-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RAi2OKKQUjFQ2Eacze2YyQc6Pf17Czk8r9bv8PHO3iS0QnMFaoV1+wfRelfdvBir OE/saGGOObWYUPFm4PztEg== 0000927356-99-002023.txt : 19991222 0000927356-99-002023.hdr.sgml : 19991222 ACCESSION NUMBER: 0000927356-99-002023 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19991221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARBON ENERGY CORP CENTRAL INDEX KEY: 0001096019 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841515097 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-89783 FILM NUMBER: 99777866 BUSINESS ADDRESS: STREET 1: 1700 BROADWAY SUITE 1150 CITY: DENVER STATE: CO ZIP: 80290-1101 MAIL ADDRESS: STREET 1: 1700 BROADWAY SUITE 1150 CITY: DENVER STATE: CO ZIP: 80290-1101 S-4/A 1 AMENDMENT #1 TO FORM S-4 As filed with the Securities and Exchange Commission on December 21 , 1999 Registration No. 333-89783 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- Pre-Effective Amendment No. 1 to FORM S-4 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- CARBON ENERGY CORPORATION (Exact name of registrant as specified in its charter) Colorado 1311 84-1515097 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Classification Identification Number) incorporation or Code Number) organization) Carbon Energy Corporation 1700 Broadway, Suite 1150 Denver, CO 80290-1101 (303) 860-1575 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Patrick R. McDonald President and Chief Executive Officer Carbon Energy Corporation 1700 Broadway, Suite 1150 Denver, CO 80290-1101 (303) 860-1575 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- COPIES TO: Mark R. Levy, Esq. Holland & Hart LLP 555 17th Street, Suite 3200 Denver, Colorado 80202 (303) 295-8000 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. --------------- If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Subject to Completion, dated December 21, 1999 CARBON ENERGY CORPORATION OFFER TO EXCHANGE Shares of Common Stock of Carbon Energy Corporation for any and all Shares of Common Stock of CEC Resources Ltd. Our offer will expire at 5:00 P.M., New York City time on , 2000, unless extended. Carbon Energy Corporation is offering to exchange one share of our common stock for each share of common stock of CEC Resources Ltd. ("CEC"). If all CEC's shareholders accept our offer, in the aggregate we will issue approximately 1,521,400 shares of our common stock. CEC's Board of Directors has approved this transaction. CEC's common shares are traded on the American Stock Exchange under the symbol "CGS." On , 2000, the closing price for CEC's common shares was $ . Carbon's common stock is not currently traded on a national securities exchange or other public trading market. Carbon's common stock has been approved for listing on the American Stock Exchange, upon issuance of the shares after the exchange offer, under the symbol " ." You have until 5:00 p.m., New York City time, on , 2000 to accept our offer, unless extended. At that time, our offer and your withdrawal rights will expire. This prospectus and the enclosed letter of transmittal describe how to accept our offer. Directors and executive officers of CEC who hold in the aggregate 580,346 shares of CEC's common shares, representing approximately 38% of CEC's voting power, have stated their intention to accept our offer. After the exchange offer, CEC will be a subsidiary of Carbon. The Carbon common stock we are offering involves a high degree of risk. See "Risk Factors" beginning on page 12 of this prospectus for a discussion of the risks you should consider in connection with our offer and an investment in Carbon's common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in the exchange offer or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2000. The information in this prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. CARBON ENERGY CORPORATION PROSPECTUS Introduction Please read this prospectus carefully. It describes our and CEC's businesses and finances. We have prepared this prospectus so that you will have the information necessary to make a decision on the exchange offer. You should only rely on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to exchange shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of common stock. Table of Contents PROSPECTUS SUMMARY.......................................................... 3 RISK FACTORS................................................................ 13 SOURCES OF INFORMATION ABOUT CARBON AND CEC................................. 15 FORWARD-LOOKING STATEMENTS.................................................. 15 THE EXCHANGE OFFER.......................................................... 15 General.................................................................... 15 Background Of The Exchange Offer/Exchange Agreement........................ 15 CEC's Reasons For Recommending The Exchange Offer.......................... 19 Our Reasons For The Exchange Offer......................................... 20 Intentions Of The Directors And Officers Of CEC............................ 20 Interests Of Certain Persons In The Exchange Offer......................... 21 Description of Exchange Agreement.......................................... 23 Expiration Date............................................................ 23 Exchange Of CEC Stock For Carbon Common Stock.............................. 24 Book-Entry Transfer Procedures............................................. 26 Exchange Agent............................................................. 26 Guaranteed Delivery Procedures............................................. 26 Conditions To The Exchange................................................. 26 Termination Of The Exchange Offer.......................................... 26 Withdrawal Rights.......................................................... 27 Fees And Expenses.......................................................... 27 Regulatory Matters......................................................... 28 Accounting Treatment....................................................... 28 Possible Effects of the Exchange Offer..................................... 28 Second Step Merger......................................................... 29 UNITED STATES FEDERAL INCOME TAX CONSEQUENCES............................... 29 Scope and Limitation Advice................................................ 29 Taxation of U.S. Shareholders.............................................. 30 Basic Treatment of Exchange Transaction for U.S. Shareholders.............. 30 Passive Foreign Investment Company Considerations for U.S. Shareholders.... 31 Taxation of Non-U.S. Shareholders.......................................... 32 Estate Tax for Non-U.S. Shareholders....................................... 33 Information Reporting and Backup Withholding............................... 33 CANADIAN FEDERAL INCOME TAX CONSEQUENCES.................................... 34 Holders Resident in Canada................................................. 34 Holders Not Resident in Canada............................................. 36
i UNAUDITED PRO FORMA FINANCIAL INFORMATION.................................. 37 INFORMATION ABOUT CEC...................................................... 42 Overview of Business...................................................... 42 CEC Selected Financial Data............................................... 42 CEC Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 43 Properties................................................................ 50 Legal Proceedings......................................................... 56 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 56 Quantitative and Qualitative Disclosures about Market Risk................ 57 INFORMATION ABOUT CARBON................................................... 58 Business.................................................................. 58 Carbon Selected Financial Data............................................ 59 Our Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 59 Properties................................................................ 65 Legal Proceedings......................................................... 71 Charges in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 71 Quantitative and Qualitative Disclosures about Market Risk................ 71 OUR MANAGEMENT............................................................. 73 Executive Directors and Officers.......................................... 73 Committees of the Board of Directors...................................... 74 Executive Compensation.................................................... 75 Stock Option Grants and Exercises......................................... 75 1999 Stock Option and Restricted Stock Plans.............................. 76 Directors' Compensation................................................... 77 Indemnification and Limitation of Liability............................... 77 Employment Agreement...................................................... 78 PRINCIPAL SHAREHOLDERS OF OUR COMPANY...................................... 79 PRINCIPAL SHAREHOLDERS OF CEC.............................................. 80 CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 81 DESCRIPTION OF OUR CAPITAL STOCK........................................... 81 Common Stock.............................................................. 81 Preferred Stock........................................................... 81 Certain Effects of Authorized but Unissued Stock.......................... 82 American Stock Exchange Listing........................................... 82 Transfer Agent............................................................ 82 COMPARISON OF SHAREHOLDERS' RIGHTS......................................... 83 LEGAL MATTERS.............................................................. 94 EXPERTS.................................................................... 94 WHERE YOU CAN FIND MORE INFORMATION........................................ 94 INDEX TO FINANCIAL STATEMENTS.............................................. F-1
ii PROSPECTUS SUMMARY This Summary highlights selected information that we present more fully in other sections of this prospectus. To understand this exchange offer, you should read the entire prospectus carefully, including the "Risk Factors" and the financial statements of Carbon Energy Corporation and its predecessor Bonneville Fuels Corporation and the financial statements of CEC Resources Ltd. included in this prospectus. Carbon Energy Corporation 1700 Broadway, Suite 1150 Denver, Colorado 80290-1101 (303) 860-1575 We are an independent oil and gas company engaged in the exploration, development and production of natural gas and crude oil, principally in the states of Colorado, Kansas, New Mexico, Texas, and Utah. Our business and assets are presently comprised of the assets and property of Bonneville Fuels Corporation ("BFC") which we acquired on October 29, 1999 with the concurrence of CEC. Yorktown Energy Partners III, L.P. ("Yorktown") formed Carbon for the purpose of acquiring BFC and making this exchange offer. CEC Resources Ltd. 1700 Broadway, Suite 1150 Denver, Colorado 80290-1101 (303) 860-1575 CEC is an independent oil and gas company engaged in the exploration, development and production of natural gas and crude oil and the acquisition and development of interests in oil and gas properties in the provinces of Alberta and Saskatchewan, Canada. CEC also owns an interest in one natural gas liquids extraction plant and several gas gathering and compression systems in Alberta. Yorktown Energy Partners III, L.P. 410 Park Avenue, Suite 1900 New York, New York 10025 (212) 515-2113 Yorktown Energy Partners III, L.P. was formed in 1997 with $253.7 million of commmitted capital. Yorktown has invested in companies in different sectors of the energy industry. The manager of Yorktown is Yorktown Partners LLC ("Yorktown Partners") which manages two predecessor partnerships which invested $75 million from February 1991 through June 1997. Yorktown's equity investment in Carbon provided the funds for our purchase of BFC. Yorktown owns almost all of Carbon shares outstanding prior to the exchange offer and will continue to own at least 74% of outstanding Carbon shares after the exchange offer. Summary of Exchange Offer Terms of Our Offer We are offering to exchange one share of our common stock for each share of CEC common stock held by you. All shares of CEC common stock properly tendered and not withdrawn will be exchanged at the one-for-one exchange rate, on the terms and subject to the conditions of the exchange offer. We will promptly return any shares of CEC common stock if the conditions of the exchange offer are not met. The exchange offer does not require any minimum number of shares of CEC common stock to be tendered and does not have a maximum amount of CEC common stock that can be tendered and accepted. 3 Expiration Date You have until 5:00 p.m., New York City time, on , 2000 to accept our offer, unless extended. At that time, our offer will expire. If we extend the expiration date, we will publicly announce the extension as soon as practicable after we make the extension and in any event no later than 9:00 a.m. New York City time on the next business day after the previously scheduled expiration date. Withdrawal Rights You may withdraw tenders of your shares of CEC common stock at any time before the exchange offer expires. If you change your mind again, you may retender your shares of CEC common stock by following the exchange offer procedures again prior to the expiration of the exchange offer. Our offer may be terminated if any court or governmental authority issues an order restraining, enjoining or otherwise prohibiting consummation of the exchange offer. Procedures For Tendering Your Shares Of CEC Common Stock If you hold certificates for shares of CEC common stock, you must complete and sign the letter of transmittal designating the number of CEC shares you wish to tender and return the letter with your stock certificates and any other documents required by the letter of transmittal, by registered mail, return receipt requested, so that it is received by the exchange agent at one of the addresses listed in "The Exchange Offer--The Exchange Agent" before the expiration of the exchange offer on , 2000. If you hold shares of CEC common stock through a broker, you should receive instructions from your broker on how to participate. In this situation, you do not need to complete the letter of transmittal. Please contact your broker directly if you have not yet received instructions. Some financial institutions may also effect tenders by book-entry transfer through The Depository Trust Company. If you hold certificates for shares of CEC common stock or if you hold CEC shares through a broker, you may also comply with the procedures for guaranteed delivery. Guaranteed Delivery Procedures Holders of CEC common stock who wish to tender their shares and whose shares are not immediately available or who cannot deliver their certificates for CEC common stock, the letter of transmittal or any other documentation required by the letter of transmittal to the exchange agent prior to the expiration date must tender their shares of CEC common stock according to the guaranteed delivery procedures described in "The Exchange Offer--Guaranteed Delivery Procedures." Acceptance of CEC Common Stock and Delivery of Carbon Common Stock Subject to the satisfaction or waiver of the conditions to the exchange offer, we will accept for exchange any and all shares of CEC common stock that are properly tendered in the exchange offer and not withdrawn prior to the expiration date. The Carbon common stock to be delivered in exchange for your shares of CEC common stock will be delivered promptly following the expiration of our offer. No Dissenters' Rights No dissenters' rights are available to shareholders of CEC in connection with the exchange offer. 4 Exchange Agent Harris Trust and Savings Bank is serving as the exchange agent in connection with our exchange offer. Possible Effects of the Exchange Offer The exchange of shares of CEC common stock in the exchange offer will reduce the number of holders of CEC common stock and the number of shares of CEC common stock that might otherwise trade publicly. Depending on the number of shares of CEC common stock exchanged, the liquidity and market value of the remaining shares of CEC common stock could be adversely affected. CEC's common stock is listed on the American Stock Exchange ("AMEX"). Depending on the number of shares of CEC common stock exchanged pursuant to the exchange offer, CEC common stock may no longer meet the requirements of the AMEX for continued listing. AMEX will normally consider delisting a stock if: . the number of shares publicly held (other than those held by officers, directors, controlling shareholders or other family or concentrated holdings) is less than 200,000; or . the the total number of public shareholders is less than 300; or . the aggregate market value of shares publicly held is less than $1,000,000. The delisting of CEC common stock from AMEX may be initiated by AMEX or by CEC. Because holders of approximately 40% of the outstanding shares of CEC have stated their intentions to accept the exchange offer, we anticipate that CEC common stock will be delisted from the AMEX. If the shares of CEC common stock were to be delisted from the AMEX, the market for such shares could be adversely affected. It is possible that such shares might be traded on other securities markets. The extent of the public market for the shares of CEC common stock would, however, depend upon the number of holders and/or the aggregate market value of such shares remaining at that time, the interest in maintaining a market in such shares on the part of securities firms and the possible termination of registration of CEC common stock under the Securities Exchange Act of 1934 ("Exchange Act"). CEC's common stock is currently registered under the Exchange Act. Such registration may be terminated by CEC upon application to the Securities and Exchange Commission ("SEC") if the outstanding shares of CEC common stock are not listed upon a national securities exchange and if there are fewer than 300 holders of record of such shares. Termination of registration of the CEC common stock under the Exchange Act would reduce the information required to be furnished by CEC to its shareholders and to the SEC and would make certain provisions of the Exchange Act, such as the filing of periodic SEC reports, the requirement of furnishing a proxy statement pursuant to Section 14(a), and the short-swing profit recovery provisions of Section 16(b), no longer applicable to CEC shares. If we acquire control of CEC upon completion of the exchange offer, we intend to conduct its business in substantially the same manner as currently conducted. We expect that CEC will be able to finance its exploration and development programs from cash generated by its operations and existing bank financings. CEC's activities will be primarily limited to Canada. However, CEC has acquired leases covering approximately 51,000 acres in Nebraska on which it plans to drill an exploratory well in early 2000. Carbon and CEC expect that Patrick R. McDonald and Kevin D. Struzeski will continue as President and Chief Financial Officer of CEC, respectively, after completion of the exchange offer. Background of the Exchange Offer/Exchange and Financing Agreement The information in this section regarding the deliberations of CEC's Board of Directors and the actions of CEC's management and legal and financial advisors is based on information furnished by CEC. Patrick R. McDonald, the President of Carbon, is the President of CEC and a member of CEC's Board of Directors. 5 CEC and Carbon believe there are attractive opportunities available for acquisitions of oil and gas properties and exploration and production in both the United States and Canada as a result of improving oil and gas prices, lower exploration and production costs, the divestiture of non-core properties by major oil companies and large independent oil companies and consolidation within the oil and gas industry. CEC's position as a small independent public oil and gas company limits its potential for growth unless steps are taken to increase its size and the value of its oil and gas reserves. This exchange offer results from an acquisition of BFC, originally proposed by CEC and completed by Carbon. In order to combine with BFC, obtain financing for the combination with BFC and avoid adverse income tax consequences to CEC, (1) CEC entered into an agreement to purchase the shares of BFC from BPC, (2) CEC assigned the agreement to Carbon on Carbon's agreement to make this exchange offer and comply with other terms of an exchange and financing agreement, (3) Carbon closed an equity financing of $24,750,000 from Yorktown for the purpose of Carbon's purchasing of all BFC shares, (4) Carbon completed the purchase of the BFC shares, and (5) Carbon has made this exchange offer. The overall goal of CEC and Carbon is to provide each CEC shareholder with the opportunity to own shares in a company that consists of both BFC and CEC. In early May, 1999, CEC learned that Bonneville Pacific Corporation ("BPC") would be selling the stock of its Denver based 100% owned subsidiary, BFC. During May, June, July and early August, 1999, CEC participated in a sale process conducted by BPC for the sale of BFC. During that period, CEC conducted due diligence concerning BFC and its properties, submitted various offers for BFC and submitted comments on the form of the stock purchase agreement for the acquisition of BFC prepared by BPC. During this period, CEC also conducted discussions with Yorktown Partners LLC (an energy investment firm which is the manager of Yorktown Energy Partners III, L.P.) relating to the financing of the acquisition of BFC by Yorktown. As a result, Yorktown Partners indicated that a partnership managed by Yorktown Partners was willing to purchase common stock of CEC or economically equivalent shares for a total of $24,750,000 at $5.50 per share in order to provide equity financing for the purchase of BFC shares. Yorktown Partners also stated that it wished to have this investment made through a United States corporation. On August 11, 1999, CEC and BPC signed the BFC stock purchase agreement. Under the BFC stock purchase agreement, CEC agreed to purchase all BFC outstanding stock from BPC at a price of $23,857,951 in cash, subject to certain adjustments, with debt less working capital of approximately $6,500,000 remaining at BFC (referred to as "net debt"). On October 14, 1999, Carbon, CEC and Yorktown signed the exchange and financing agreement providing for an assignment of the BFC stock purchase agreement to Carbon, the purchase of common stock of Carbon by Yorktown for $24,750,000, and the exchange offer made by this prospectus. This purchase of Carbon stock by Yorktown was at a price of $5.50 per share. On October 29, 1999, Carbon completed the purchase of BFC. The exchange offer gives each shareholder of CEC the opportunity to become a shareholder in Carbon which will be a substantially larger oil and gas company than CEC alone. Carbon owns BFC, and, it is anticipated Carbon will own more than a majority of CEC. The formation of Carbon results from Yorktown's desire for making its investment in a United States corporation and unfavorable tax consequences that would have resulted by reincorporating CEC from an Alberta corporation with Canadian assets into a U.S. corporation with both Canadian and U.S. assets. For a more complete description of the background surrounding the purchase of BFC, the formation of Carbon and the making of the exchange offer, see "The Exchange Offer--Background of the Exchange Offer/Exchange Agreement". Recommendation of the Board of Directors of CEC CEC's Board of Directors believes that the terms of the exchange offer are fair to and in the best interest of CEC and its shareholders. In reaching its decision, CEC's Board considered a number of factors, including the 6 terms and anticipated benefits of the acquistion of BFC, the opportunity for CEC's shareholders to participate in Carbon by accepting the exchange offer, the tax consequences of the exchange offer, and other factors. For a more complete description of the factors considered by CEC's Board, see "The Exchange Offer--CEC's Reasons for Recommending the Exchange Offer." Intentions of the Board of Directors of CEC Directors and executive officers of CEC who hold, in the aggregate, 580,346 shares of outstanding CEC common stock, representing approximately 38.1% of CEC's outstanding shares, have stated their intention to accept our stock in the exchange offer. United States Federal Income Tax Consequences Subject to a number of qualifications and conditions, and to the accuracy of certain factual representations made by Carbon and CEC, Holland & Hart LLP, tax counsel to CEC, has rendered an opinion, that for U.S. federal income tax purposes, (1) the transactions contemplated by the exchange offer should constitute a tax-free B reorganization, assuming that Carbon acquires at least 80% of the outstanding stock of CEC pursuant to the exchange offer, and (2) the transactions contemplated by the exchange offer likely constitute part of a tax-free Section 351 transaction even if the transactions contemplated by the exchange offer do not qualify as a B reorganization. See "United States Federal Income Tax Consequences." Tax counsel's opinion is not a substitute for each individual CEC shareholder's review of the tax consequences of the exchange by its own advisor. See "Risk Factors." Non-U.S. shareholders who receive Carbon stock in the exchange may be subject to U.S. tax with respect to their investment in Carbon common stock or may otherwise be affected by U.S. tax law. The summary of U.S. federal income tax consequences of the exchange set forth in "United States Federal Income Tax Consequences" does not cover all U.S. federal income tax aspects of the exchange and may not be applicable to every CEC shareholder exchanging shares. For these reasons, each CEC shareholder participating in the exchange is urged and expected to consult with and rely on its tax advisor regarding the U.S. federal income tax aspects of the exchange. Canadian Federal Income Tax Consequences Subject to the specific exceptions referred to under "Canadian Federal Income Tax Consequences" below, the exchange of CEC common stock for Carbon common stock will generally be tax-free to non-Canadian holders of CEC common stock for Canadian federal income tax purposes. Canadian holders of CEC common stock will not benefit from tax-free treatment for Canadian federal income tax purposes and will have to recognize a gain or loss equal to the difference between the fair market value of the Carbon common stock and the aggregate of the adjusted cost base of the CEC common stock and any reasonable costs of disposition. The tax considerations to you resulting from your individual position and the exchange may be complex. Carbon recommends that you read carefully the discussion under "Canadian Federal Income Tax Consequences" and consult with your own advisors as to the Canadian federal, provincial or territorial tax consequences. An opinion on these Canadian tax matters has been rendered by Bennett Jones, counsel to CEC. Their opinion is subject to the assumptions and qualifications set forth under "Canadian Federal Income Tax Consequences." 7 Accounting Treatment We will account for the exchange offer as a purchase of CEC in accordance with generally accepted accounting principles. For a discussion of the application of purchase accounting to this transaction, see "The Exchange Offer--Accounting Treatment." Comparison of Shareholders' Rights CEC shareholders who accept our exchange offer will become shareholders of Carbon and be governed by our articles of incorporation and bylaws and the Colorado Business Corporation Act. There are a number of differences between our articles of incorporation and bylaws and the Colorado Business Corporation Act and the articles of association and bylaws of CEC and the Alberta Business Corporations Act. These differences are discussed under "Comparison Of Shareholders' Rights." Interests of Certain Persons in the Exchange Offer In considering whether to accept our offer, you should consider the interests various executive officers and directors have in the exchange offer. Patrick R. McDonald, President of CEC, and Kevin Struzeski, Chief Financial Officer-Treasurer of CEC, have entered into employment agreements with Carbon. In addition, Mr. McDonald and Mr. Struzeski have been granted restricted stock of Carbon and stock options to acquire shares of its common stock. Mr. McDonald, Mr. Struzeski and other officers of CEC are to receive bonuses from CEC upon completion of the exchange offer if 50% or more of the CEC shares are exchanged for Carbon shares. The employment agreements replace employment agreements with CEC and were negotiated on an arms'-length basis with Yorktown. For a description of these interests, see "The Exchange Offer--Interests of Certain Persons in the Exchange Offer." Second Step Merger After the exchange offer, it is possible that we may merge CEC with a wholly-owned Canadian subsidiary of Carbon. We will not make any decision as to whether to do a second-step merger until after completion of the exchange offer. Whether we decide to proceed with the merger depends on a number of factors which cannot be ascertained at the present time, including the number of CEC shares acquired in our offer, the relative attractiveness of the merger compared to other possible investments, the availability of financing to fund any cash payments required to effect the merger and the U.S. and Canadian tax consequences of the merger. In such a merger, shareholders of CEC may receive cash, shares of our stock, other securities or a combination of some or all of the foregoing. If CEC common stock is listed on the AMEX on the record date for determining shareholders entitled to vote on the merger, no dissenters' rights will be available to CEC's shareholders in connection with the merger. In contrast, if CEC common stock is not listed on the AMEX on such record date, CEC shareholders will be entitled to dissenters' rights in connection with the merger. The continued listing of CEC common stock will depend upon the effect of the exchange offer on the shares of CEC held by persons other than Carbon, and it is currently contemplated that the CEC shares will be delisted from AMEX. We do not currently intend to engage in a second step merger. If we eventually decide to merge CEC with a wholly-owned Canadian subsidiary of Carbon, we will not engage in such a transaction without informing, and receiving approval from, our tax counsel, so that there will be no adverse tax effect on shareholders who have accepted the exchange offer. For a U.S. Shareholder (as defined in "United States Federal Income Tax Consequences--Scope and Limitation Advice") whose CEC common stock is not exchanged under the exchange offer and is disposed of in connection with a second step merger, the United States federal income tax consequences would depend on the 8 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. Summary Selected Financial Data of Carbon The following table summarizes financial data for our business. The data is derived from the financial statements of our predecessor, BFC, included elsewhere in this prospectus. In addition to this information, please read our financial statements and the financial statements of Bonneville Fuels Corporation starting on page F-7 and "Information About Carbon--Our Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 58.
As of or for the Nine Months Ended September As of or for the Year 30, Ended December 31, ---------------- ------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- ------- ------- (In Thousands) Operating Data: Revenue............... $18,254 $12,595 $21,092 $16,539 $15,067 $12,675 $14,956 Net income (loss)..... 683 114 (1,941) 732 4,060 172 (2,950) Cash Flow Data: Cash provided by (used in) operating activities........... $ (734) $ 2,587 $ 4,696 $ 3,193 $ 4,136 $ 3,016 $ 3,091 Cash used in investing activities........... (4,654) (3,828) (5,948) (4,442) (1,025) (859) (1,181) Cash provided by (used in) financing activities........... 2,950 1,300 3,450 1,019 (2,760) (2,090) (2,046) Balance Sheet Data: Total assets.......... $21,627 $18,726 $22,840 $16,054 $14,524 $13,177 $16,321 Working capital....... 1,603 688 812 1,491 1,725 628 405 Long term debt........ 8,800 3,700 5,850 2,400 1,700 4,760 6,850 Stockholder's equity(1)............ 9,997 9,709 9,313 9,591 8,859 6,774 6,552
- -------- (1) Includes debt to parent company (BPC) of $3,787 in 1995 and $3,737 in 1994, which was converted to equity in 1996. 9 Summary Selected Financial Data of CEC The following table summarizes financial data for CEC's business. The data is derived from the financial statements of CEC included elsewhere in this prospectus which were prepared in accordance with Canadian generally accepted accounting principles. In addition to this information, please read the financial statements of CEC starting on page F-27 and "Information About CEC-- CEC Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 42.
As of or for the Nine Months Ended August As of or for the 31, Year Ended November 30, ---------------- ------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- ------- ------- (in Canadian dollars) (In thousands) Operating Data: Revenues.............. $ 3,463 $ 2,364 $ 3,253 $ 3,309 $ 3,212 $ 3,794 $ 3,673 Net income (loss)..... (188) 268 240 605 526 870 1,033 Cash Flow Data: Cash provided by operating activities ..................... $ 1,389 $ 1,218 $ 1,366 $ 1,724 $ 1,656 $ 1,933 $ 2,145 Cash used in investing activities .......... (7,751) (489) (564) (1,265) (2,333) (2,064) (1,989) Cash provided by (used in) financing activities........... 4,696 (79) (209) (98) 604 -- -- Balance Sheet Data: Total assets.......... $15,981 $11,444 $11,235 $11,378 $10,166 $ 8,729 $ 7,852 Working capital....... 182 2,039 2,120 1,149 981 937 684 Long term debt........ 4,850 -- -- -- -- -- -- Stockholders' equity.. 8,380 8,880 8,722 8,691 $ 8,184 $ 7,054 $ 6,184
Summary Pro Forma Consolidated Condensed Financial Information The following is summary pro forma consolidated financial information of Carbon and is derived from the historical financial statements of BFC and CEC. This information assumes that the acquisition of BFC and the exchange offer of Carbon shares for CEC shares were consummated at the beginning of relevant periods. This information should be read in connection with the financial statements of Carbon and CEC, beginning on page F-1 of this prospectus and the unaudited pro forma consolidated financial information beginning on page 37 of this prospectus.
As of or for the As of or for the Year Ended Nine Months Ended December 31, 1998 September 30, 1999 ----------------- ------------------ (In thousands) Operating Data: Revenues........................... $24,332 $20,671 Net loss........................... (895) (263) Balance Sheet Data: Total assets....................... $49,089 Working capital.................... 2,648 Long term debt..................... 12,042 Stockholders' equity............... 31,493
10 Comparative Per Share Data The table below sets forth, for the periods indicated, the following: . the pro forma basic and diluted net income (loss) and book value per share of Carbon common stock after giving effect to the closing of the exchange offer and assuming all shareholders of CEC accept our offer; and . the historical basic and diluted net income (loss) and book value per share of CEC common stock which is the same as the equivalent pro forma per share data because the exchange offer is on a one-to-one basis. Neither we nor CEC have declared or paid any cash dividends on our common stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. The information presented in this table should be read in conjunction with the pro forma consolidated condensed financial information and the separate financial statements of Carbon and CEC included elsewhere in this prospectus.
As of or for the As of or for the nine months ended year ended September 30, 1999(1) December 31, 1998(1) ---------------------- -------------------- Unaudited Carbon pro forma data: Net income (loss) per common share--basic.................... $(.04) $(.15) Net income (loss) per common share--diluted.................. $(.04) $(.15) Cash dividends paid per common share........................... -- -- Book value per common share...... $5.22 $5.20
- -------- (1) Net income (loss) per common share data assumes that the acquisition of BFC was consummated on January 1, 1998 and the exchange offer of Carbon shares for CEC shares was consummated on December 1, 1997. The book value per common share data assumes that the acquisition of BFC was consummated on September 30, 1999 and the exchange offer of Carbon shares for CEC shares was consummated on August 31, 1999.
