offer
If you hold certificates for shares of CEC Resources common stock in your
name and you wish to receive the Carbon shares in your name at your address as
shown in our records, you need only to do the following:
. Complete and sign the letter of transmittal, by completing Box A
(which includes the number of CEC Resources shares you wish to tender)
and signing the letter in Box D;
. Send the letter of transmittal with your stock certificates to the
exchange agent at one of the New York City addresses shown at the top
of the letter of transmittal.
If you hold shares of CEC Resources common stock through a broker, you will
receive instructions from your broker on how to accept the exchange offer. You
will need to complete an instruction form for the broker.
Recommendation
The CEC Board of Directors believes that the terms of the exchange offer
are fair to and in the best interests of CEC Resources and its shareholders. The
directors and executive officers of CEC Resources who own, in the aggregate,
580,346 shares of outstanding CEC Resources common stock, representing
approximately 38.1% of CEC Resources' outstanding shares, have stated that they
intend to accept the exchange offer .
Please act now in regard to the exchange offer. Please contact me if you
have any questions.
Very truly yours,
CEC RESOURCES LTD.
By: /s/ Patrick R. McDonald
------------------------------------------
Patrick R. McDonald, President