As of or for the As of or for the nine months year ended ended August 31, 1999 November 30, 1998 ---------------------- ----------------- CEC historical equivalent pro forma data (translated to US$): Net income (loss) per common share--basic...................... $(.08) $ .11 Net income (loss) per common share--diluted.................... $(.08) $ .11 Cash dividends paid per common share............................. -- -- Book value per common share........ $ 3.68 $3.71
11 CEC Per Share Market Information The common stock of CEC has traded on the American Stock Exchange regular list since July 6, 1995. The common stock initially began trading on the American Stock Exchange Emerging Companies Marketplace on March 24, 1995 about one month after it was divested by Columbus Energy Corp. to its shareholders by a rights offering. The reported high and low sales prices in U.S. dollars for the periods ending below were as follows:
High Low ------- ------- 1999: First quarter.......................................... $4.7500 $4.1250 Second quarter......................................... 4.8125 4.1250 Third quarter.......................................... 5.1250 4.1250 Fourth quarter (through December , 1999) 1998: First quarter.......................................... $6.2500 $4.8750 Second quarter......................................... 5.1250 4.8750 Third quarter.......................................... 5.6250 4.8750 Fourth quarter......................................... 5.6875 4.2500 1997: First quarter.......................................... $5.8750 $4.7500 Second quarter......................................... 5.2500 4.5000 Third quarter.......................................... 5.1875 4.8750 Fourth quarter......................................... 7.2500 4.8750
As of August 11, 1999, the day prior to announcement of the proposed acquisition of BFC stock under the BFC stock purchase agreement, the closing sales price of CEC common stock was $4.375. As of , 2000 the most recently reported closing sales price of CEC common stock was $ per share. As of , 2000, there were approximately holders of record of CEC common stock and an estimated 430 or more beneficial owners who hold their shares in brokerage accounts. 12 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before you decide to accept or reject the exchange offer. The risks and uncertainties we describe below are not the only risks we face. We also face risks common to companies engaged in the exploration, development and production of oil and gas. You should consider all of these risk factors along with the other information contained in the documents to which we have referred you. If any of the adverse events described in the following risk factors actually occur or we do not accomplish necessary events described in the risk factors, our business, financial condition and operating results could be materially and adversely affected, the trading price of our common stock could decline and you could lose all or part of your investment. We may not be able to successfully integrate BFC and CEC. Carbon acquired BFC in October, 1999. The integration and consolidation of the assets and operations of Carbon, BFC and CEC after the exchange offer will present significant management challenges for Carbon. Currently we and CEC use different accounting and computer systems. We plan to integrate these systems but we have not established a definitive time table for integration of such systems or determined the capital required for such integration. In addition, there may be adverse short-term effects on our reported operating results caused by severance payments to certain terminated employees, acquisition costs including legal and accounting fees, difficulties with retention, hiring and training of key employees and risks associated with unanticipated problems or legal liabilities. Carbon cannot assure you that it will be able to successfully integrate the Carbon, BFC and CEC business operations or that the combined company will realize any of the anticipated benefits of the transactions. You or Carbon could incur United States income taxes. As described in the section of this prospectus entitled "United States Federal Income Tax Consequences," no ruling will be requested from the IRS regarding the United States income tax aspects of the exchange. Although Holland and Hart LLP, tax counsel for Carbon, has rendered the opinion set forth in the section of this prospectus entitled "United States Federal Income Tax Consequences," the opinion is limited in scope, is subject to a number of qualifications, limitations and conditions and is subject to the accuracy of certain factual representations made by Carbon. As discussed in "United States Federal Income Tax Consequences," holders of more than 80% of CEC shares must participate in the exchange in order for the exchange to constitute a tax-free B reorganization. If holders of less than 80% of the CEC shares accept the exchange offer, tax-free treatment is less certain, (although still likely), and depends on whether Yorktown's contribution of cash to Carbon and CEC shareholders' subsequent exchange of CEC common stock for Carbon common stock constitute transfers pursuant to the same plan or arrangement for purposes of a tax-free Section 351 transaction. Moreover, an opinion of counsel is not binding on the IRS, and the IRS may successfully take a position contrary to tax counsel's opinion. For these reasons, each CEC shareholder participating in the exchange is urged and expected to consult with and rely on its tax advisor regarding the exchange. Shareholders of CEC who reside in Canada may incur Canadian income taxes by accepting the exchange offer. Canadian holders of CEC common stock will not benefit from tax-free treatment for Canadian federal income tax purposes and will have to recognize a gain or loss equal to the difference between the fair market value of the Carbon common stock and the aggregate of the adjusted cost base of the CEC common stock and any reasonable costs of disposition. 13 The tax considerations to you resulting from your individual position and the exchange may be complex. You should read carefully the discussion under "Canadian Federal Income Tax Consequences" and consult with your own advisors as to the Canadian federal, provincial or territorial tax consequences. Yorktown is Carbon's controlling stockholder. After the exchange offer, Yorktown will own 74% of Carbon's common stock if all of CEC's shareholders accept the exchange offer and a greater percentage if some of CEC's shareholders do not accept the exchange offer. Accordingly, Yorktown will be able to determine virtually all matters submitted for shareholder approval. The nomination and election of Carbon's directors are subject to the terms of the exchange and financing agreement among Carbon, CEC and Yorktown. Upon termination of the provisions of the exchange and financing agreement relating to the nomination and election of directors, Yorktown will be able to control the election of directors and to determine the corporate and management policies of Carbon. See "The Exchange Offer--Description of Exchange Agreement." No prior market for Carbon shares exists, and the market price for Carbon shares may decrease after the exchange offer. Prior to the exchange offer, there has been no public market for our shares. CEC shares have been traded on the AMEX, but the market was very thin and little trading occurred. There can be no assurance that an active trading market for our common stock will develop or be sustained. There is also uncertainty as to the prices at which our shares will trade. The possibility exists that the trading price for our shares may be lower than the prior market prices for CEC shares. Also, the price of CEC shares may decrease after the exchange offer if holders with a relatively large number of shares decide to sell the shares immediately or shortly after the exchange offer. CEC shareholders will not have a readily available market for CEC shares after the exchange offer. We anticipate that most CEC shareholders will tender their shares in exchange for Carbon shares. We therefore contemplate that CEC shares will be delisted from the AMEX and may not be traded or quoted on any public market. We depend heavily on our key personnel. We depend to a substantial extent on the expertise and services of our senior management personnel and upon the expertise and services of Patrick R. McDonald, who is our President and Chief Executive Officer and one of our directors. The loss of Mr. McDonald's or of any of our other senior management personnel's services could have a material adverse effect on us. We do not maintain key-man life insurance on any of our personnel. We may be unable to obtain additional financing. We expect to be able to finance our development and exploration programs for the next twelve months from cash generated by our operations and from bank financing. We will seek and evaluate opportunities for the acquisition of oil and gas businesses and properties. Although there are presently no agreements or understandings for any significant acquisitions, future acquisitions may require additional capital investment and bank financing. We cannot assure you as to the availability or terms of any additional capital investment or bank financing that may be required or whether financing will continue to be available under existing or new credit facilities. If sufficient capital resources are not available to us, our ability to make acquisitions may be curtailed, which could have a material adverse effect upon our results of operations and financial condition. 14 Carbon's technology systems may not be ready for the Year 2000. Carbon has not completed a comprehensive analysis of the operational problems and costs that would be reasonably likely to result from any failure of the technology systems of Carbon or of other third parties with which Carbon has significant relationships to be Year 2000 compliant by January 1, 2000. Carbon has made inquiries of the suppliers and manufacturers of its computer systems, including equipment supplied by third parties, and it has been advised that these systems are Year 2000 compliant except in the case of its property management software, which is currently under review regarding Year 2000 compliance. If Carbon's property management software is not Year 2000 compliant, Carbon believes that the cost of replacing such software would not exceed $25,000. Carbon has not reviewed all Year 2000 issues with third parties of business importance to Carbon such as its natural gas purchasers, gathering system and plant operators, downstream pipeline operators, equipment and service providers, operators of its oil and gas properties, financial institutions and vendors providing payroll and medical benefits and services. If any of these third parties have Year 2000 issues, Carbon believes that the most serious effect on Carbon would be delays in receiving payment for oil and gas sold to its purchasers. This could have a material adverse effect upon the results of operations and financial condition of Carbon. SOURCES OF INFORMATION ABOUT CARBON AND CEC Our business now consists only of BFC's business. Because BFC was acquired in October, 1999, much of the information in this prospectus with respect to BFC is derived from data and records prepared or developed under the prior management of BFC. Information and data in this prospectus with respect to CEC has been developed or derived from CEC data and records. FORWARD-LOOKING STATEMENTS This prospectus contains certain forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "believes," "expects," "estimates," "anticipates," "intends," "plans" and similar expressions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including all the risks discussed in "Risk Factors" and elsewhere in this prospectus. 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 15 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, (1) CEC entered into the BFC stock purchase agreement, (2) CEC assigned the BFC stock purchase 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, (3) Carbon closed an equity financing of $24,750,000 from Yorktown for the purpose of Carbon's purchasing all BFC shares, (4) Carbon completed the purchase of the BFC shares, and (5) 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 Exchange. In the spring and fall of 1996, CEC assembled a data room 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 a multi-zone oil discovery in Canada. In the spring of 1997, CEC restarted its efforts. CEC discussed for approximately four months in 1997 a potential business combination with a 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. Ultimately, the private company made continuous sales of shares for an active acquisition program, and it was not possible to reach a final agreement with that company. 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. 16 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 L. 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. 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 17 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 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. All discussions between Yorktown and CEC were conducted by Mr. McDonald with managers of Yorktown Partners. Mr. McDonald informed Yorktown Partners of each significant step 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. 18 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 Yorktown Partners is recognized for its quality investments, and thereby improving Carbon's access to opportunities to acquire oil and gas properties. 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 geographic location, the mix of oil versus gas and the development potential of the assets. 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 general industry guidelines of value including discounted cash flow and multiple cash flow methods. 19 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. CEC's Reasons For Recommending The Exchange Offer CEC's Board of Directors believe that the terms of the exchange offer are fair to and in the best interests of CEC and its shareholders. In reaching its conclusion to approve the BFC stock purchase agreement, the exchange and financing agreement and the exchange offer, CEC's Board consulted with management, as well as its legal advisors, and considered the following factors: . The acquisition of BFC and the exchange offer would result in Carbon being led by 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, including discounted cash flow, multiple of cash flow and public stock market values. 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 involved in any such opinion and the experience of all of CEC's directors in buying and selling oil and gas companies. 20 The Board also recognized that Yorktown's investment in Carbon or CEC would bring other benefits, as described above under "Background of the Exchange Offer/Exchange Agreement." In regard to values for CEC shares and shares of the combined CEC and BFC, members of the Board were aware of and considered general industry guidelines for the purchase price. One guideline for the value of a small company is an amount equal to 75% to 100% times the discounted future cash flow from proved developed reserves plus 50% of the discounted future cash flow from proved undeveloped reserves; another guideline is 5 to 6 1/2 multiplied by EBITDA (earnings before interest, taxes and depreciation, depletion and amortization). Both guidelines indicated that $5.50 per share was favorable. The price of $5.50 per share was also a premium of 26% over the market price for CEC common stock on August 11, 1999, the day prior to announcing the proposed BFC transaction. . 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. 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 21 less than US$200,000 per year, to be adjusted on each July 1 for cost of living increases in the U.S. consumer price index. Carbon is to provide Mr. McDonald benefits that he currently receives as an executive of CEC, and is to maintain for his benefit a life insurance policy in the amount of $1 million and a disability insurance policy with terms mutually agreeable to us and Mr. McDonald. According to the employment agreement, Carbon is also to nominate and endorse Mr. McDonald as a director on Carbon's Board of Directors so long as he is an officer of Carbon. Either Carbon or Mr. McDonald may terminate the agreement if there is a change in control of Carbon. A change in control includes (1) the acquisition by a third party or a group of 50% or more of the combined voting power for election of Carbon's directors (excluding those owned by Yorktown or entities controlled by Yorktown), or (2) the acquisition of Carbon by merger after which Carbon shareholders do not own more than 2/3 of the outstanding voting securities of the surviving corporation in substantially the same proportion as they owned Carbon prior to the merger, or any sale or exchange or other disposition of all or substantially all of our assets, (3) or the sale or other disposition of more than 50% in fair market value of our assets other than in the ordinary course of business, whether in a single transaction or related transactions, or (4) there is a change in more than a majority of our Board of Directors as a result of a proxy contest waged by a third party unaffiliated with the officer who is the party to the employment agreement and not endorsed by that officer. In the event of a change in control not supported by a majority of our then-existing Board of Directors, Mr. McDonald is to be paid 400% of his compensation upon termination of the employment agreement. In the event of a change in control supported by our then-existing Board of Directors, Mr. McDonald is to be paid 300% of his compensation upon 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 22 provides that either Carbon or Mr. Struzeski may terminate the contract if there is a change in control of Carbon. Change in control is defined in the same manner under this contract as our employment agreement with Mr. McDonald. In the event of a change in control not supported by a majority of our then- existing Board of Directors, Mr. Struzeski is to be paid 300% of his compensation upon termination of the employment agreement. In the event of a change in control supported by our then-existing Board of Directors, Mr. Struzeski is to be paid 200% of his compensation upon termination of his employment agreement by us or 100% of his compensation upon termination of his employment by him. For this purpose, compensation means the average of Mr. Struzeski's annual base salary and incentive compensation for the two years prior to the date of termination, (or, if he has been employed for less than two years, such lesser number of calendar years during any part of which he has been employed, with his base salary and incentive compensation taken into account at their full annualized rates for any partial year or years), prorated to be a monthly amount and multiplied by the remaining months of the term of his agreement (but not less than 12 months). Also, in the event of a change in control, the restrictions on any outstanding incentive awards (including restricted stock and performance shares) granted to Mr. Struzeski will lapse and such awards and all stock options and stock appreciation rights granted to him will become immediately exercisable and will become 100% vested. If Mr. Struzeski's employment is terminated by us for any reason other than "cause" (defined the same as in Mr. McDonald's employment agreement) or upon the death or disability of Mr. Struzeski or if Mr. Struzeski terminates his employment because of a change in the position of Mr. Struzeski with Carbon, Carbon is pay Mr. Struzeski an amount equal to his compensation (pro rated on a monthly basis) multiplied by the remaining months of his employment agreement. Also, in that event, all his options and restricted stock become 100% vested. 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 has determined that CEC will pay to Mr. McDonald a bonus of $200,000 Canadian (approximately $134,000 U.S.) when 50% or more of CEC shares are exchanged for Carbon shares. Similarly, other officers of CEC, including Mr. Struzeski, are to receive bonuses from CEC at the same time. Mr. Struzeski's bonus will be $ Canadian (approximately $ U.S.). Description of Exchange Agreement Under the Exchange Agreement, Yorktown agreed to acquire 4,500,000 shares of Carbon common stock at a purchase price of $24,750,000 in cash, or $5.50 per share. Carbon agreed to use these proceeds for the purchase of BFC shares under the BFC stock purchase agreement with any remaining proceeds to be added to its working capital. CEC agreed to assign to Carbon its rights and obligations under the BFC stock purchase agreement and Carbon agreed to assume those rights and obligations. Carbon, CEC and Yorktown agreed that Carbon would 23 make the exchange offer to all CEC shareholders. CEC agreed that its Board would recommend acceptance of the exchange offer. The Exchange Agreement also provided for the adoption of our 1999 stock option plan and our 1999 restricted stock plan, and employment agreements with Mr. McDonald and Mr. Struzeski. Carbon, CEC and Yorktown agreed that the Board of Directors of Carbon would consist of five directors. Carbon, CEC and Yorktown agreed that the five directors initially would be David H. Kennedy, Lambros J. Lambros, Bryan H. Lawrence, Peter A. Leidel and Patrick R. McDonald. Upon completion of the exchange offer, if Harry A. Trueblood accepts the exchange offer for all CEC common stock owned beneficially by him, the number of Carbon directors will be six and Mr. Trueblood will be the sixth director. As long as Yorktown beneficially owns shares with 50% or more of the outstanding votes in the election of directors of Carbon, Yorktown has the right to designate for nomination two directors. If Yorktown owns beneficially shares with 25% or more but less than 50% of the outstanding votes in the election of directors of Carbon, then Yorktown has the right to designate for nomination one director. Yorktown has no right to designate directors for nomination under the Exchange Agreement if Yorktown owns beneficially shares with less than 25% of the outstanding votes in the election of directors of Carbon. So long as Mr. McDonald is an officer of Carbon, he is to be designated for nomination as a director of Carbon. Under the Exchange Agreement, a nominating committee of our Board was established. The nominating committee consists of one Yorktown designated director, Mr. McDonald so long as he is a director of Carbon, and two independent directors. The nominating committee is responsible for determining nominees for the positions of directors of Carbon or persons to be elected by the Board of Directors or shareholders of Carbon to fill any vacancy in the Board of Directors. The nominating committee is required to nominate for director each Yorktown director which Yorktown has the right to designate and has designated. The nominating committee is required to nominate Mr. McDonald if he is entitled to be nominated. The nominating committee will then nominate the remaining directors; at least two of the persons nominated will be independent directors. If the size of the Board is changed and there are not sufficient positions for the election of two independent directors after taking into account the directors designated by Yorktown and Mr. McDonald, then the nominating committee is not required to nominate two independent directors. If there is a vacancy in the position relating to a Yorktown director, the remaining Yorktown director has the right to designate any replacement to fill the vacancy. The nominating committee has the right to designate any replacement to fill any other vacancy. The Exchange Agreement requires that any change in the size or composition of the Board of Directors or the nominating committee be approved by a supermajority vote of the Board consisting of a majority of the entire Board which includes a majority of all Yorktown directors and at least one independent director. Yorktown and Mr. McDonald agreed to take such actions as shareholders of Carbon as necessary to effectuate the election of directors 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 , 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. 24 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. 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. 25 All questions as to the validity, form, eligibility, acceptance and withdrawal of the tendered shares of the CEC common stock will be determined by us in our sole discretion, and our determination will be final and binding. We reserve the absolute right to reject any and all shares of the CEC common stock not properly tendered or any shares of the CEC common stock our acceptance of which would, in the opinion of our counsel, be unlawful. We reserve the absolute right to waive any irregularities or conditions of tenders as to particular shares of the CEC common stock. Unless waived by us, any defects or irregularities in connection with tenders of shares of the CEC common stock must be cured within the time we determine. Neither we, the exchange agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of shares of the CEC common stock or withdrawal of shares nor shall any of them incur any liability for failure to give any notification. Tenders of shares of the CEC common stock will not be deemed to have been made until such defects or irregularities have been cured or waived. As soon as practicable following the expiration date, the exchange agent will return without cost any stock certificates representing the CEC common stock that were not properly tendered and as to which defects or irregularities have not been cured or waived to the tendering holder of these stock certificates, unless otherwise provided in the letter of transmittal. 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 conformation 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. 26 Exchange Agent Harris Trust and Savings Bank has been appointed as exchange agent of the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for notice of guaranteed delivery (see below) should be directed to the exchange agent addressed as follows: By Registered or By Hand Delivery: By Overnight Delivery: Certified Mail: Harris Trust and Savings Harris Trust and Savings Harris Trust and Savings Bank Bank Bank Corporate Trust Corporate Trust P.O. Box 830 Operations Operations Chicago, IL 60606-0830 311 West Monroe Street 311 West Monroe Street 11th Floor 11th Floor Chicago, IL 60606 Chicago, IL 60606 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. Conditions To The Exchange We will be under no obligation to accept shares of CEC common stock tendered if prior to the expiration date any court or other governmental entity shall have issued an order restraining, enjoining or otherwise prohibiting consummation of the exchange offer. Termination Of The Exchange Offer Our exchange offer, as well as the Exchange Agreement may be terminated at any time prior to the expiration date if: . the parties to the Exchange Agreement agree to the termination, or 27 . by any party if any court or governmental authority of competent jurisdiction shall have issued a final order restraining, enjoining or otherwise prohibiting consummation of the transactions contemplated by the Exchange Agreement. If the exchange offer is terminated without our acceptance of any shares of the CEC common stock tendered, we will promptly return all shares tendered to the appropriate CEC shareholders. Withdrawal Rights You may withdraw tenders of your shares of the CEC common stock at any time before the exchange offer expires. If you change your mind again, you may retender your shares of the CEC common stock by following the exchange offer procedures again prior to the expiration of the exchange offer. For a withdrawal to be effective, a written notice of withdrawal must be received by the exchange agent at one of its addresses set forth in the section of this prospectus titled "--The Exchange Agent." The notice of withdrawal must: . specify the name of the person having tendered the shares of the CEC common stock to be withdrawn, . identify the number of shares of the CEC common stock to be withdrawn, and . specify the name in which physical share certificates representing the CEC common stock are registered, if different from that of the withdrawing holder. If certificates for the CEC common stock have been delivered or otherwise identified to the exchange agent, then, before the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an eligible institution unless such holder is an eligible institution. Any shares of the CEC common stock withdrawn will be deemed not to have been validly tendered for exchange for purposes of our offer. Any shares which have been tendered for exchange but which are not exchanged for any reason will be promptly returned to the holder who tendered the shares. Properly withdrawn shares may be retendered by following one of the procedures described in this prospectus and the letter of transmittal. Except as otherwise provided above, any tender of shares of the CEC common stock made under the exchange offer is irrevocable. Fees And Expenses We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by our officers and regular employees and the officers and regular employees of our affiliates. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We, however, will pay the exchange agent reasonable out-of-pocket expenses in connection therewith. We will pay the cash expenses to be incurred in connection with the exchange offer, which are estimated in the aggregate to be approximately . Such expenses include registration fees, fees and expenses of the exchange agent for our offer and, accounting and legal fees and printing costs, among others. We will pay all transfer taxes, if any, applicable to the exchange of Carbon common stock for the CEC common stock in the exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of Carbon common stock for CEC common stock in the exchange offer, then the amount of any transfer taxes 28 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 Upon completion of the exchange offer, it is likely that the CEC common stock will be delisted from the AMEX. If the shares of CEC common stock are delisted from the AMEX, the market for such shares could be adversely affected. It is possible that such shares might not be traded on other public securities exchanges. The extent of any public market for the shares of CEC common stock would, however, depend upon the number of holders and/or the aggregate market value of such shares remaining at that time, the interest in maintaining a market in such shares on the part of securities firms and the possible termination of registration of CEC common stock under the Exchange Act. The trading in CEC common stock prior to the exchange offer was thin and inactive; it can be expected that there will be no public market for CEC common stock after the exchange offer. CEC's common stock is currently registered under the Exchange Act. Such registration may be terminated by CEC upon application to the SEC if the outstanding shares of CEC common stock are not listed upon a national securities exchange and if there are fewer than 300 holders of record of such shares. Termination of registration of the CEC common stock under the Exchange Act would reduce the information required to be furnished by CEC to its shareholders and to the SEC and would make certain provisions of the Exchange Act, 29 such as the short-swing recovery provisions of Section 16(b) and the requirement of furnishing a proxy statement pursuant to Section 14(a), no longer applicable to such shares. Second Step Merger After the exchange, 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. If CEC common stock is listed on the AMEX on the record date for determining shareholders entitled to vote on the merger, no dissenters' rights will be available to CEC's shareholders in connection with the merger. In contrast, if CEC's common stock is not listed on the AMEX on such record date, CEC's shareholders will be entitled to dissenters' rights in connection with the merger. 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 30 administration of the trust and one or more United States fiduciaries have the authority to control all the substantial decisions of the trust. You are a non-U.S. Shareholder if you are not a U.S. Shareholder. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to you, particularly if you are subject to special treatment under United States federal income tax laws. For example, this discussion does not address the potential application of the alternative minimum tax; or the tax consequences to certain types of investors subject to special treatment under U.S. federal income tax laws, such as: banks, life insurance companies, tax-exempt organizations, broker-dealers or holders of Carbon common or CEC common stock who received such stock as compensation. In addition, this discussion does not address any aspect of state, local or foreign tax laws. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations, IRS rulings and pronouncements, reports of congressional committees, judicial decisions and current administrative rulings and practice, all as of October 20, 1999, which are subject to change. Any such change could be retroactive and change the tax consequences discussed below. No advance ruling from the Internal Revenue Service with respect to these matters has been requested. The following does not address all aspects of federal income taxation that may be relevant to you in light of your individual circumstances and tax situation. The federal income tax consequences will in all likelihood differ from one investor to the next. Therefore, you are urged to consult your tax advisor regarding the federal income tax consequences unique to your situation. Taxation of U.S. Shareholders. The following discussion applies to you if you are a U.S. Shareholder and: . you hold CEC common shares and/or will hold Carbon common stock as "capital assets" within the meaning of Section 1221 of the Code; . your ownership, receipt or disposition of CEC common shares and/or Carbon common stock is not attributable to a permanent establishment in a country other than the United States for purposes of an income tax treaty to which the United States is a party; and . you are not a resident of a country other than the United States for purposes of an income tax treaty to which the United States is a party. Basic Treatment of Exchange Transaction for U.S. Shareholders. The following represents Holland & Hart LLP's opinion regarding the United States federal income tax consequences of the exchange of CEC common shares for Carbon common stock. First, the exchange may, if certain requirements are satisfied, qualify as a so-called "B Reorganization" under relevant U.S. federal income tax law. A transaction generally constitutes a B Reorganization if, among other things, an acquiring corporation (Carbon) has "control" of a target corporation (CEC) immediately following an exchange of the target corporation's shares for the acquiring corporation's shares, but only if stock representing "control" of the target corporation (CEC) was acquired solely for voting stock. For this purpose, "control" means at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Assuming that Carbon acquires at least 80% of the outstanding stock of CEC solely in exchange for the stock of Carbon, and that the representations made by Carbon and CEC to tax counsel are accurate, tax counsel is of the opinion that the exchange should qualify for tax-free treatment as a B Reorganization. Even if the exchange does not satisfy the requirements for a tax-free B Reorganization, there nevertheless may be a second means of characterizing the exchange as tax-free. Specifically, if certain requirements are satisfied, it is likely that the exchange may qualify as a tax-free transaction under Section 351 of the Code. Under 31 Section 351 of the Code, persons transferring property to a corporation in exchange for stock of the corporation generally do not recognize gain or loss on the transfer of their property to the corporation. However, this favorable treatment applies only if, among other things, immediately following the exchange, the persons transferring property to the corporation hold at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. In addition, in order for multiple transferors to be taken into account in computing this 80% control test, the transferors must transfer property to the corporation as part of the same plan or arrangement. Although the matter is not free from doubt, tax counsel believes that Yorktown's contribution of cash to Carbon and CEC shareholders' subsequent exchange of CEC common stock for Carbon common stock likely constitute transfers pursuant to the same plan or arrangement for purposes of Section 351 of the Code. Accordingly, and based upon the representations of Carbon and CEC, in tax counsel's opinion, the exchange of CEC common stock for Carbon common stock likely constitutes part of a tax-free Section 351 transaction. It is possible that the IRS would view Yorktown's contribution of cash to Carbon and the subsequent exchange as separate, unrelated events, in which case tax- free treatment would be unavailable under Section 351 of the Code. Neither CEC nor Carbon has requested, nor will request, a ruling by the Internal Revenue Service that the exchange of shares will be treated as tax free. No assurance can be given that the Internal Revenue Service will not challenge the tax-free nature of the exchange for U.S. federal income tax purposes. If such a challenge were sustained by a court, each U.S. Shareholder of CEC would recognize a capital gain or loss, assuming CEC is not a "passive foreign investment company" (described below) to the extent of the difference between the fair market value of the Carbon shares received by such shareholder and such shareholder's tax basis of the CEC shares surrendered therefor. If the exchange is tax-free as a B Reorganization or a Section 351 transaction, it is the opinion of Holland & Hart LLP that the following will be the material United States federal income tax consequences of the exchange of CEC common shares for Carbon common shares: . You should not recognize gain or loss on the exchange of CEC common shares solely for Carbon common stock; . The tax basis of the Carbon common stock received should be the same as the basis of the CEC common shares constructively surrendered in exchange therefor; and . The holding period for the shares of Carbon common stock should include the holding period of CEC common shares surrendered in exchange therefor. Under Code Section 367(b) and the regulations thereunder, U.S. Shareholders participating in the exchange are required to file an "exchange notice" with the IRS. This exchange notice must be filed on or before the last date for filing a federal income tax return (taking into account any extensions of time for such filing) for the U.S. Shareholder's taxable year in which the exchange takes place. The exchange notice must be filed with the IRS office with which the U.S. Shareholder would be required to file a federal income tax return for the year. This filing requirement will apply whether the exchange is treated as tax-free B reorganization or a tax-free Section 351 transaction. You should consult your tax advisors regarding the Section 367(b) exchange notice and its required content. Passive Foreign Investment Company Considerations for U.S. Shareholders. For U.S. federal income tax purposes, CEC generally would be classified as a Passive Foreign Investment company, or PFIC, for any taxable year during which either: (1) 75 percent or more of its gross income is passive income, as defined for U.S. federal income tax purposes; or (2) on average for such taxable year, 50 percent or more of its assets by value produce or are held for the production of passive income. The classification of CEC as a PFIC could have adverse tax consequences with respect to the exchange that may be substantial for U.S. Shareholders. However, CEC has represented that the factual conditions that give rise to PFIC status have not 32 existed with respect to CEC during any taxable year ending at or prior to consummation of the exchange. Therefore, based on this factual representation, the PFIC rules will not affect U.S. Shareholders who participate in the exchange. Taxation of Non-U.S. Shareholders. The following discussion applies to you if you are a non-U.S. Shareholder: . who holds CEC common shares or will hold Carbon common stock as capital assets within the meaning of Section 1221 of the Code; . who does not actually or constructively own, nor at any time in the preceding five-year period actually or constructively owned, five percent or more of the stock of CEC; . whose ownership, receipt or disposition of CEC common shares and/or Carbon common stock is not attributable either to the conduct of a trade or business in the United States or to a permanent establishment in the United States; and . who are not residents of the United States for purposes of United States federal income tax law or an income tax treaty to which the United States is a party. If you are a non-U.S. Shareholder who does not meet one or more of the foregoing criteria, you are urged and expected to consult your own tax advisors regarding your particular U.S. federal income tax consequences. Generally, you will not be subject to U.S. federal income tax on gain recognized, if any, upon the exchange of the shares of CEC common shares for the shares of Carbon common stock, unless: . the gain is effectively connected with the conduct of a trade or business within the United States by you; . the gain is attributable to a permanent establishment in the United States; . if you are a nonresident alien and hold CEC common shares as a capital asset, you are present in the United States for 183 or more days in the taxable year and certain other circumstances are present; or . you are subject to tax pursuant to the provisions of the Code applicable to some United States expatriates. Generally, dividends received by you with respect to Carbon common stock will be subject to United States withholding tax at a rate of 30 percent, which rate may be subject to reduction by an applicable income tax treaty. For example, 15 percent is the applicable rate with respect to dividends paid to residents of Canada who qualify for the benefits of the income tax treaty between the U.S. and Canada. If the dividends you receive are effectively connected with the conduct of a U.S. trade or business or are attributable to a permanent establishment in the U.S. of yours, they will be taxed at the graduated rates that are applicable to U.S. citizens, resident aliens and domestic corporations and will not be subject to United States withholding tax if you give an appropriate statement to the withholding agent in advance of the dividend payment. A non-U.S. Shareholder that is a corporation may be subject to an additional branch profits tax on effectively connected dividends. Generally, foreign persons are not subject to U.S. federal income tax on gain recognized, if any, upon the sale of shares of U.S. companies. However, the gain on such sales can be taxable, including gain on the sale of Carbon common stock, if: . the gain is effectively connected with conduct of a trade or business within the United States; . you are a nonresident alien individual and hold the Carbon common stock as a capital asset, you are present in the United States for 183 or more days in the taxable year and other specific circumstances are present; . you are subject to tax pursuant to the provisions of the Code applicable to U.S. expatriates; or 33 . Carbon likely is or will be a "United States real property holding corporation," a "USRPHC," for federal income tax purposes, as such term is defined by Section 897(c) of the Code. If Carbon is a USRPHC, then the gain from the disposition of its stock by a non-U.S. shareholder can be taxable in the United States. However, if Carbon's common stock is regularly traded on an established securities market, within the meaning of Section 897(c)(3) of the Code, an exception to this gain recognition rule is available. Carbon believes that as of the date of the exchange, Carbon common stock will be treated as being traded on an established exchange. However, this exception is available to non-U.S. shareholders only if the non-U.S. shareholder has not owned, directly or indirectly, pursuant to attribution rules, more than 5% of the Carbon stock at any time during the five-year period ending on the date of the disposition. Estate Tax for Non-U.S. Shareholders. Carbon common stock owned, or treated as such, by an individual may be includible in his or her gross estate for United States federal estate tax purposes and thus if you are an individual you may be subject to United States federal estate tax, unless an applicable estate tax treaty provides otherwise. Information Reporting and Backup Withholding. Carbon must report annually to the IRS and to you and all other shareholders the amount of dividends paid that year, and the tax withheld with respect to such dividends, if any. These information reporting requirements apply regardless of whether withholding tax is reduced by an applicable income tax treaty. Copies of these information returns reporting such dividends and withholding are made available to the tax authorities in the country in which a non-U.S. Shareholder resides under the provisions of an applicable income tax treaty or other agreement with the tax authorities in that country. In general, information reporting requirements may apply to dividend distributions on Carbon common stock, or the proceeds of a sale, exchange, retraction or redemption of Carbon common stock. A 31% backup withholding tax may apply to these payments unless you are a corporation, non-U.S. Shareholder or come within specific exempt categories and, when required, demonstrate your exemption or provide a correct taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise comply with applicable requirements of the backup withholding rules. If you are required to provide your correct taxpayer identification number and fail to do so, you may be subject to penalties imposed by the IRS. United States backup withholding tax generally will not apply to dividends paid on Carbon common stock that are subject to the 30% or reduced treaty rate of withholding previously discussed if the beneficial owner certifies its non- U.S. status under penalties of perjury, otherwise establishes an exemption or, with respect to payments made after December 31, 1999, satisfies certain documentary evidence requirements for establishing that it is a non-U.S. holder. Under current law, dividends paid on Carbon common stock to you at an address outside the United States are generally exempt from backup withholding tax, but not from 30% withholding tax, as discussed above. On October 14, 1997 the IRS issued final regulations which affect your United States taxation. Under these regulations, for dividends paid after December 31, 1999, a non-United States person must generally provide proper documents indicating their status to a withholding agent in order to avoid backup withholding tax. However, dividends paid to exempt recipients, not including individuals, will not be subject to backup withholding even if such documentation is not provided, if the withholding agent is allowed to rely on certain presumptions concerning the recipient's non-United States status (i.e. payment to an address outside the United States). If you are a non-U.S. Shareholder, payments of proceeds from the sale of Carbon common shares by you made to or through a non-United States office of a broker generally will not be subject to information reporting or backup withholding. However, payments made to or through a non-United States office of a United States 34 broker or a non-United States office of a non-United States broker that has certain specified connections with the United States, are generally subject to information reporting, but not backup withholding unless you certify your non- United States status under penalties of perjury or otherwise establish your entitlement to an exemption. Payments of proceeds from the sale of Carbon common stock by you made to or through a U.S. office of a broker are generally subject to both information reporting and backup withholding at a rate of 31% unless you certify your non-United States status under penalties of perjury or otherwise establish your entitlement to an exemption. Any amounts withheld under the backup withholding rules from a payment to you will be allowed as a credit against your United States federal income tax, provided that the required information is furnished to the IRS. Under Code Section 367(b) and the regulations thereunder, non-U.S. Shareholders participating in the exchange might technically be required to file an "exchange notice" with the IRS. You should consult your tax advisors regarding the Section 367(b) exchange notice, its timing, its required content, and the effect of failure to file such notice. CANADIAN FEDERAL INCOME TAX CONSEQUENCES Subject to the qualifications and assumptions contained herein in the opinion of Bennett Jones, Canadian counsel to CEC, the following is a general summary of the material Canadian federal income tax consequences generally applicable to holders of CEC common stock who dispose of CEC common stock pursuant to the exchange offer. This summary: (i) is based on the current provisions of the Income Tax Act (Canada) (the "Canadian Tax Act"), the regulations thereunder (the "Regulations") and counsel's understanding of the current administrative practices of Revenue Canada, Customs, Excise and Taxation. This summary also takes into account the amendments to the Canadian Tax Act and Regulations publicly announced by the Canadian Minister of Finance prior to the date hereof (the "Proposed Amendments") and assumes that all such Proposed Amendments will be enacted in their present form. However, no assurances can be given that the Proposed Amendments will be enacted in the form proposed, or at all. Except for the foregoing, this summary does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from the Canadian federal income tax consequences described herein; and (ii) applies only to persons who, within the meaning of the Canadian Tax Act, acquire, hold and dispose of CEC common stock and Carbon common stock as capital property, deal at arm's length with CEC and Carbon and are not "financial institutions" for the purposes of the mark-to-market rules. CEC common stock and Carbon common stock will generally be considered to be capital property to a holder thereof provided that the holder does not hold any such shares in the course of carrying on a business of buying and selling shares and has not acquired such shares in a transaction considered to be an adventure in the nature of trade. Certain holders who are resident in Canada and who might not otherwise be considered to hold CEC common stock as capital property may be entitled to have such shares treated as capital property by making the election provided by subsection 39(4) of the Canadian Tax Act. The tax consequences of the exchange will in all likelihood differ from one holder to the next. Therefore, we urge you to consult your tax advisor regarding the tax consequences unique to your situation. Holders Resident in Canada The following portion of the summary is applicable only to holders of CEC common stock who are resident or deemed to be resident in Canada for the purposes of the Canadian Tax Act (a "Canadian Holder"). 35 Disposition of CEC Common Stock On the exchange of CEC common stock for Carbon common stock, a Canadian Holder will be considered to have disposed of the CEC common stock for proceeds of disposition equal to the fair market value at the time of the exchange of the Carbon common stock received by the holder. A Canadian Holder will realize a capital gain or capital loss, as appropriate, equal to the amount by which such proceeds of disposition, net of any reasonable costs associated with the disposition, exceed or are less than, as appropriate, the holder's adjusted cost base of the CEC common stock. The cost to the Canadian Holder of the Carbon common stock received by such holder will be equal to the fair market value of such shares at the time of the exchange. The computation of the adjusted cost base of Carbon common stock is discussed below in this section under the heading "Disposition of Carbon Common Stock." The general tax treatment of capital gains and losses is discussed in this section under the heading "Capital Gains and Losses." Disposition of Carbon Common Stock A disposition or deemed disposition by a Canadian Holder of Carbon common stock will generally give rise to a capital gain or capital loss, as appropriate, equal to the amount by which the proceeds of disposition of the Carbon common stock, net of any reasonable costs associated with the disposition, exceed or are less than, as appropriate, the holder's adjusted cost base of the Carbon common stock. In that regard, the cost to the holder of the Carbon common stock acquired on the exchange will be averaged with the adjusted cost base of any other Carbon common stock then owned by such holder as capital property for the purposes of determining the adjusted cost base of such Carbon common stock. The general tax treatment of capital gains and losses is discussed below in this section under the heading "Capital Gains and Losses". Capital Gains and Losses A Canadian Holder's taxable capital gain or allowable capital loss from the disposition of CEC common stock or Carbon common stock will be equal to three- quarters of the amount of the holder's capital gain or capital loss, as appropriate, in respect of such disposition. A Canadian Holder must include any such taxable capital gain in income for the taxation year of disposition, and may, subject to the detailed provisions of the Canadian Tax Act, deduct any such allowable capital loss from taxable capital gains in the year in which such allowable capital loss is realized. Subject to the detailed rules contained in the Canadian Tax Act, any remaining allowable capital loss may generally be applied to reduce net taxable gains realized by the holder in the three preceding and in all subsequent taxation years. If a Canadian Holder is a corporation, the amount of any capital loss arising from a disposition or deemed disposition of CEC common stock or Carbon common stock may be reduced by the amount of dividends received or deemed to have been received by it on such shares to the extent and under circumstances prescribed by the Canadian Tax Act. Similar rules may apply where a corporation is a member of a partnership or a beneficiary of a trust that owns CEC common stock or Carbon common stock. Capital gains realized by a Canadian Holder who is an individual may be subject to alternative minimum tax under the Canadian Tax Act, depending on the individual's circumstances. A Canadian Holder that is a "Canadian-controlled private corporation," as defined in the Canadian Tax Act, may be liable to pay an additional refundable tax of 6 2/3% on certain investment income, including amounts in respect of taxable capital gains. Eligibility for Investment The Carbon common stock issued pursuant to the offer, when listed on a prescribed stock exchange, which includes the American Stock Exchange, will be qualified investment under the Canadian Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing 36 plans. However, such shares will constitute "foreign property," as defined in the Canadian Tax Act, for the purposes of such plans. Subsequent Transaction As described in "The Exchange Offer--Second Step Merger", Carbon may, in certain circumstances, merge CEC with a wholly-owned Canadian subsidiary of Carbon (the "Second Step Merger"). The consequences under the Canadian Tax Act to a holder whose CEC common stock is not exchanged under the exchange offer and is disposed of in connection with the Second Step Merger will depend upon the circumstances of the merger including, without limitation, the consideration received by the holder and the person from whom such consideration is received. If a holder receives Carbon common stock or cash in consideration for the disposition of CEC common stock to Carbon, the holder will realize a capital gain (or a capital loss) to the extent that the proceeds received for such common stock, net of any reasonable costs associated with the disposition, exceed (or are less than) the adjusted cost base of the CEC common stock disposed of. If in the course of the Second Step Merger, CEC common stock is acquired by CEC from an individual holder (including upon the exercise by an individual holder of certain dissent rights), the individual holder will be deemed to have received a taxable dividend in the amount by which the amount received (other than in respect of interest awarded by a Court) exceeds the paid-up capital of such CEC common stock. This amount will be excluded from the former individual holder's proceeds of disposition for the purposes of computing any taxable gain on the disposition. If the former individual holder is a resident of Canada, the deemed dividend will be treated in the same manner as a regular taxable dividend received from CEC. Corporations or trusts or partnerships which have corporations as beneficiaries or partners should consult their own tax advisors with respect to the income tax consequences where CEC common stock is acquired by CEC. Upon the merger of CEC and a wholly-owned Canadian affiliate of Carbon, the Canadian Tax Act deems the CEC common stock to be disposed of and the shares of the amalgamated corporation to be acquired for an amount equal to the adjusted cost base to the former holders of the CEC common stock. Consequently, no capital gain or capital loss would be realized by the former holders upon such amalgamation. A subsequent disposition of the shares of the amalgamated corporation acquired on the amalgamation may give rise to a capital gain, a capital loss, or if such shares are repurchased by the amalgamated corporation, a deemed dividend. If on such amalgamation the former holder receives property other than shares of the amalgamated corporation (such as Carbon shares or cash) or exercises a dissent right pursuant to the Alberta Business Corporations Act and receives cash in consideration for his CEC common stock, such former holder will have a capital gain (or a capital loss) to the extent that the proceeds received for such CEC common stock (other than in respect of interest awarded by a Court), net of any reasonable costs associated with the disposition, exceed (or are less than) the adjusted cost base of the CEC common stock disposed of by the former holder. Holders Not Resident in Canada The following portion of the summary is applicable only to holders of CEC common stock who are not and will not be resident nor deemed to be resident in Canada for the purposes of the Canadian Tax Act and any applicable tax treaty at any time they hold such shares, who do not use or hold and are not deemed to use or hold their CEC common stock in carrying on a business in Canada, and in the case of a holder who carries on an insurance business in Canada and elsewhere, whose shares are not "designated insurance property" and are not effectively connected with an insurance business carried on in Canada at any time (a "Non-Resident Holder"). A Non-Resident Holder will not be subject to tax in respect of capital gains realized on the disposition of CEC common stock provided that the CEC common stock is not "taxable Canadian property" of the Non-Resident Holder immediately before the exchange. The CEC common stock will not constitute "taxable Canadian property" of a Non-Resident Holder provided that such shares are listed on a prescribed stock 37 exchange (which currently includes the American Stock Exchange), and the holder, persons with whom such holder does not deal at arm's length, or the holder together with all such persons, has not owned (or had under option) 25% or more of the issued shares of any class or series of the capital stock of CEC at any time within five years preceding the date of the exchange, and the shares were not acquired in a transaction which deemed them to be "taxable Canadian property." The Canadian federal income tax consequences to a Non-Resident Holder who does not tender to the offer of the transactions described in this summary under "Subsequent Transaction" may be substantially different than those described above and may include, without limitation, the recognition of a gain which is subject to tax in Canada and/or the receipt of deemed dividends and/or interest which would be subject to Canadian withholding tax. If CEC common stock ceases at any time to be listed on a prescribed exchange, the stock will at that time be considered "taxable Canadian property" to the Non- Resident Holder. Non-Resident Holders who are considering not tendering to the exchange offer are urged to consult their tax advisors as to the potential consequences to them of such transactions. UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information is derived from the historical financial statements of BFC and CEC. The historical financial statements are adjusted to reflect the following: The Carbon Unaudited Pro Forma Condensed Balance Sheet as of September 30, 1999 has been prepared assuming that the acquisition of BFC was consummated on September 30, 1999 and the exchange offer of Carbon shares for CEC shares was consummated on August 31, 1999. The Carbon Unaudited Pro Forma Statements of Income for the twelve months ended December 31, 1998 and for the nine months ended September 30, 1999 have been prepared assuming that the acquisition of BFC was consummated on January 1, 1998 and the exchange offer of Carbon shares for CEC shares was consummated on December 1, 1997. The historical financial statements of CEC were prepared in Canadian dollars in accordance with Canadian generally accepted accounting principles. CEC's historical balance sheet as of August 31, 1999 and statements of income for the year ended November 30, 1998 and the nine months ended August 31, 1999 have been adjusted to present the results in accordance with United States generally accepted principles and have been translated to U.S. dollars. The Unaudited Pro Forma Balance Sheet reflects the allocation of the purchase price of the BFC acquisition to the assets and liabilities of Carbon. This statement also reflects the preliminary allocation of the exchange offer of Carbon shares for CEC shares to the assets and liabilities of Carbon. The valuation of the exchange offer for pro forma purposes was calculated using the average of the three quoted closing prices for CEC shares prior and subsequent to the announcement date of the signing of the BFC purchase and sales agreement. The final allocation of the CEC exchange will differ from the preliminary estimates because the final allocation will be based on the level of acceptance of the exchange offer and the estimated fair values of the CEC assets and liabilities assumed upon the consummation of the exchange offer. The Carbon Unaudited Pro Forma Financial Information should be read in conjunction with the accompanying notes thereto, and the historical financial statements and notes thereto for Carbon, BFC, and CEC included elsewhere in this prospectus. The pro forma information presented is not necessarily indicative of the financial position or results of operations that would have actually occurred had the acquisition of BFC and the exchange offer of Carbon shares for CEC shares been consummated on the dates previously assumed. The pro forma information presented is not intended to be a projection of future financial position or results of operation. 38 CARBON ENERGY CORPORATION PRO FORMA BALANCE SHEET September 30, 1999 (in US dollars, unless otherwise indicated, in thousands)
Carbon Yorktown Acquisition Exchange BFC CDN $ CEC CEC Investment of BFC Offer Carbon 09/30/99 08/31/99 (a) 08/31/99 (b) Adjustments Adjustments Adjustments Pro Forma -------- ------------ ------------ ----------- ----------- ----------- --------- Current assets: Cash.................. $ 304 $ -- $ -- $24,805 (c) $(23,581)(d) $ -- $ 1,528 Accounts receivable... 2,213 973 650 -- -- -- 2,863 Amount due from broker............... 1,761 -- -- -- -- -- 1,761 Prepaid expenses and other................ 155 -- -- -- -- -- 155 ------- ------- ------- ------- -------- ------ ------- Total current assets............. 4,433 973 650 24,805 (23,581) -- 6,307 Property and equipment: Oil and gas properties........... 37,115 21,358 14,280 -- (6,833)(d) (4,327(e)(f)(g) 40,235 Liquids extraction plant................ -- 1,477 987 -- -- (592)(e) 395 Compression/gathering. -- 665 445 -- -- (125)(e) 320 Furniture, equipment and other............ 499 200 134 -- (273)(d) (44)(e) 316 ------- ------- ------- ------- -------- ------ ------- 37,614 23,700 15,846 -- (7,106) (5,088) 41,266 DD&A.................. (20,721) (10,556) (7,057) -- 20,721 (d) 7,057 (e) -- ------- ------- ------- ------- -------- ------ ------- Property and equipment, net..... 16,893 13,144 8,789 -- 13,615 1,969 41,266 Other assets: Deposits and other.... 270 1,864 1,246 -- -- -- 1,516 Deferred loan costs, net.................. 31 -- -- -- (31)(d) -- -- ------- ------- ------- ------- -------- ------ ------- Total other assets.. 301 1,864 1,246 -- (31) -- 1,516 ------- ------- ------- ------- -------- ------ ------- Total assets............ $21,627 $15,981 $10,685 $24,805 $ (9,997) $1,969 $49,089 ======= ======= ======= ======= ======== ====== ======= Current liabilities: Accounts payable and accrued expenses..... $ 1,838 $ 284 $ 190 $ -- $ -- $ 300 (g) $ 2,328 Accrued production taxes payable........ 415 -- -- -- -- -- 415 Undistributed revenue. 577 507 339 -- -- -- 916 ------- ------- ------- ------- -------- ------ ------- Total current liabilities........ 2,830 791 529 -- -- 300 3,659 Long-term debt.......... 8,800 4,850 3,242 -- -- -- 12,042 Future site restoration costs.................. -- 221 148 -- -- -- 148 Deferred income taxes... -- 1,739 1,163 -- -- 584 (f) 1,747 Stockholders' equity: Share capital......... -- 1,512 1,011 -- -- (1,011)(e) -- Paid in capital....... 3,475 24,805 (c) (3,475)(d) 6,688 (e) 31,493 Retained earnings..... 6,522 6,868 4,592 -- (6,522)(d) (4,592)(e) -- ------- ------- ------- ------- -------- ------ ------- Total stockholders' equity............. 9,997 8,380 5,603 24,805 (9,997) 1,085 31,493 ------- ------- ------- ------- -------- ------ ------- Total liabilities and stockholders' equity... $21,627 $15,981 $10,685 $24,805 $ (9,997) $1,969 $49,089 ======= ======= ======= ======= ======== ====== =======
The accompanying notes are an integral part of these financial statements. 39 CARBON ENERGY CORPORATION UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT Nine Months Ended September 30, 1999 (in US dollars, unless otherwise indicated, in thousands)
CEC BCF CDN $ CEC CEC Acquisition Acquisition Carbon 09/30/99 08/31/99(a) 08/31/99(b) 08/31/99(j) Adjustments Pro Forma -------- ----------- ----------- ----------- ----------- --------- Revenues: Oil and gas sales..... $ 6,730 $3,386 $2,254 $112 $ -- $ 9,096 Field services........ -- 75 50 -- -- 50 Gas marketing and transportation....... 11,059 -- -- -- -- 11,059 Electricity sales..... -- -- -- -- -- 0 Other................. 465 2 1 -- -- 466 ------- ------ ------ ---- ------ ------- 18,254 3,463 2,305 112 -- 20,671 Expenses: Oil and gas production costs................ 2,701 585 389 43 -- 3,133 Field services........ -- 65 43 -- -- 43 Gas marketing and transportation....... 11,009 -- -- -- -- 11,009 Costs of electricity.. -- -- -- -- -- -- DD&A.................. 1,789 1,597 1,063 72 1,545 (h) 4,469 Exploration expense... 681 -- -- -- (681)(i) -- Impairment expense.... 60 -- -- -- (60)(i) -- General and administrative....... 985 1,522 1,013 -- -- 1,998 Interest expense...... 346 136 91 27 -- 464 ------- ------ ------ ---- ------ ------- 17,571 3,905 2,599 142 804 21,116 Income (loss) before taxes.................. 683 (442) (294) (30) (804) (445) Tax expense: Current............... -- 2 1 -- -- 1 Deferred.............. -- (256) (170) (17) 4 (183) ------- ------ ------ ---- ------ ------- -- (254) (169) (17) 4 (182) ------- ------ ------ ---- ------ ------- Net income (loss)....... $ 683 $ (188) $ (125) $(13) $ (808) $ (263) ======= ====== ====== ==== ====== ======= Earnings per share: Basic................. $(0.12) $(0.08) $ 0.04 $ (0.04) Fully diluted......... (0.12) (0.08) 0.04 (0.04) Average number of common shares outstanding: Basic................. 1,529 1,529 4,510 6,039 Fully diluted......... 1,529 1,529 4,510 6,039
The accompanying notes are an integral part of these financial statements. 40 CARBON ENERGY CORPORATION UNAUDITED PRO FORMA CONSOLIDATED INCOME SHEET Year Ended December 31, 1998 (in US dollars, unless otherwise indicated, in thousands)
CEC BFC CEC Acquisitions Year Ended CDN $ CEC Year Ended Year Ended Acquisition Carbon 12/31/98 11/30/99(a) 11/30/98(b) 11/30/98(j) Adjustments Pro Forma ---------- ----------- ----------- ------------ ----------- --------- Revenues: Oil and gas sales..... $ 6,758 2,958 $2,007 $1,033 $ -- $ 9,798 Field services........ -- 246 167 -- -- 167 Gas marketing and transportation....... 12,610 -- -- -- -- 12,610 Electricity sales..... 1,331 -- -- -- -- 1,331 Other................. 393 49 33 -- -- 426 ------- ----- ------ ------ ------- ------- 21,092 3,253 2,207 1,033 -- 24,332 Expenses: Oil and gas production costs................ 3,004 710 482 433 -- 3,919 Field services........ -- 148 100 -- -- 100 Gas marketing and transportation....... 12,674 -- -- -- -- 12,674 Costs of electricity.. 1,137 -- -- -- -- 1,137 DD&A.................. 2,086 1,087 737 602 1,370 (h) 4,795 Exploration expense... 556 -- -- -- (556)(i) -- Impairment expense.... 1,858 -- -- -- (1,858)(i) -- General and administrative....... 1,655 988 671 -- -- 2,326 Interest expense...... 238 -- -- 212 -- 450 ------- ----- ------ ------ ------- ------- 23,208 2,933 1,990 1,247 (1,044) 25,401 Income (loss) before taxes.................. (2,116) 320 217 (214) 1,044 (1,069) Tax expense (benefit): Current............... (225) 19 13 (13) -- (225) Deferred.............. 50 61 41 (40) -- 51 ------- ----- ------ ------ ------- ------- (175) 80 54 (53) -- (174) ------- ----- ------ ------ ------- ------- Net income (loss)....... $(1,941) 240 $ 163 $ (161) $ 1,044 $ (895) ======= ===== ====== ====== ======= ======= Earnings per share: Basic................. $0.16 $ 0.11 $(0.26) $ (0.15) Fully diluted......... 0.16 0.11 (0.26) (0.15) Average number of common shares outstanding: Basic................. 1,545 1,545 4,510 6,055 Fully diluted......... 1,549 1,549 4,506 6,055
The accompanying notes are an integral part of these financial statements. 41 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (a) CEC historical financial statements, prepared in accordance with Canadian generally accepted accounting principles, stated in Canadian dollars. (b) CEC's historical financial statements have been translated from Canadian dollars to U.S. dollars as follows: CEC's assets and liabilities were translated to U.S. dollars using the exchange rate in effect at August 31, 1999 of $1 Canadian to $.6685 U.S. CEC's revenues and expenses for the year ended November 30, 1998 and the nine months ended August 31, 1999 were translated to U.S. dollars using the weighted average exchange rate for the period of $1 Canadian to $.6785 U.S. and $1 Canadian to $.6657 U.S., respectively. (c) To reflect the purchase of Carbon stock by Yorktown for $24,750,000 and one Yorktown Board member for $55,000. (d) To reflect the purchase of BFC stock by Carbon for $23,581,000 in cash. This adjustment also eliminates the historical book value of BFC assets and reflects the allocated book value of the assets acquired resulting from the purchase method of accounting. The allocated book value was determined by maintaining the historical book value of working capital and long-term debt, allocating historical net book value for furniture, equipment and other ($226,000), with the remainder of the purchase price allocated to oil and gas properties. (e) Adjustment to eliminate the historical book value of CEC assets and to reflect the allocated book value of CEC's assets and liabilities resulting from the exchange offer. The allocated book value was determined by maintaining the historical book value of working capital line items and long- term debt, allocating historical net book value for the liquids extraction plant ($395,000), compression/gathering facilities ($320,000) and furniture, equipment and other ($90,000), with the remainder of the purchase price allocated to oil and gas properties. The purchase price allocated to oil and gas properties includes provisions for deferred taxes and exchange offer costs. See footnotes (f) and (g) below. The exchange offer value was calculated based on the average of the three quoted closing prices for CEC shares prior and subsequent to the announcement date of the signing of the BFC purchase and sale agreement ($4.25, $4.125, $4.375, $4.25, $4.625 and $4.75) and the number of CEC shares outstanding at August 31, 1999 of 1,521,400. (f) Adjustment to reflect an increase in oil and gas properties and deferred taxes of $584,000 resulting from the exchange of CEC shares for Carbon shares. The allocation of exchange offer value to oil and gas properties resulted in a difference between book basis and tax basis of the CEC assets. (g) Adjustment to reflect the estimated legal, accounting and printing costs incurred in the exchange offer. Pro forma oil and gas properties were increased by $300,000 to reflect costs of the exchange offer. (h) Adjustment to reflect the impact on historical depletion attributed to the acquisition of BFC and the exchange offer to current CEC shareholders. The depletion amounts were calculated on the units-of-production method based on estimates of total proved reserves. Separate cost pools were established for CEC and BFC due to accounting rules that require cost centers be established on a country-by-country basis. Based on the preliminary purchase price allocation and the discounted future net cash flows attributable to the CEC and BFC properties calculated using November 30, 1998 oil and gas prices for CEC and December 31, 1998 prices for BFC, a ceiling test deficit would exist on the properties. As a result of improved oil and gas prices subsequent to year-end, the CEC and BFC properties had a cushion for ceiling test purposes using August 31, 1999 oil and gas prices for CEC and September 30, 1999 prices for BFC. Accordingly, the accompanying pro forma financial statements do not reflect any ceiling test write down for the CEC and BFC properties. Depreciation on the extraction plant and compression/gathering equipment are calculated using the straight-line method with an estimated useful life of 15 years while furniture, equipment, and other assets are depreciated on a straight line basis with an estimated useful life of 5 years. 42 (i) To adjust for the capitalization of certain items under the full cost method of accounting utilized by Carbon as compared to the successful efforts method utilized by BFC. As a result of improved oil and gas prices subsequent to year-end, the CEC and BFC properties had a cushion for ceiling test purposes using August 31, 1999 oil and gas prices for CEC and September 30, 1999 prices for BFC. Accordingly, the accompanying pro forma financial statements do not reflect any ceiling test write down for the CEC and BFC properties. (j) Between December 1998 and April 1999, CEC purchased producing oil and gas properties and natural gas gathering and compression facilities in Alberta, Canada. These acquisitions were accounted for as purchases and considered material in the aggregate by management for pro forma disclosure purposes. The results of operations are presented as though the acquisition had occurred at the beginning of the period being reported on. Revenues and expenses subsequent to the purchase dates have been included in the 1999 operating results of CEC and are not included in this column. These results of operations are not indicative of the results that would have occurred if the acquisitions had been in effect for the entire periods presented and are not intended to be a projection of future results. (k) An estimated bonus of $200,000 will be paid to certain Carbon employees in the fourth quarter of 1999 related in large part to the acquisition of BFC and the exchange offer for CEC. These estimated expenditures are not reflected in the pro forma financial statements. INFORMATION ABOUT CEC Overview of Business CEC is an independent oil and natural gas company incorporated on May 31, 1955 under the Business Corporations Act (Alberta) in Canada. CEC was acquired by the former parent of Columbus Energy Corp. ("Columbus") in 1969 and by Columbus on July 31, 1984. It remained a wholly-owned subsidiary of Columbus until spun-off from Columbus by a rights offering in February 1995. CEC engages in the exploration, development and production of crude oil and natural gas and acquires and develops leaseholds and other interests in oil and gas properties in the provinces of Alberta and Saskatchewan. CEC owns working interests in 16 oil wells located in Saskatchewan, Canada and 47 natural gas wells located in Alberta, Canada. CEC also has ownership interests in a natural gas processing plant and several gas gathering and compression systems in Alberta. Prior to the end of 1998, substantially all of CEC's oil and gas properties were operated by other industry companies. With certain acquisitions completed in fiscal 1999, CEC has increased the percent of oil and gas properties which it operates. CEC's business strategy is to grow through exploitation of existing oil and gas properties by development of proved non-producing and proved undeveloped reserves; acquisitions of complementary working interests in existing and adjacent properties; and optimization of gathering, compression and processing facilities. CEC will also conduct oil and gas exploration activities in its core area of operations. In addition CEC will evaluate acquisition and merger opportunities in Canada and the United States. CEC employs a staff of professional oil and gas engineers, geologists, land personnel and accountants to direct this effort. CEC's principal office is located at Suite 1605, 700 6th Avenue S.W., Calgary, Alberta, Canada T2P 0T8. CEC also has a United States office located at 1700 Broadway, Suite 1150, Denver, Colorado 80290. CEC Selected Financial Data The table below sets forth selected historical financial and operating data for CEC as of the dates and for the periods indicated. The historical financial data for the nine months ended August 31, 1999 and August 31, 1998 were derived from CEC's unaudited financial statements. The historical financial data for each of the years in the five-year period ended November 30, 1998 were derived from CEC's financial statements, which were audited by PricewaterhouseCoopers LLP and were prepared in accordance with Canadian generally accepted accounting principles. See pages F-43 and F-55 for a discussion regarding comparisons between U.S. and Canadian Generally Accepted Accounting Principles. For purposes of the table below, there were no differences in presentation between Canadian generally accepted accounting principles and U.S. generally accepted accounting principles. Currency amounts are in Canadian dollars unless otherwise indicated. The information set forth below should be read in conjunction with "CEC Management's Discussion and 43 Analysis of Financial Condition and Results of Operations" and CEC's Financial Statements and notes thereto, included elsewhere in this document.
As of or for the Nine Months Ended As of or for the August 31, Year Ended November 30, ---------------- ----------------------------------------- 1999(4) 1998 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- ------ ------ (In thousands, except per share data) Operating Data: Revenues.............. $ 3,463 $ 2,364 $ 3,253 $ 3,309 $ 3,212 $3,794 $3,673 Net earnings (loss)... (188) 268 240 605 526 870 1,033 Earnings (loss) per share................ (0.12) 0.17 0.16 0.38 0.35 0.58 0.69 Average common shares outstanding (3)...... 1,529 1,542 1,545 1,580 1,505 1,500 1,500 Cash Flow Data: (1)(2) Cash provided by operating activities. $ 1,389 $ 1,218 $ 1,366 $ 1,724 $ 1,656 $1,933 $2,145 Cash used in investing activities........... (7,751) (489) (564) (1,265) (2,333) (2,064) (1,989) Cash provided by (used in) financing activities........... 4,696 (79) (209) (98) 604 -- -- Balance sheet data: Total assets.......... $15,981 $11,235 $11,235 $11,378 $10,166 $8,729 $7,852 Working capital....... 182 2,120 2,120 1,149 981 937 684 Long-term debt........ 4,850 -- -- -- -- -- -- Stockholders' equity.. 8,380 8,722 8,722 8,691 8,184 7,054 6,184
- -------- (1) See discussion of cash flows in "CEC Management's Discussion and Analysis of Financial Condition and Results of Operations" below. (2) In 1998, CEC elected to adopt Canadian Institute of Chartered Accountants ("CICA") 1540, Cash Flow Statements. Cash flow data for years ended November 30, 1998, 1997 and 1996 have been restated to reflect presentation in conformance with CICA 1540. (3) Restated for a five-to-one stock split on October 27, 1994. (4) Between December 1998 and April 1999 CEC purchased producing oil and gas properties and natural gas gathering and compression facilities in Alberta, Canada. As such, revenues and expenses presented in 1999 may not be comparable to those recorded in previous periods. See "CEC Management's Discussion and Analysis of Financial Condition and Results of Operations." CEC Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion below summarizes CEC's financial condition and results of operations and should be read in conjunction with the financial statements and related notes. The financial related comments contained in this section are derived from financial statements prepared in accordance with Canadian GAAP. Results of Operations--Nine Months Ended August 31, 1999 Compared to the Nine Months Ended August 31, 1998 Revenues for the nine months ended August 31, 1999 totaled $3,463,000, a 46% increase from the prior year period. The increase was due primarily to increased natural gas and plant liquid volumes, including production resulting from CEC's acquisitions and higher natural gas, oil and plant liquid prices. The net loss in the first nine months of 1999 was $188,000 compared to net income of $268,000 in the first nine months of 1998. The decrease was primarily due to increased general and administrative expenses, increased depletion, depreciation and amortization expenses partially offset by higher oil, natural gas and plant liquid revenues. 44 Oil and Gas Revenues. The following table shows comparative revenue, sales volume, average prices and percentage changes between periods, for natural gas, oil, and plant liquids for the first nine months of 1999.
Nine Months Ended August 31, -------------------- % 1999 1998 Change ------ ------ ------ Natural gas revenue M$............................... 2,934 1,716 71% Oil revenue M$....................................... 385 367 5% Natural gas liquids revenues M$...................... 365 297 23% Natural gas sales volumes: Millions of cubic feet............................. 1,115 889 25% Mcf/day............................................ 4,069 3,244 Oil sales volumes: Barrels............................................ 18,395 19,797 -7% Barrels/day........................................ 67 72 Natural gas liquids sales volumes: Barrels............................................ 23,802 20,206 18% Barrels/day........................................ 87 74 Average price received: Natural gas--$/Mcf................................. 2.63 1.93 36% Oil--$/Bbl......................................... 20.91 18.51 13% Plant liquids--$/Bbl............................... 15.34 14.69 4%
Average daily oil and plant liquid production for the first nine months of 1999 were 67 and 87 barrels, respectively. Average daily gas production for the first nine months of 1999 was 4,069 mcf. This is an increase of 21% on a barrels of oil equivalent ("boe") basis compared to the same period in 1998. CEC's continued success with the exploitation of properties acquired during 1999 and current development activity have resulted in increasing production for three successive quarters. Exploration activities are expected to continue for the balance of 1999. Average oil prices increased 13% from $18.51 per barrel in the first 9 months of 1998 to $20.91 in 1999. Average plant liquids prices increased 4% from $14.69 per barrel for the first nine months of 1998 to $15.34 in 1999. Average natural gas prices increased 36% from $1.93 per mcf for the first nine months of 1998 to $2.63 in 1999. Royalty expense consists primarily of Crown Royalties as well as smaller amounts of freehold and gross overriding royalties. CEC is eligible for the Alberta Royalty Tax Credit ("ARTC") which varies inversely with prevailing prices for oil and gas sales in Alberta. For the first nine months of 1999 and 1998 the net Crown Royalty rate was 6%. Field Services Business Segments. CEC receives operating service revenue generated by its share of processing fees at the Carbon field liquid extraction plant. Because of CEC's acquisitions in the East Carbon area, the amount of unrelated third party gas processed through the plant has declined, resulting in a decline in field service revenue for 1999 relative to 1998. Lease Operating Expense. Lease operating expenses totaled $585,000 or $2.57 per boe for the first nine months of 1999 compared to $563,000 or $2.99 per boe in the prior year period. This reduction in per boe expense is due to overall lower 1999 lease operating expenses on CEC's properties, including acquired properties, and the fact that lease operating expenses for 1998 were higher due to well workovers at CEC's Hoffer properties. 45 Field netbacks commonly reported by Canadian energy companies equate to oil and gas sales less royalties and lease operating expenses. Resources' average field netback increased significantly for the first nine months of 1999 to $12.28 per boe compared to $8.50 per boe for the first nine months of 1998 primarily due to the positive revenue and lease operating expense variances previously discussed. CEC has always followed the U.S. practice of converting its natural gas to boe based on the heating value ratio of six mcf of natural gas to one barrel of oil. A ratio of 10:1 which historically has more closely approximated price ratios, is used by nearly all Canadian public companies. If natural gas volume had been converted to boe using the Canadian practice of a 10:1 ratio, then reported field netbacks would have been $18.22 and $12.40 per boe for the first nine months of 1999 and 1998 respectively. General and Administrative Expenses. General and administrative ("G&A") expenses, net of third party reimbursements, for the first nine months of 1999 totaled $1,522,000, a $907,000 or 148% increase from the same period in 1998. The increase in G&A expense was primarily due to the hiring of full time employees, partially offset by a reduction in charges for management services provided by Columbus Energy under a management contract which was terminated March 31, l999. Depletion, Depreciation and Amortization Expense. Depletion, depreciation and amortization expense for the nine month period ended August 31, l999 totaled $1,597,000, an increase of $911,000 or 133% from the 1998 level. Depletion expense increased primarily due to increased gas sales and a downward adjustment to CEC's 1998 year end developed non-producing and proved undeveloped natural gas reserves that resulted in an increased depletion rate per boe in 1999 compared to 1998. For the first nine months of 1999 the depletion rate was $6.29 per boe, compared to $3.20 per boe for the same period in 1998. Interest Expense. Interest and other expenses increased to $136,000 for the first nine months of 1999, a $159,000 increase from the prior year period. Interest expense increased as a result of incurring long-term debt in 1999 to partially fund acquisitions. See "Acquisitions" and "Liquidity and Capital Resources". CEC's average interest rate for the first nine months of 1999 was 7.25%. Acquisitions In December 1998 CEC acquired for $2.3 million working interests in 16 natural gas wells, associated natural gas gathering and compression facilities and undeveloped lands in the East Carbon Field (Wayne-Rosedale), located in Alberta, Canada from Neutrino Resources, Ltd. The acquisition was funded with cash and bank financing. The acquisition increased CEC's working interest ownership in the East Carbon Field from 33 1/3% to 64%. CEC estimates that as of November 30, 1998, the remaining proved reserves before royalty of the acquired properties are approximately 51,000 barrels of oil and natural gas liquids and approximately 2.3 billion cubic feet of natural gas. In March 1999, CEC acquired for $800,000 a 100% working interest in one natural gas well, associated natural gas gathering facilities and underdeveloped lands in the East Carbon Field, located in Alberta, Canada from Westdrum Energy Ltd. and C. & D. Oil and Gas Ltd. The acquisition was funded with bank financing. CEC estimates that as of March 1, 1999, the remaining proved reserves before royalty of the acquired property are approximately 19,000 barrels of oil and natural gas liquids and approximately 720,000 mcf of natural gas. In March 1999, CEC acquired for $2.1 million working interests in 17 natural gas wells, associated natural gas gathering and compression facilities in the East Carbon Field, located in Alberta, Canada from Cometra Energy (Canada) Ltd. The acquisition was funded with bank financing. The acquisition increased CEC's working interest ownership in the East Carbon Field from 64% to 97%. CEC estimates that as of March 1, 1999, the remaining proved reserves before royalty of the acquired properties are approximately 48,000 barrels of oil and natural gas liquids and approximately 2.1 billion cubic feet of natural gas. 46 In April 1999, CEC acquired for $125,000 working interests in 13 natural gas wells, associated natural gas gathering and compression facilities and undeveloped lands in the East Carbon Field, located in Alberta, Canada from Springroad Resources, Inc. The acquisition was funded with bank financing. The acquisition increased CEC's working interest ownership in the East Carbon Fields from 97% to approximately 100%. CEC estimates that as of March 1, 1999, the remaining proved reserves before royalty of the acquired properties are approximately 4,000 barrels of oil and natural gas liquids and approximately 180,000 mcf of natural gas. On August 12, 1999, CEC entered into the BFC Stock Purchase Agreement to acquire all of the stock of BFC, a company with working interests in approximately 290 oil and natural gas wells and over 150,000 net acres located in Colorado, Kansas, New Mexico, Texas and Utah. The purchase price for the stock of BFC is approximately $24,000,000, subject to adjustments, plus net debt of approximately $6,500,000 remaining at BFC. Exploration Activities Under the full cost method of accounting, all exploration costs associated with continuing efforts to acquire or review prospects including outside geological and seismic consultants are capitalized. A total of $201,000 of exploration costs were capitalized during the first nine months of 1999 compared to $40,000 in the first nine months of 1998. Liquidity and Capital Resources CEC has positive working capital, a history of strong cash flow from operating activities relative to its modest market capitalization and has secured a financing commitment with Canadian Imperial Bank of Commerce ("CIBC"). The principal sources of CEC's funds are cash flows from operating activities and available borrowings under CEC's financing commitment. For the first nine months of 1999, net cash from operating activities was $1,389,000 compared to $1,218,000 for the same period in 1998. The increase is primarily due to increased oil and gas sales, a positive net change in operating assets and liabilities, partially offset by increased general and administrative expenses. Net cash used in investing activities was $7,751,000 for the first nine months of 1999 compared to $489,000 in 1998. This increase was primarily due to acquisitions in the East Carbon Area and a deposit related to the BFC acquisition. "See Acquisitions". Net cash provided by financing activities in the first nine months of 1999 was $4,696,000 which was primarily due to the proceeds from long-term debt, partially offset by the acquisition of 23,000 shares of CEC's common stock. Net cash used in financing activities in the first nine months of 1998 was $79,000 due to the acquisition of 83,000 shares of CEC's common stock partially offset by the issuance of 70,000 shares of CEC's common stock. In December 1998, CEC received a financing commitment from CIBC. The purpose of the loan is to provide financing for the acquisition of oil and gas reserves and for normal operating requirements. The loan is secured by CEC's oil and gas assets. The interest rate on outstanding borrowings is the CIBC Prime Rate plus 3/4%. The initial commitment was a $2.5 million revolving loan. In March, 1999, the commitment was increased to a $5.0 million revolving loan. In October 1999, the commitment was increased to a $6.5 million revolving loan. The commitment will be reduced to $5.75 million upon closing of the BFC acquisition. "See Acquisitions." The revolving phase of the loan will expire on April 30, 2000 and may be renewed by CIBC. If the revolving commitment is not renewed by CIBC, the loan would be converted into a term loan and will be permanently reduced by way of consecutive monthly principal payments over a period not to exceed 36 months. This loan is secured by all of CEC's assets. Borrowings under the loan during 1999 have resulted in increased interest expense during 1999 compared to 1998. 47 Income Taxes In 1997, the Company adopted CICA 3465, Income Taxes. Since 1993, CEC had paid current taxes to Revenue Canada based on its taxable income after utilization, to the extent allowed, of its tax pool carry forwards. Currently payable taxable income for future periods is dependent upon the level and type of capital expenditures incurred in those future periods as well as percentage limitations for utilization of existing tax pools. For 1999, the Company anticipates little or no current income tax liability based upon current and anticipated 1999 activity. For 1998, federal and provincial taxes were $41,000. Exchange Rate of the Canadian Dollar All dollar amounts in this report are in Canadian dollars except where otherwise indicated. The following table sets forth the rates of exchange for the Canadian dollar, expressed in United States dollars:
Nine Months Ended August 31, ------------- 1999 1998 ------ ------ Rate at end of period....................................... 0.6685 0.6361 Average rate during period.................................. 0.6657 0.6880 High........................................................ 0.6894 0.7105 Low......................................................... 0.6440 0.6343
On September 30, 1999, the noon buying rate in Canadian dollars was 0.6803 U.S.=$1.00 Canadian. Year 2000 Issues The Year 2000 issue is the result of computer programs being written using two digits rather than four, or other methods, to define the applicable year. Computer programs that have date sensitive software may recognize a date using "00" as the year 1900, rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to price transactions, send invoices or engage in similar normal business activities. In addition to affecting mainframe and mid-range computer systems, this problem potentially impacts computer chips integrated in security, plant automation, and pipeline control and metering systems. CEC is currently completing an external review of all Year 2000 issues by contacting and/or sending out questionnaires to all of its natural gas purchasers, gathering system and plant operators, downstream pipeline operators, equipment and service providers, operators of its oil and gas properties, financial institutions and vendors providing payroll and medical benefits and services. The preliminary phase of this review has been completed. Based upon this review, a schedule of revisions (if any) to existing systems as well as requisite contingency plans will be designed and implemented. CEC utilizes a service bureau for its accounting processing. The service bureau has represented that the oil and gas accounting system utilized by the service bureau is Year 2000 compliant. CEC has selected an accounting system and is in the process of bringing all accounting services and processing in- house. The oil and gas accounting system vendor has represented that the software is Year 2000 compliant. CEC is also dependent upon personal computer based software programs and files that may not be Year 2000 compliant. CEC has set a revised deadline of November 1999, to be internally compliant with Year 2000 specifications. Management expects costs for CEC to become Year 2000 compliant will not be significant. CEC does not believe that any loss of revenue will occur as a result of the Year 2000 problem. However, despite CEC's efforts to identify and remedy Year 2000 problems, there may be related failures that disrupt CEC's business temporarily. In addition, the timetable for CEC's planned completion of its own Year 2000 modifications and the estimated costs to accomplish this are management's best estimates. These assessments involve many assumptions concerning future events, including the continued availability of certain resources, particularly 48 personnel able to locate, reprogram or replace, and test CEC's hardware and software in accordance with CEC's established schedule. There can be no guarantee that CEC's estimates will prove accurate, and actual results could differ significantly because of the non-compliance of third parties of business importance to CEC. Results of Operations--Year 1998 Compared to 1997 and 1997 Compared to 1996 Oil and Gas Revenues. The following table shows comparative revenues, sales volumes, average prices and the percentage changes between periods for natural gas, oil, and plant liquids for 1998, 1997, and 1996.
Year ended November Year ended November 30, 30, -------------------- -------------------- % % 1998 1997 Change 1997 1996 Change ------ ------ ------ ------ ------ ------ Natural gas revenues M$.............. 2,367 2,281 4% 2,281 2,168 5% Oil Revenues M$...................... 491 591 -17% 591 380 55% Plant liquids revenues M$............ 377 579 -35% 579 545 7% Natural gas sales volumes: Millions of cubic feet............. 1,147 1,244 -8% 1,244 1,502 -17% Mcf/day............................ 3,142 3,408 3,408 4,115 Oil sales volumes: Barrels............................ 26,552 22,624 17% 22,624 14,436 57% Barrels/day........................ 73 62 62 40 Plant liquids sales volumes: Barrels............................ 25,805 26,301 -2% 26,301 28,223 -7% Barrels/day........................ 71 72 72 77 Average price received: Natural gas--$/Mcf................. 2.06 1.83 13% 1.83 1.44 27% Oil--$/Barrel...................... 18.49 26.10 -29% 26.10 26.34 -1% Plant liquids--$/Barrel............ 14.61 22.03 -35% 22.03 19.28 14%
Natural gas revenues in 1998 were 4% higher than in 1997. Natural gas prices were 13% higher and natural gas sales volumes were 8% lower due to a gas processing plant and compressor down time and normal well productivity decline. Revenues from oil were 17% lower in 1998 compared to 1997 because of a 29% decrease in oil prices, partially offset by a 17% increase in volume. Natural gas processing plant liquids sales volumes declined slightly from 1997 to 1998 due to lower natural gas production. Revenues were lower due to lower oil and natural gas liquids prices in 1998 versus 1997. Natural gas revenues for 1997 were 5% higher than 1996 because of 27% higher average prices which more than offset 17% lower gas sales volume due to well productivity decline. Revenues from oil were 55% higher in 1997 compared to 1996 because of a 57% increase in sales volumes due to a new oil well. Plant liquids sales volumes decreased 7% and natural gas liquids prices increased 14% in 1997 compared to 1996. Royalty expense consists primarily of Crown royalties in addition to freehold and gross overriding royalties. CEC is eligible for the ARTC that varies inversely with prevailing prices for oil and gas sales in Alberta. For 1998 the net Crown royalty rate was 6% of oil and gas sales compared to 8% in 1997. This decrease was attributed to a 13% increase from 1997 to 1998 in the gas sales price received by CEC coupled with a 4% decrease from 1997 to 1998 in the reference price used to calculate Crown royalty expense. Field Services Business Segment. CEC receives operating service revenue generated by its share of processing fees at the Carbon area liquid extraction plant. CEC also processes its own gas, and that portion of the processing fee revenue attributable thereto is not reported in this segment and offsets an identical amount of process expense otherwise chargeable to lease operations. The Carbon plant also processes gas of unrelated third parties which in 1998 amounted to approximately 37% of the plant's volumes and represents the majority of field services profit. 49 CEC also derives revenues and net cash flow from separate gathering and compression facilities in which it has ownership. Amounts applicable to CEC's own production have likewise been eliminated from both revenue and expense of these operations. Lease Operating Expense. Lease operating expenses for 1998 were 22% as a percentage of oil and gas sales compared to 17% for 1997 and 20% for 1996. The increase in 1998 compared to 1997 is attributed to well workovers and a full year of production of oil wells in CEC's Hoffer area and additional compression in the East Carbon area. This increase was partially offset by variable expense decreases related to production declines. Lease operating expenses per boe sold were $2.92, $2.27 and $2.12 for 1998, 1997 and 1996, respectively. This trend is attributed to increased well workovers and fixed costs allocated to a declining production base. CEC has always followed the U.S. practice of converting its natural gas to boe based on the heating value ratio of six mcf of natural gas to one barrel of oil rather than a ratio of 10 to 1 which historically has approximated price ratios. The latter ratio is used almost exclusively by Canadian public companies. CEC's share of processing fees charged to its wells have been deducted from its field services revenues where CEC's one-third Carbon plant ownership is involved. Field netbacks which are commonly reported by Canadian energy companies equate to oil and gas sales less royalties and lease operating expenses. CEC's average field netback was $9.23/boe in 1998, $9.69/boe in 1997 and $7.68/boe in 1996. If natural gas had been converted to oil using the Canadian practice of a 10:1 ratio, then reported field netbacks would have been $13.45/boe in 1998, $14.32/boe in 1997 and $11.67/boe in 1996. General and Administrative Expenses. G&A expenses relate to the direct costs of CEC which do not originate from either its operation of properties or the providing of services. Historically CEC had incurred certain direct and indirect G&A costs for management services provided by Columbus Energy. These costs were primarily for labor, related benefits and other overhead costs. G&A costs increased by $223,000 in 1998 compared to 1997 primarily due to the hiring of full time employees, which was partially offset by a reduction in Columbus expenses. The management agreement with Columbus was terminated on March 31, 1999. Depreciation, Depletion and Amortization Expense. DD&A costs of oil and gas assets are determined based upon the units of production method. Natural gas gathering, compression and processing facilities are depreciated on a straight line method. For 1998, the depletion rate of oil and gas properties was $4.02 per boe for CEC, compared to $3.01 per boe for 1997, and $2.15 per boe for 1996. The 1998 increase in the depletion rate was primarily due to a downward adjustment to CEC's year end proved reserves. The above calculated amounts for 1998, 1997 and 1996 include $62,000, $33,000 and $30,000 respectively, for estimated future site restoration costs. Interest Expense. Interest expense in 1998 compared and 1997 was minimal due to the fact that the company maintained significant cash balances and no borrowings. Exploration Activities Under the full cost method of accounting, all exploration costs associated with continuing efforts to acquire or review prospects and outside geological and seismic consulting work are capitalized. A total of $54,000 of exploration costs were capitalized during 1998. These charges include seismic and consulting costs in the Carbon, East Carbon and Harmon areas of Alberta. A total of $230,000 of exploration costs were capitalized during 1997. These charges included seismic costs in the Maxim area of Saskatchewan and in the East Carbon area of Alberta. Exploration costs capitalized in 1996 were $181,000, primarily in the Hoffer area of Saskatchewan and for seismic cost in the Carbon field. Income Taxes In 1997, CEC adopted CICA 3465, Income Taxes. Since 1993, CEC has paid current taxes to Revenue Canada based on its taxable income after utilization, to the extent allowed, of its tax pool carryforwards. 50 Currently payable taxable income for future periods is dependent upon the level and type of capital expenditures that are incurred in these periods as well as percentage limitations for utilization of existing tax pools. For 1998, current income taxes are estimated to be $19,000. For the 1997 and 1996 fiscal years CEC paid no current federal tax because additions to deductible property tax pools and carryover balances were sufficient to result in no taxable income. Effects of Changing Prices The Canadian economy experienced considerable inflation during the late 1970's and early 1980's but in recent years inflation has been fairly stable at relatively low levels. CEC, along with most other business enterprises, was then and will be affected in the future by any recurrence of such inflation. Changing prices, or a change in the Canadian dollar's purchasing power, distorts the traditional measures of financial performance which are generally expressed in terms of the actual number of dollars exchanged and do not take into account changes in the purchasing power of the monetary unit. This results in the reporting of many transactions over an extended period as though the dollars received or expended were of common value, which does not accurately portray financial performance. Inflation, as well as a recessionary period, can cause significant swings in the interest rates that companies pay on bank borrowings. These factors are anticipated to continue to affect CEC's operations both positively and negatively for the foreseeable future. Oil and gas prices fluctuate over time as a function of market economics. Refer to the price change table in the discussion "Oil and Gas Operations Comparisons 1998, 1997 and 1996" for information on product price fluctuation over the past three years. This table depicts the effect of changing prices on CEC's revenue stream. Operating expenses have been relatively stable but are a critical component of profitability since they represent a larger percentage of revenues when lower product prices prevail. Competition in the industry can significantly affect the cost of acquiring leases, although in recent years this factor has been less important as more operators have withdrawn from active exploration programs. Exchange Rate of the Canadian Dollar All dollar amounts set forth in the CEC report are in Canadian dollars except where otherwise indicated. The following table sets forth the rates of exchange for the Canadian dollar, expressed in United States dollars:
Year Ended November 30, ---------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Rate at end of period........................ 0.6563 0.7021 0.7414 0.7362 0.7272 Average rate during period................... 0.6785 0.7251 0.7331 0.7278 0.7347 High......................................... 0.7105 0.7292 0.7515 0.7474 0.7632 Low.......................................... 0.6343 0.7019 0.7215 0.7025 0.7167
Properties Estimated Oil and Gas Reserve Quantities and Revenues The estimated reserve amounts and future net revenues for 1998 were determined by Sproule Associates Limited, an independent geological and petroleum engineering firm, and for 1997 and 1996 by Reed Ferrill & Associates, an independent petroleum engineering firm. CEC owned only Canadian reserves during the periods. CEC's reserves are sensitive to natural gas and oil sales prices and their effect on economic production rates and are based on the spot market price in effect at year end and the sales prices of long-term contracts in effect prior to year-end. 51 Price declines decrease reserve values by lowering the future net revenues attributable to the reserves and reducing the quantities of reserves that are recoverable on an economic basis. Price increases have the opposite effect. A significant decline in prices of oil or natural gas could have a material adverse effect on CEC's financial condition and results of operations. Proved developed reserves. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Proved undeveloped reserves. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. Future prices received from production and future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates. There can be no assurance that the proved reserves will be developed within the periods indicated or that prices and costs will remain constant. There can be no assurance that actual production will equal the estimated amounts used in the preparation of reserve projections. The present values shown should not be construed as the current market value of the reserves. The 10% discount factor used to calculate present value, which is specified by the Securities and Exchange Commission, is not necessarily the most appropriate discount rate, and present value, no matter what discount rate is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate. For properties operated by CEC, expenses exclude CEC's share of overhead charges. In addition, the calculation of estimated future net revenues does not take into account the effect of various cash outlays, including among other things general and administrative costs and interest expense. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. Oil and natural gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those shown above. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may justify revisions. Accordingly, reserve estimates are often materially different from the quantities of oil and natural gas that are ultimately recovered. The meaningfulness of such estimates depends primarily on the accuracy of the assumptions upon which they were based. In general, the volume of production from oil and gas properties CEC owns declines as reserves are depleted. Except to the extent CEC acquires additional properties containing proved reserves or conducts successful exploration and development activities or both, the proved reserves will decline as reserves are produced. 52 Changes in Proved Oil and Gas Reserves
Natural Gas Oil and Liquids (Millions (Thousands of of Cubic Barrels) Feet) --------------- ----------- Proved Reserves: November 30, 1995................................... 363 23,115 Revision to previous estimates.................... (9) (2,664) Extensions and discoveries........................ 366 414 Sales and abandonments............................ 0 (217) Production........................................ (40) (1,468) ---- ------ November 30, 1996................................... 680 19,180 Revision to previous estimates.................... (271) (2,020) Extensions and discoveries........................ 7 331 Production........................................ (46) (1,217) ---- ------ November 30, 1997................................... 370 16,274 Revision to previous estimates.................... (56) (9,965) Extensions and discoveries........................ 57 400 Production........................................ (49) (1,123) ---- ------ November 30, 1998................................... 322 5,586 ==== ====== Proved developed reserves: November 30, 1996................................... 513 16,068 November 30, 1997................................... 287 13,180 November 30, 1998................................... 285 4,439
Proved Developed Reserves At November 30, 1998, CEC had approximately 4.4 billion cubic feet of proved developed gas reserves representing 79% of CEC's total proved gas reserves and 285,000 barrels of oil and natural gas liquids representing 89% of CEC's total proved oil reserves. Approximately 3.9 of the 4.4 billion cubic feet of proved developed gas reserves and 225,000 of the 285,000 barrels of proved developed oil reserves are presently being provided from completion intervals open for production in existing wells. The remainder of the proved developed reserves are primarily behind the casing in existing wells and recompletion of those zones will be required to place them on production. Also included are any wells which have been completed and were awaiting connection to a gas pipeline as of year end, provided such pipeline connection does not require significant investment. Proved Undeveloped Reserves At November 30, 1998, CEC's proved undeveloped reserves total approximately 1.1 billion cubic feet of gas, or 21% of its total proved gas reserves, and approximately 38,000 barrels of oil and liquids, or 11% of its total proved oil reserves. These reserves are attributable to undrilled locations offsetting production in the Carbon, East Carbon, Harmon and Rowley areas of Alberta. 53 Comparison of Proved Reserves The following table compares CEC's estimated proved reserves at November 30, 1997 and 1998.
Oil and Natural Liquids Gas (Thousands (Millions of of Cubic Barrels) Feet) ---------- --------- Proved Reserves: November 30, 1997 Proved developed......................................... 287 13,180 Proved undeveloped....................................... 83 3,094 --- ------ Total.................................................. 370 16,274 === ====== November 30, 1998 Proved developed......................................... 285 4,439 Proved undeveloped....................................... 37 1,147 --- ------ Total.................................................. 322 5,586 === ======
On a BOE basis, approximately 18% of the decrease in November 30, 1998 proved reserves compared to November 30, 1997 is due to 1998 production. The majority of the remainder of the decrease in proved reserves is due to the following factors: The unsuccessful completion of a well in the East Carbon area resulted in more stringent reservoir engineering interpretations of log characteristics and analogous production in two natural gas zones. The unsuccessful completion also disproved a geological hypothesis that was formerly presumed in the determination of proved undeveloped reserves in these two natural gas zones. In 1998, a zone in the East Carbon area was remapped due to new offset well information, resulting in geologic interpretations that did not support the assignment of proved reserves for a location. Standardized Measure The Standardized Measure schedule is presented below pursuant to the disclosure requirements of the Securities and Exchange Commission and Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing Activities" (SFAS 69). Future cash flows are calculated using year-end oil and gas prices and operating expenses, and are discounted using a 10% discount factor. Under SEC guidelines, Future Net Revenues shown below must be calculated using prices that were in effect on November 30 of each year and are projected forward based on existing contracts or the spot market price on that date. Accordingly, the Future Net Revenues have been calculated using the spot market sales price in effect at year end and the sales prices of long-term contracts in effect prior to year end. The prices utilized in this calculation for Future Net Revenues at November 30, 1998 are summarized as follows: Natural Gas 1998....................... $ 2.80/mcf 1999....................... 2.69/mcf 2000....................... 2.60/mcf 2001....................... 2.58/mcf 2002-forward............... 2.49/mcf Ngl........................ $12.67/barrel Oil........................ $16.94/barrel
54 The standardized measure is intended to provide a standard of comparable measurement of CEC's estimated proved oil and gas reserves based on economic and operating conditions existing as of November 30, 1998, 1997 and 1996. Pursuant to SFAS 69, the future oil and gas revenues are calculated by applying to the proved oil and gas reserves the oil and gas prices at November 30 of each year relating to such reserves. Future price changes are considered only to the extent provided by contractual arrangements in existence at year end. Production and development costs are based upon costs at each year end. Future income taxes are computed by applying statutory tax rates as of the year end with recognition of tax basis, resource allowance, tax pool carryforwards and earned depletion carryforwards as of that date and relating to the proved properties. Discounted amounts are based on a 10% annual discount rate. Changes in the demand for oil and gas, price changes and other factors make such estimates inherently imprecise and subject to revision. Standardized Measure of Discounted Future Net Cash Flows Relating to Estimated Proved Oil and Gas Reserves (thousands of dollars)
1998 1997 1996 ------- ------- ------- Future oil and gas revenue.......................... $19,260 $31,984 $59,858 Future cost: Production cost................................... (4,351) (7,620) (10,521) Crown royalty..................................... (1,646) (5,515) (9,982) Development cost.................................. (536) (1,260) (1,712) Future income taxes................................. (2,368) (3,039) (9,144) ------- ------- ------- Future net cash flows............................... 10,359 14,550 28,499 Discount at 10%..................................... (2,334) (4,584) (10,800) ------- ------- ------- Standardized measure of discounted future net cash flows.............................................. $ 8,025 $ 9,966 $17,699 ======= ======= =======
As required by SFAS 69, the tax computation does not consider CEC's annual interest expense and general and administrative expenses or future drilling and equipment costs. Because of these factors, the tax provisions shown do not represent the much lower future tax expense expected as long as CEC remains an active operating company. Change in Standardized Measure of Discounted Future Net Cash Flows from Estimated Proved Oil and Gas Reserves For the Three Years Ended November 30, 1998 (thousands of dollars)
November 30, -------------------------- 1998 1997 1996 -------- ------- ------- Standardized measure--beginning of year............ $ 9,966 $17,699 $ 9,286 Sale of oil and gas net of production costs........ (2,248) (2,482) (2,250) Net changes in prices, crown royalty and production costs ............................................ 8,662 (8,672) 11,238 Extensions and discoveries......................... 787 358 4,936 Sales and abandonments............................. -- 0 (129) Revisions to previous estimates.................... (11,804) (2,207) (3,590) Previously estimated development costs incurred during the period ................................ -- 90 411 Changes in development costs....................... 771 316 (49) Accretion of discount.............................. 1,131 2,242 1,066 Other.............................................. 844 (758) 133 Change in future income tax........................ (84) 3,380 (3,353) -------- ------- ------- Net increase (decrease)............................ (1,941) (7,733) 8,413 ======== ======= ======= Standardized measure--end of year.................. $ 8,025 $ 9,966 $17,699 ======== ======= =======
55 Production CEC's net oil and gas production for each of the past three years is shown on the following table:
Year ended November 30, -------------------- 1998 1997 1996 ------ ------ ------ Oil--barrel.......................................... 25,000 22,000 15,000 Ngl--barrel.......................................... 24,000 24,000 25,000 Gas--Mmcf............................................ 1,124 1,217 1,468
Average price and cost per unit of production for the past three years are as follows (gas prices include net hedging gains and losses):
Year Ended November 30, -------------------- 1998 1997 1996 ------ ------ ------ Average sales price per barrel of oil............... $18.49 $26.10 $26.34 Average sales price per mcf of gas.................. 2.06 1.83 1.44 Average sales price per barrel of Ngl............... 14.61 22.03 19.28 Average production cost per boe..................... 3.01 2.33 2.17
Natural gas is converted to oil at the ratio of six mcf of natural gas to one barrel of oil. Production costs include only lease operating expenses. Gas sales are generally made pursuant to gas purchase contracts with unrelated third parties. Our gas sales are subject to price adjustment provisions of the gas purchase contracts as well as general economic and political conditions affecting the production and price of natural gas. Developed Properties and Acreage A summary of the gross and net interest in producing wells and gross and net interest in producing acres as of November 30, 1998 is shown in the following table:
Gross Net ------- ------- Oil Gas Oil Gas --- --- --- --- Wells..................................................... 16 47 5 19 === === === === Acres..................................................... 18,876 6,993 ====== =====
Undeveloped Acreage The following table sets forth CEC's ownership in undeveloped acreage as of November 30, 1998:
Gross Acres Net Acres ----------- --------- Alberta............................................. 7,360 3,242 Saskatchewan........................................ 9,840 4,710 ------ ----- Total Undeveloped Acreage....................... 17,200 7,952 ====== =====
56 Drilling Activities CEC engages in exploratory and development drilling on its own and in association with other oil and gas companies. The table below sets forth information regarding CEC's drilling activity for the last three years. The net interest shown is CEC's working interest.
Year Ended November 30, ------------------------------- 1998 1997 1996 --------- ---------- ---------- Gross Net Gross Net Gross Net ----- --- ----- ---- ----- ---- EXPLORATORY Wells Drilled: Oil........................................... -- -- -- -- 3 1.50 Gas........................................... -- -- 1 0.60 2 0.67 Dry........................................... -- -- -- -- 1 0.20 DEVELOPMENT Wells Drilled: Oil........................................... -- -- 1 0.50 -- -- Gas........................................... -- -- 1 1.00 6 2.83 Dry........................................... -- -- -- -- -- -- TOTAL Wells Drilled: Oil........................................... -- -- 1 0.50 3 1.50 Gas........................................... -- -- 2 1.60 8 3.50 Dry........................................... -- -- -- -- 1 0.20 --- --- --- ---- --- ---- -- -- 3 2.10 12 5.20 === === === ==== === ====
Current Operations Activity CEC engages in the exploration, development and production of crude oil and natural gas and acquires and develops leaseholds and other interests in oil and gas properties in the provinces of Alberta and Saskatchewan. CEC owns working interests in 16 oil wells located in Saskatchewan, Canada and 47 natural gas wells located in Alberta, Canada. CEC also has ownership interests in a natural gas processing plant and several gas gathering and compression systems in Alberta. Prior to the end of 1998, substantially all of CEC's oil and gas properties were operated by other industry companies. With certain acquisitions completed in fiscal 1999, CEC has increased the percent of oil and gas properties which it operates. CEC's business strategy is to grow through exploitation of existing oil and gas properties by development of proved undeveloped reserves; acquisitions of complementary working interests in existing and adjacent properties; and optimization of gathering, compression and processing facilities. CEC will also conduct oil and gas exploration activities in its core area of operations. In addition CEC will evaluate acquisition and merger opportunities. Acquisition Activities. See "CEC Management's Discussion and Analysis of Financial Condition and Results of Operations"--"Acquisitions." Legal Proceedings There are no material legal proceedings pending or, to our knowledge, threatened against CEC. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PricewaterhouseCoopers LLP were engaged as CEC's independent auditors for the 1998 fiscal year. On April 16, 1999, CEC, upon approval of its Board of Directors, determined that the appointment of PricewaterhouseCoopersLLP should not be renewed and that Arthur Andersen LLP should be proposed to CEC's shareholders as its independent auditors for the 1999 fiscal year. The President and Chief Executive Officer of 57 CEC, as well as the Chief Financial Officer, both of whom joined CEC during the last half of 1998, have a previous relationship with Arthur Andersen LLP as a result of work at another oil and gas company. In addition for fiscal 1999, Arthur Andersen LLP proposed a fee structure for the year end audit, quarterly reviews and accounting consultation that was economically beneficial to CEC. During CEC's two most recent fiscal years and subsequent interim period preceding this determination, there were no disagreements with the former auditors on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. The auditors' report during CEC's two most recent fiscal years preceding this determination did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk In 1999, CEC established a $6.5 million credit facility with a Canadian bank as described in "CIBC Relationship" under "CEC Management's Discussion and Analysis of Financial Condition and Results of Operations". The interest rate for borrowings under this facility are variable. Foreign Currency Risk CEC's operations, except for certain administration functions performed in its Denver, Colorado office, are conducted in Canada. CEC does not use financial instruments relating to currency and exchange rates. For information on the exchange rate of the Canadian dollar, refer to "Exchange Rate of the Canadian Dollar" under "CEC Management's Discussion and Analysis of Financial Condition and Results of Operations." Commodity Price Risk CEC uses certain financial instruments in an attempt to manage commodity price risk. CEC attempts to manage these risks by minimizing its commodity price exposure through the use of derivative contracts as described in Note 9 to the November 30, 1998 Financial Statements of CEC and Note 5 to the August 31, 1999 Financial Statements of CEC. Gains and losses on these contracts are deferred and recognized in income as an adjustment to oil and gas sales revenues during the period in which the physical product to which the contracts relate is actually sold. Oil and gas commodity markets are influenced by global as well as regional supply and demand. Worldwide political events can also impact commodity prices. Management's policy is to mitigate its exposure to fluctuations in sales prices received for natural gas production through the use of various hedging tools. These tools include, but are not limited to: commodity futures and option contracts; fixed-price swaps; basis swaps; and term sales contracts. Contract terms generally range from one month to three years. While we mitigate our exposure to declining natural gas sales prices, we may be subject to lost opportunity costs resulting from increasing natural gas prices in excess of those committed. Should production from existing facilities under existing operating conditions not fulfill committed contracts, we may be required to acquire natural gas in the open market, while volumes produced in excess of those contracted are sold at market prices. 58 INFORMATION ABOUT CARBON Business Carbon was incorporated on September 14, 1999 under the Colorado Business Corporation Act and has its principal executive offices in Denver, Colorado. Our business is currently comprised of the assets and properties of BFC, which were acquired on October 29, 1999 in a stock purchase. The total cash purchase price after adjustments was $23,581,000. On August 11, 1999, CEC entered into a stock purchase agreement with BPC which provided for the purchase by CEC from BPC of all outstanding shares of BFC for $23,858,000 in cash, subject to certain adjustments. The purchase of BFC stock under the stock purchase agreement was completed by Carbon rather than CEC. Rights and obligations of CEC under the stock purchase agreement were assigned to Carbon. Yorktown purchased 4,500,000 shares of Carbon for $24,750,000. The funds from this purchase were used to acquire the BFC shares under the stock purchase agreement and pay expenses incurred in connection with the purchase and related transactions. As described above, we now own all of the stock of BFC. As the parent company of BFC, we provide management and other services to BFC. Carbon itself has not engaged in other activities, except for the acquisition of BFC and preparations for the exchange offer made by this prospectus. BFC is an independent oil and gas company engaged in the exploration, development, and production of natural gas and crude oil. All of the properties and activities described below were acquired or conducted by the prior management of BFC. Through our acquisition of BFC, our activities are currently concentrated in the Piceance and Uintah Basins in northwestern Colorado and eastern Utah, the San Juan Basin in northwest New Mexico, the Permian Basin in southeast New Mexico and western Texas, and southwestern Kansas. BFC owns working interests in approximately 292 oil and gas wells, of which, approximately 190 wells are operated by BFC. BFC employs a staff of oil and gas professionals to manage its operations. Our business strategy is to grow through exploitation of existing oil and gas properties by development of proved undeveloped reserves; acquisitions of complementary working interests in existing and adjacent properties; and optimization of gathering, compression and processing facilities. We will also conduct oil and gas exploration activities and evaluate acquisition and merger opportunities. Our activities will be conducted in the United States primarily through BFC and in Canada through CEC. Our oil and gas properties are located in the western United States and are principally natural gas properties as discussed below and in "Properties." Piceance and Uintah Basins The Piceance and Uintah Basins have been core production areas since BFC's inception. The productive formations are the Morrison, Dakota, Mancos, Castle Gate, Mesa Verde and Wasatch formations. All of these formations produce natural gas; however, in some areas, the Castle Gate sands formations are known to contain oil reserves. We operate 132 wells and own working interests in 146 wells in the Piceance Basin in Colorado and the Uintah Basin in Utah. Carbon has not drilled any wells in these basins during 1999, however, additional drilling locations have been identified for further analysis and possible future drilling. We have leasehold rights in approximately 164,000 gross and 122,500 net acres of which approximately 41,500 gross and 37,500 net acres are undeveloped. San Juan Basin Production in the San Juan Basin of northwest New Mexico is predominantly natural gas. The primary productive formations on our acreage is the Dakota, Gallup, Pictured Cliffs, and Fruitland (Coal Sands). We operate 41 wells and own working interests in 42 wells in the San Juan Basin. We have lease rights in approximately 5,200 gross and 2,600 net acres, all of which are developed. 59 Permian Basin Our well interests in the Permian Basin are both operated and non-operated in nature. We own working interests in 76 wells in the Permian Basin and operate 11 of these wells. During 1999 we have participated in the drilling of five wells, all of which were completed or are in the process of being completed as producing gas wells. Additional wells are scheduled for drilling during the balance of 1999. We have lease rights in approximately 23,500 gross and 11,500 net acres, of which 1,400 gross and 1,000 net acres are undeveloped. Southwestern Kansas The main exploratory efforts of Carbon are concentrated in southwestern Kansas. We own working interests in 28 wells and operate 4 wells in this area. We are conducting regional geologic and geophysical work to identify additional drilling prospects. We are also currently acquiring acreage covering the most attractive prospects. We have lease rights in approximately 33,000 gross and 25,500 net acres of which 30,000 gross and 24,500 net acres are undeveloped. Carbon Selected Financial Data The table below sets forth our selected historical financial and operating data as of the dates and for the periods indicated. All the historical financial data in the table is that of our predecessor, BFC. The historical financial data for the nine months ended September 30, 1998 and September 30, 1999 were derived from BFC's unaudited financial statements. The historical financial data for each of the years in the five-year period ended December 31, 1998 were derived from BFC's financial statements, which were audited by Hein + Associates LLP. Currency amounts are in U.S. dollars unless otherwise stated. The information set forth below should be read in conjunction with "Our Management's Discussion and Analysis of Financial Condition and Results of Operations" and BFC's Financial Statements and notes thereto, included elsewhere in this prospectus.
As of or for the Nine Months Ended As of or for the September 30, Year Ended December 31, ------------------ --------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- ------- ------- ------- ------- ------- (in thousands) Operating Data: Revenues............... $ 18,254 $ 12,595 $21,092 $16,539 $15,067 $12,675 $14,956 Net earnings (loss).... 683 114 (1,941) 732 4,060 172 (2,950) Cash Flow Data: Cash provided by (used in) operating activities............ $ (734) $ 2,587 $ 4,696 $ 3,193 $ 4,136 $ 3,016 $ 3,091 Cash used in investing activities............ (4,654) (3,828) (5,948) (4,442) (1,025) (859) (1,181) Cash provided by (used in) financing activities............ 2,950 1,300 3,450 1,019 (2,760) (2,090) (2,046) Balance Sheet Data: Total assets........... $21,627 $18,726 $22,840 $16,054 $14,524 $13,177 $16,321 Working capital........ 1,603 688 812 1,491 1,725 628 405 Long-term debt......... 8,800 3,700 5,850 2,400 1,700 4,760 6,850 Stockholder's equity(1)............. 9,997 9,709 9,313 9,591 8,859 6,774(1) 6,552(1)
- -------- (1) Includes debt to parent company (BPC) of $3,787 in 1995 and $3,737 in 1994, which was converted to equity in 1996. Our Management's Discussion and Analysis of Financial Condition and Results of Operations Our financial statements and related notes included in this prospectus are those of our predecessor, BFC. The discussion below summarizes our financial condition and results of operations and should be read in connection with the financial statements and related notes of BFC. 60 Results of Operations- Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September 30, 1998. Oil and gas production revenue increased $1,545,000 or 30% to $6,730,000 in the nine months ended September 30, 1999 compared to $5,185,000 in the nine months ended September 30, 1998. Natural gas volumes produced in the first nine months of 1999 increased 643,000 mcf or 26% to 3,128,000 mcf from 2,485,000 mcf in the nine months ended September 30, 1998. Oil volumes produced decreased 2,900 bbls or 5% to 49,900 bbls in the nine months ended September 30, 1999 from 52,800 bbls in the nine months ended September 30, 1998. The average realized price received for oil production increased 15% to $15.79 per bbl in the first nine months of 1999 from $13.76 per bbl in the nine months of 1998. The average realized price received for gas production increased 6% to $1.90 per mcf in the first nine months of 1999 from $1.79 per mcf in the first nine months of 1998. Prices received for gas production are net of hedging gains and/or losses in the respective periods. The production increases in natural gas production resulted from successful drilling and recompletion results in various basins, particularly in western Kansas and in the Permian Basin of New Mexico. Some of these increases were partially offset by production declines on previously existing properties. Production volume realized in the first nine months of 1999 related to the successful drilling efforts were: Oil production--13,800 bbls; and gas production--822,000 mcf. The sales related to this production was $1,772,000. Gas marketing revenue increased 54% in the first nine months of 1999 to $11,059,000 from $7,157,000 in the first nine months of 1998. Gas marketing related expenses increased 121% to $11,009,000 in the first nine months of 1999 from $7,133,000 in the first nine months of 1998. BFC entered into a management contract which includes the first four months of 1999 for the purchase and sale of a high volume of natural gas. The contract was not in place in the first four months of 1998, and was terminated on April 30, 1999. Net income in the first nine months of 1999 was $683,000 compared to net income of $114,000 in the first nine months of 1998. The increase in net income is primarily due to increased oil, gas, and other revenues, and decreased general and administrative expense, partially offset by an increase in lease operating, DD&A, exploration and interest expense. Oil and Gas Revenues. The following table shows comparative revenues, sales volumes, average prices and percentage changes between periods, for natural gas and oil for the first nine months of 1999 and 1998.
Nine Months Ended September 30, ---------------------- 1999 1998 % Change ------ ------ -------- Natural gas revenues M$........................... 5,942 4,459 33% Oil revenues M$................................... 788 726 9% Natural gas sales volumes: Millions of cubic feet.......................... 3,128 2,485 26% MCF/day......................................... 11,500 9,100 Oil sales volumes: Barrels......................................... 49,900 52,800 (5)% Barrels/day..................................... 183 194 Average price received: Natural gas--$/Mcf.............................. 1.90 1.79 6% Oil--$/Barrel................................... 15.79 13.76 15%
Natural gas revenues for the first nine months of 1999 increased 33% over the first nine months of 1998 because of a 6% price increase and a 26% increase in sales volumes. The increase in sales volumes were primarily due to successful drilling and recompletion results in various basins, particularly in western Kansas and in the Permian Basin of New Mexico, partially offset by production declines on existing properties. Oil revenues were 9% higher for the first nine months of 1999 compared to the first nine months of 1998 because of a 15% price increase partially offset by a 5% decline in sales volumes. 61 Average daily oil and gas production for the first nine months of 1999 totaled 183 barrels of oil per day and 11,500 mcf of gas per day, an increase of 22% on an barrel of oil equivalent basis (6:1) from the same period in 1998. Carbon's current drilling activity and continued success with the exploitation of properties has resulted in increasing production for the first nine months of 1999. Exploitation and drilling activities are expected to continue for the balance of 1999. Average oil prices increased 15% from $13.76 per barrel in the first nine months of 1998 to $15.79 in 1999. Average natural gas prices increased 6% from $1.79 per mcf for the first nine months of 1998 to $1.90 per mcf in 1999. Oil and Gas Production Costs. Oil and gas production costs consist of lease operating expense and severance taxes. Oil and gas production costs for the first nine months of 1999 were 40% as a percentage of oil and gas sales compared to 43% for the first nine months of 1998. Oil and gas productions costs for the first nine months of 1999 and 1998 were $4.73 and $4.75 respectively, per boe. Gas and Electrical Marketing. Gas and electrical marketing revenue increased 55% in the first nine months of 1999 compared to the first nine months of 1998. Gas and electrical marketing related expenses increased 54% in the first nine months of 1999 compared to the first nine months of 1998. The primary reason for the increase is a management contract in place during the first quarter of 1999 for the purchase and sale of a high volume of natural gas. The contract was not in place in the first quarter of 1998, and was terminated on April 30, 1999. General and Administrative Expenses. G&A expenses relate to the direct costs of BFC which do not originate from either its operation of properties or the providing of services and are presented net of amounts billed to unrelated third parties. G&A expenses decreased by $159,000 for the first nine months of 1999, compared to 1998. Depreciation, Depletion, Amortization and Impairment Expense. DD&A of oil and gas assets are determined based upon the units of production method. This expense is primarily dependent upon the historical capitalized costs incurred to find, develop, and recover oil and gas reserves. For the first nine months of 1999 the depletion rate was $3.13 per boe (6:1) compared to $3.44 per boe for the first nine months of 1998. For the first nine months of 1999 impairment losses related to a property drilled in Oklahoma in 1998 at a cost to BFC of $60,000. Early reserve estimates in 1999 indicated that this well had no value and the amount was considered impaired at that time. There were no impairment losses recorded for the first nine months of 1998. Interest Expense. For the first nine months of 1999, interest expense was $418,000 compared to $143,000 for the first nine months of 1998. The increase is primarily due to higher levels of borrowing to finance drilling activity. BFC capitalized $20,000 of interest in the first nine months of 1999 which related to calendar year 1998 interest charges and $44,000 of interest in the first nine months of 1999 related to drilling activity. Exploration Expense. Exploration expense was recorded under the successful efforts method of accounting and primarily consists of unsuccessful drilling costs and Geological and Geophysical ("G&G") costs. For the first nine months of 1999 exploration expense was $681,000 compared to $276,000 for the first nine months of 1998. Unsuccessful drilling costs amounted to $199,000 for the first nine months of 1999 compared to $49,000 for the first nine months of 1998. G&G cost for the first nine months of 1999 were $433,000 compared to $141,000 for the first nine months of 1998. 62 Liquidity and Capital Resources Management considers our liquidity to be favorable compared to other oil and gas companies based on the fact BFC has positive working capital and a credit facility with U.S. Bank National Association. The purpose of the loan is to provide financing for the acquisition of oil and gas reserves and for normal operating requirements. The facility is collateralized by certain oil and gas properties of BFC and is scheduled to convert to a term note July 1, 2001. This term loan is scheduled to have a maturity of either the economic half life of BFC's remaining reserves on the date of the conversion, or July 1, 2006, whichever is earlier. The borrowing base is based upon the lender's evaluation of BFC's proved oil and gas reserves, generally determined semi-annually. The future minimum principal payment under the term note will be dependent upon the bank's evaluation of BFC's reserves at that time. The borrowing base was $16.9 million at September 30, 1999 with interest at a variable rate that approximated 7.15% at September 30, 1999. BFC has issued letters of credits totaling $2.3 million which further reduce the amount available for borrowing under the base. The Company currently has approximately 41% of its proved reserves pledged against this loan. The principal sources of our funds are cash flows from operating activities and available borrowings under our existing credit facility. We expect to be able to fund our development and exploration programs for the next twelve months from cash generated by our operations and from existing bank financing. Although there are presently no agreements or understandings for any significant acquisitions of oil and gas businesses and properties, future acquisitions may require additional capital investment and bank financing. In October, 1999, we sold 4,500,000 shares of our common stock to Yorktown for $24,750,000 of which $23,581,000 was used to purchase the stock of BFC on October 29, 1999 and the remaining proceeds have been added to our working capital. For the nine months ended September 30, 1999, net cash used in operating activities was $734,000 compared to net cash provided by operating activities of $2,587,000 for the same period in 1998. This decrease is due to changes in operating assets and liabilities. Cash used in investing activities was $4,654,000 for the nine months ended September 30, 1999 compared to $3,828,000 for the same period in 1998. This increase was primarily due to additions of oil and gas properties. Net cash provided by financing activities for the nine months ended September 30, 1999 was $2,950,000 due to an increase in net bank borrowings used to fund capital expenditures. Income Taxes. Carbon accounts for income taxes under the liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. BFC's operations were formerly included in BPC's consolidated tax return. Income taxes were allocated to BFC as if BFC was a separate taxpayer. BFC has not accrued an estimate for income taxes for the nine months ended September 30, 1999 as it is anticipated that estimates of taxes due for the period are offset by intangible drilling costs. Year 2000 Compliance The Year 2000 issue is the result of computer programs being written using two digits rather than four, or other methods, to define the applicable year. Computer programs that have date sensitive software may recognize a date using "00" as the year 1900, rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to price transactions, send invoices or engage in similar normal business activities. In addition to affecting mainframe and mid-range computer systems, this problem potentially impacts computer chips integrated in security, plant automation, and pipeline control and metering systems. 63 Our company has made inquiries of the suppliers and manufacturers of its computer systems, including equipment supplied by third parties, and has been advised that such systems are Year 2000 compliant except for our property management software that is currently under review regarding Year 2000 compliance. If Carbon's property management software is not Year 2000 compliant, Carbon believes that the cost of replacing such software would not exceed $25,000. Management expects costs for Carbon to become Year 2000 compliant will not be significant. However, despite Carbon's efforts to identify and remedy Year 2000 problems, there may be related failures that disrupt Carbon's business temporarily. Carbon has not reviewed all Year 2000 issues with third parties of business importance to Carbon such as its natural gas purchasers, gathering system and plant operators, downstream pipeline operators, equipment and service providers, operators of its oil and gas properties, financial institutions and vendors providing payroll and medical benefits and services. If any of these third parties have Year 2000 issues, Carbon believes that the most serious effect on Carbon would be delays in receiving payment for oil and gas sold to its purchasers. This could have a material adverse effect upon the results of operations and financial condition of Carbon. Results of Operations--1998 Compared to 1997 and 1997 Compared to 1996 Oil and Gas Revenues. The following table shows comparative revenue, sales volumes, average prices and the percentage change between periods for natural gas and oil for 1998, 1997 and 1996.
Year ended December Year ended December 31, 31, --------------------- --------------------- 1998 1997 %Change 1997 1996 %Change ------ ------ ------- ------ ------ ------- Natural gas revenues M$(1).......... 5,896 5,202 13% 5,202 4,038 29% Oil Revenues M$..................... 862 1,227 -30% 1,227 1,224 0% Natural gas sales volumes: Millions of cubic feet(1)......... 3,272 2,908 13% 2,908 2,435 19% MCF/day........................... 8,964 7,967 7,967 6,671 Oil sales volumes: Barrels........................... 65,000 63,000 3% 63,000 58,000 9% Barrels/day....................... 178 173 173 159 Average price received: Natural gas--$/Mcf(1)............. 1.78 1.79 -1% 1.79 1.64 9% Oil--$/Barrel..................... 13.26 19.48 -32% 19.48 21.10 -8%
- -------- (1) Exclusive of a production payment used to pay down a related note. Volumes attributed to this activity were 238,313 mcf in 1997 and 308,580 mcf in 1996. Natural gas revenues for 1998 increased 13% compared to 1997 primarily due to a 13% increase in sales volumes. Oil revenue for 1998 decreased 30% compared to 1997 primarily due to a 32% decrease in sales prices. The increases to sales volumes were primarily due to successful drilling and recompletion activity, partially offset by production declines on previously existing properties. Natural gas revenue for 1997 increased 29% compared to 1996 primarily due to a 19% increase in sales volumes and a 9% price increase. Oil revenue for 1997 was essentially flat compared to 1996 as a 9% increase in sales volumes was offset by 8% price decline. The increases in sales volumes were primarily due to successful drilling and recompletion activity, partially offset by production declines on previously existing properties. Oil and Gas Production Costs. Oil and gas production costs consist of lease operating expense and severance taxes. Oil and gas production costs for 1998 were 44% as a percentage of oil and gas sales compared to 43% for 1997 and 40% for 1996. Oil and gas production costs for 1998, 1997 and 1996 were $4.92, $5.16 and $4.92 respectively, per boe. The increase in 1997 from 1996 was largely the result of increased spending for environmental remediation purposes. In addition, severance taxes increased 40% in 1997 compared to 1996. 64 Gas and Electrical Marketing. Gas and electrical marketing revenue increased 45% in 1998 compared to 1997 while gas and electrical marketing expenses increased 53% in 1998 compared to 1997. Certain high margin contracts expired early in 1997. The related margins were not present during most of 1997, nor in 1998. Gas and electrical marketing revenue increased 1% in 1997 compared to 1996 while related expenses increased 31% in 1997 compared to 1996. Certain high margin contracts which were in effect in 1996, expired early in 1997. The related margins were not present during most of 1997. General and Administrative Expenses. G&A expenses relate to the direct costs of BFC which do not originate from either its operation of properties or the providing of services and are presented net of amounts billed to unrelated third parties. G&A expenses increased by $1,065,000 in 1998 compared to 1997. In 1998 a court approved retention compensation accrual of $425,000 was recorded. The remainder of the increase is primarily due to costs associated with additional staffing related to anticipated increases in drilling activity. G&A expenses increased by $118,000 in 1997 compared to 1996. DD&A Depreciation, Depletion, Amortization and Imparment Expense. Depreciation, Depletion, Amortization and Impairment ("DD&A") of oil and gas assets are determined based upon the units of production method. This expense is primarily dependent upon historical capitalized cost incurred to find, develop and recover oil and gas reserves. For 1998 the depletion rate was $3.42 per boe compared to $3.24 per boe in 1997 and $2.40 per boe in 1996. The increase in 1997 compared to 1996 was primarily due to increased production from high DD&A properties and from an additional $200,000 recorded in 1997 for future plugging and abandonment charges. Impairment losses were $1,858,000 in 1998 compared to $312,000 in 1997. Impairments taken in 1998 are as follows: South Humble City Field (SE New Mexico)--$931,000; Taiga Mountain (Western Colorado)--$713,000; Other-- $133,000. The major assumptions used for determining impairment losses were as follows: Prices were year-end 1998 prices (not escalated); estimates of declining production were based on estimates by independent 3rd party engineers; estimated operating cost and severance taxes were based on past experience and were not escalated. Impairment losses in 1998 were generally calculated by: Comparing the cost basis of proved properties with the undiscounted cash flows based on unescalated pricing. If the unamortized cost on a property was higher than the net undiscounted cash flow projected, the property was deemed to be possibly impaired. A further test was done at this point to determine the amount (if any) to impair. A subsequent test compared unamortized cost to the estimated fair market value. This test looked at the price of the commodity used in the initial test, and assessed whether it was representative of fair market value. Both tests described above used estimates by independent third party engineers to determine estimates of declining production. Additional considerations included in-house assessment of reserves attributable to a property. After the above tests, if a property was still deemed to require an impairment allowance, impairment was then taken to reduce the carrying value to the estimated fair value. Reserve categories used in the impairment test include all categories of proven reserves. There were no categories of reserves used other than proved (i.e. no probable or possible). There were no recorded impairment losses in 1996. Interest Expense. Interest expense was $238,000 in 1998 compared to $83,000 in 1997 and $272,000 in 1996. The increase in 1998 is primarily due to increased borrowings for drilling and development activity and because of lower prices received from oil and gas sales. The decrease in interest expense from 1997 compared to 1996 is primarily due to lower borrowings for drilling and development activities. 65 Exploration Expense. Exploration expense was recorded under the successful efforts method of accounting and consists primarily of unsuccessful drilling costs and G&G costs. Exploration expense in 1998 was $556,000 compared to $772,000 in 1997 and $419,000 in 1996. The amount related to unsuccessful drilling was $84,000 in 1998 compared to $599,000 in 1997, while G&G costs increased in 1998 to $390,000 compared to $89,000 in 1997 because of increased exploration activities. The amount related to unsuccessful drilling was $599,000 in 1997 compared to $229,000 in 1996, and G&G costs decreased to $89,000 in 1997 compared to $130,000 in 1996. Income Taxes. BFC accounts for income taxes under the liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. BFC's operations were formerly included in BPC's consolidated tax return. Income taxes were allocated to BFC as if BFC was a separate taxpayer. Effects of Changing Prices The U.S. economy experienced considerable inflation during the late 1970's and early 1980's but in recent years inflation has been fairly stable at relatively low levels. BFC, along with most other business enterprises, was then and will be affected in the future by any recurrence of such inflation. Changing prices, or a change in the dollar's purchasing power, distorts the traditional measures of financial performance which are generally expressed in terms of the actual number of dollars exchanged and do not take into account changes in the purchasing power of the monetary unit. This results in the reporting of many transactions over an extended period as though the dollars received or expended were of common value, which does not accurately portray financial performance. Inflation, as well as a recessionary period, can cause significant swings in the interest rates that companies pay on bank borrowings. These factors are anticipated to continue to affect BFC's operations both positively and negatively for the foreseeable future. Oil and gas prices fluctuate over time as a function of market economics. Refer to the price change table in the discussion "Oil and Gas Operations Comparisons for 1998, 1997 and 1996" for information on product price fluctuation over the past three years. This table depicts the effect of changing prices on BFC's revenue stream. Operating expenses have been relatively stable but are a critical component of profitability since they represent a larger percentage of revenues when lower product prices prevail. Competition in the industry can significantly affect the cost of acquiring leases, although in recent years this factor has been less important as more operators have withdrawn from active exploration programs. Properties We have approximately 234,000 gross acres and 152,000 net acres of land in inventory. The majority of our proved reserves are concentrated in four areas--the Piceance/Uintah Basins, the Permian Basin, the San Juan Basin and Southwestern Kansas. All wells and acreage are located in the continental United States. Estimated Oil and Gas Reserve Quantities and Revenues The estimated reserve amounts and future net revenues were determined by Ryder Scott, an independent petroleum engineering firm, for 1998, 1997 and 1996. BFC's reserves are sensitive to natural gas and oil prices and their effect on future net revenues and the quantities of reserves that are recoverable at economic producing rates are based on fixed price contracts or on the spot market price in effect on December 31, 1998, 1997 and 1996. 66 Price declines decrease reserve values by lowering the future net revenues attributable to the reserves and reducing the quantities of reserves that are recoverable on an economic basis. Price increases have the opposite effect. A significant decline in prices of oil or natural gas could have a material adverse effect on the company's financial condition and results of operations. Proved developed reserves. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Proved undeveloped reserves. proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. Future prices received from production and future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates. There can be no assurance that the proved reserves will be developed within the periods indicated or that prices and costs will remain constant. There can be no assurance that actual production will equal the estimated amounts used in the preparation of reserve projections. The present values shown should not be construed as the current market value of the reserves. The 10% discount factor used to calculate present value, which is specified by the Securities and Exchange Commission, is not necessarily the most appropriate discount rate, and present value, no matter what discount rate is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate. For properties operated by BFC, expenses exclude BFC's share of overhead charges. In addition, the calculation of estimated future net revenues does not take into account the effect of various cash outlays, including among other things general and administrative costs and interest expense. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. Oil and natural gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those shown above. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may justify revisions. Accordingly, reserve estimates are often materially different from the quantities of oil and natural gas that are ultimately recovered. The meaningfulness of such estimates depends primarily on the accuracy of the assumptions upon which they were based. In general, the volume of production from oil and gas properties we own declines as reserves are depleted. Except to the extent we acquire additional properties containing proved reserves or conduct successful exploration and development activities or both, the proved reserves will decline as reserves are produced. 67 Changes in Proved Oil and Gas Reserves
Oil Natural (Thousands Gas (Millions of Barrels) of Cubic Feet) ----------- -------------- Proved Reserves: December 31, 1995.................................... 207 19,807 Revision to previous estimates..................... 34 8,008 Extensions and discoveries......................... 44 935 Purchase of minerals in place...................... -0- 506 Production......................................... (58) (2,744) ---- ------ December 31, 1996.................................... 227 26,512 Revision to previous estimates..................... 3 (1,569) Extensions and discoveries......................... 32 427 Purchase of minerals in place...................... 99 916 Production......................................... (63) (3,146) ---- ------ December 31, 1997.................................... 298 23,140 Revision to previous estimates..................... (101) 976 Extensions and discoveries......................... 34 5,011 Purchase of minerals in place...................... -0- -0- Production......................................... (65) (3,272) ---- ------ December 31, 1998.................................... 166 25,855 ==== ====== Proved developed reserves: December 31, 1996.................................... 188 25,483 December 31, 1997.................................... 298 22,623 December 31, 1998.................................... 166 25,855
Proved Developed Reserves At December 31, 1998, BFC had approximately 25.4 billion cubic feet of proved developed gas reserves representing 98% of BFC's total proved gas reserves and 166,000 barrels of oil and natural gas liquids representing 100% of BFC's total proved oil reserves. Approximately 16.8 of the 25.4 billion cubic feet of proved developed gas reserves and 162,000 of the 166,000 barrels of proved developed oil reserves are presently being produced from completion intervals open for production in existing wells. The remainder of the proved developed reserves are primarily reserves for wells which have been completed and were awaiting connection to a gas pipeline as of year end, provided such pipeline connection does not require significant investment. Also included are reserves behind the casing in existing wells and recompletion of those zones will be required to place them in production. Proved Undeveloped Reserves At December 31, 1998, BFC's proved undeveloped reserves total approximately 517 million cubic feet of gas, or 2% of its total proved natural gas reserves, and no barrels of oil and liquids. These reserves are primarily attributable to undrilled locations offsetting production in various fields. 68 Comparison in Proved Reserves The following table compares BFC's estimated proved reserves as of December 31, 1997 and 1998.
Oil and Liquids (Thousands of Natural Gas barrels) (Millions of cubic feet) --------------- ------------------------ Proved Reserves: December 31, 1997 Proved developed..................... 298 22,623 Proved undeveloped................... -- 517 --- ------ Total.............................. 298 23,140 === ====== December 31, 1998 Proved developed..................... 166 23,338 Proved undeveloped................... 0 517 --- ------ Total.............................. 166 25,855 === ======
Standardized Measure The Standardized Measure schedule is presented below pursuant to the disclosure requirements of the Securities and Exchange Commission and Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing Activities" (SFAS 69). Future cash flows are calculated using year-end oil and gas prices and operating expenses, and are discounted using a 10% discount factor. Under SEC guidelines, Future Net Revenues shown below must be calculated using prices that were in effect on December 31 of each year and are projected forward based on existing contracts or the spot market price on that date. Accordingly, the Future Net Revenues have been calculated using the appropriate sales price in effect on December 31, 1998, 1997 and 1996. Oil and gas prices at December 31, 1998, 1997, and 1996 of $10.69, $16.91, and $25.60, respectively, per barrel of oil and $1.84, $1.81, and $3.17 respectively, per mcf of gas were used in the estimation of BFC's reserves and future net cash flows. The standardized measure is intended to provide a standard of comparable measurement of BFC's estimated proved oil and gas reserves based on economic and operating conditions existing as of December 31, 1998, 1997 and 1996. Pursuant to SFAS 69, the future oil and gas revenues are calculated by applying to the proved oil and gas reserves the oil and gas prices at December 31 of each year relating to such reserves. Future price changes are considered only to the extent provided by contractual arrangements in existence at year end. Production and development costs are based upon costs at each year end. Future income taxes are computed by applying statutory tax rates as of the year end with recognition of tax basis and earned depletion carryforwards as of that date relating to the proved properties. Discounted amounts are based on a 10% annual discount rate. Changes in the demand for oil and gas, price changes and other factors make such estimates inherently imprecise and subject to revision. 69 Standardized Measure of Discounted Future Net Cash Flows Relating to Estimated Proved Oil and Gas Reserves (thousands of dollars)
December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Future oil and gas revenue................. $ 49,428 $ 46,859 $ 89,985 Future production and development costs.... (18,507) (18,155) (26,608) -------- -------- -------- Future net cash flows...................... 30,921 28,704 63,377 Discount at 10%............................ (10,426) (9,075) (23,366) -------- -------- -------- Standardized measure of discounted future net cash flows............................ $ 20,495 $ 19,629 $ 40,011 ======== ======== ========
As required by SFAS 69, the tax computation does not consider BFC's annual interest expense and general and administrative expenses or future drilling and equipment costs. Because of these factors, the tax provisions shown do not represent the much lower future tax expense expected as long as BFC remains an active operating company. Change in Standardized Measure of Discounted Future Net Cash Flows from Estimated Proved Oil and Gas Reserves for the Three Years Ended December 31, 1998 (thousands of dollars)
December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Standardized measure-beginning of year........ $19,629 $40,011 $10,233 Sales and transfers of oil and gas produced, net of production costs...................... (3,754) (3,650) (2,977) Net changes in prices and production costs.... (999) (20,485) 19,056 Extensions, discoveries and other additions recovery, less related costs................. 4,699 756 3,226 Purchases of reserves in place................ 147 1,610 436 Revisions of future development costs......... 87 1,069 (1,200) Revisions of previous quantity estimates...... 279 (1,098) 12,475 Accretion of discount......................... 1,963 4,001 1,023 Other......................................... (1,556) (2,585) (2,261) ------- ------- ------- Net increase (decrease)....................... 866 (20,382) 29,778 ------- ------- ------- Standardized measure-end of year.............. $20,495 $19,629 $40,011 ======= ======= =======
Production The following table sets forth annual net production for each of the three years ended December 31, 1998. Net production includes volumes related to a production payment used to pay a related note. Volumes attributable to this activity were 238,312 mcf in 1997 and 308,580 mcf in 1996.
Year ended December 31, -------------------- 1998 1997 1996 ------ ------ ------ Oil--Barrels......................................... 65,000 63,000 58,000 Gas--Mmcf............................................ 3,272 3,146 2,744
70 Average price and cost per unit of production for the past three years are as follows (gas prices are exclusive of hedging results):
Year Ended December 31, -------------------- 1998 1997 1996 ------ ------ ------ Average sales price per barrel of oil............... $13.26 $19.48 $21.10 Average sales price per mcf of gas.................. $ 1.76 $ 1.99 $ 1.64 Average production cost per boe..................... $ 4.92 $ 5.16 $ 4.92
Natural gas is converted to oil at the ratio of six mcf of natural gas to one barrel of oil. Production costs include only lease operating expenses and severance taxes. We operate most of the wells in which we own interests and also hold working interests in some wells operated by third parties. Gas sales are generally made pursuant to gas purchase contracts with unrelated third parties. Our gas sales are subject to price adjustment provisions of the gas purchase contracts as well as general economic and political conditions affecting the production and price of natural gas. Disclosure of Capitalized Costs Relating to Oil and Gas Producing Activities BFC's oil and gas producing activities are all located in the Western United States. The aggregate amount of capitalized cost of oil and gas properties at December 31 for the year indicated was comprised of the following:
December 31, ---------------- 1998 1997 ------- ------- (in thousands) Proved developed and undeveloped properties........ $29,521 $26,519 Unproved oil and gas properties.................... 2,745 1,900 Gas transportation system.......................... 158 158 ------- ------- Total.............................................. 32,424 28,577 Accumulated depreciation, depletion and amortization...................................... (18,681) (16,709) ------- ------- Total net properties........................... $13,743 $11,868 ======= =======
Costs Incurred in Property Acquisition, Exploration and Development Activities
Year ended December 31, -------------------- 1998 1997 1996 ------ ------ ------ (in thousands) Acquisition of properties: Proved properties.................................. $ 95 $2,230 $ 63 Unproved properties................................ 473 -- -- Exploration.......................................... 1,932 599 299 Development.......................................... 3,784 1,812 959 ------ ------ ------ Total costs incurred............................. $6,284 $4,641 $1,321 ====== ====== ======
Developed Properties and Acreage The following tables set forth the total gross and net productive oil and gas wells and gross and net developed acres as of December 31, 1998. All wells and acreage are located in the continental United States.
Gross Net ------- ------- Oil Gas Oil Gas --- --- --- --- Wells..................................................... 28 258 10 167 === === === === Acres..................................................... 116,000 85,000 ======= =======
71 Undeveloped Acreage The following table sets forth the gross and net undeveloped acres as of December 31, 1998. All undeveloped acreage is located in the continental United States.
Gross Acres Net Acres ----------- --------- 84,000 61,000
Drilling Activities BFC engages in exploratory and development drilling on its own and in association with other oil and gas companies. The table below sets forth information regarding BFC's drilling activity for the last three fiscal years. The net interest shown is BFC's working interest.
Year Ended December 31 -------------- 1998 1997 1996 ---- ---- ---- EXPLORATORY Wells Drilled: Productive............................................... 5 -- -- Dry...................................................... 2 8 2 DEVELOPMENT Wells Drilled: Productive............................................... 6 2 4 Dry...................................................... 3 1 -- TOTAL Wells Drilled: Productive............................................... 11 2 4 Dry...................................................... 5 9 2 --- --- --- 16 11 6
Current Operations Activity See "Information About Carbon--Business" for a description of present activities. Legal Proceedings There are no material legal proceedings pending or, to our knowledge, threatened against us. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Hein + Associates, LLP audited BFC's consolidated financial statements for the years ending December 31, 1992--1998. Management has engaged Hein + Associates to audit BFC's financial statements for the ten months ending October 31, 1999. Carbon's new Board of Directors has appointed Arthur Andersen LLP to be Carbon's accountants for the two month period ended December 31, 1999. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. See Notes 3 and 10 to the December 31, 1998 Financial Statements of BFC. 72 Foreign Currency Risk To date our cash flows have been in U.S. dollars only, negating the need to hedge against any foreign currency risks. Commodity Price Risk BFC uses certain financial instruments in an attempt to manage commodity price risk. BFC attempts to manage these risks by minimizing its commodity price exposure through the use of derivative contracts as described in Note 6 to the December 31, 1998 Financial Statements of BFC. Gains and losses on these contracts are deferred and recognized in income as an adjustment to oil and gas sales revenues during the period in which the physical product to which the contracts relate is actually sold. Oil and gas commodity markets are influenced by global as well as regional supply and demand. Worldwide political events can also impact commodity prices. Management's policy is to mitigate its exposure to fluctuations in sales prices received for natural gas production through the use of various hedging tools. These tools include, but are not limited to: commodity futures and option contracts; fixed-price swaps; basis swaps; and term sales contracts. Contract terms generally range from one month to three years. While we mitigate our exposure to declining natural gas sales prices, we may be subject to lost opportunity costs resulting from increasing natural gas prices in excess of those committed. Should production from existing facilities under existing operating conditions not fulfill committed contracts, we may be required to acquire natural gas in the open market, while volumes produced in excess of those contracted are sold at market prices. 73 OUR MANAGEMENT Executive Officers and Directors Our executive officers and directors are:
Name Age Position - ---- --- ------------------------------------- Patrick R. McDonald................... 42 President and Director Kevin D. Struzeski.................... 40 Treasurer and Chief Financial Officer David H. Kennedy...................... 50 Director Cortlandt S. Dietler.................. 78 Director Bryan H. Lawrence..................... 57 Director Peter A. Leidel....................... 43 Director Harry A. Trueblood, Jr................ 74 Director(1)
- -------- (1) Mr. Trueblood will become a director upon completion of the exchange offer. Each current director, other than Mr. Dietler, has served since his appointment on September 14, 1999. Mr. Dietler was elected to the Board on December , 1999. Brief descriptions of the background and business experience of our executive officers and directors are set forth below. Patrick R. McDonald. Mr. McDonald became our President on September 14, 1999. He has been President and Chief Executive Officer of CEC since July 1998. From 1987 until 1997 Mr. McDonald was Chairman and President of Interenergy Corporation, Denver, Colorado. Since January 1998, he has been the sole member of McDonald Energy, LLC. Mr. McDonald is a petroleum geologist. Kevin D. Struzeski. Mr. Struzeski became our Treasurer and Chief Financial Officer on September 14, 1999. He has been Chief Financial Officer-Treasurer for CEC since November 1998. Mr. Struzeski was employed as Accounting Manager, MediaOne Group from 1997 to 1998 and prior to that he was employed as Controller, Interenergy Corporation from 1995 to 1997 and Accounting Manager, Snyder Oil from 1993 to 1995. Cortlandt S. Dietler. Mr. Dietler has served as a director of Carbon since December , 1999. Mr. Dietler has been the Chairman of TransMontaigne, Inc., which owns and operates terminals and pipelines for the transportation of oil, gas and other petroleum products, since April 1995. Mr. Dietler was Chief Executive Officer of TransMontaigne from April 1995 through September 30, 1999. He was the founder, Chairman and Chief Executive Officer of Associated Natural Gas Corporation, a natural gas gathering, processing and marketing company, prior to its 1994 merger with PanEnergy Corporation, on whose Board he served as an Advisory Director, prior to its merger with Duke Energy Corporation. Mr. Dietler also serves as a director of Hallador Petroleum Company, Key Production Company, Inc., Forest Oil Corporation and Grease Monkey Holding Corporation. David H. Kennedy. Mr. Kennedy has served as a director of Carbon since September 14, 1999. From March, 1981 through December 31, 1998, Mr. Kennedy was a managing director of First Reserve Corp. and was responsible for investing and monitoring part of its portfolio of energy investments. Since January 1, 1999, Mr. Kennedy has acted as a consultant to and investor in the energy industry. He serves as a director of Maverick Tube Corporation, whose common stock is traded on the Nasdaq market, and as a director of Berkley Petroleum Corp. and Pursuit Resources Corp., oil and gas companies whose stocks are listed on the Toronto Stock Exchange. Bryan H. Lawrence. Mr. Lawrence is a founder and a senior manager of Yorktown Partners LLC which was established in September, 1997, and manages investment partnerships formerly affiliated with Dillon, Read & Co. Inc. Mr. Lawrence had been employed at Dillon, Read & Co. Inc. since 1966, serving as a Managing Director 74 until the merger of Dillon Read with SBC Warburg in September, 1997. Mr. Lawrence also serves as a Director of D&K Healthcare Services, Inc., Hallador Petroleum Company, TransMontaigne Inc., and Vintage Petroleum, Inc. (each a United States public company) and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests. Peter A. Leidel. Mr. Leidel is a co-founder and manager of Yorktown Partners LLC which was established in September, 1997, and manages investment partnerships affiliated with Dillon, Read & Co. Inc. Yorktown Partners LLC is the manager of four private equity partnerships that invest in the energy industry, with aggregate committed capital of approximately $700 million. Previously, he was a partner of Dillon, Read & Co. Inc.'s venture capital fund and has invested in a variety of private companies with a particular focus on energy investments since 1983. He was previously in corporate treasury positions at Mobil Corporation and worked for KPMG Peat Marwick and the U.S. Patent and Trademark Office. Mr. Leidel is a director of Cornell Corrections, (ASE-CRN), Willbros Group (NYSE-WG), Fintube, Meenan Oil Co., Roemer-Swanson Energy, Athanor Resources, Inc., Tanglewood Companies, and Metal Supermarkets. Harry A. Trueblood, Jr. Mr. Trueblood has served as the President and Chief Executive Officer of CEC from 1972 until July 1, 1998. Mr. Trueblood has served as Chairman and CEO of Columbus Energy Corp., the former parent of CEC, since 1982 and was a founder and former President and/or Chairman and CEO of Consolidated Oil & Gas, Inc., the former parent of both Columbus Energy and CEC from 1958 to 1998. Messrs. Lawrence and Leidel were designated as nominees for directors by Yorktown pursuant to the Exchange Agreement. Mr. McDonald was also designated as a director pursuant to that agreement. See "The Exchange Offer--Description of Exchange Agreement." Committees of the Board of Directors Our Board of Directors has established a compensation committee, an audit committee and a nominating committee. Members of the compensation committee are Messrs. Leidel (Chairman), Kennedy and Dietler. Mr. Trueblood will become a member of the Compensation Committee upon completion of the exchange offer. The compensation committee reviews and approves our compensation and benefits for our executive officers and makes recommendations to the Board of Directors regarding these matters. Members of the audit committee are Messrs. Kennedy (Chairman) and Dietler. The functions of the audit committee are: . Review the scope of the audit procedures utilized by our independent auditors; . Review with the independent auditors our accounting practices and policies; . Consult with our independent auditors during the year; and . Report to our Board of Directors with respect to these matters and to recommend the selection of independent auditors. The nominating committee is responsible for determining, on behalf of the Board of Directors of Carbon, nominees for the position of director of Carbon, or persons to be elected by the Board of Directors or shareholders to fill any vacancy in the Board of Directors of Carbon. The existence of the nominating committee is required by the Exchange Agreement among Carbon, CEC and Yorktown. The Exchange Agreement requires that the nominating committee be comprised of one Yorktown director, Mr. McDonald, so long as he is a director of Carbon, and two independent directors. The Yorktown directors who serve on the nominating committee are selected by a majority vote of the Yorktown directors. A majority of the independent directors are to designate the independent directors to serve on the nominating committee. Mr. Lawrence (Chairman) is the Yorktown director on the nominating committee, Mr. McDonald serves on the committee, and the two independent directors on the committee are Messrs. Kennedy and Dietler. 75 Executive Compensation The following table depicts information regarding the annual and long-term compensation paid during each of the last three years by CEC to the President and Chief Executive Officer, who is the only executive officer of Carbon to earn in excess of U.S. $100,000 in salary and bonus in fiscal 1998 from either CEC or BFC. Summary Compensation Table
Long Term Compensation Number of Securities Underlying Fiscal Salary Bonus Options Name and Principal Position Year (U.S.$) (U.S.$) Granted - --------------------------- ------ ------- ------- ------------ Patrick R. McDonald, President........... 1998 $50,000(1) 0 78,000
- -------- (1) Appointed July 1, 1998 We currently pay to Patrick R. McDonald, our President, an annual salary of US $200,000. Stock Option Grants And Exercises The following table sets forth information concerning individual grants of stock options made by CEC during fiscal 1998 to CEC's President and Chief Executive Officer. The stock options were granted at the market price on the date of grant. Option Grants In Fiscal 1998
Potential Realizable Value at Assumed Annual Rates of Stock Number of % of Total Price Securities Options Appreciation for Underlying Granted to Option Term (2) Options Employees ----------------- Granted in Fiscal Exercise Price Expiration 5% 10% Name (1) Year (U.S. $/Share) Date (U.S.$) (U.S.$) ---- ---------- ---------- -------------- ---------- -------- -------- Patrick R. McDonald..... 78,000 66.1 $5.50 7/1/03 $145,902 $331,000
- -------- (1) Options were originally granted to acquire CEC common stock at the closing price of CEC's common stock on the date of the grant. These options are being replaced with Carbon options on the same terms. (2) These columns present hypothetical future realizable values of the options, obtainable upon exercise of the options net of the option's exercise price, assuming CEC's common stock appreciates at a 5% and 10% compound annual rate over the term of the options. The 5% and 10% rates of market price appreciation are presented as examples pursuant to rules of the SEC and do not reflect management's prediction of the future market price of our common stock. No gain to the optionees is possible without an increase in the market price of the common stock above the option price. There can be no assurance that the potential realizable values shown in this table will be achieved. The potential realizable values presented are not intended to indicate the value of the options. No options were exercised by CEC's President and Chief Executive Officer during fiscal 1998. The following table summarizes information with respect to the value of that officer's unexercised stock options at November 30, 1998: 76 Fiscal Year End Option Values
Number of Securities In-the-Money Underlying Unexercised Value of Unexercised Options at Year End Options at Year End (2) ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Patrick R. McDonald......... 0 78,000(1) 0 0
- -------- (1) Options were granted by CEC to acquire its common stock. These options are replaced with options to acquire our stock. (2) The in-the-money value of unexercised options is equal to the excess of the per share market price of CEC's stock at November 30, 1998 over the per share exercise price multiplied by the number of unexercised options. However, the per share exercise price was higher than the market price of CEC's stock at fiscal year end. 1999 Stock Option and Restricted Stock Plans Our 1999 Stock Option Plan was adopted by the directors as of October 14, 1999. Under the 1999 plan, we may grant options to purchase up to 700,000 shares of our common stock. Grants under the Stock Option Plan may consist of (1) options intended to qualify as incentive stock options under the Internal Revenue Code and (2) non-qualified stock options that are not intended to so qualify. Persons eligible to receive incentive stock options under the plans are only our employees; non-qualified stock options may be granted to employees, directors and consultants. The Stock Option Plan terminates on September 1, 2009. We also have a 1999 Restricted Stock Plan which was adopted by our Board of Directors on October 14, 1999. The Restricted Stock Plan has 300,000 shares of our common stock available for grants. Under the Restricted Stock Plan, the administrator may issue shares of our common stock to the grantee, and those shares are subject to restrictions and forfeiture in accordance with the terms of a stock restriction agreement. Under the current form of agreement, the restricted stock may be subject to vesting requirements and forfeiture of unvested shares if the grantee ceases to be an employee or a member of the Board of Directors, except as may be provided in an employment agreement. Grants under the Restricted Stock Plan may be made to an employee, director or consultant of our company or any subsidiary. The Restricted Stock Plan terminates on September 1, 2009. Each plan is administered by the Board of Directors or a committee appointed by the Board consisting of two or more non-employee directors and our President. The Board or administrating committee determines the persons to be granted options, the exercise price per share for each option, the expiration date of each option and other terms which may be set forth in an option agreement. Likewise, the Board or administrating committee determines the persons to be granted restricted stock and nature of any forfeitures and related restrictions regarding that stock. The Board of Directors currently administers both plans. The exercise price of an incentive stock option granted under to the plans cannot be less than 100% of the fair market value of the common stock on the date of the grant. The Board determines the exercise price of a non-qualified stock option; in the case of the 1999 plan, the exercise price of a non- qualified stock option cannot be less than 85% of the fair market value of the common stock on the date of grant. The term of any stock option cannot exceed ten years. However, the exercise price of an incentive stock option granted to any person who at the time of grant owns stock representing more than 10% of the total combined voting power of all classes of our capital stock or any of our affiliates must be at least 110% of the fair market value of our common stock on the date of grant and the term of such an incentive stock option cannot exceed five years. Options granted under the plans vest at the rate specified in any option agreement. The exercise price may be paid in cash or other shares of our common stock, as determined by the Board of Directors or the administering committee. In the event of a proposed sale of all or substantially all our assets, or the merger of Carbon with another corporation, or any other capital reorganization in which persons who were stockholders of our company immediately before the capital reorganization owned less than two-thirds of the outstanding voting securities of the surviving company following the capital reorganization, the plan administrator is to make appropriate 77 provisions for the protection of outstanding options by the substitution of appropriate stock of our company or any surviving corporation or, alternatively, our Board of Directors may terminate an outstanding option by permitting the option to be exercisable as to all shares subject to the option, whether or not previously vested, for a period of thirty days (or not less than 10 days in the case of the 1999 plan) after a notice to the option holder. All outstanding options under the 1999 plan become immediately exercisable and full, whether or not there were vesting requirements, upon the occurrence of a change in control. All restricted stock outstanding under the 1999 Restricted Stock Plan also become fully vested upon a change of control. For this purpose, a change in control occurs (1) at the time a third person or group becomes the beneficial owner of shares with 50% or more of the total number of votes cast for the election of our directors; (2) on the date our shareholders approve a merger or consolidation (unless our shareholders continue to own after the merger or consolidation more than two-thirds of the voting securities of the resulting corporation in substantially the same proportion as their ownership of our voting securities before the merger or consolidation) or any sale or other disposition of all or substantially all of our assets, or (3) a sale or other disposition of more than 50% in fair market value of our assets outside the ordinary course of business, or (4) if at the time there is a change in more than a majority of our Board of Directors as a result of a proxy contest (unless any option holder or the holder of restricted stock, as the case may be, or the person's affiliate has waged the proxy contest or endorsed the change in our Board). In determining whether clause (1) of this definition has been satisfied, Yorktown and entities controlled by Yorktown Partners LLC (the managing general partner of Yorktown) are excluded. Directors' Compensation Each of our directors who is neither an officer nor an employee will be paid a director's fee of $1,500 per quarter. Also, in consideration of their joining our Board of Directors, David Kennedy and Cortlandt Dietler, who are considered to be independent directors, each were granted on October 14, 1999 and January , 2000, respectively, a nonqualified stock option to purchase 20,000 shares of our common stock at $5.50 per share. Shares subject to these options vest one-half on the first anniversary and one-half on the second anniversary of the date of grant, and these options have a ten-year term. Indemnification and Limitation of Liability Our Bylaws provide that we will indemnify our directors and executive officers and may indemnify our other officers, employees and other agents to the fullest extent permitted by Colorado law. We have also entered into indemnification agreements with each of our directors and executive officers. All indemnification agreements are identical. These agreements provide, among other things, for indemnification and advancement of expenses to the fullest extent permitted by law in connection with any legal proceeding in which the person was made a party because the person was a director or executive officer of Carbon, place the burden of proof on us in regard to whether an individual has met the required standard of conduct for indemnification, cover procedural matters such as the hiring of counsel and require us to pay the expenses of the director or executive officer in enforcing any required indemnification or advancement of expenses. In addition, our Articles of Incorporation provide that to the fullest extent permitted by Colorado law, our directors will not have personal liability to us or our stockholders for monetary damages for any breach of fiduciary duties as a director. This does not eliminate the duties themselves, and in appropriate circumstances, equitable remedies such as injunction or other forms of nonmonetary relief remain available under Colorado law. This provision does not eliminate the liability of a director for (1) any breach of the director's duty of loyalty to us or our stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) unlawful dividends, stock repurchases or redemptions; or (4) any transaction from which the director derived an improper personal benefit. This does not affect a director's responsibilities under other laws such as the federal or state securities laws. 78 There is no pending litigation or proceeding involving a director or officer as to which indemnification is being sought. We are not aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. Employment Agreement On October 31, 1999, we entered into a three-year employment contract with Mr. McDonald. The employment agreement with Mr. McDonald is described under "The Exchange Offer--Interests of Certain Persons in the Exchange Offer." 79 PRINCIPAL SHAREHOLDERS OF OUR COMPANY The following table contains information regarding ownership of our common stock (the only class of stock outstanding) as of November 1, 1999 by (1) each director, (2) our President, (3) all of our directors and executive officers as a group, and (4) each shareholder who, to our knowledge, was the beneficial owner of five percent or more of the outstanding shares. The table also shows the ownership of our common stock by these persons as adjusted to reflect the exchange offer, assuming that CEC shareholders accept the exchange offer for all outstanding CEC shares. All information is based on information provided by such persons to us. Unless otherwise indicated, their addresses are the same as our address and each person identified in the table holds sole voting and investment power with respect to the shares shown opposite such person's name.
Amount and Amount and Nature of Nature of Beneficial Beneficial Percent Ownership Name and Address Ownership Prior After Percent of Beneficial Owner Prior to Offer to Offer Offer After Offer - ------------------- -------------- -------- ---------- ----------- Yorktown Energy Partners III, L.P................. 4,500,000 98.7% 4,500,000 74.0% 410 Park Avenue, Suite 1900 New York, NY 10025 Patrick R. McDonald and McDonald Energy, LLC..... 30,000(4) (1) 315,100(4)(5) 5.1% 1700 Broadway, Suite 1150 Denver, CO 80290 Harry A. Trueblood, Jr.... -- -- 308,696(5) 5.1% 1660 Lincoln Street Suite 2400 Denver, CO 80264 Cortlandt S. Dietler...... 0 (1) 0 (1) 2750 Republic Plaza 370 17th Street Denver, CO 80202 David H. Kennedy.......... 10,000 (1) 10,000 (1) 18 Pasture Lane Darien, CT 06820 Bryan H. Lawrence......... 4,500,000(2) 98.7% 4,500,000(2) 74.0% 410 Park Avenue, Suite 1900 New York, NY 10025 Peter A. Leidel........... 4,500,000(3) 98.7% 4,500,000(3) 74.0% 410 Park Avenue, Suite 1900 New York, NY 10025 All directors and execu- tive officers as a group (7 persons including the above)................... 4,560,000 100% 5,173,796(6) 83.4%
- -------- (1) Less than 1%. (2) These shares owned by Yorktown Energy Partners III, L.P. As a member of Yorktown Partners LLC, the manager of Yorktown Energy Partners III, L.P., Mr. Lawrence may be deemed to be a beneficial owner of these shares. Mr. Lawrence disclaims beneficial ownership of these shares. (3) These shares owned by Yorktown Energy Partners III, L.P. As a member of Yorktown Partners LLC, the manager of Yorktown Energy Partners III, L.P., Mr. Leidel may be deemed to be a beneficial owner of these shares. Mr. Leidel disclaims beneficial ownership of these shares. (4) Includes 30,000 shares of restricted stock, one-half of which vests in October, 2000 and one-half of which vests in October, 2001. (5) See "Principal Shareholders of CEC" for information on ownership of CEC shares which may be exchanged for Carbon shares in the exchange offer. We will substitute Carbon stock options for outstanding CEC stock options. (6) Includes 121,000 shares underlying exercisable options to be issued by us in substitution of CEC stock options. 80 PRINCIPAL SHAREHOLDERS OF CEC The table below provides information regarding ownership of CEC common stock (which is CEC's only class of outstanding stock) as of November 1, 1999 by (1) each director of CEC, (2) CEC's President and Chief Executive Officer, (3) all CEC's directors and executive officers as a group, and (4) each shareholder who, to our knowledge, was the beneficial owner of five percent or more of the common stock of CEC. All information is taken from or based on filings made by such persons with the SEC or provided by such persons to CEC. Except as indicated in the footnotes, each person identified in the table holds sole voting and investment power with respect to the shares shown opposite such person's name.
Amount and Nature of Name and Address Beneficial Percent of Beneficial Owner Ownership of Class - ------------------- ---------- -------- Patrick R. McDonald and McDonald Energy, LLC............. 285,100(1) 17.6% Harry A. Trueblood, Jr................................... 308,696(2) 20.1% Carl Seaman.............................................. 217,209(3) 14.3% 63 Hunting Ridge Road Greenwich, CT 06831 James C. Crawford........................................ 21,500(4) 1.4% Loyola G. Keough......................................... 15,000(5) (6) Craig W. Sandahl......................................... 115,050(4) 7.5% 13875 Virginia Foothills Drive Reno, NV 89511 Peter N. T. Widdrington.................................. 22,000(4) 1.4% All directors and executive officers as a group (8 persons including the above)............................ 812,346(7) 46.3%
- -------- (1) Patrick R. McDonald is the sole member of McDonald Energy, LLC. Includes 117,100 shares owned by CEC Resources Holdings, LLC of which McDonald Energy, LLC has 58.3% interest. (2) Does not include 33,911 shares which are owned by Lucile B. Trueblood, Mr. Trueblood's wife, which she acquired as her separate property and as to which Mr. Trueblood disclaims any beneficial ownership. Includes 140,000 shares owned by the Harry A. Trueblood Charitable Remainder Unitrust dated June 1, 1998 to which shares Mr. Trueblood disclaims ownership; but as the only trustee, does hold sole voting rights to such shares. Also includes 11,000 shares underlying exercisable stock options. (3) Includes 79,957 shares owned by Carl and Associates, a partnership in which Mr. Seaman owns an 80% partnership interest and as to which Mr. Seaman shares voting and investment power. Does not include 2,032 shares which are owned by Linda Seaman, Mr. Seaman's wife, which she acquired as her separate property and as to which Mr. Seaman disclaims any beneficial ownership. (4) Includes 21,000 shares underlying exercisable stock options. (5) Includes 15,000 shares underlying exercisable stock options. (6) Less than 1%. (7) Includes 232,000 shares underlying exercisable stock options. 81 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 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 provide 82 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 1, 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. 83 Certain Effects Of Authorized But Unissued Stock Under our Articles of Incorporation and, upon completion of the exchange offer and assuming 100% acceptance of the exchange offer, there will be approximately 13,988,600 shares of common stock and approximately 10,000,000 shares of preferred stock available for future issuance without stockholder approval (except that as part of the criteria for maintaining a listing on the Amex, we are required to obtain stockholder approval of certain issuances of stock). These additional shares may be utilized for a variety of corporate purposes including future public offerings to raise additional capital or to facilitate corporate acquisitions. One of the effects of the existence of unissued and unreserved common stock and preferred stock may be to enable the Board of Directors to issue shares to persons friendly to current management which could render more difficult or discourage an attempt to obtain control of Carbon by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management. Such additional shares also could be used to dilute the stock ownership of persons seeking to obtain control of Carbon. The Board of Directors is authorized without any further action by the shareholders to determine the rights, preferences, privileges and restrictions of the unissued Preferred Stock. The purpose of authorizing the Board of Directors to determine such rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The Board of Directors may issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of common stock, and which could, among other things, have the effect of delaying, deferring or preventing a change in control of Carbon. We do not currently have any plans to issue additional shares of common stock or preferred stock other than shares of common stock which may be issued upon the exercise of options which have been granted or which may be granted in the future to our employees. American Stock Exchange Listing Our common stock has been approved for quotation on the AMEX under the symbol . Transfer Agent We have appointed Harris Trust and Savings Bank, Chicago, Illinois, as the transfer agent and registrar for our common stock. 84 COMPARISON OF SHAREHOLDERS' RIGHTS Shareholders of CEC who tender their shares in the exchange offer will become shareholders of Carbon. CEC is a corporation organized under and governed by Alberta, Canada law. Carbon is a corporation organized under and governed by Colorado law. The principal attributes of Carbon common stock and CEC common stock are comparable, but there are material differences in shareholder rights. The following is a summary of these material differences which arise from the differences between the Colorado Business Corporation Act, the "CBCA," and the Alberta Business Corporations Act, the "ABCA," and between the Articles of Incorporation and Bylaws of Carbon and the Articles of Association and Bylaws of CEC. This summary is qualified in its entirety by the terms of the Articles of Association and Bylaws of CEC and the Articles of Incorporation and Bylaws of Carbon. CEC CARBON Capitalization Authorized Capital Stock. The Authorized Capital Stock. The authorized capital stock of CEC authorized capital stock of Carbon consists of an unlimited number of consists of 20,000,000 shares of Common Shares and an unlimited common stock and 10,000,000 shares number of Class A Preferred Shares. of preferred stock. Restrictions On Ownership There are no restrictions on There are no restrictions on ownership of CEC shares. ownership of Carbon shares. Shareholder Voting Rights Generally Rights of Common Shareholders. CEC's Rights of Common Articles of Amendment provide that Shareholders. Carbon's Articles of the holders of Common Shares: Incorporation provide that the common stock has exclusive voting rights on all matters requiring the vote of shareholders, except as otherwise specifically provided by the CBCA or by the terms of any outstanding preferred stock. The CBCA provides that preferred stock as a class or a series of preferred stock, if outstanding, is entitled to vote as a separate voting group on certain amendments to the Articles of Incorporation, share exchanges or mergers of Carbon with other corporations which affect the class or series of preferred stock. Holders of common stock are also entitled to receive dividends and distribution of assets upon any dissolution of Carbon, subject to the preferential rights of any preferred stock. . are entitled to receive notice of and to attend and to vote at any meeting (one vote per share); . are entitled to receive dividends subject to dividends attached to other classes of shares which rank ahead in priority; . are entitled to distribution of assets on any dissolution or winding up of the Corporation subject to the preferential right of other classes of shares which rank ahead in priority. Rights of Preferred Shareholders. The Carbon Board of Directors has the exclusive authority to issue the preferred stock in one or more series and to determine the preferences, limitations and relative rights, including voting rights, of any preferred stock. Rights of Preferred Shareholders. CEC's Board of Directors have the authority with regard to the Class A Preferred Shares: . to issue in one or more series from time to time; . to change the rights restriction and privileges and conditions from time to time. The Class A Preferred Shares rank on parity with all other series of preferred shares and ahead of the Common Shares with respect to dividends and dissolution or winding up. The Class A Preferred shareholders are not entitled to receive notice of, attend or vote at any meetings of shareholders. 85 CEC CARBON No Preemptive Rights. No shareholder No Preemptive Rights. No shareholder is entitled as of right to subscribe is entitled to acquire unissued for, purchase or receive any part of shares of the corporation or any new or additional issue of securities convertible into shares shares of any class, or any bonds, or carrying a right to subscribe for debentures or other securities or to acquire such shares. convertible into shares of any class. Quorum. A majority of the votes to Quorum. A majority of the votes be cast at any meeting of entitled to be cast on a matter by a shareholders of a quorum which is voting group constitute a quorum of constituted by two persons person that voting group for action on that present(or their proxies) entitled matter at any meeting of the to vote at the meeting and together shareholders. holding not less than ten percent of the outstanding shares entitled to vote at a meeting. Voting. At any meeting of shareholders every question shall, Voting. Except as otherwise provided unless required by the ABCA, be in the CBCA, or unless the Articles determined by the majority of the of Incorporation or provisions of votes cast on the question. the Bylaws adopted by shareholders require a greater vote, action by a voting group on a matter other than the election of directors is approved if a quorum exists and if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action. The CBCA requires approval by the majority of the votes entitled to be cast by the voting group for the issuance of shares of one class or series as a share dividend in respect of shares of another class or series, the sale of substantially all assets of Carbon requiring shareholder approval, mergers of Carbon with other corporations requiring shareholder approval, and the voluntary dissolution of Carbon. While only common stock is outstanding, the common stock as a class is the sole voting group of Carbon. Proxy. A shareholder may appoint a Proxy. A shareholder may appoint a proxy by signing and transmitting an proxy by signing and transmitting an appointment form. A proxy is only appointment form, which is effective valid at the meeting in respect of when received by the corporation. which it is given or any adjournment Proxy appointments are effective for of that meeting. 11 months unless otherwise specified and are revocable except as may be permitted or provided by law. No Cumulative Voting No Cumulative Voting Rights. Cumulative voting rights are Rights. Cumulative voting rights are not permitted in the election of not permitted in the election of directors. directors. Shareholder Voting by Written Consent Written Consent. CEC shareholders Written Consent. Carbon shareholders may act by unanimous written consent may act by unanimous written consent in lieu of a meeting of the in lieu of a meeting of the shareholders. shareholders. 86 CEC CARBON Annual Shareholder Meeting Annual Meeting. A meeting of the Annual Meeting. A meeting of the shareholders is held annually to shareholders is held annually to consider the financial statements elect directors to succeed those and reports, electing directors, directors whose terms expire and for appointing auditors and for the the transaction of other business. transacting of business properly brought before the meeting. Special Shareholders Meetings Initiation of Special Meetings. The Initiation of Special Meetings. The CEC bylaws provide that special Carbon bylaws provide that special shareholders' meetings may be called shareholders meetings may be called by the Board of Directors, the by the President or by the Board of Chairman of the Board, the Managing Directors and shall be called by the Director or the President at any President or Secretary upon written, time. signed and dated demand of holders of shares representing not less than 10% of all votes entitled to be cast on any issue proposed to be considered at the meeting. Scope of Special Meeting. Business Scope of Special Meetings. Business transacted at any special transacted at any special shareholders' meeting is limited to shareholders meeting is limited to the purposes stated in the notice of the purposes stated in the notice of the meeting. the meeting. Notice. Notice of any annual or Notice. Pursuant to the Carbon special meeting shall be sent not bylaws, notice of any annual or less than 21 days and not more than special meeting of the shareholders 50 days before the meeting. will be given to each shareholder entitled to vote at the meeting not less than 10 nor more than 60 days prior to the meeting. Inspection Rights General Inspection Rights. Any General Inspection Rights. The Carbon shareholder who has been a directors and shareholders of CEC, shareholder for at least three their agents and legal months, or who holds at least 5% of representatives may examine the the outstanding shares of any class, following records during the usual may inspect and copy the following business hours of CEC free of records of Carbon upon delivery of a charge: written demand made in good faith and for a proper purpose and given to Carbon at least five business days prior to the inspection: . the articles and by-laws and all amendments; . any USA and any amendments; . excerpts from Board minutes or records of actions taken by the Board; . any USA and any amendments; . minutes of meetings and . accounting records; and resolutions of shareholders; . the names and addresses of . copies of all notices shareholders. . the securities register The requesting shareholder must describe with reasonable particularity the purpose and the records which the shareholder desires to inspect. The records must be directly connected with the described purpose. . copies of the financial statements, . reports and information . a register of disclosures in relation to material contracts 87 CEC CARBON In addition, any shareholder may inspect or copy the following records of Carbon upon written demand at least five business days before the inspection: . its Articles of Incorporation; . its Bylaws; . the minutes of all shareholder meetings and records of all actions taken by shareholders without a meeting, for the past three years; . all written communications to all or any class of shareholders as a group within the past three years; . a list of names and business addresses of Carbon's directors and officers; . a copy of the most recent corporate report delivered to the Secretary of State; and . the financial statements described below. Financial Statements: See above. Financial Statements. The CBCA requires Carbon, upon written request of any shareholder, to mail to that shareholder its most recent annual financial statements, if any, and its most recent published financial statements, if any, reasonably detailing its assets and liabilities and results of operations. Liability of Shareholders Limited Liability. Shareholders are Limited Liability. Shareholders are generally not personally liable for generally not personally liable for the acts or debts of CEC. the acts or debts of Carbon. No Capital Assessment: A shareholder No Capital Assessment. A shareholder is required to pay the consideration is required to pay the consideration stated by the Board of Directors for stated by the Board of Directors for shares issued to that person. A shares issued to that person. (In shareholder of CEC is not liable to the case of the exchange offer, the CEC or its creditors for capital consideration for each Carbon share assessments or calls. is one CEC share.) A shareholder of Carbon is not liable to Carbon or its creditors for capital assessments or calls. 88 CEC CARBON Number and Election of Directors Number: The CEC Articles of Number. The Carbon Articles of Incorporation require a minimum of Incorporation name five initial three and a maximum of nine directors. However, the number of directors. However, the number of directors can be changed by a Board directors can be changed by the of Directors resolution, so long as shareholders amending the Articles, such a resolution does not have the but no decrease shall shorten the effect of shortening the term of any term of the incumbent director. incumbent director. Election. Shareholders shall, by Election. The Board of Directors is ordinary resolution at each annual elected at the annual shareholders' meeting, elect the Board of meeting. At each annual meeting, the Directors. number of candidates equaling the number of directors to be elected receiving the highest number of votes are elected to the Board of Directors. Residence of Directors Residence. At least half of the Residence. There are no requirements directors must be resident as to the place of residence of Canadians. directors of Carbon. Removal of Directors Removal. The shareholders may by Removal. Any director can be removed ordinary resolution passed at a from office, either with or without special meeting remove any director cause, at a meeting of shareholders from office. If a director is when the votes cast in favor of elected by any class of removal exceeds the votes against shareholders, only that class of removal. If a director is elected by shareholders may participate in a a voting group of shareholders, only vote for removal. that voting group may participate in a vote for removal. Vacancies on the Board of Directors Expiration of Terms. The ABCA Expiration of Terms. The Carbon provides that if directors are not bylaws and CBCA provide that even elected at a meeting of after the expiration of a director's shareholders, the incumbent term, he or she continues to serve directors continue in office until until his or her successor is their successors are elected. elected and qualifies. 89 CEC CARBON Vacancies in General. Any vacancies on the Board of Directors are filled by: Vacancies in General. Any vacancies on the Board of Directors are filled by: . the Board of Directors, if a quorum is present, by a simple majority. . the shareholders; or . a vote of the shareholders. . the Board of Directors, or a simple majority vote of the remaining directors if their number is insufficient to constitute quorum. Any vacant directorship held by a director elected by a particular class of shareholders may be filled by either: Any vacant directorship held by a director elected by a particular shareholder voting group may be filled by either: . the shareholders of that particular class if there are no remaining directors of that class; or . shareholders of that voting group . the directors elected by that entitled to vote; or class. . a simple majority of any one or more remaining directors elected by that same voting group. Standard of Conduct General Standard of General Standards of Conduct for Conduct. Directors and officers are Directors and Officers. Directors required to discharge their and officers are required to respective duties: discharge their respective duties: . in good faith with a view to the . in good faith; best interests of the Corporation; and . with the care an ordinary person in a like position would exercise under similar circumstances; and . exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. . in a manner that he or she reasonably believes is in the best interests of the corporation. Conflicting Interest Conflicting Interest Transactions. Under the ABCA, if a Transactions. Under the CBCA, no material contract is made between loan, guaranty, contract or the Corporation and one or more of transaction between Carbon and a its directors or officers, or director or between Carbon and any between a corporation and another entity in which a Carbon director is person of which a director of a director or officer or has a officer of the corporation is a financial interest is void or director or officer or in which he voidable, can be enjoined or gives has a material interest, the rise to an award of damages solely contract is neither void or voidable because of the conflicting interest by reason only of that relationship of the director if: and a director is not liable to account to the corporation for that profit if: . after disclosure of material facts of the relationship or interest in the transaction, the transaction is approved by the affirmative vote of disinterested directors; or . the director or officer disclosed his interest; . the contract was approved by the directors or shareholders; and . after disclosure of material facts of the relationship or interest in the transaction, the transaction is approved a vote of shareholders; or . it was reasonable and fair to the Corporation at the time it was approved. . the conflicting interest transaction is fair to Carbon. 90 CEC CARBON Limitation of Liability of Directors and Officers Limitation on Personal Liability of Limitation on Personal Liability of Directors. Pursuant to the CEC Arti- Directors. The CBCA permits Colorado cles of Incorporation, CEC directors corporations to limit or eliminate are not liable to the Corporation or personal liability of the a director its shareholders for anything except to the corporation or to its share- as set out in the ABCA. Those in- holders for monetary damages for a stances where directors in any event breach of fiduciary duty as a direc- remain liable to the Corporation or tor, except for certain specified its shareholders for monetary dam- instances. Those instances where di- ages are: rectors in any event remain liable to the corporation or its sharehold- . any breach of a directors' duty to ers for monetary damages are: act honestly and in good faith with a view to the best interests . any breach of the director's duty of the Corporation; of loyalty to the corporation or its shareholders, . any breach where a director did not exercise the care, diligence . acts or omissions not in good and skill that a reasonably pru- faith or which involve intentional dent person would exercise in com- misconduct or a knowing violation parable circumstances; of the law . unlawful dividends or other dis- . the unlawful purchase, redemption tributions; or or other acquisitions of shares; . any transaction from which the di- rector directly or indirectly de- . the unlawful commission on the rived an improper personal bene- sale of shares; fit. . the unlawful payment of any divi- Pursuant to the Carbon Articles of dends; Incorporation, Carbon directors are not personally liable to the corpo- . any unlawful financial assistance; ration or its shareholders, either directly or indirectly, for monetary . any unlawful payment of an indem- damages for the breach or breaches nity to a director or officer of of fiduciary duty as a director to the Corporation; the full extent permitted by law. . any unlawful payment to a share- holder; and . up to six months wages for non- payment of wages to employees. Indemnification of Directors and Officers ABCA Provisions. Pursuant to the CBCA Provisions. Pursuant to the ABCA, CEC must indemnify a director CBCA, Carbon must indemnify a person or officer in respect of all costs, who was wholly successful, on the charges and expenses reasonably in- merits or otherwise, in the defense curred in his defense of any civil, of any proceeding to which the per- criminal or administrative action or son was a party because the person proceeding if: is or was a director or officer, against reasonable expenses incurred . he was substantially successful on by him or her in connection with the the merits; proceeding. The CBCA also permits Carbon to indemnify and advance ex- . he acted honestly and in good penses to a director or officer, who faith and had reasonable grounds was made a party to a proceeding be- for believing his conduct was law- cause that person is a director or ful; and officer, against liability incurred in the proceeding if: . he is fairly and reasonably enti- tled to indemnity. The Court may grant approval to . the person conducted himself or grant indemnity for a derivative ac- herself in good faith; tion if he acted honestly and in good faith and had reasonable . the person reasonably believed grounds for believing his conduct that his or her conduct was in was lawful. Carbon's best interest or not op- posed to Carbon's best interest; and . in the case of any criminal pro- ceeding, the person had no reason- able cause to believe his or her conduct was unlawful. The CBCA will not allow Carbon to indemnify a director or officer for liability to the corporation in an action brought by a shareholder on behalf of Carbon or for liability to the corporation for deriving an im- proper personal benefit. 91 CEC CARBON Carbon Bylaws and Indemnification A court may nevertheless order Agreement. CEC's bylaws permit indemnification as the court deems indemnification subject to the above proper, except that indemnification as set out in the ABCA. is limited to reasonable expenses of a proceeding where the director or officer has been held liable in an action brought by a shareholder or for deriving an improper personal benefit. Carbon Bylaws and Indemnification Agreements. Carbon's bylaws and indemnification agreements with each director and officer mandate that Carbon indemnify and advance expenses to the director or officer to the full extent permitted by law. Exclusiveness. See above Exclusiveness. Carbon may provide, by shareholder or Board of Directors resolution or by way of contract, for indemnification or advancement of expenses not expressly provided for in the CBCA, if not inconsistent with public policy. Appraisal Rights Right to Dissent. Under the ABCA, a Right to Dissent. Under the CBCA, a CEC shareholder, whether or not Carbon shareholder, whether or not entitled to vote, is entitled to entitled to vote, is entitled to dissent and obtain payment of the dissent and obtain payment of the fair value of their shares if the fair value of their shares in the Corporation resolves to: event of the consummation of a: . amend its articles changing the . plan of merger requiring approval share structure; by the shareholders, or a short- form merger of a corporation with its parent corporation; or . amend its articles to remove or change any business restrictions; . share exchange, by operation of . amalgamate with another law, with an acquiring corporation; corporation; or . be continued into another . sale, lease, exchange or other jurisdiction; or disposition of substantially all of the corporation's property requiring shareholder approval; or . sell, lease or exchange all or substantially all its property. . reverse stock-split that reduces the number of shares owned by the shareholder to a fraction of a share for which the corporation pays cash. No Right to Dissent. There is no No Right to Dissent. Under the CBCA, comparable section under the ABCA. except in the case of a reverse stock split described above, a Carbon shareholder may not dissent and obtain payment for their shares if the securities are: (1) listed on a national securities exchange, such as the American Stock Exchange, or a national market system of the National Association of Securities Dealers automated quotation system or (2) held of record by more than 2,000 shareholders. 92 CEC CARBON Vote Required in Extraordinary Transactions Merger or Share Exchange. The Board Merger or Share Exchange. The Board of Directors submits a plan of of Directors submits a plan of merger or share exchange to the merger or share exchange to the shareholders for approval. The plan shareholders for approval. The plan must be approved by special must be approved by a majority of resolution ( 2/3) of the outstanding the outstanding votes entitled to be votes entitled to be cast within cast within each voting group each voting group entitled to vote entitled to vote separately on the separately on the plan. plan. Separate voting by a class or series of shares as a voting group is required: . on a plan of merger, if the plan contains a provision that would require approval by the class or series as a separate voting group if the provision was contained in an amendment to the corporation's Articles of Incorporation (see below for information on the vote to amend the Articles of Incorporation); or . on a plan of share exchange, by each class or series of shares included in the share exchange. There is no comparable section with However, approval of the regard to any "surviving shareholders of any surviving corporation" in the ABCA. corporation in a merger is not required if: . the Articles of Incorporation of the surviving corporation prior to the merger will not be changed after the merger; . shareholders with shares prior to the merger will hold the same number of shares after the merger, with the same designations, preferences, limitations and relative rights; . the number of voting shares outstanding immediately after the merger plus the number issuable as a result of the merger does not exceed by more than 20% the total number of voting shares of the surviving corporation prior to the merger; and . the number of participating shares outstanding immediately after the merger plus the number issuable as a result of the merger, does not exceed by more than 20% the total number of participating shares outstanding prior to the merger. Merger of Parent and Wholly-Owned Merger of Parent and 90% Held Subsidiary. The directors of a Subsidiary. No shareholder approval holding corporation and one or more of the parent company is required if of its wholly-owned subsidiaries may a parent corporation owning at least approve an amalgamation of the 90% of a subsidiary corporation resolutions provided that: merges the subsidiary into itself. . shares of each subsidiary will be cancelled; . the articles of amalgamation will be the same as the holding company; and . no securities shall be issued by the amalgamated corporation in connection with the amalgamation 93 CEC CARBON Sale of Assets. Under the ABCA, the Sale of Assets. Under the CBCA, the sale, lease or exchange of all or sale, lease, exchange or other substantially all the property of a disposition of all, or substantially corporation other than in the all, of Carbon's property (which may ordinary course of business requires include goodwill) other than in the approval by special resolution ( ordinary course of business requires 2/3) of the outstanding votes approval of a majority of the entitled to be cast within each outstanding votes entitled to be voting group entitled to vote cast within each voting group separately on the plan. entitled to vote separately on the plan. Dissolution. The Board of Directors Dissolution. The Board of Directors recommends to the CEC shareholders recommends to the Carbon approval of any proposal for shareholders approval of any voluntary dissolution of the proposal for voluntary dissolution Corporation, and by special of the corporation, and the plan resolutions of each shareholder must be approved by a majority of class, the plan must be approved by the outstanding votes entitled to be 2/3 of the outstanding votes cast within each voting group entitled to be cast within each entitled to vote separately on the voting group entitled to vote plan. separately on the plan. Change in Control Under Colorado/Alberta Law The ABCA contains no special voting The CBCA contains no special voting or other requirements that result or other requirements that result from a change in control. from a change in control. Oppression Remedy Under the ABCA, a complainant may The CBCA does not provide for any apply to the Court for an order in statutory oppression remedy. respect of a corporation or any of However, shareholders have legal and its affiliates: equitable remedies for improper acts or omissions by directors or officers. . any act or omission of the Corporation or any of its affiliates effects a result; . the business or affairs of the Corporation or its affiliates have been conducted in a manner; or . the powers of the directors of the Corporation of any of its affiliates have been exercised in a manner that is oppressive or unfairly prejudicial to or unfairly disregards the interests of any securityholder, creditor, director or officer, the Court may make an order to rectify the matter complained of. Amendment to Governing Documents Amendment to Articles. CEC Amendment to Articles. Carbon shareholders can approve amendments shareholders can approve amendments to the Articles of Incorporation at to the Articles of Incorporation at a meeting by 2/3 of the votes cast a meeting by a majority of the votes with respect to the amendment. Such cast on the amendment. A class or items would include: series of shares are entitled to vote as a separate voting group on an amendment if the amendment would, among other things: . a name change; . changing or removing the business restrictions; . increase or decrease the aggregate number of authorized shares of the class or series; . increase or decrease the aggregate number of shares that CEC is authorized to issue; . exchange or reclassify all or part of the shares of the class or series; . changing share structure or creating a new class of shares; . change the preferences, . increasing or decreasing the limitations or relative rights of number of directors. the shares of the class or series; 94 CEC CARBON . change the shares into a different number of shares of the same class or series; or . create a new class of shares having rights or preferences with respect to distributions or dissolution that are superior or equal to the shares of the class or series. Amendment to Bylaws. Either the Amendment to Bylaws. Either the Board of Directors or the Board of Directors or the shareholders may make a proposal to shareholders may adopt amendments to adopt amendments to the by-laws. The the Bylaws of Carbon. Shareholder directors shall submit a by-law, or approval of such an amendment at a an amendment or a repeal of a by-law meeting requires a majority of the to the shareholders at the next votes cast on the subject. meeting of shareholders, and the shareholders, may by ordinary resolution, confirm, reject or amend the by-law, amendment or repeal. 95 LEGAL MATTERS The validity of the issuance of the shares of common stock being offered hereby will be passed upon for us by Holland & Hart LLP, Denver, Colorado. Holland and & Hart LLP has rendered an opinion as to the material United States federal income tax considerations relating to the exchange offer and Bennett Jones has rendered an opinion as to the material Canadian federal income tax consequences of the exchange offer. These opinions have been filed as exhibits to the registration statement of which this prospectus is a part. EXPERTS The financial statements of Carbon Energy Corporation as of October 20, 1999 and for the period from inception (September 14, 1999) through October 20, 1999, included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. BFC's audited financial statements included in this prospectus and elsewhere in the registration statement have been audited by Hein + Associates LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firms as experts in giving said reports. The financial statements of CEC Resources Ltd. as of November 30, 1998 and 1997 and for each of the three years in the period ended November 30, 1998 included in this Prospectus have been so included in the reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, a registration statement on Form S-4 under the Securities Act of 1933 with respect to the common stock offered by this prospectus. This prospectus does not contain all of the information in the registration statement and the exhibits and schedules. For further information about us and our common stock, please refer to the registration statement and the exhibits and schedules filed. Statements contained in this prospectus as to the contents of any contract or document filed as an exhibit to the registration statement are qualified by reference to such exhibit as filed. A copy of the registration statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Information regarding the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Website that contains registration statements, reports, proxy and other information regarding registrants that file electronically with the SEC. The address of this Website is sec.gov. 96 INDEX TO FINANCIAL STATEMENTS
Page ---- Carbon Energy Corporation Report of Independent Public Accountants.................................. F-2 Balance Sheet as of October 20, 1999...................................... F-3 Statement of Stockholder's Equity......................................... F-4 Statement of Cash Flow for period from inception (September 14, 1999) through October 20, 1999................................................. F-5 Notes to the Financial Statements......................................... F-6 Bonneville Fuels Corporation (predecessor to Carbon Energy Corporation) Independent Auditor's Report.............................................. F-7 Consolidated Balance Sheets at December 31, 1998 and 1997................. F-8 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996...................................................... F-9 Consolidated Statement of Stockholders' Equity for the period from January 1, 1996 through December 31, 1998........................................ F-10 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996...................................................... F-11 Notes to Consolidated Financial Statements................................ F-12 Consolidated Balance Sheets at September 30, 1999 and 1998 (unaudited).... F-17 Consolidated Statement of Operations for the nine months ended September 30, 1998 and 1998 (unaudited)............................................ F-19 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited)..................................................... F-20 Consolidated Statement of Stockholders' Equity and Retained Earnings for the nine months ended September 30, 1999 (unaudited)..................... F-21 Notes to Consolidated Financial Statements................................ F-22 CEC Resources Ltd. Auditors' Report.......................................................... F-27 Balance Sheets at November 30, 1998 and 1997.............................. F-28 Statements of Income for the years ended November 30, 1998, 1997 and 1996. F-30 Statements of Stockholders' Equity for the years ended November 30, 1998, 1997 and 1996............................................................ F-31 Statements of Cash Flows for the years ended November 30, 1998, 1997 and 1996..................................................................... F-32 Notes to the Financial Statements......................................... F-33 Balance Sheets at August 31, 1999 (unaudited) and November 30, 1998....... F-44 Statements of Income for nine months ended August 31, 1999 and 1998 (unaudited).............................................................. F-45 Statement of Stockholders' Equity for the nine months ended August 31, 1999 (unaudited)......................................................... F-46 Statements of Cash Flow for the nine months ended August 31, 1999 and August 31, 1998 (unaudited).............................................. F-47 Notes to Financial Statements............................................. F-48
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Carbon Energy Corporation: We have audited the accompanying balance sheet of CARBON ENERGY CORPORATION (a Colorado corporation) as of October 20, 1999, and the related statements of stockholder's equity and cash flow for the period from inception (September 14, 1999) to October 20, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carbon Energy Corporation as of October 20, 1999, and its cash flow for the period from inception (September 14, 1999) to October 20, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Denver, Colorado October 21, 1999 F-2 CARBON ENERGY CORPORATION BALANCE SHEET As of October 20, 1999 ASSETS Cash....................................................................... $550 ---- Total assets............................................................... $550 ==== STOCKHOLDER'S EQUITY Preferred stock, no par value: 10,000,000 shares authorized, none outstanding........................... $-- Common stock, no par value: 20,000,000 shares authorized, 100 outstanding............................ 550 ---- Total stockholder's equity................................................. $550 ====
The accompanying notes are an integral part of these financial statements. F-3 CARBON ENERGY CORPORATION STATEMENT OF STOCKHOLDER'S EQUITY For the Period From Inception (September 14, 1999) Through October 20, 1999
Common Stock ------------- Shares Value Total ------ ------ ----- Balances, September 14, 1999................................ -- $-- $-- Shares issued (note 2)...................................... 100 550 550 --- ---- ---- Balances, October 20, 1999.................................. 100 $550 $550 === ==== ====
The accompanying notes are an integral part of these financial statements. F-4 CARBON ENERGY CORPORATION STATEMENT OF CASH FLOW For the Period From Inception (September 14, 1999) Through October 20, 1999 Cash flow from financing activities: Issuance of common stock................................................ $550 ---- 550 ---- Net increase in cash...................................................... 550 Cash at the beginning of the period....................................... -- ---- Cash at the end of the period............................................. $550 ====
The accompanying notes are an integral part of these financial statements. F-5 CARBON ENERGY CORPORATION NOTES TO THE FINANCIAL STATEMENTS (1) Nature of Business Carbon Energy Corporation ("Carbon") was incorporated under the laws of the State of Colorado on September 14, 1999. Carbon is an independent oil and gas company engaged in the exploration, development and production of natural gas and crude oil. Carbon has been formed for the purpose of acquiring Bonneville Fuels Corporation ("BFC"), a wholly owned subsidiary of Bonneville Pacific Corporation ("BPC"). BFC is an oil and gas company incorporated in Colorado. Carbon was also formed for the purpose of exchanging Carbon shares for shares of CEC Resources Ltd. ("CEC"), an independent oil and gas company, incorporated in Alberta, Canada. (2) Capital Stock During October 1999, Carbon issued 100 shares of common stock at U.S. $5.50 to Yorktown Energy Partners III, L.P. ("Yorktown"). This has been the only activity to date since the inception of Carbon. (3) Acquisitions On August 11, 1999, CEC and BPC signed a stock purchase agreement, whereby CEC agreed to purchase all of the outstanding BFC stock from BPC at a price of $23,857,951 in cash, subject to certain adjustments, with debt less working capital of approximately $6,500,000 remaining at BFC. On October 14, 1999, Carbon, CEC and Yorktown signed an exchange and financing agreement providing for an assignment of the BFC stock purchase agreement to Carbon, the purchase of Carbon common stock by Yorktown for $24,750,000 and an exchange offer whereby Carbon will exchange one share of Carbon common stock for one share of CEC common stock. (4) Accounting for Derivative Investments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument including certain derivative instruments embedded in other contracts be recorded on the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Carbon is required to adopt SFAS No. 133 as of January 1, 2001, but may implement SFAS No. 133 as of the beginning of any fiscal quarter prior to that date. SFAS No. 133 cannot be applied retroactively. Carbon has not yet quantified the impacts of adopting SFAS No. 133 or determined the timing or method of adoption. However, SFAS No. 133 could increase the volatility of Carbon's earnings and comprehensive income. F-6 INDEPENDENT AUDITOR'S REPORT Board of Directors Bonneville Fuels Corporation Denver, Colorado We have audited the accompanying consolidated balance sheets of Bonneville Fuels Corporation (a wholly-owned subsidiary of Bonneville Pacific Corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bonneville Fuels Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Hein + Associates LLP Denver, Colorado February 26, 1999 F-7 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- 1998 1997 ------------ ------------ ASSETS ------ Current Assets: Cash............................................... $ 2,742,000 $ 544,000 Accounts receivable, trade......................... 4,972,000 2,818,000 Amounts due from broker............................ 534,000 63,000 Prepaid expenses and other......................... 241,000 241,000 ------------ ------------ Total current assets........................... 8,489,000 3,666,000 ------------ ------------ Property and Equipment, at cost: Oil and gas properties, using the successful efforts method: Unproved properties.............................. 2,745,000 1,953,000 Proved properties................................ 29,679,000 26,624,000 Furniture and equipment............................ 497,000 293,000 ------------ ------------ 32,921,000 28,870,000 Less accumulated depreciation, depletion and amortization.................................... (18,891,000) (16,863,000) ------------ ------------ Property and equipment, net.................... 14,030,000 12,007,000 ------------ ------------ Other Assets: Deposits and other................................. 276,000 317,000 Deferred loan costs, net........................... 45,000 64,000 ------------ ------------ Total other assets............................. 321,000 381,000 ------------ ------------ Total Assets......................................... $ 22,840,000 $ 16,054,000 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ Current Liabilities: Accounts payable and accrued expenses.............. $ 6,866,000 $ 1,470,000 Accrued production taxes payable................... 335,000 257,000 Undistributed revenue.............................. 476,000 448,000 ------------ ------------ Total current liabilities...................... 7,677,000 2,175,000 ------------ ------------ Long-term Debt....................................... 5,850,000 2,400,000 Taxes Payable to BPC................................. -- 1,888,000 Commitments and Contingencies (Notes 2, 4, and 6) Stockholder's Equity: Common stock, $.01 par value; 1,000 shares authorized, issued and outstanding................ -- -- Additional paid in capital......................... 3,475,000 1,812,000 Retained earnings.................................. 5,838,000 7,779,000 ------------ ------------ Total stockholder's equity..................... 9,313,000 9,591,000 ------------ ------------ Total Liabilities and Stockholder's Equity........... $ 22,840,000 $ 16,054,000 ============ ============
See accompanying notes to these consolidated financial statements. F-8 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ------------------------------------ 1998 1997 1996 ----------- ----------- ----------- Revenues: Oil and gas sales....................... $ 6,758,000 $ 6,429,000 $ 5,262,000 Gas marketing and transportation........ 12,610,000 9,135,000 9,550,000 Electricity sales....................... 1,331,000 506,000 -- Other................................... 393,000 469,000 255,000 ----------- ----------- ----------- 21,092,000 16,539,000 15,067,000 ----------- ----------- ----------- Expenses: Oil and gas production costs............ 3,004,000 2,779,000 2,095,000 Gas marketing and transportation........ 12,674,000 8,553,000 6,910,000 Cost of electricity..................... 1,137,000 497,000 -- Depreciation, depletion and amortization expense................................ 2,086,000 1,942,000 1,205,000 Exploration expense..................... 556,000 772,000 419,000 Impairment expense...................... 1,858,000 312,000 -- General and administrative expense...... 1,655,000 590,000 472,000 Interest expense........................ 238,000 83,000 272,000 ----------- ----------- ----------- 23,208,000 15,528,000 11,373,000 ----------- ----------- ----------- Income (Loss) Before Extraordinary Items and Taxes.............................. (2,116,000) 1,011,000 3,694,000 Extraordinary Gain on Extinguishment of Debt Owed to Parent Company, net of taxes of zero.................................. -- -- 1,788,000 ----------- ----------- ----------- Income (Loss) Before Taxes................ (2,116,000) 1,011,000 5,482,000 Tax Expense (Benefit): Current................................. (225,000) 279,000 1,422,000 Deferred................................ 50,000 -- -- ----------- ----------- ----------- Net Income (Loss)......................... $(1,941,000) $ 732,000 $ 4,060,000 =========== =========== ===========
See accompanying notes to these consolidated financial statements. F-9 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY For the Period from January 1, 1996 Through December 31, 1998
Common Stock Additional ---------------- Paid-in Retained Shares Par Value Capital Earnings Total ------ --------- ---------- ----------- ----------- Balances, January 1, 1996.................... 1,000 $-- $ -- $ 2,987,000 $ 2,987,000 Intercompany payables converted to equity by Parent................ -- -- 1,812,000 -- 1,812,000 Net income............. -- -- -- 4,060,000 4,060,000 ----- ---- ---------- ----------- ----------- Balances, December 31, 1996.................... 1,000 -- 1,812,000 7,047,000 8,859,000 Net income............. -- -- -- 732,000 732,000 ----- ---- ---------- ----------- ----------- Balances, December 31, 1997.................... 1,000 -- 1,812,000 7,779,000 9,591,000 Intercompany payables converted to equity by Parent................ -- -- 1,663,000 -- 1,663,000 Net loss............... -- -- -- (1,941,000) (1,941,000) ----- ---- ---------- ----------- ----------- Balances, December 31, 1998.................... 1,000 $-- $3,475,000 $ 5,838,000 $ 9,313,000 ===== ==== ========== =========== ===========
See accompanying notes to these consolidated financial statements. F-10 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, -------------------------------------- 1998 1997 1996 ----------- ----------- ------------ Cash Flows from Operating Activities: Net income (loss).................... $(1,941,000) $ 732,000 $ 4,060,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred taxes..................... 50,000 -- -- Gain on debt extinguishment........ -- -- (1,788,000) Depreciation, depletion and amortization expense.............. 2,067,000 1,942,000 1,205,000 Impairment of property and equipment......................... 1,858,000 312,000 -- Amortization of loan costs......... 19,000 19,000 20,000 Changes in operating assets and liabilities: Decrease (increase) in: Accounts receivable, trade..... (2,154,000) (21,000) (1,440,000) Amount due from broker......... (471,000) 152,000 (61,000) Prepaid expenses and other..... (50,000) (36,000) (32,000) Other assets................... 41,000 (26,000) 37,000 Increase (decrease in): Accounts payable and accrued expenses...................... 5,396,000 59,000 609,000 Accrued production taxes payable....................... 78,000 (77,000) (30,000) Undistributed revenues......... 28,000 (194,000) 204,000 Deferred gain and other liabilities................... -- 52,000 (74,000) Taxes payable to Parent........ (225,000) 279,000 1,426,000 ----------- ----------- ------------ Net cash provided by operating activities........................ 4,696,000 3,193,000 4,136,000 ----------- ----------- ------------ Cash Flows from Investing Activities: Capital expenditures for oil and gas properties.......................... (5,948,000) (4,442,000) (1,025,000) ----------- ----------- ------------ Net cash used in investing activities........................ (5,948,000) (4,442,000) (1,025,000) Cash Flows from Financing Activities: Proceeds from note payable........... 4,650,000 3,600,000 400,000 Payments on note payable............. (1,200,000) (2,900,000) (3,460,000) Production payment received.......... -- 319,000 300,000 ----------- ----------- ------------ Net cash provided by (used in) financing activities.............. 3,450,000 1,019,000 (2,760,000) ----------- ----------- ------------ Net Increase (Decrease) in Cash and Equivalents........................... 2,198,000 (230,000) 351,000 Cash, beginning of year................ 544,000 774,000 423,000 ----------- ----------- ------------ Cash, end of year...................... $ 2,742,000 $ 544,000 $ 774,000 =========== =========== ============ Supplemental Disclosures of Cash Flow Information: Cash paid for interest............... $ 236,000 $ 83,000 $ 303,000 =========== =========== ============ Noncash investing and financing activities--Intercompany payable contributed to capital by Parent.... $ 1,663,000 $ -- $ 1,812,000 =========== =========== ============
See accompanying notes to these consolidated financial statements. F-11 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nature of Operations and Significant Accounting Policies: Nature of Operation--Bonneville Fuels Corporation (BFC), a wholly-owned subsidiary of Bonneville Pacific Corporation (BPC), was incorporated in the State of Colorado in April 1987 and began doing business in June 1987. The Company owns four subsidiaries, Bonneville Fuels Marketing Corporation (BFMC), Bonneville Fuels Management Corporation (BFM Corp.), Bonneville Fuels Operating Corporation (BFO), and Colorado Gathering Corporation (CGC). Collectively, these entities are referred to as the Company. The Company's principal operations include exploration for and production of oil and gas reserves, marketing of natural gas, and gathering of natural gas. The Company from time to time also purchases and resells electricity. Principles of Consolidation--The consolidated financial statements include the accounts of BFC and its four wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements. Cash Equivalents--The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Gas Marketing--The Company's marketing contracts are generally month-to- month or up to eighteen months, and provide that the Company will sell gas to end users which is produced from the Company's properties and acquired from third parties. Amounts due from Broker--This account generally represents net cash margin deposits held by a brokerage firm for the Company's trading accounts. Oil and Gas Producing Activities--The Company follows the "successful efforts" method of accounting for its oil and gas properties, all of which are located in the continental United States. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well has not found proved reserves, the costs of drilling the well are charged to expense. The costs of development wells are capitalized whether productive or nonproductive. Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Depreciation and depletion of capitalized costs for producing oil and gas properties is computed using the units-of-production method based upon proved reserves for each field. In 1997, the Company began to accrue for future plugging, abandonment, and remediation using the negative salvage value method whereby costs are expensed through additional depletion expense over the remaining economic lives of the wells. Management's estimate of the total future costs to plug, abandon, and remediate the Company's share of all existing wells, including those currently shut in is approximately $3,500,000, net of salvage values. The total amount expensed for this liability was $206,000 and $200,000, for the years ended December 31, 1998 and 1997, respectively. The Company follows Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for Impairment of Long-Lived Assets. This statement limits net capitalized costs of proved oil and gas properties to the aggregate undiscounted future net revenues related to each field. If the net capitalized costs exceed the limitation, impairment is provided to reduce the carrying value of the properties in the field to estimated actual value. The Company also periodically assesses impairment on unproved oil and gas properties by analyzing factors that may affect the fair market value of the property. The impairment is included as a reduction of gross oil and gas properties in the accompanying balance sheets. In 1998, 1997, and 1996, the Company recorded F-12 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) impairments of $1,858,000, $312,000, and $-0-, respectively. Factors causing the impairment of oil and gas properties in 1998 were the decline in oil prices worldwide and the re-estimation of reserve values on certain producing properties. The primary factor causing the impairments in 1997 was the reevaluation of certain undeveloped leases. Gains and losses are generally recognized upon the sale of interests in proved oil and gas properties based on the portion of the property sold. For sales of partial interests in unproved properties, the Company treats the proceeds as a recovery of costs with no gain recognized until all costs have been recovered. Revenue Recognition--The Company recognizes revenue upon delivery of the Company's products to its customers. Energy Marketing Arrangements--In 1998, BFC entered into an agreement to manage certain natural gas contracts of an unrelated entity. For some contracts, BFC takes title to the gas purchased to service these contracts prior to the sale under the contracts. For these contracts, BFC consolidates all revenue, expenses, receivables and payables associated with the contracts. In contracts where title is not taken, BFC only records the margin associated with the transaction. Other Property and Equipment--Depreciation of other property and equipment is calculated using the straight-line method over the estimated useful lives (ranging from 3 to 25 years) of the respective assets. The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any gains or losses are reflected in current operations. Deferred Loan Costs--Costs associated with the Company's note payable have been deferred and are being amortized using the effective interest method over the original term of the note. Gas Balancing--The Company uses the sales method of accounting for amounts received from natural gas sales resulting from production credited to the Company in excess of its revenue interest share. Under this method, all proceeds from production credited to the Company are recorded as revenue until such time as the Company has produced its share of related estimated remaining reserves. Thereafter, additional amounts received are recorded as a liability. Income Taxes--The Company accounts for income taxes under the liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. BPC includes the Company's operations in its consolidated tax return. Income taxes are allocated by BPC as if the Company were a separate taxpayer. Accounting for Hedged Transactions--The Company periodically enters into futures, forwards, and swap contracts as hedges of commodity prices associated with the production of oil and gas and with the purchase and sale of natural gas in order to mitigate the risk of market price fluctuations. Changes in the market value of futures, forwards, and swap contracts are not recognized until the related production occurs or until the related gas purchase or sale takes place. Realized losses from any positions which were closed early are deferred and recorded as an asset or liability in the accompanying balance sheet, until the related production, purchase or sale takes place. Gains and losses incurred on these contracts are included in oil and gas revenue or in gas marketing costs in the accompanying statements of operations. F-13 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Impact of Recently Issued Accounting Pronouncements--In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for fiscal years beginning after June 15, 1999. Earlier application is encouraged; however, the Company does not anticipate adopting SFAS No. 133 until the fiscal year beginning January 1, 2000. SFAS No. 133 requires that an entity recognize all derivatives as assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not believe the adoption of SFAS No. 133 will have a material impact on assets, liabilities or equity. The Company has not yet determined the impact of SFAS No. 133 on its statement of operations or the impact on comprehensive income. In November 1998, the Emerging Issues Task Force reached a consensus on issue #98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. This consensus will not have a material impact on the Company. Reclassifications--Certain reclassifications have been made to conform the 1997 and 1996 financial statements to the presentation in 1998. These reclassifications had no effect on net income. Accounting Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and the accompanying notes. The actual results could differ from those estimates. Parent Company Bankruptcy and Related Transactions: In 1991, BPC filed a petition for re-organization under Chapter 11 of the U.S. Bankruptcy Code and in June 1992, a Trustee was appointed for the case. As a result of BPC's bankruptcy, the Company established, prior to 1994, an allowance for doubtful accounts from BPC equal to the receivable. In 1995, claims filed against the estate of BPC were amended to total $1,788,000 to reflect additional amounts due related to pre-petition transactions. As a condition of granting a loan in 1991, the lender required that BPC convert intercompany debt of $3,600,000 to equity. In Board meetings at both the Company and BPC, the officers of each company were authorized and directed to complete this financing. In their respective internal financial statements, both the Company and BPC treated the intercompany debt as converted to equity. In 1993, it was discovered that the BPC Board resolution to ratify the conversion had not been duly executed. The Company, therefore, continued to disclose the intercompany debt as a liability. On December 20, 1996, the Bankruptcy Court authorized the Trustee to offset the mutual debts of the Company and BPC. After the offset, the Company was to convert any remaining intercompany debt to equity. The Company had established, prior to 1994, an allowance for doubtful accounts from BPC equal to the receivable. The amount of the offset equal to the allowance was recorded as an extraordinary gain on extinguishment of debt, with the remainder being recorded as a contribution of capital. In 1998, BPC approved the conversion of $1,663,000 in taxes payable to equity. Also in 1998, BPC emerged from bankruptcy. F-14 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-Term Debt: The Company has an asset-based line-of-credit with a bank which provides for borrowing up to the borrowing base (as defined). The borrowing base was $13,200,000 at December 31, 1998. At December 31, 1998, outstanding borrowings amounted to $5,150,000, with interest at a variable rate that approximated 7% at December 31, 1998. The Company has issued letters of credit totaling $3,100,000 which further reduces the amount available for borrowing under the base. This facility is collateralized by certain oil and gas properties of the Company and is scheduled to convert to a term note on July 1, 2001. This term loan is scheduled to have a maturity of either the economic half life of the Company's remaining reserves on the date of conversion, or July 1, 2006, whichever is earlier. The borrowing base is based upon the lender's evaluation of BFC's proved oil and gas reserves, generally determined semi-annually. The future minimum principal payments under the term note will be dependent upon the bank's evaluation of the Company's reserves at that time. The Company also has an accounts receivable-based credit facility which includes a revolving line-of-credit with the bank which provides for borrowings up to $1,500,000. Outstanding borrowings under this facility at December 31, 1998 amounted to $700,000. This facility bears interest at prime (7.75% at December 31, 1998). This facility is collateralized by certain trade receivables of BFC and has a maturity date of July 1, 1999. The credit agreement contains various covenants which prohibit or limit the subsidiary's ability to pay dividends, purchase treasury shares, incur indebtedness, repay debt to the Parent, sell properties or merge with another entity. Additionally, the Company is required to maintain certain financial ratios. Commitments: Office Lease--The Company leases office space under a noncancellable operating lease. Total rental expense was approximately $139,000, $58,000, and $58,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Beginning in 1998, the Company has a new lease agreement which provides for total minimum rental commitments of: 1999............................................................. $147,000 2000............................................................. 153,000 2001............................................................. 159,000 2002............................................................. 166,000 -------- $625,000 ========
Income Taxes: The components of the net deferred tax assets are as follows:
As of December 31, ------------------------ 1998 1997 ----------- ----------- Excess of tax basis over book basis of oil and gas properties............................... $ 1,873,000 $ 1,439,000 ----------- ----------- Deferred tax assets........................... 1,873,000 1,439,000 Less valuation allowance...................... (1,873,000) (1,389,000) ----------- ----------- Net deferred tax assets....................... $ -- $ 50,000 =========== ===========
The effective tax rate of the Company differed from the Federal statutory rate primarily due to changes in the valuation allowance on the deferred tax assets. F-15 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Concentrations of Credit Risk and Price Risk Management: Concentrations of Credit Risk--Substantially all of the Company's accounts receivable at December 31, 1998 result from crude oil and natural gas sales and/or joint interest billings to companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, since these entities may be similarly affected by changes in economic or other conditions. In determining whether or not to require collateral from a customer or joint interest owner, the Company analyzes the entity's net worth, cash flows, earnings, and credit ratings. Receivables are generally not collateralized. Historical credit losses incurred on trade receivables by the Company have been insignificant. The Company's revenues are predominantly derived from the sale of natural gas and management estimates that over 85% of the value of the Company's properties is derived from natural gas reserves. Energy Financial Instruments--BFC uses energy financial instruments and long-term user contracts to minimize its risk of price changes in the spot and fixed price natural gas and crude oil markets. Energy risk management products used include commodity futures and options contracts, fixed-price swaps, and basis swaps. Pursuant to company guidelines BFC is to engage in these activities only as a hedging mechanism against price volatility associated with pre-existing or anticipated gas or crude oil sales in order to protect profit margins. As of December 31, 1998, BFC has financial and physical contracts which hedge 6 bcf (billion cubic feet) of production through December 2001. The difference between the current market value of the hedging contracts and the original market value of the hedging contracts was a favorable $701,000 and an unfavorable $60,000 as of December 31, 1998 and 1997, respectively. These amounts are not reflected in the accompanying financial statements. In the event energy financial instruments do not qualify for hedge accounting, the difference between the current market value and the original contract value would be currently recognized in the statement of operations. In the event that the energy financial instruments are terminated prior to the delivery of the item being hedged, the gains and losses at the time of the termination are deferred until the period of physical delivery. Such deferrals were immaterial in all periods presented. Financial Instruments: SFAS Nos. 107 and 127 requires certain entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, management's best estimate is that the carrying amount of cash, receivables, notes payable, accounts payable, undistributed revenue, and accrued expenses approximates fair value of these instruments. See Note 6 for a discussion regarding the fair value of energy financial instruments. Management Retention Bonuses and Employment Contracts: The Company has accrued bonuses as of December 31, 1998 of $164,000 in accordance with a management retention program approved by the bankruptcy court. The Company has also entered into certain employment contracts with key employees that provide for certain benefits to the employees upon termination without cause. Tax Credit Sale: In December 1995, the Company entered into a transaction to sell its interest in certain wells that qualified for certain tax credits. Gain on the sale was recognized on the installment method generally as cash was received. The assets were separately recorded at net book value in the property section of the balance sheet. In 1997 and 1996, the Company recognized gains of $146,000 and $147,000, respectively, on the sale and reduced the assets F-16 held for sale to $-0-. The estimated proceeds from the sale of the tax credits were reflected as a production payment received. Subsequent Event: Subsequent to year-end, BPC engaged a financial advisor to pursue various strategic opportunities. BPC is considering all options including the continued operation of all its subsidiaries or the sale of the entire company or any part thereof. No adjustment to the financial statements has been made to reflect this uncertainty. F-17 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A wholly owned subsidiary of Bonneville Pacific Corporation) CONSOLIDATED BALANCE SHEET (Unaudited)
September 30 -------------------------- ASSETS 1999 1998 ------ ------------ ------------ Current Assets: Cash Unrestricted................................... $ 304,000 $ 604,000 Amounts due from broker........................ 1,761,000 448,000 ------------ ------------ Total cash................................... 2,065,000 1,052,000 Accounts receivable Gas marketing.................................. 634,000 1,752,000 Oil and gas sales.............................. 1,169,000 475,000 Joint interest, net of allowance for doubtful accounts...................................... 403,000 632,000 Other.......................................... 7,000 7,000 ------------ ------------ Total accounts receivable.................... 2,213,000 2,866,000 Prepaid expenses, inventories and other.......... 155,000 199,000 ------------ ------------ Total current assets......................... 4,433,000 4,117,000 ------------ ------------ Property and Equipment, at cost Oil and gas properties........................... 37,115,000 32,264,000 Furniture and equipment.......................... 499,000 473,000 Less depreciation, depletion and amortization.... (20,721,000) (18,448,000) ------------ ------------ Total property and equipment................. 16,893,000 14,289,000 ------------ ------------ Other Assets: Deposits and other............................... 270,000 270,000 Deferred loan cost, net.......................... 31,000 50,000 ------------ ------------ Total other assets........................... 301,000 320,000 ------------ ------------ Total Assets....................................... $ 21,627,000 $ 18,726,000 ============ ============
See accompanying notes to these financial statements. F-18 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A wholly owned subsidiary of Bonneville Pacific Corporation) CONSOLIDATED BALANCE SHEET (Unaudited)
September 30 ----------------------- LIABILITIES AND STOCKHOLDER EQUITY 1999 1998 ---------------------------------- ----------- ----------- Current Liabilities: Accounts payable and accrued expenses................... $ 1,838,000 $ 2,730,000 Accrued production taxes payable........................ 415,000 321,000 Undistributed revenue, taxes and other.................. 577,000 378,000 ----------- ----------- Total current liabilities........................... 2,830,000 3,429,000 ----------- ----------- Long Term Liabilities: Long term debt.......................................... 8,800,000 3,700,000 Accrued income taxes due parent......................... 0 1,888,000 ----------- ----------- Total long term liabilities......................... 8,800,000 5,588,000 ----------- ----------- Stockholder's Equity: Common stock............................................ Additional paid in capital.............................. 3,475,000 1,812,000 Retained earnings....................................... 6,522,000 7,897,000 ----------- ----------- Total stockholder's equity.......................... 9,997,000 9,709,000 ----------- ----------- Total Liabilities and Stockholder's Equity.......... $21,627,000 $18,726,000 =========== ===========
See accompanying notes to these financial statements. F-19 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A wholly owned subsidiary of Bonneville Pacific Corporation) CONSOLIDATED STATEMENT OF OPERATIONS For the nine months ended September 30 (Unaudited)
1999 1998 ----------- ---------- Operating Revenue Sales: Oil and gas.......................................... $ 6,730,000 $5,185,000 Marketing services................................... 11,059,000 7,157,000 Other................................................ 465,000 253,000 ----------- ---------- Total operating income............................. 18,254,000 12,595,000 ----------- ---------- Operating Expenses Lease operations..................................... 2,207,000 1,803,000 Severance taxes...................................... 494,000 413,000 Marketing service cost............................... 11,009,000 7,133,000 DD & A............................................... 1,789,000 1,606,000 Impairment of proved and unproved properties......... 60,000 0 General and administrative........................... 984,000 1,143,000 Provision for uncollectibles......................... 1,000 2,000 Exploration expense.................................. 681,000 276,000 ----------- ---------- Total operating expenses........................... 17,225,000 12,376,000 ----------- ---------- Net Income Before Interest and Other................... 1,029,000 219,000 Interest: Income............................................... 72,000 38,000 (Expense)............................................ (418,000) (143,000) ----------- ---------- Net Income Before Income Taxes......................... 683,000 114,000 Provision for income taxes............................. 0 0 ----------- ---------- Net Income............................................. $ 683,000 $ 114,000 =========== ==========
See accompanying notes to these financial statements. F-20 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A wholly-owned subsidiary of Bonneville Pacific Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30
1999 1998 ----------- ----------- Cash Flows from Operating Activities: Net Income......................................... $ 683,000 $ 114,000 Adjustment to reconcile net income to cash provided by operating activities: Depreciation, depletion and amortization......... 1,775,000 1,592,000 Gain on debt extinguishment...................... Amortization of loan cost........................ 14,000 14,000 Other............................................ Changes in operating assets and liabilities: (Increase) decrease in: Amount due from broker........................... (1,226,000) (385,000) Accounts receivable.............................. 2,759,000 (45,000) Prepaid expenses, inventories and other.......... 42,000 39,000 Increase (decrease) in: Accounts payable and undistributed revenue....... (4,781,000) 1,258,000 ----------- ----------- Net cash provided by operations.................. (734,000) 2,587,000 Cash Flows from Investing Activities: Additions to oil and gas properties................ (4,691,000) (3,688,000) Other net property and equipment (additions) disposals......................................... (1,000) (180,000) (Increases) decreases in other assets.............. 38,000 40,000 ----------- ----------- Net cash used in investing activities.............. (4,654,000) (3,828,000) Cash Flows from Financing Activities: Net bank borrowings (payments)..................... 2,950,000 1,300,000 ----------- ----------- Net cash used in financing activities.............. 2,950,000 1,300,000 ----------- ----------- Net Increase (decrease) in Unrestricted Cash......... (2,438,000) 59,000 Unrestricted Cash Balance at Beginning of Period..... 2,742,000 545,000 ----------- ----------- Cash Balance at End of Period........................ $ 304,000 $ 604,000 =========== ===========
See accompanying notes to these consolidated financial statements. F-21 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A wholly owned subsidiary of Bonneville Pacific Corporation) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND RETAINED EARNINGS For the nine months ended September 30, 1999, and the year ended December 31, 1998 (Unaudited)
Common Stock Additional ------------- Paid In Retained Shares Amount Capital Earnings Total ------ ------ ---------- ----------- ----------- Balance December 31, 1997... 1,000 $ -- $1,812,000 $ 7,779,000 $ 9,591,000 Intercompany payables converted to Equity by Parent..................... 1,663,000 1,663,000 Net income (loss)........... (1,940,000) (1,940,000) ----- ----- ---------- ----------- ----------- Balance December 31, 1998... 1,000 -- 3,475,000 5,839,000 9,314,000 Net income.................. 683,000 683,000 ----- ----- ---------- ----------- ----------- Balance September 30, 1999.. 1,000 $ -- $3,475,000 $ 6,522,000 $ 9,997,000 ===== ===== ========== =========== ===========
See accompanying notes to these consolidated financial statements. F-22 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations and Significant Accounting Policies: Nature of Operation--Bonneville Fuels Corporation (BFC), a wholly-owned subsidiary of Bonneville Pacific Corporation (BPC), was incorporated in the State of Colorado in April 1987 and began doing business in June 1987. BFC owns four subsidiaries, Bonneville Fuels Marketing Corporation (BFMC), Bonneville Fuels Management Corporation (BFM Corp.), Bonneville Fuels Operating Corporation (BFO), and Colorado Gathering Corporation (CGC). Collectively, these entities are referred to as the Company. The Company's principal operations include exploration for and production of oil and gas reserves, marketing of natural gas, and gathering of natural gas. From time to time the Company also purchases and resells electricity. These financial statements are prepared in accordance with generally accepted accounting principles and require the use of management's estimates. These statements contain all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present fairly the financial positions of BFC as of September 30, 1999 and 1998 and the results of its operations and of its cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Principles of Consolidation--The consolidated financial statements include the accounts of BFC and its four wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements. Cash Equivalents--The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Gas Marketing--The Company's marketing contracts are generally month-to- month or up to eighteen months, and provide that the Company will sell gas to end users which is produced from the Company's properties and acquired from third parties. Amounts Due from Broker--This account generally represents net cash margin deposits held by a brokerage firm for the Company's trading accounts. Oil and Gas Producing Activities--The Company follows the "successful efforts" method of accounting for its oil and gas properties, all of which are located in the continental United States. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well has not found proved reserves, the costs of drilling the well are charged to expense. The costs of development wells are capitalized whether productive or nonproductive. Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Depreciation and depletion of capitalized costs for producing oil and gas properties is computed using the units-of-production method based upon proved reserves for each field. In 1997, the Company began to accrue for future plugging, abandonment, and remediation using the negative salvage value method whereby costs are expensed through additional depletion expense over the remaining economic lives of the wells. Management's estimate of the total future costs to plug, abandon, and remediate the Company's share of all existing wells, including those currently shut in, is approximately $3,500,000, net of salvage values. The total amount expensed for this liability was $150,000 and $-0-, for the periods ended September 30, 1999 and 1998, respectively. F-23 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company follows Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for Impairment of Long-Lived Assets. This statement limits net capitalized costs of proved and unproved oil and gas properties to the aggregate undiscounted future net revenues related to each field. If the net capitalized costs exceed the limitation, impairment is provided to reduce the carrying value of the properties in the field to estimated actual value. The impairment is included as a reduction of gross oil and gas properties in the accompanying balance sheets. In the first nine months of 1999, the Company incurred impairment cost of $60,000. In 1998, the Company recorded impairment cost of $1,858,000. Factors causing the impairment of oil and gas properties were the decline in oil prices worldwide and the re-assessment of reserve values on certain producing properties in 1998, and re-assessment of reserve values on a drilling venture in 1999. Gains and losses are generally recognized upon the sale of interests in proved oil and gas properties based on the portion of the property sold. For sales of partial interests in unproved properties, the Company treats the proceeds as a recovery of costs with no gain recognized until all costs have been recovered. Revenue Recognition--The Company recognized revenue upon delivery of the Company's products to its customers. Energy Marketing Arrangements--In 1998, BFC entered into an agreement to manage certain natural gas contracts of an unrelated entity. For contracts under which BFC takes title to the gas which services these contracts, BFC consolidates by item, all revenue, expense, receivables and payables associated with the contracts. In contracts where title is not taken, BFC records only the margin associated with the transaction. This agreement was terminated at the end of April 1999. Other Property and Equipment--Depreciation of other property and equipment is calculated using the straight-line method over the estimated useful lives (ranging from 3 to 25 years) of the respective assets. The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization is removed from the accounts, and any gains or losses are reflected in current operations. Deferred Loan Costs--Costs associated with the Company's note payable have been deferred and are being amortized using the effective interest method over the original term of the note. Gas Balancing--The Company uses the sales method of accounting for amounts received from natural gas sales resulting from production credited to the Company in excess of its revenue interest share. Under this method, all proceeds from production credited to the Company are recorded as revenue until such time as the Company has produced its share of related estimated remaining reserves. Thereafter, additional amounts received are recorded as a liability. Income Taxes--The Company accounts for income taxes under the liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. BPC includes the Company's operations in its consolidated tax return. Income taxes are allocated by BPC as if the Company were a separate taxpayer. Accounting for Hedged Transactions--The Company periodically enters into futures, forwards, and swap contracts as hedges of commodity prices associated with the production of oil and gas and with the purchase and sale of natural gas in order to mitigate the risk of market price fluctuations. Changes in the market value of futures, forwards, and swap contracts are not recognized until the related production occurs or until the related F-24 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) gas purchase or sale takes place. Realized losses from any positions which were closed early are deferred and recorded as an asset or liability in the accompanying balance sheet, until the related production, purchase or sale takes place. Gains and losses incurred on these contracts are included in oil and gas revenue or in gas marketing costs in the accompanying statements of operations. Contingent Liabilities--The Company accrued a liability in the amount of $250,000 for well connect fees in the nine months ended September 30, 1999. The estimated liability arose as a result of a 1997 well connect agreement as it was determined in the current year that a liability under this agreement was reasonably possible. Reclassifications--Certain reclassifications have been made to conform the 1999 financial statements to the presentation in 1998. These reclassifications had no effect on net income. 2. Parent Company Bankruptcy and Related Transactions: In 1991, BPC filed a petition for re-organization under Chapter 11 of the U.S. Bankruptcy Code and in June 1992, a Trustee was appointed for the case. As a result of BPC's bankruptcy, the Company established, prior to 1994, an allowance for doubtful accounts from BPC equal to the receivable. In 1995, claims filed against the estate of BPC were amended to total $1,788,000 to reflect additional amounts due related to pre-petition transactions. As a condition of granting a loan in 1991, the lender required that BPC convert intercompany debt of $3,600,000 to equity. In Board meetings at both the Company and BPC, the officers of each company were authorized and directed to complete this financing. In their respective internal financial statements, both the Company and BPC treated the intercompany debt as converted to equity. In 1993, it was discovered that the BPC Board resolution to ratify the conversion had not been duly executed. The Company, therefore, continued to disclose the intercompany debt as a liability. On December 20, 1996, the Bankruptcy Court authorized the Trustee to offset the mutual debts of the Company and BPC. After the offset, the Company was to convert any remaining intercompany debt to equity. The Company had established, prior to 1994, an allowance for doubtful accounts from BPC equal to the receivable. The amount of the offset equal to the allowance was recorded as an extraordinary gain on extinguishment of debt, with the remainder being recorded as a contribution of capital. In 1998, BPC approved the conversion of $1,663,000 in taxes payable to equity. Also in 1998, BPC emerged from bankruptcy. 3. Long-Term Debt: The Company has an asset-based line-of-credit with a bank which provides for borrowing up to the borrowing base (as defined). The borrowing base is $16,556,667 on September 30, 1999. Outstanding borrowings amounted to $8,800,000, with interest at a variable rate that approximated 7.15% at September 30, 1999. The Company has issued letters of credit totaling $2,300,000 which reduce the amount available for borrowing under the base. This facility is collateralized by certain oil and gas properties of the Company and is scheduled to convert to a term note on July 1, 2001. This term loan is scheduled to have a maturity of either the economic half life of the Company's remaining reserves on the date of conversion, or July 1, 2006, whichever is earlier. The borrowing base is based upon the lender's evaluation of BFC's proved oil and gas reserves, generally determined semi-annually. The future minimum principal payments under the term note will be dependent upon the bank's evaluation of the Company's reserves at that time. F-25 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company also has an accounts receivable-based credit facility which includes a revolving line-of-credit with the bank which provides for borrowings up to $1,500,000. Outstanding borrowings under this facility at September 30, 1999 amounted to $0. This facility bears interest at prime (8.25% at September 30, 1999). This facility is collateralized by certain trade receivables of BFC and has a maturity date of July 1, 2001. The credit agreement contains various covenants which prohibit or limit the Company's ability to pay dividends, purchase treasury shares, incur indebtedness, repay debt to the Parent, sell properties or merge with another entity. Additionally, the Company is required to maintain certain financial ratios. 4. Commitments: Office Lease--The Company leases office space under a noncancellable operating lease. Total rental expense was approximately $110,000 and $100,000 for the periods ended September 30, 1999 and 1998, respectively. Beginning in 1998, the Company has a new lease agreement which provides for total minimum rental commitments of: 1999 (balance of year).......................................... $ 37,000 2000............................................................ 153,000 2001............................................................ 159,000 2002............................................................ 166,000 -------- $515,000 ========
5. Income Taxes: The components of the net deferred tax asset are as follows:
December 31, 1998 ----------- Excess of tax basis over book basis of oil and gas properties................................................ $ 1,873,000 ----------- Deferred tax asset......................................... 1,873,000 Less valuation allowance................................... (1,873,000) ----------- Net deferred tax asset..................................... $ -0- ===========
The Company has not accrued an income tax liability for the nine months ending September 30, 1999 due to the availability of intangible drilling costs which will essentially eliminate taxable net income. The effective tax rate of the Company differed from the Federal statutory rate primarily due to changes in the valuation allowance on the deferred tax asset. 6. Concentrations of Credit Risk and Price Risk Management: Concentrations of Credit Risk--Substantially all of the Company's accounts receivable at September 30, 1999 result from crude oil and natural gas sales and/or joint interest billings to companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, since these entities may be similarly affected by changes in economic or other conditions. In determining whether or not to require collateral from a customer or joint interest owner, the Company analyzes the entity's net worth, cash flows, earnings, and credit ratings. Receivables are generally not collateralized. Historical credit losses incurred on trade receivables by the Company have been insignificant. F-26 BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Bonneville Pacific Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's revenues are predominantly derived from the sale of natural gas. Management estimates that over 85% of the value of the Company's properties is derived from natural gas reserves. Energy Financial Instruments--BFC uses energy financial instruments and long-term user contracts to minimize its risk of price changes in the spot and fixed price natural gas and crude oil markets. Energy risk management products used include commodity futures and option contracts, fixed-price swaps, and basis swaps. Pursuant to company guidelines, BFC is to engage in these activities only as a hedging mechanism against price volatility associated with pre-existing or anticipated gas or crude oil sales in order to protect profit margins. As of September 30, 1999 and 1998, BFC has financial and physical contracts which hedge 4.4 bcf (billion cubic feet) and 5.5 bcf of production, respectively, through December 2001. The difference between the current market value of the hedging contracts and the original market value of the hedging contracts was an unfavorable $1,755,000 and a favorable $48,000 as of September 30, 1999 and 1998, respectively. These amounts are not reflected in the accompanying financial statements. In the event energy financial instruments do not qualify for hedge accounting, the difference between the current market value and the original contract value would be currently recognized in the statement of operations. In the event that the energy financial instruments are terminated prior to the delivery of the item being hedged, the gains and losses at the time of the termination are deferred until the period of physical delivery. Such deferrals were immaterial in all periods presented. 7. Financial Instruments: SFAS Nos. 107 and 127 requires certain entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, management's best estimate is that the carrying amount of cash, receivables, notes payable, accounts payable, undistributed revenue, and accrued expenses approximates fair value of these instruments. See Note 6 for a discussion regarding the fair value of energy financial instruments. 8. Subsequent Event: On October 29, 1999, Carbon Energy Corporation acquired BFC in its entirety. The purchase price for all of the stock of BFC was $23,581,000 plus debt, net of working capital, of approximately $6,500,000 that remains at BFC. F-27 [THIS PAGE INTENTIONALLY LEFT BLANK] F-28 AUDITORS' REPORT To the Stockholders of CEC Resources Ltd. We have audited the balance sheets of CEC Resources Ltd. as at November 30, 1998 and 1997, and the statements of income, stockholders' equity and cash flows for each of the three years in the period ended November 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of CEC Resources Ltd. as at November 30, 1998 and 1997 and the results of its operations and the statements of cash flows for each of the three years in the period ended November 30, 1998, in accordance with accounting principles generally accepted in Canada. PricewaterhouseCoopers LLP Chartered Accountants Calgary, Canada February 16, 1999 F-29 CEC RESOURCES LTD. BALANCE SHEETS
November 30, ----------------------- 1998 1997 ------- -------------- ASSETS (Reclassified, ------ Note 3) (in Canadian dollars) (in thousands) Current assets: Cash and cash equivalents............................ $ 1,666 $ 1,073 Accounts receivable: Oil and gas sales.................................. 466 404 Crown royalty refund and other..................... 333 266 Joint interest partners............................ 8 3 Income tax receivable (Note 6)....................... -- 53 ------- ------- Total current assets............................. 2,473 1,799 ------- ------- Property and equipment: Oil and gas assets, full cost method (Note 5)........ 16,192 16,047 Liquid extraction plant.............................. 1,477 1,473 Other property and equipment......................... 108 49 ------- ------- 17,777 17,569 Less: Accumulated depreciation, depletion and amortization (Notes 2 and 5)........................ (9,015) (7,990) ------- ------- Net property and equipment....................... 8,762 9,579 ------- ------- $11,235 $11,378 ======= =======
(continued) F-30 CEC RESOURCES LTD. BALANCE SHEETS--(continued)
November 30, ---------------------- 1998 1997 ------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY (Reclassified, ------------------------------------ Note 3) (in Canadian dollars) (in thousands) Current liabilities: Accounts payable...................................... $ 220 $ 483 Due to former Parent (Note 7)......................... 17 35 Income tax payable (Note 6)........................... 3 -- Undistributed oil and gas production receipts......... 113 132 ------- ------- Total current liabilities........................... 353 650 ------- ------- Future site restoration costs........................... 165 103 Deferred income taxes (Note 6).......................... 1,995 1,934 Commitments and contingent liabilities (Note 10) Stockholders' equity (Note 3): Preferred stock, authorized unlimited number of shares, no par value; none issued Share capital, common stock, authorized unlimited number of shares, without nominal or par value; 1,544,400 shares issued in 1998 and 1,589,000 in 1997 (Note 8)............................................. 1,534 1,106 Retained earnings..................................... 7,188 7,683 ------- ------- 8,722 8,789 ------- ------- Less: 15,000 shares held for cancellation............. -- (98) ------- ------- Total stockholders' equity.......................... 8,722 8,691 ------- ------- $11,235 $11,378 ======= =======
The accompanying notes are an integral part of these financial statements. F-31 CEC RESOURCES LTD. STATEMENTS OF INCOME
Year ended November 30, ---------------------- 1998 1997 1996 ------ ------ ------ (in Canadian dollars) (in thousands, except per share data) Revenues: Oil and gas sales..................................... $3,235 $3,451 $3,093 Royalties............................................. (586) (722) (462) Alberta royalty tax credit............................ 309 335 239 Field services........................................ 246 217 324 Other................................................. 49 28 18 ------ ------ ------ Total revenues...................................... 3,253 3,309 3,212 ------ ------ ------ Costs and expenses: Lease operating expenses.............................. 710 582 620 Field services........................................ 148 185 244 General and administrative............................ 984 751 747 Depreciation, depletion and amortization.............. 1,087 882 746 ------ ------ ------ Total costs and expenses............................ 2,929 2,400 2,357 ------ ------ ------ Operating income...................................... 324 909 855 ------ ------ ------ Other expense........................................... 4 1 5 ------ ------ ------ Earnings before income taxes.......................... 320 908 850 Provision for income taxes (Note 6)..................... 80 303 324 ------ ------ ------ Net earnings.......................................... $ 240 $ 605 $ 526 ====== ====== ====== Earnings per share: Basic................................................. $ .16 $ .38 $ .35 ====== ====== ====== Fully diluted......................................... $ .16 $ .38 $ .35 ====== ====== ====== Average number of common shares outstanding: Basic................................................. 1,545 1,580 1,505 ====== ====== ====== Fully diluted......................................... 1,549 1,584 1,511 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-32 CEC RESOURCES LTD. STATEMENTS OF STOCKHOLDERS' EQUITY For The Three Years Ended November 30, 1998 (in Canadian dollars) (in thousands, except shares)
Shares Held for Share Capital Cancellation ----------------- Retained --------------- Shares Amount Earnings Shares Amount --------- ------ -------- ------- ------ (Reclassified, Note 3) Balances, December 1, 1995......... 1,500,000 $ 502 $6,552 -- $-- Exercise of employee stock options (Note 8).......................... 10,000 32 -- -- -- --------- ------ ------ ------- Issuance of common stock (Note 8).. 79,000 572 -- -- -- Net earnings....................... -- -- 526 -- -- --------- ------ ------ ------- ---- Balances, November 30, 1996........ 1,589,000 1,106 7,078 -- -- Purchase of shares................. -- -- -- 15,000 (98) Net earnings....................... -- -- 605 -- -- --------- ------ ------ ------- ---- Balances, November 30, 1997........ 1,589,000 1,106 7,683 15,000 (98) Cancellation of 15,000 shares...... (15,000) (11) (87) (15,000) 98 Purchase and cancellation of shares............................ (99,600) (74) (648) -- -- Shares issued (Note 8)............. 70,000 513 -- -- -- Net earnings....................... -- -- 240 -- -- --------- ------ ------ ------- ---- Balances, November 30, 1998........ 1,544,400 $1,534 $7,188 -- $-- ========= ====== ====== ======= ====
The accompanying notes are an integral part of these financial statements. F-33 CEC RESOURCES LTD. STATEMENTS OF CASH FLOWS (Note 4)
Year Ended November 30, ------------------------ 1998 1997 1996 ------ ------- ------- (in Canadian dollars) (in thousands) Net earnings........................................ $ 240 $ 605 $ 526 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, depletion and amortization.......... 1,087 882 746 Future income taxes............................... 61 299 299 Other............................................. -- -- 9 Changes in operating assets and liabilities: Accounts receivable and other..................... (134) (221) (17) Due to (receivable from) former Parent............ (18) (6) 10 Accounts payable.................................. 93 12 159 Income taxes payable (receivable)................. 56 39 (78) Other current liabilities......................... (19) 114 2 ------ ------- ------- Net cash provided by operating activities......... 1,366 1,724 1,656 ------ ------- ------- Cash flows from investing activities: Proceeds from sale of oil and gas properties...... 53 -- 20 Additions to oil and gas properties............... (566) (1,190) (2,324) Additions to liquid extraction plant and other.... (51) (75) (29) ------ ------- ------- Net cash used in investing activities............. (564) (1,265) (2,333) ------ ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock............ 513 -- 572 Proceeds from exercise of stock options........... -- -- 32 Purchase of common stock.......................... (722) (98) -- ------ ------- ------- Net cash provided by (used in) financing activities....................................... (209) (98) 604 ------ ------- ------- Net increase (decrease) in cash and cash equivalents........................................ 593 361 (73) Cash and cash equivalents at beginning of year...... 1,073 712 785 ------ ------- ------- Cash and cash equivalents at end of year............ $1,666 $ 1,073 $ 712 ====== ======= ======= Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes, net of refunds.................... $ (36) $ 3 $ 103 ====== ======= =======
The accompanying notes are an integral part of these financial statements. F-34 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS (1) Formation and Operations of the Company CEC Resources Ltd. ("Resources" or "the Company") was incorporated as an Alberta, Canada corporation on May 31, 1955 and, since its acquisition in 1969 as a wholly-owned Canadian subsidiary by its former parent, Consolidated Oil & Gas, Inc., has been engaged in exploration, development and production of oil and gas reserves in Canada and oil and gas field services. Resources was a wholly-owned subsidiary of Columbus Energy Corp. ("Parent" or "Columbus") from 1984 until February 24, 1995 when 100% of the Resources shares were sold by its Parent to its shareholders or the public in a rights offering. (2) Accounting Policies The financial statements of the Company are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and require the use of management's estimates. The following is a summary of the significant accounting policies followed by the Company. Currency The amounts in these financial statements and notes thereto are in Canadian dollars, unless otherwise stated. The functional currency of the Company is Canadian dollars. Cash Equivalents For purposes of the statements of cash flows, the Company considers all short-term investments that are low risk, highly liquid and readily convertible to known amounts of cash, to be cash equivalents. Results of hedging activities, when employed, are included in cash flow from operations in the statements of cash flows. Oil and Gas Properties CEC records natural gas revenues on the entitlement method based on its percentage ownership of current production. Each working interest owner in a well generally has the right to a specific percentage of production, although actual production sold may differ from an owner's ownership percentage. Under entitlement accounting, a receivable is recorded when underproduction occurs and a payable when overproduction occurs. At November 30, 1998, Resources was neither underproduced or overproduced relative to its percentage ownership in its properties. The Company follows the full cost method of accounting whereby all costs associated with the acquisition of, exploration for and the development of oil and gas reserves are capitalized. Such costs include land acquisition costs, geological and geophysical expenditures, drilling productive and non- productive wells and tangible production equipment. General and administrative expenses are capitalized to the extent such costs are directly associated with acquisition, exploration and development of oil and gas properties. Proceeds from the sale of petroleum and natural gas properties reduce capitalized costs without recognition of a gain or loss unless such a sale would significantly alter the rate of depletion and depreciation. Capitalized costs, including tangible production equipment, are depleted using the unit of production method based on proved reserves of oil and gas, before royalties, as estimated by independent engineers. For purposes of the calculation, oil and gas reserves are converted to a common unit of measure on the basis of six thousand cubic feet of gas to one barrel of oil. Depreciation of the liquid extraction plant and other assets are calculated using the straight line method over their estimated useful lives. In applying the full cost method, the Company performs a ceiling test which restricts the net capitalized costs from exceeding an amount equal to the estimated undiscounted value of future net revenues from proven oil and gas reserves, based on current prices and costs, after deducting estimated future operating costs, development costs, general and administrative expense and income tax expense. F-35 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Estimated future site abandonment and restoration costs are provided using the unit of production method over the life of proven reserves with the current year provision included in depreciation, depletion and amortization expense. Site abandonment and restoration expenditures incurred are recorded as a reduction of the accumulated accrual. Income Taxes The liability method is used in measuring income taxes based on temporary differences including both timing differences and other differences between the tax basis of an asset or liability and its carrying amount in the financial statements. This method uses the tax rate and tax law expected to apply to taxable income in the periods in which the future income tax asset or liability is expected to be realized. The Company is subject to tax under applicable Canadian tax law. Field Services The Company recognizes revenue for field services provided to third parties from its one-third ownership in the Carbon area liquids extraction plant as well as from facilities in other fields at the time the services are rendered. The Company's share of the cost of providing such third party services is expensed and shown as "field services" cost. Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the year. Fully diluted earnings per share is calculated assuming the exercise of outstanding options. (3) Reclassification Effective for the 1998 fiscal year, Resources has classified its stockholders' equity to conform to Canadian laws in Alberta to combine stated capital and additional paid-in capital as share capital as well as to net the purchase of shares against those accounts when they are cancelled. Accordingly, year end stockholder equity balances for 1995 through 1997 have been reclassified as follows:
November 30, -------------------------- Additional Share Common Paid-in Capital Stock Capital ------- ------ ---------- 1995As previously reported..................... $ -- $ 300 $ 202 Reclassification............................ 502 (300) (202) ------ ----- ----- As reclassified............................. $ 502 $ -- $ -- ====== ===== ===== 1996As previously reported..................... $ -- $ 318 $ 788 Reclassification............................ 1,106 (318) (788) ------ ----- ----- As reclassified............................. $1,106 $ -- $ -- ====== ===== ===== 1997As previously reported..................... $ -- $ 318 $ 788 Reclassification............................ 1,106 (318) (788) ------ ----- ----- As reclassified............................. $1,106 $ -- $ -- ====== ===== =====
F-36 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (4) Statements of Cash Flows The Company elected to adopt Canadian Institute of Chartered Accountants (CICA) 1540, Cash Flow Statements for fiscal 1998. This statement requires a business enterprise to provide a statement of cash flows in place of a statement of changes in financial position. Application of this statement is required for fiscal years beginning on or after August 1, 1998, and earlier application is encouraged. Cash flow information for earlier years that is presented with corresponding information for the initial year of application is restated to conform to the requirements of CICA 1540 as follows:
Year Ended November 30, Net Cash Provided by Net Cash Provided by 1997 Operating Activities (Used In) Investing Activities ----------------------- -------------------- ------------------------------ As previously reported.. $2,108 $(1,649) Restatement............. (384) 384 ------ ------- As Restated............. $1,724 $(1,265) ====== =======
There are no restatements for the year ended November 30, 1996. The adjustments for 1997 were due to capital expense accruals that are excluded in calculating cash flows from investing activities. (5) Oil and Gas Producing Activities The following tables set forth the capitalized costs related to oil and gas producing activities, costs incurred in oil and gas property acquisition, exploration and development activities, and results of operations for producing activities: CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (in thousands)
November 30, ---------------- 1998 1997 ------- ------- Costs being amortized (a) (b).......................... $15,527 $15,383 Less accumulated depreciation, depletion, amortization and valuation allowance............................... (8,003) (7,117) ------- ------- Total net properties................................. $ 7,524 $ 8,266 ======= =======
- -------- (a) Excludes well facilities cost of $664,000 in 1998 and 1997 that are amortized on a straight-line basis. (b) In 1998 and 1997 no costs are excluded from amortization. COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES (in thousands)
Year Ended November 30, ------------------ 1998 1997 1996 ---- ------ ------ Property acquisition costs: Proved.............................................. $ 10 $ -- $ -- Unproved............................................ -- 54 65 Exploration costs..................................... 54 230 181 Development costs..................................... 134 1,159 1,889 ---- ------ ------ Total costs incurred.............................. $198 $1,443 $2,135 ==== ====== ======
During the three years ended November 30, 1998, no general and administrative expenses have been capitalized. F-37 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES (in thousands)
Year Ended November 30, -------------------- 1998 1997 1996 ------ ------ ------ Sales............................................... $3,235 $3,451 $3,093 Royalties, net of credits........................... 277 387 223 Production (lifting) costs (a)...................... 710 582 620 Depletion and amortization (b)...................... 949 746 614 ------ ------ ------ 1,299 1,736 1,636 Imputed income tax.................................. 325 579 624 ------ ------ ------ Results of operations from producing activities (excluding overhead and interest costs)............ $ 974 $1,157 $1,012 ====== ====== ======
- -------- (a) Production costs only include lease operating expenses. (b) Depletion and amortization expense per equivalent barrel of production: 1998--$4.02, 1997--$3.01, 1996 --$2.15 MAJOR CUSTOMERS
Year Ended November 30, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Customer 1 Amount sold......................... $2,315,000 $2,190,000 $1,997,000 Percent of revenue.................. 72% 64% 65% Customer 2 Amount sold......................... $ 425,000 $ 651,000 $ 636,000 Percent of revenue.................. 13% 16% 21%
The Company sells its own natural gas production in the Carbon and East Carbon areas directly to gas marketing companies. The operator of the gas processing plant pays Resources for liquids sold at the plant tailgate and those amounts are included in Customer 2. During the fourth quarter of 1998, the Company made a change in accounting estimate in proved reserves due to a significant decrease in proved developed non-producing and proved undeveloped reserves. The majority of this decrease is attributable to the unsuccessful completion of a well in the East Carbon area and additional offset well information. The effect of this change on current year operations was an increase in depletion expense of $190,000. F-38 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (6) Income Taxes The provision for income taxes consists of the following (in thousands):
Year Ended November 30, -------------- 1998 1997 1996 ---- ---- ---- Current: Federal................................................. $19 $-- $ 23 Alberta................................................. -- 4 2 --- ---- ---- 19 4 25 --- ---- ---- Future: Federal................................................. 58 209 215 Alberta................................................. 3 90 84 --- ---- ---- 61 299 299 --- ---- ---- Total income tax expense.............................. $80 $303 $324 === ==== ====
The total tax provision has resulted in effective tax rates which differ from the statutory Federal income tax rates. The reasons for these differences are illustrated by the following table:
Year Ended November 30, ---------------- 1998 1997 1996 ---- ---- ---- Percent of Pretax Earnings Federal Canadian and provincial statutory rates......... 45% 45% 45% Resource allowance...................................... (46) (19) (13) Crown royalties, net of credits......................... 26 14 6 Statutory rate change................................... -- -- 1 Adjustments of prior year amounts and other............. -- (7) (1) --- --- --- Effective rate.......................................... 25% 33% 38% === === ===
The tax effect of significant temporary differences representing Canadian deferred tax assets and liabilities and charges were as follows (in thousands):
Dec. 1, Current Nov. 30, 1997 Activity 1998 ------- -------- -------- Deferred income tax liabilities: Temporary differences, principally oil and gas properties.............................. $1,934 $61 $1,995 ====== === ======
For Canadian income tax purposes, Resources has the following tax attributes available at November 30, 1998 to reduce future taxable income which have been included in calculating the temporary differences above: Accumulated property exploration and development costs of $1,696,000, earned depletion base of $1,167,000 and undepreciated capital cost of $1,152,000. The tax attributes of carryforward pools are included to determine the temporary differences shown as deferred tax liabilities. These attributes generally do not expire. F-39 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) The earnings before income taxes for financial statements differed from taxable income as follows (in thousands):
Year Ended November 30, ------------------------ 1998 1997 1996 ------ ------- ------- Earnings before income taxes per financial statements................................... $ 320 $ 908 $ 850 Differences between income before taxes for financial statement purposes and taxable income: Book depletion, depreciation and amortization............................... 1,087 882 746 Non-deductible crown royalties, net......... 190 286 126 Capital cost allowance...................... (354) (409) (429) Resource allowance.......................... (329) (379) (241) Tax pools utilized.......................... (818) (1,283) (1,082) Earned depletion allowance.................. (22) -- -- Other....................................... (7) (5) 30 ------ ------- ------- Canadian taxable income....................... $ 67 $ -- $ -- ====== ======= =======
(7) Related Party Transactions The Company incurs certain direct and indirect general and administrative costs for management services provided by its former Parent in lieu of expanding the number of its own full-time employees. These costs are primarily for labor, related benefits and other overhead costs. The following table sets forth these costs, in thousands, for each period: Year Ended November 30, 1998........................................ $334 Year Ended November 30, 1997........................................ 394 Year Ended November 30, 1996........................................ 445
(8) Capital Stock During November 1996, the Company issued 79,000 shares of common stock at U.S. $5.25 per share by private placement using an investment letter under a Regulation D exemption of which 38,000 shares were purchased by Resources' then President and Chairman of the Board. During June 1998, McDonald Energy, LLC ("McDonald"), a Colorado limited liability company solely owned by Patrick R. McDonald, currently a director, President and Chief Executive Officer of Resources acquired 70,000 shares of common stock by direct purchase from Resources for U.S. $5.50 per share. On October 27, 1994 the Company's Board of Directors authorized an unlimited number of shares of preferred stock, no par value, none of which is currently issued. On October 27, 1994 the Company adopted an Employee Incentive Share Option Plan (the "Plan"). The Plan is administered by a committee appointed by the Board of Directors of the Company. The Plan authorizes the committee to grant options for up to 300,000 shares of the Company's common stock. The shares are to be issued out of the Company's authorized and unissued shares and will be issued as fully paid and non-assessable. Also, the number of Resources shares so reserved for issuance or subject to an option under the Plan to any one person may not exceed 5% of the number of Resources shares which are outstanding at the time of the granting of the option. F-40 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Options may be granted to officers, directors and regular full and part- time employees of the Company and majority-owned subsidiaries. Options may be exercised starting one year after grant. The option term cannot be less than one year or more than five years from the date the option is granted. The option price may not be less than 100% of the fair market value of the last trading price on the date the option is granted. During 1996, the Board of Directors granted stock options for 30,000 shares at the exercise price of U.S. $5.50 per share and an option for 10,000 shares was exercised at the price of U.S. $3.25 per share. At November 30, 1996, there were 80,000 shares under option at prices ranging from U.S. $3.25 to U.S. $6.00 per share, of which 50,000 shares were exercisable. No options were granted in fiscal year 1997. At November 30, 1997, there were 80,000 shares under option at prices ranging from U.S. $3.25 to U.S. $6.00 per share, all of which were exercisable. During 1998, the Board of Directors granted stock options for 152,000 shares at exercise prices ranging from U.S. $4.625 to U.S. $5.50 per share and a stock option grant of 10,000 shares at U.S. $6.00 per share expired. At November 30, 1998 there were 222,000 shares under option at prices ranging from U.S. $3.25 to U.S. $6.00 per share, of which 70,000 shares are exercisable. On June 30, 1998, Resources entered into a Stock Purchase Agreement (the "Agreement") with McDonald. In connection with the Agreement, McDonald was granted a one-year option to purchase 250,000 shares of common stock at U.S. $6.00 per share, all of which are exercisable and were granted in addition to options granted to Mr. McDonald as a director and officer. (9) Financial Instruments The nature of the Company's operations exposes the Company to fluctuations in commodity prices. The Company attempts to manage these risks by minimizing its commodity price exposure through the use of derivative contracts. Gain and losses on these contracts are deferred and recognized in income as an adjustment to oil and gas sales revenues during the period in which the physical product to which the contracts relate is actually sold. During the fourth quarter of 1998, the Company entered into three AECO C/N.I.T. based forward price hedge transactions. The terms of these transactions are as follows:
Daily Quantity Contract Quantity Period GigaJoules GigaJoule Price/GigaJoule ------ -------------- ----------------- --------------- Nov 98-Mar 99........... 1,055 159,000 $2.82 Apr 99-Oct 99........... 1,055 226,000 $2.39 Dec 98-Oct 01........... 1,055 1,125,000 $2.57
The unrecognized gain on these contracts totaled $148,000 based on November 30, 1998 market values. (10) Commitments and Contingent Liabilities The Company leases office space in Calgary, Alberta and Denver, Colorado. These leases are month-to-month with no related future minimum lease payments. Total rent expense for 1998, 1997 and 1996 was $64,000, $34,000 and $33,000, respectively. The Company adopted a separation pay policy effective February 24, 1995 which covers all regular terminations and, in addition, certain "special" terminations of officers in the case of certain contractions and restrictions of the Company, or in the event of a change of control of the Company. At the discretion of the F-41 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Board of Directors, officers and non-officer employees may receive upon their retirement the same benefits they would have received upon a friendly change of control of the Company. As of November 30, 1998 no benefits are payable. Resources sells its natural gas production in the Carbon and East Carbon areas directly to certain gas marketing companies. At November 30, 1998 the Company had entered into three forward price hedge transactions, as described in Note 9. The majority of the Company's remaining gas is contracted to a gas marketing company on a deliverability basis and sold at published index prices less applicable transportation and marketing charges. The Company has assigned its firm transportation agreements through October 1999 but has reserved the right to obtain firm transportation service in its own name. The Company estimates that future costs of site abandonment and restoration of well sites, gas processing plant and other facilities will be $310,000 as of November 30, 1998 in addition to $165,000 already accrued as a liability. The estimated costs are being recognized on the unit of production basis over the life of the properties. (11) Industry Segments The Company's business is primarily participating in (1) oil and gas exploration and development, and (2) field services. Summarized financial information concerning the business segments is as follows:
Year Ended November 30, ------------------------- 1998 1997 1996 ------- ------- ------- (in thousands) Operating revenues from unaffiliated services (a): Oil and gas............................... $ 3,007 $ 3,092 $ 2,888 Services.................................. 640 633 809 ------- ------- ------- Total................................... $ 3,647 $ 3,725 $ 3,697 ======= ======= ======= Depreciation, depletion and amortization: Oil and gas............................... $ 952 $ 749 $ 617 Services.................................. 135 133 129 ------- ------- ------- Total................................... $ 1,087 $ 882 $ 746 ======= ======= ======= Operating income: Oil and gas............................... $ 951 $ 1,344 $ 1,166 Services.................................. 357 316 436 General corporate expenses................ (984) (751) (747) ------- ------- ------- Total operating income.................. $ 324 $ 909 $ 855 Other expense............................... 4 1 5 ------- ------- ------- Earnings before income taxes................ $ 320 $ 908 $ 850 ======= ======= ======= Identifiable assets: Oil and gas............................... $10,063 $10,076 $ 8,804 Services.................................. 1,172 1,302 1,362 ------- ------- ------- Total................................... $11,235 $11,378 $10,166 ======= ======= ======= Additions to property and equipment: Oil and gas............................... $ 258 $ 1,444 $ 2,135 Services.................................. 4 73 26 ------- ------- ------- Total................................... $ 262 $ 1,517 $ 2,161 ======= ======= =======
- -------- (a) Inter-segment revenues of $394,000, $416,000 and $485,000 for 1998, 1997 and 1996, respectively, are included in services revenues and are offset by the same amounts in oil and gas operating expenses. F-42 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (12) Concentrations of Credit Risk and Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. The Company maintains demand deposit accounts with separate banks in Calgary, Alberta and Denver, Colorado. The Company also invests cash in the highest rated commercial paper of large Canadian companies, with maturities not over 30 days, which have minimal risk of loss. At November 30, 1998 the Company had $1,598,000 invested in such commercial paper. Most jointly owned oil and gas properties are operated by other companies who sell oil and liquids production to relatively large Canadian oil and gas purchasers (see Note 5) and who pay vendors of oil and gas services on the wells. The Company sells its own natural gas production in the Carbon and East Carbon Areas directly to certain gas marketing companies. The risk of non- payment by the purchasers or by those operators is monitored and is considered minimal. The Company does not obtain collateral from these purchasers to assure payment for sales to them. Joint interest receivables are subject to collection under the terms of operating agreements which provide lien rights to the operator. In management's judgment, termination by any purchaser under which its present sales are made would not have a material impact upon its ability to sell its production to another purchaser at similar prices. Also, because the Company has a high percentage of natural gas reserves, results of operations are particularly sensitive to current pricing. The sensitivity to current prices has been partially mitigated by the Company's use of financial instruments that provide a fixed sales price for a percentage of the Company's production. (13) Generally Accepted Accounting Principles in Canada and the United States The financial statements have been prepared in accordance with Canadian GAAP which differ in certain respects from those principles that the Company would have followed had its financial statements been prepared in accordance with U.S. GAAP. Differences in disclosures which affect these financial statements are: (a) Under U.S. GAAP, cash (and cash equivalents) includes bank deposits, money market instruments, and commercial paper with original maturities of three months or less. Canadian GAAP permits the inclusion of temporary investments with maturities greater than 90 days in cash. The differences in measurement had no impact on classification in the balance sheets. (b) Basic earnings per share using U.S. GAAP is the same as basic earnings per share using Canadian GAAP. Diluted earnings per share using U.S. GAAP uses the "treasury stock method". Fully diluted earnings per share using Canadian GAAP assumes cash proceeds from the deemed exercise of stock options are invested in such a way as to earn a reasonable return but the number of shares remains the same. (c) Using the full cost accounting method under U.S. GAAP, the ceiling test is applied to capitalized costs using a 10% discount factor. There would be no impairment of the U.S. full cost pool under this method. Stock Based Compensation Plans Using U.S. GAAP, the Company would have adopted in 1996, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The Company would have elected to continue to measure compensation costs for these plans using the current method of accounting under F-43 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation expense is recognized for stock options granted with an exercise price equal to the market value of Resources stock on the date of grant. Had compensation cost for the Company's stock option plan been determined using the fair-value method in SFAS No. 123, the Company's net income and earnings per share would have been as follows:
Year Ended November 30, ----------------- 1998 1997 1996 ----- ----- ----- (Thousand except per share amounts) Net income As reported.......................................... $ 240 $ 605 $ 526 Pro forma............................................ $ 90 $ 581 $ 526 Earnings per share (basic) As reported.......................................... $0.16 $0.38 $0.35 Pro forma............................................ $0.06 $0.37 $0.35
Options are granted at 100% of fair market value on the date of grant. The following table is a summary of stock option transactions (reported in U.S. dollars) for the three years ended November 30, 1998:
1998 1997 1996 ---------- --------- ---------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Shares Shares Shares ---------- --------- ---------- (options in thousands) Shares under option at beginning of year....... 80 $5.44 80 $5.44 60 $5.04 Granted........................................ 152 5.26 -- -- 30 5.50 Exercised...................................... -- -- -- -- (10) 3.25 Expired........................................ (10) 6.00 -- -- -- -- --- --- --- Shares under option at end of year............. 222 5.29 80 5.44 80 5.44 === === === Options exercisable at Nov. 30................. 70 5.36 80 5.44 50 5.39 Shares available for future grant at end of year.......................................... 68 210 210 Weighted-average fair value of options granted during the year............................... $0.83 N/A $1.28
The following table summarizes information about the Company's stock options (reported in U.S. dollars) outstanding at November 30, 1998:
Options Outstanding (in Options Exercisable thousands) (in thousands) -------------------------------- -------------------- Weighted Average Remaining Weighted Weighted Options Contractual Average Options Average Outstanding Life Exercise Exercisable Exercise Range of Exercise Prices At Year End (Years) Price at Year End Price - ------------------------ ----------- ----------- -------- ----------- -------- $3.25--$4.75............. 50 4.2 $4.40 10 $3.25 $5.375--$5.50............ 142 3.4 5.47 30 5.50 $5.75-- $6.00............ 30 1.5 5.92 30 5.92 --- --- ----- --- ----- $3.25--$6.00............. 222 3.3 $5.29 70 $5.36 === === ===== === =====
F-44 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1998 1996 ----- ----- Expected option life--years................................ 1.70 3.00 Risk-free interest rate.................................... 5.31% 6.29% Dividend yield............................................. 0% 0% Volatility................................................. 28.35% 20.70%
No options were granted during 1997. (14) SUBSEQUENT EVENTS In December 1998, the Company acquired working interests in 16 producing natural gas wells and associated leaseholds in the Wayne-Rosedale Field, located in Alberta, Canada, effective September 1, 1998 for $2.3 million. The assets, liabilities, revenues and expenses for the period September through November 1998 have not been recorded as of November 30, 1998 because the closing did not take place until after year end. In December 1998, the Company secured a financing commitment. The initial commitment is a $2.5 million revolving production loan. The revolving phase of the loan will expire on April 30, 1999 and may be renewed by the bank. The interest rate on outstanding borrowings is the CIBC Prime Rate plus 3/4 of 1%. F-45 CEC RESOURCES LTD. BALANCE SHEETS
August 31, November ASSETS 1999 30, 1998 ------ ----------- -------- (unaudited) (in Canadian dollars) (in thousands) Current assets: Cash and cash equivalents............................... $ -- $ 1,666 Accounts receivable: Oil and gas sales..................................... 421 466 Crown royalty refund and other........................ 470 333 Joint interest partners............................... 24 8 Income tax receivable................................... 58 0 -------- ------- Total current assets................................ 973 2,473 -------- ------- Property and equipment: Oil and gas assets, full cost method.................... 22,023 16,192 Liquid extraction plant................................. 1,477 1,477 Other property and equipment............................ 200 108 -------- ------- 23,700 17,777 Less: Accumulated depreciation, depletion and amortization........................................... (10,556) (9,015) -------- ------- Net property and equipment.............................. 13,144 8,762 -------- ------- Other assets............................................ 1,864 -- -------- ------- $ 15,981 $11,235 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable........................................ $ 282 $ 237 Income tax payable...................................... 2 3 Undistributed oil and gas production receipts........... 507 113 -------- ------- Total current liabilities............................. 791 353 -------- ------- Future site restoration costs (Note 5).................... 221 165 Deferred income taxes (Note 3)............................ 1,739 1,995 Long-term debt (Note 7)................................... 4,850 -- Stockholders' equity Preferred stock, authorized unlimited number of shares, no par value; none issued.............................. Share capital, common stock, authorized unlimited number of shares, without nominal or par value; 1,521,400 shares issued in 1999 and 1,544,400 in 1998............ 1,512 1,534 Retained earnings....................................... 6,868 7,188 -------- ------- Total stockholders' equity............................ 8,380 8,722 -------- ------- $ 15,981 $11,235 ======== =======
The accompanying notes are an integral part of these financial statements. F-46 CEC RESOURCES LTD. STATEMENTS OF INCOME (Unaudited)
Nine Months Ended August 31, -------------- 1999 1998 ------ ------ (in Canadian dollars) (in thousands, except per share data) Oil and gas sales............................................... $3,684 $2,380 Royalties....................................................... (732) (460) Alberta royalty tax credit...................................... 434 242 Field services.................................................. 75 175 Other........................................................... 2 27 ------ ------ Total revenues................................................ 3,463 2,364 ------ ------ Lease operating expenses........................................ 585 563 Field services.................................................. 65 111 General and administrative...................................... 1,522 615 Depreciation, depletion and amortization........................ 1,597 686 ------ ------ Total costs and expenses...................................... 3,769 1,975 ------ ------ Operating income................................................ (306) 389 ------ ------ Interest expense and other...................................... 136 (23) ------ ------ Earnings before income taxes.................................... (442) 412 Provisions for income taxes (Note 3)............................ (254) 144 ------ ------ Net earnings.................................................... $ (188) $ 268 ====== ====== Earnings per share.............................................. $(0.12) $ 0.17 ====== ====== Basic........................................................... $(0.12) $ 0.17 ====== ====== Average number of common shares outstanding Basic........................................................... 1,529 1,542 ====== ====== Fully diluted................................................... 1,529 1,546 ====== ======
The accompanying notes are an integral part of these financial statements. F-47 CEC RESOURCES LTD. STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended August 31, 1999 (Unaudited)
Earnings Shares Amount Retained --------- ------ -------- (in Canadian dollars) (in thousands, except share data) Balances, November 30, 1998......................... 1,544,400 $1,534 $7,188 Purchase and cancellation of shares................. (23,000) (22) (132) Net earnings........................................ -- -- (224) --------- ------ ------ Balances August 31, 1999............................ 1,521,400 $1,512 $6,832 ========= ====== ======
The accompanying notes are an integral part of these financial statements. F-48 CEC RESOURCES LTD. STATEMENTS OF CASH FLOW (Note 2) (Unaudited)
Nine Months Ended August 31, --------------- 1999 1998 ------- ------ (in Canadian dollars) (in thousands) Net earnings.................................................. $ (188) $ 268 Adjustments to reconcile net earnings to net cash provided by operating activities:........................................ -- -- Depreciation, depletion and amortization.................... 1,597 686 Future income taxes......................................... (256) 120 Other....................................................... (55) -- Net change in operating assets and liabilities................ 291 144 ------- ------ Net cash provided by operating activities................... 1,389 1,218 ------- ------ Cash flows from investing activities: Additions to oil and gas properties......................... (5,851) (489) Additions to other assets................................... (1,900) -- ------- ------ Net cash used in investing activities....................... (7,751) (489) Cash flows from financing activities: Proceeds from long-term debt................................ 4,850 0 Proceeds from issuance of common stock...................... 513 Purchase of common stock.................................... (154) (592) ------- ------ Net cash provided by (used in) financing activities......... 4,696 (79) Net increase (decrease) in cash and cash equivalents.......... (1,666) 650 Cash and cash equivalents at beginning of period.............. 1,666 1,073 ------- ------ Cash and cash equivalents at end of period.................... $ 0 $1,723 ======= ====== Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes, net of refunds.............................. $ 40 $ (50) ------- ------
The accompanying notes are an integral part of these financial statements. F-49 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) (1) Basis of Presentation The accompanying financial statements are for CEC Resources Ltd. ("Resources" or "Company"). Resources is an independent oil and gas company and was incorporated on May 31, 1955 under the Business Corporations Act (Alberta ) in Canada and was acquired by the former parent of Columbus Energy Corporation ("Columbus") in 1969 and by Columbus on July 31, 1984. It remained a wholly owned subsidiary of Columbus until spun-off from Columbus by a rights offering in February 1995. These financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and require the use of management's estimates. These statements contain all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of August 31, 1999 and November 30, 1998, and the results of its operations and of its cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Currency The amounts in these financial statements and notes thereto are in Canadian dollars, unless otherwise stated. The functional currency of the Company is Canadian dollars. Cash Equivalents For purposes of the statements of cash flow, the Company considers all short-term investments that are low risk, highly liquid and readily convertible to known amounts of cash to be cash equivalents. Results of hedging activities, when employed, are included in cash flow from operations in the statements of cash flow. Oil and Gas Properties CEC records natural gas revenues on the entitlement method based on its percentage ownership of current production. Each working interest owner in a well generally has the right to a specific percentage of production, although actual production sold may differ from an owner's ownership percentage. Under entitlement accounting, a receivable is recorded when the underproduction occurs and a payable when overproduction occurs. At August 31, 1999, CEC was neither underproduced or overproduced relative to its percentage ownership in its properties. The Company follows the full cost method of accounting whereby all costs associated with the acquisition of, exploration for, and the development of oil and gas reserves are capitalized. Such costs include land acquisition costs, geological and geophysical expenditures, drilling costs of productive and non-productive wells and tangible production equipment. General and administrative expenses are capitalized to the extent such costs are directly associated with acquisition, exploration and development of oil and gas properties. Proceeds from the sale of petroleum and natural gas properties reduce capitalized costs without recognition of a gain or loss unless such a sale would significantly alter the rate of depletion and depreciation. Capitalized costs, including tangible production equipment, are depleted using the unit of production method based on proved reserves of oil and gas, before royalties, as estimated by independent engineers. For purposes of the calculation, oil and gas reserves are converted to a common unit of measure on the basis of six thousand cubic feet of gas to one barrel of oil. Depreciation of the natural gas liquids processing plant and other property and equipment are calculated using the straight line method over their estimated useful lives. F-50 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (Unaudited) In applying the full cost method, the Company performs a ceiling test which restricts the net capitalized costs from exceeding an amount equal to the estimated undiscounted value of future net revenues from proven oil and gas reserves, based on current prices and costs, after deducting estimated future operating costs, development costs, general and administrative expenses and income tax expense. Estimated future site abandonment and restoration costs are provided using the unit of production method over the life of proven reserves with the current year provision included in depreciation, depletion and amortization expense. Site abandonment and restoration expenditures incurred are recorded as a reduction of the accumulated accrual. Field Services Business Segment The Company receives field service revenue generated by its share of natural gas processing fees at the Carbon gas plant. The portion of the plant processing fee revenue attributable to Resources own gas volumes processed by the plant is not reported as field service revenue, but instead offsets an identical amount otherwise chargeable to lease operating expenses. The Carbon plant also processes natural gas belonging to unrelated plant non-owners which represents the majority of Resources field services revenues. Field services revenues are recognized at the time the services are rendered. Resources also derives less significant revenues and net cash flow from other gathering and compression facilities in which it has ownership. Amounts applicable to Resources' own gas production volumes have likewise been eliminated from both revenues and expenses from these operations. Income Taxes The liability method is used in measuring income taxes based on temporary differences including timing differences and other differences between the tax basis of an asset or liability and its carrying amount in the financial statements. The method uses the tax rate and the tax law expected to apply to taxable income in the periods in which the future income tax asset or liability is expected to be realized. The Company is subject to tax under applicable Canadian tax law. Earnings Per Share Basic earnings per share are calculated using the weighted average number of shares of common stock outstanding during the period. Fully diluted earnings per share are calculated assuming the exercise of outstanding dilutive options. F-51 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (Unaudited) (2) Statements of Cash Flow The Company elected for 1998 to adopt Canadian Institute of Chartered Accountants (CICA) 1540, Cash Flow Statements, which require a business enterprise to provide a statement of cash flow in place of a statement of changes in financial position. Application of CICA 1540 is required for fiscal years beginning on or after August 1, 1998. Cash flow information for prior years is restated to conform to the requirements of CICA 1540 as follows:
Net Cash Provided by Net Cash Provided by Operating (Used In) Investing Activities Activities ----------- -------------------- (In Canadian Dollars) (in thousands) Nine Months Ended August 31, 1998 As previously reported................... $ 835 $(106) Restatement.............................. 383 (383) ------ ----- As Restated.............................. $1,218 $(489) ====== =====
(3) Income Taxes The provision for income taxes consists of the following (in thousands):
Nine Months Ended August 31, ----------- 1999 1998 ----- ---- Current: Federal..................................................... $ 2 $ 24 Alberta..................................................... -- -- ----- ---- 2 24 ----- ---- Future: Federal..................................................... (160) 68 Alberta..................................................... (96) 52 ----- ---- (256) 120 ----- ---- Total income tax expense...................................... $(254) $144 ===== ====
Total tax provision has resulted in effective tax rates which differ from statutory Federal income tax rates. The reasons for these differences are illustrated by the following table:
Percent of Pretax Earnings Nine Months Ended August 31, ---------- 1999 1998 ---- ---- Federal Canadian and provincial statutory rates............... 45% 45% Resource allowance............................................ 28 (27) Crown royalties, net of credits............................... (19) 16 Adjustments of prior year amounts and other................... 3 1 --- --- Effective Rate................................................ 57% 35% === ===
F-52 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (Unaudited) The tax effect of significant temporary differences representing deferred tax assets and liabilities and charges were as follows (in thousands):
Current Dec. 1, Year August 31, 1998 Activity 1999 ------- -------- ---------- Deferred tax liabilities: Temporary differences, principally oil and gas properties............................ $1,995 $(256) $1,739 ====== ===== ======
For Canadian income tax purposes Resources has tax pools available at August 31, 1999 to reduce future taxable income. These pools include oil and gas property expenses of $4,235,000, development and exploration expenses of $1,042,000, earned depletion base of $1,170,000 and undepreciated capital costs of $2,465,000. The tax attributes of carryforward pools are included to determine the temporary differences shown as deferred tax liabilities. These attributes generally do not expire. (4) Related Party Transactions Resources incurred certain direct and indirect general and administrative costs for services provided by its former Parent in lieu of expanding the number of its own full-time employees. These costs were primarily for labor, related benefits and other overhead costs as provided by an agreement between the parties. These costs were $54,000 and $271,000 for the nine months of 1999 and 1998, respectively. Effective March 31, 1999, this management agreement was terminated. (5) Commitments The majority of the Company's natural gas is contracted to gas marketing companies on a deliverability basis and sold at published index prices less applicable transportation and marketing charges. The Company has temporarily assigned its firm transportation agreements through October, 1999 and has retained the option to obtain additional firm transportation service. At August 31, 1999, the Company had seven forward priced hedge contracts. These contracts allow the Company to receive fixed prices for a percentage of its production. The terms of these transactions are as follows:
Daily Contract Quantity Quantity Fixed Period GigaJoules GigaJoules Price/GigaJoule ------ ---------- ---------- --------------- Apr 99-Oct 99....................... 1,055 226,000 $2.390 Dec 98-Oct 01....................... 1,055 1,125,000 $2.570 Apr 99-Oct 99....................... 1,000 214,000 $2.310 Apr 99-Oct 99....................... 500 107,000 $2.220 Nov 99-Oct 00....................... 1,000 366,000 $2.730 Nov 99-Mar 00....................... 750 113,250 $3.620 Apr 00-Oct 00....................... 750 160,500 $2.925
The unrecognized loss on these contracts totaled $806,000 based on August 31, 1999 market values. The Company estimates that future costs of site abandonment and restoration of well sites, gas processing plants and other facilities will be $434,362 as of August 31, 1999 in addition to $221,000 already accrued as a liability. The estimated costs are being recognized on a unit-of-production basis over the life of the properties. F-53 CEC RESOURCES LTD. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (Unaudited) (6) Acquisition of Oil and Gas Properties Between December 1998 and April 1999, Resources purchased producing oil and gas properties and natural gas gathering and compression facilities in Alberta, Canada. These acquisitions were accounted for as a purchase and considered "material" by management for purposes of pro forma disclosure. The following pro forma statement presents incremental results of operations for the current year and for the corresponding period of the preceding year as though the acquisitions had occurred at the beginning of the periods being reported on. Revenues and expenses subsequent to the purchase dates have been included in 1999 operating results and are not included in the incremental results. The incremental pro forma results below are not indicative of the results that would have occurred if the acquisitions had been in effect for the entire periods presented. The pro forma results are not intended to be a projection of future results. Financial information showing the incremental pro forma results of the acquisition is presented below:
Nine Months Ended August 31, ------------- 1999 1998 ----- ------ (in Canadian dollars) (in thousands, except per share data) Revenues................................................... $ 168 $1,080 Direct Operating Expenses.................................. 64 510 Depreciation & Depletion................................... 109 682 Interest Expense........................................... 40 237 Income Tax Expense (a)..................................... (15) (122) Net Income................................................. (30) (227) Earnings per share......................................... (0.02) (0.15)
- -------- (a) Income taxes at Company's effective rate for the applicable period. (7) Long-Term Debt The Company has a revolving loan from a bank used to finance acquisitions of oil and gas reserves and for normal operating requirements. The loan is secured by the Company's oil and gas assets and had a borrowing base of $5.0 million at August 31, 1999. In October 1999, the commitment was increased to $6.5 million. The commitment will be reduced to $5.75 million upon closing of the BFC Acquisition. The interest rate on the outstanding borrowings is the bank's prime rate, plus 3/4% which has averaged 7.25% for the nine months ended August 31, 1999. The revolving phase of the loan will expire on April 30, 2000 and may be renewed by the bank. If the revolving commitment is not renewed by the bank the loan will be converted into a term loan and will be permanently reduced by way of consecutive monthly principal payments over a period not to exceed 36 months. Outstanding borrowings amounted to $4.5 million at August 31, 1999. The repayment schedule would be based on the technical review of the assets and the bank's determination of a reasonable cash flow to be available for principal reductions. The repayment mechanism requires the borrowing base to be reduced by a calculated amount and if current draws are not in excess of the reduced borrowing base there are no requirements for principal repayments. Based upon the most recent technical review by the bank, the estimated required repayments (or borrowing base reduction) required over the next twelve months would not exceed current draws, consequently there are no borrowings classified as current liabilities. F-54 (8) Generally Accepted Accounting Principles in Canada and the United States The financial statements have been prepared in accordance with Canadian GAAP and differ in certain respects from financial statements which the Company would have made had its financial statements been prepared in accordance with United States GAAP. Differences between the two methods which affect these financial statements are: (a) Under U.S. GAAP, cash (and cash equivalents) includes bank deposits, money market instruments, and commercial paper with original maturities of three months or less. Canadian GAAP permits the inclusion in cash of temporary investments with maturities greater than 90 days. The differences in measurement had no impact on classification in the balance sheets. (b) Basic earnings per share using U.S. GAAP is the same as basic earnings per share using Canadian GAAP. Under U.S. GAAP, fully diluted earnings per share are reported using the "treasury stock method". Under Canadian GAAP, fully diluted earnings per share assumes that cash proceeds from the deemed exercise of stock options are invested by the Company in such a way as to earn a reasonable return. The number of shares used in the calculation is the same for both methods. (c) Under U.S. GAAP, the full cost accounting method requires that capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value (discounted at 10%) of future net revenues from estimated production of proved oil and gas reserves; plus (2) the cost of properties not being amortized, if any, plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized if any, less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Using U.S. GAAP, there would not have been an impairment to the full cost pool. F-55 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 20. Indemnification Of Directors And Officers Under the Colorado Business Corporation Act, we have broad powers to indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act. Colorado law provides that a director, officer or any other employee, fiduciary or agent, may be entitled to indemnification if: (1) the person conducted himself or herself in good faith; (2) the person reasonably believed, (a) in the case of conduct in an official capacity with the corporation, that his or her conduct was in the corporation's best interests, and (b) in all other cases, that his or her conduct was at least not opposed to the corporation's best interests; and (3) in the case of any criminal proceeding, the person had no reasonable cause to believe his or her conduct was unlawful. A corporation may not indemnify a director in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation or in connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which the director was adjudged liable on the basis that he or she derived an improper personal benefit. Our Bylaws provide that we will indemnify our directors and executive officers and may indemnify our other officers, employees and other agents to the full extent permitted under Colorado law. We have also entered into indemnification agreements with each of our executive officers and directors. The terms of these indemnification agreements are described in "Management-- Indemnification and Limitation of Liability." Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling Carbon pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. II-1 Item 21. Exhibits and Financial Statement Schedules (a) Exhibits
Exhibit Number Description of Exhibit ------- ---------------------- 2 Articles of Incorporation of Carbon Energy Corporation.* 3 Bylaws of Carbon Energy Corporation.* 4 Specimen stock certificate representing shares of common stock of Carbon Energy Corporation. 5 Opinion of Holland & Hart LLP regarding the legality of the securities being registered. 8.1 Tax Opinion of Holland & Hart LLP, dated October 20, 1999.* 8.2 Tax Opinion of Bennett Jones, dated October 20, 1999.* 10.1 1999 Stock Option Plan.* 10.2 1999 Restricted Stock Plan.* 10.3 Exchange and Financing Agreement dated October 14, 1999 among Carbon Energy Corporation, CEC Resources Ltd and Yorktown Energy Partners III, L.P.* 10.4 Stock Purchase Agreement dated August 11, 1999 between Bonneville Pacific Corporation and CEC Resources Ltd.* 10.5 Form of Indemnification Agreement between Carbon Energy Corporation and its officers and directors.* 10.6 Form of Employment Agreement, dated as of October 29, 1999, between Carbon Energy Corporation and Patrick R. McDonald.* 10.7 Form of Employment Agreement, dated as of October 29, 1999, between Carbon Energy Corporation and Kevin D. Struzeski.* 10.8 Amended and Restated Credit Agreement dated as of May 31, 1994 among Bonneville Fuels Corporation, Bonneville Fuels Marketing Corporation, Colorado Gathering Corporation, Bonneville Fuels Operating Corporation and Bonneville Fuels Management Corporation ("Borrowers") and First Interstate Bank of Denver, N.A. ("Lender"); Revolving Note for $20,000,000 dated May 31, 1994 from Borrowers to Lender; Promissory Note for $1,000,000 from Borrowers to Lender dated May 31, 1994; Term Note for $20,000,000 from Borrowers to Lender dated May 31, 1994; as amended by Note Modification Agreement dated April 1, 1995, among Borrowers and Lender; Amendment to Credit Agreement dated as of April 1, 1995 among Borrowers and Lender; Note Modification Agreement dated May 1, 1996 among Borrowers and Lender; Second Amendment to Credit Agreement dated as of April 1, 1996 among Borrowers and Lender; Loan Transfer Agreement dated as of September 18, 1996 among Borrowers, Wells Fargo Bank (Colorado), N.A. formerly known as First Interstate Bank of Denver, N.A. and Colorado National Bank ("CNB"); Third Amendment of Amended and Restated Credit Agreement dated as of September 18, 1996 among Borrowers and CNB; Fourth Amendment of Amended and Restated Credit Agreement dated as of May 15, 1998 among Borrowers and CNB and Fifth Amendment of Amended and Restated Credit Agreement dated as of June 1, 1999 among Borrowers and CNB. 23.1 Consent of Holland & Hart LLP (included in Exhibits 5 and 8.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Hein + Associates LLP. 23.4 Consent of PricewaterhouseCoopers LLP.
II-2
Exhibit Number Description of Exhibit ------- ---------------------- 23.5 Consent to Being Director of Harry A. Trueblood, Jr.* 23.6 Consent of Reed W. Ferrill & Associates, Inc.* 23.7 Consent of Sproule Associates Limited* 23.8 Consent of Ryder Scott Company, L.P.* 24 Power of Attorney.** 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule
- -------- *Previously filed **Power of attorney for Cortlandt S. Dietler is being filed with this Amendment No. 1. All other powers of attorney were previously filed. Item 22. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 to this registration statement to be signed on its behalf by the undersigned in the City of Denver, State of Colorado, on December 20, 1999. Carbon Energy Corporation /s/ Patrick R. McDonald By: _________________________________ Patrick R. McDonald President In accordance with the requirements of the Securities Act of 1933, this registration statement was signed below by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Patrick R. McDonald President (Principal December 20, 1999 ____________________________________ Executive Officer) Patrick R. McDonald /s/ Cortlandt S. Dietler Director December 20, 1999 ____________________________________ Cortlandt S. Dietler /s/ David H. Kennedy* Director December 20, 1999 ____________________________________ David H. Kennedy
/s/ Bryan H. Lawrence* Director December 20, 1999 ____________________________________ Bryan H. Lawrence /s/ Peter A. Leidel* Director December 20, 1999 ____________________________________ Peter A. Leidel /s/ Kevin D. Struzeski* Treasurer (Principal December 20, 1999 ____________________________________ Financial Officer and Kevin D. Struzeski Principal Accounting Officer)
/s/ Patrick R. McDonald *By: __________________________ Attorney-in-Fact II-4 INDEX TO EXHIBITS
Exhibit Number Description of Exhibit ------- ---------------------- 2 Articles of Incorporation of Carbon Energy Corporation.* 3 Bylaws of Carbon Energy Corporation.* 4 Specimen stock certificate representing shares of common stock of Carbon Energy Corporation. 5 Opinion of Holland & Hart LLP regarding the legality of the securities being registered. 8.1 Tax Opinion of Holland & Hart LLP, dated October 20, 1999.* 8.2 Tax Opinion of Bennett Jones, dated October 20, 1999.* 10.1 1999 Stock Option Plan.* 10.2 1999 Restricted Stock Plan.* 10.3 Exchange and Financing Agreement dated October 14, 1999 among Carbon Energy Corporation, CEC Resources Ltd and Yorktown Energy Partners III, L.P.* 10.4 Stock Purchase Agreement dated August 11, 1999 between Bonneville Pacific Corporation and CEC Resources Ltd.* 10.5 Form of Indemnification Agreement between Carbon Energy Corporation and its officers and directors.* 10.6 Form of Employment Agreement, dated as of October 29, 1999, between Carbon Energy Corporation and Patrick R. McDonald.* 10.7 Form of Employment Agreement, dated as of October 29, 1999, between Carbon Energy Corporation and Kevin D. Struzeski.* 10.8 Amended and Restated Credit Agreement dated as of May 31, 1994 among Bonneville Fuels Corporation, Bonneville Fuels Marketing Corporation, Colorado Gathering Corporation, Bonneville Fuels Operating Corporation and Bonneville Fuels Management Corporation ("Borrowers") and First Interstate Bank of Denver, N.A. ("Lender"); Revolving Note for $20,000,000 dated May 31, 1994 from Borrowers to Lender; Promissory Note for $1,000,000 from Borrowers to Lender dated May 31, 1994; Term Note for $20,000,000 from Borrowers to Lender dated May 31, 1994; as amended by Note Modification Agreement dated April 1, 1995, among Borrowers and Lender; Amendment to Credit Agreement dated as of April 1, 1995 among Borrowers and Lender; Note Modification Agreement dated May 1, 1996 among Borrowers and Lender; Second Amendment to Credit Agreement dated as of April 1, 1996 among Borrowers and Lender; Loan Transfer Agreement dated as of September 18, 1996 among Borrowers, Wells Fargo Bank (Colorado), N.A. formerly known as First Interstate Bank of Denver, N.A. and Colorado National Bank ("CNB"); Third Amendment of Amended and Restated Credit Agreement dated as of September 18, 1996 among Borrowers and CNB; Fourth Amendment of Amended and Restated Credit Agreement dated as of May 15, 1998 among Borrowers and CNB and Fifth Amendment of Amended and Restated Credit Agreement dated as of June 1, 1999 among Borrowers and CNB. 23.1 Consent of Holland & Hart LLP (included in Exhibits 5 and 8.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Hein + Associates LLP. 23.4 Consent of PricewaterhouseCoopers LLP. 23.5 Consent to Being Director of Harry A. Trueblood, Jr.* 23.6 Consent of Reed W. Ferrill & Associates, Inc.* 23.7 Consent of Sproule Associates Limited*
INDEX TO EXHIBITS (cont.)
Exhibit Number Description of Exhibit ------- ---------------------- 23.8 Consent of Ryder Scott Company, L.P.* 24 Power of Attorney.** 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule
- -------- *Previously filed **Power of attorney for Cortlandt S. Dietler is being filed with this Amendment No. 1. All other powers of attorney were previously filed. EX-4 2 SPECIMEN STOCK CERTIFICATE Number Common Stock SHARES CEC ____ CARBON ENERGY CORPORATION SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP INCORPORATED UNDER THE LAWS OF THE STATE OF COLORADO INCORPORATED UNDER THE COLORADO BUSINESS CORPORATION ACT THIS CERTIFICATE IS TRANSFERABLE EITHER IN CHICAGO, IL OR IN NEW YORK, NY This Certifies that is the record holder of FULL PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, WITH NO PAR VALUE, OF ___________________ CARBON ENERGY CORPORATION ______________________________ transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the seal of the Corporation and the signatures of its duly authorized officers. Dated: CARBON ENERGY CORPORATION CORPORATE SEAL COLORADO Countersigned and Registered: HARRIS TRUST AND SAVINGS BANK Transfer Agent and Registrar By: ------------------------- AUTHORIZED SIGNATURE SECRETARY PRESIDENT The Corporation will furnish to a shareholder, on demand and without charge, a full copy of the text of (1) the designations, preferences, limitations and relative rights attached to each class of shares authorized to be issued, (2) the variations in preferences, limitation, and rights determined for each series of shares, and (3) the authority of the directors to fix the designations, preferences, limitations and relative rights for future classes or series. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - _________Custodian_________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with under Uniform Gifts to Minors right of survivorship Act ______________________ and not as tenants in (State) common UNIF TRF MIN ACT - _______Custodian (until age __) (Cust) _______ under Uniform Transfers (Minor) to Minors Act _______________ (State)
Additional abbreviations may also be used though not in the above list. For Value Received, __________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ------------------------------ ------------------------------ - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _____________________________________Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _____________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated __________________ X______________________________________ X______________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE Signature(s) Guaranteed By_____________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17d-15. EX-5 3 OPINION OF HOLLAND & HART LLP EXHIBIT 5 December 17, 1999 Board of Directors Carbon Energy Corporation c/o Bonneville Fuels Corporation 1660 Lincoln Street, Suite 2200 Denver, Colorado 80264 To the Board of Directors: As counsel for Carbon Energy Corporation (the "Company"), a Colorado corporation, we have examined and are familiar with its Articles of Incorporation, its Bylaws and its various corporate records and proceedings relating to its incorporation. We are also familiar with the proceedings taken by the Board of Directors of the Company to authorize the exchange offer (the "exchange offer") pursuant to which one share of the Company's common stock, no par value, will be offered in exchange for each outstanding share of common stock of CEC Resources Ltd. ("CEC"). The exchange offer is described in the Registration Statement on Form S-4 of the Company, No. 333-89783. Pursuant to the terms of the exchange offer, the Company may issue up to 1,765,900 shares of its common stock to holders of CEC common stock who properly tender their CEC shares for exchange. We also have examined such other matters and have made such other inquiries as we deem relevant to our opinion expressed below. We are of the opinion that the up to 1,765,900 shares of common stock of the Company described above have been duly authorized by all necessary corporate action of the Company and, when issued in accordance with the exchange offer, will be validly issued and outstanding shares of the common stock of the Company, fully paid and non-assessable. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-4 in connection with the exchange offer and any amendments thereto and to the reference to our firm contained under the heading "Legal Matters". Very truly yours, Holland & Hart LLP EX-10.8 4 AMENDED/RESTATED CREDIT AGREEMENT Exhibit 10.8 ------------ ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT AMONG BONNEVILLE FUELS CORPORATION, BONNEVILLE FUELS MARKETING CORPORATION, COLORADO GATHERING CORPORATION, BONNEVILLE FUELS OPERATING CORPORATION, AND BONNEVILLE FUELS MANAGEMENT CORPORATION, as Borrowers AND FIRST INTERSTATE BANK OF DENVER, N.A., as Lender Dated as of May 31, 1994 ================================================================================ TABLE OF CONTENTS ----------------- Page ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS................................ 2 ARTICLE II THE CREDIT..................................................... 10 (a) Loans and Letters of Credit................................. 11 (b) Conversion of Facility A Prime Rate Loans................... 11 ARTICLE III FEES, PROCEDURES AND PAYMENT.................................. 12 (a) Facility Fee................................................ 12 (b) Borrowing Base Commitment Fees.............................. 12 (c) Letter of Credit Fees....................................... 12 (d) Facility A Prepayment Fee................................... 13 (e) General..................................................... 13 (f) Interest Periods............................................ 13 (g) Facility A.................................................. 15 (h) Facility B.................................................. 15 ARTICLE IV BORROWING BASE................................................. 16 (a) Facility A.................................................. 16 (b) Facility B.................................................. 16 ARTICLE V CONDITIONS OF LENDING........................................... 20 ARTICLE VI SECURITY....................................................... 22 ARTICLE VII REPRESENTATIONS AND WARRANTIES................................ 23 (a) Existence; Standing......................................... 23 (b) Qualification to Do Business................................ 23 (c) Due Authorization........................................... 23 (d) Approvals................................................... 24 (e) Binding Obligations......................................... 24 (f) Financial Statements........................................ 24 (g) Use of Proceeds............................................. 24 i (h) Regulation U.............................................. 24 (i) Investment Company Act.................................... 24 (j) Other Obligations......................................... 24 (k) Full Disclosure........................................... 25 (l) No Litigation............................................. 25 (m) No ERISA Liability........................................ 25 (n) Title to Mortgaged Properties............................. 25 (o) Existing Subsidiaries..................................... 25 (p) Drilling and Operations................................... 25 (q) Qualification to Hold Federal Oil and Gas Leases.......... 26 (r) Environmental............................................. 26 ARTICLE VIII COVENANTS OF THE BORROWERS................................. 27 (a) Payment and Performance................................... 27 (b) Books, Financial Statements and Reports................... 27 (c) Other Information and Inspections......................... 29 (d) Notice of Material Events................................. 29 (e) Financial Covenants....................................... 30 (f) Maintenance of Existence and Qualifications............... 30 (g) Maintenance of Properties................................. 30 (h) Payment of Taxes, Etc..................................... 31 (i) Insurance................................................. 31 (j) Books and Records......................................... 31 (k) Payment of Expenses....................................... 31 (l) Performance on the Borrowers' Behalf...................... 31 (m) Compliance with Agreements and Law........................ 32 (n) Evidence of Compliance.................................... 32 (o) Further Assurances........................................ 32 (p) Production Purchasers..................................... 32 (q) Environmental Laws........................................ 32 (r) Limitation on Dividends and Distributions................. 33 (s) Limitation on Stock Repurchase............................ 33 ii (t) Limitation on Indebtedness................................. 33 (u) Limitation on Liens........................................ 34 (v) Limitation on Mergers...................................... 34 (w) Limitation on Sales of Property............................ 34 (x) Fiscal Year................................................ 34 (y) Amendment of Contracts..................................... 34 (z) Limitation on Investments and New Businesses............... 35 (aa) Limitation on Credit Extensions........................... 35 (bb) ERISA Compliance.......................................... 35 (cc) Limitation on Certain Repayments.......................... 35 (dd) Limitation on Payments to BPC............................. 35 ARTICLE IX EVENTS OF DEFAULT AND THEIR EFFECT............................ 36 (a) Nonpayment of Notes........................................ 36 (b) Collateral Documents....................................... 36 (c) Representations And Warranties............................. 36 (d) Noncompliance With Specific Provisions Of This Agreement... 36 (e) Noncompliance With This Agreement.......................... 36 (f) Nonpayment Of Other Indebtedness For Borrowed Money........ 36 (g) Bankruptcy, Insolvency, Etc................................ 36 (h) Material Adverse Change.................................... 37 (i) Judgment................................................... 37 (j) American Atlas Contract.................................... 37 Section 9.1 Effect of the Occurrence of an Event of Default............. 37 ARTICLE X MISCELLANEOUS.................................................. 38 iii EXHIBITS -------- EXHIBIT A-1 FORM OF FACILITY A NOTE EXHIBIT A-2 FORM OF FACILITY B NOTE EXHIBIT A-3 FORM OF TERM NOTE EXHIBIT B FORM OF REQUEST FOR CREDIT EXHIBIT C FORM OF A/R BORROWING BASE CERTIFICATE EXHIBIT D FORM OF INTEREST PERIOD/CONVERSION NOTICE EXHIBIT E FORM OF OPINION OF BORROWERS' COUNSEL EXHIBIT F FORM OF SECURITY OPINION EXHIBIT G FORM OF OMNIBUS CERTIFICATE SCHEDULES --------- SCHEDULE 6.3 SECURITY OPINION PROPERTIES SCHEDULE 7.1(d) APPROVALS SCHEDULE 7.1(j) OTHER OBLIGATIONS SCHEDULE 7.1(1) PENDING LITIGATION SCHEDULE 7.1(n) LIENS AND ENCUMBRANCES SCHEDULE 7.1(r) ENVIRONMENTAL DISCLOSURE SCHEDULE 8.2(c) EXISTING DEBT iv AMENDED AND RESTATED CREDIT AGREEMENT This Amended and Restated Credit Agreement is made and entered into as of the 31st day of May, 1994, by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation ("BFC"), BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation ("BFMC"), COLORADO GATHERING CORPORATION, a Utah Corporation ("CGC"), BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation ("BFOC"), and BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation ("BFM Corp.," with BFC, BFMC, CGC, BFOC, and BFM Corp., referred to collectively as "Borrowers" and individually as a "Borrower"), and FIRST INTERSTATE BANK OF DENVER, N.A., a national banking association (the "Bank"). RECITALS -------- A. The Borrowers are collectively engaged in the business of exploring for, producing, gathering and marketing of natural gas and oil, and require funds for working capital needs and for other general corporate purposes. B. Pursuant to a Credit Agreement dated as of August 30, 1991 (the "Chase Credit Agreement") BFC has heretofore borrowed certain funds from Chase Manhattan Bank (National Association) ("Chase"). The funds so borrowed by BFC are evidenced by a Note dated as of August 30, 1991 (the "Chase Note"), the outstanding principal balance of which is $7,368,725 as of the date hereof (the "Chase Loan"). The obligations of BFC under the Chase Credit Agreement, Chase Note and certain other agreements executed in connection therewith are secured by various collateral security documents creating liens and encumbrances on and security interests in certain real and personal property of BFC (collectively, the "Chase Collateral Documents," with the Chase Credit Agreement, the Chase Note and the Chase Collateral Documents sometimes referred to collectively as the "Chase Documents"). C. Contemporaneously with the execution of this Agreement, the Bank is acquiring the Chase Loan and is receiving from Chase a conveyance of the Chase Documents. D. The Bank has agreed to extend credit to all of the Borrowers, and the Bank and the Borrowers desire hereby to amend and restate the Chase Credit Agreement in its entirety to reflect the continuation of the principal balance of the Chase Loan currently outstanding, to add the Borrowers in addition to BFC as parties liable for repayment of the Chase Loan, and to provide for certain other credit facilities, all on the terms and conditions set forth herein. AGREEMENT --------- NOW, THEREFORE, IN CONSIDERATION of the following mutual covenants and other good and valuable consideration, the Borrowers and the Bank agree that the outstanding principal balance of the Chase Loan constitutes a Loan hereunder for all purposes, and the Chase Credit Agreement is hereby amended and restated in its entirety to read as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the indicated meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accounts Receivable Report" means a monthly report of its outstanding accounts receivable, including aging, in form acceptable to the Bank, submitted by BFMC and BFM Corp. to the Bank pursuant to Section 8.1(b)(vii). "Advance" means, as a verb, the advance of the Loans by the Bank to the Borrowers pursuant to Article II, and as a noun, the funds so Advanced. "Advance Date" means any day on which an Advance is made hereunder. "Agreement" means this Credit Agreement as the same may be amended from time to time. "AAA" means the American Arbitration Association. "American Atlas Contract" means the Amended and Restated Gas Sales Agreement dated January 1, 1993 between BFC, as seller, and American Atlas #1, Ltd., as buyer. "Amortizing Period" means, with regard to Facility A, the period following the Conversion Date during which the Facility A Loan will be repaid by the Borrowers, as established by the Bank pursuant to Section 3.3. "A/R Borrowing Base" has the meaning specified in Sections 4.1(b) and 4.4. "A/R Borrowing Base Redetermination" has the meaning specified in Section 4.4. "Bank" means First Interstate Bank of Denver, N.A., and its successors and assigns. "Borrowers" mean Bonneville Fuels Corporation, a Colorado corporation, Bonneville Fuels Marketing Corporation, a Utah corporation, Colorado Gathering 2 Corporation, a Utah Corporation, Bonneville Fuels Operating Corporation, a Utah corporation, and Bonneville Fuels Management Corporation, a Utah corporation. "BPC" means Bonneville Pacific Corporation, a Delaware corporation. "Borrowing Base Commitment Fees" mean the fees payable by the Borrowers to the Bank pursuant to Section 3.1(b). "Breakage Costs" mean the aggregate net amount of all costs and losses which the Bank actually incurs as a result of payment of the Principal Amount of any LIBOR Loan other than at the end of an Interest Period, the Bank's good faith computation of such costs and losses to be conclusive and binding in the absence of error, and the amount thereof to be paid in same day funds upon demand by the Bank. "Business Day" means any day of the year not a Saturday or Sunday on which banks in Denver, Colorado are open for business. "Chase" means Chase Manhattan Bank (National Association). "Chase Collateral Documents" mean the various collateral security documents creating liens and encumbrances on and security interests in certain real and personal property of BFC that secure the Chase Loan. "Chase Credit Agreement" means the credit agreement dated as of August 30, 1991 between BFC and Chase. "Chase Documents" mean the Chase Credit Agreement, the Chase Note and the Chase Collateral Documents. "Chase Loan" means the outstanding principal balance of the funds advanced by Chase to BFC, as evidenced by the Chase Note. "Chase Note" means the note dated as of August 30, 1991 between BFC and Chase evidencing the Chase Loan. "Chase Transfer Documents" mean assignments and other instruments of transfer in form reasonably satisfactory to the Bank, transferring the Chase Loan and Chase Documents to the Bank. "Closing Date" means June 27, 1994. "Collateral" means at any time, properties, assets, rights and interests of the Borrowers in which the Bank has an encumbrance, lien or security interest pursuant to the Collateral Documents. "Collateral Documents" mean the deeds of trust, mortgages, chattel mortgages, assignments of proceeds, security agreements, financing statements, pledge agreements 3 and other instruments in form and substance satisfactory to the Bank executed by the Borrowers as provided in Section 6.1, together with the Chase Collateral Documents and the Chase Transfer Documents, granting to and perfecting in favor of the Bank first and prior liens on or security interests in the properties, assets, rights and interests of the Borrowers described in such documents. "Commitment" means the aggregate undertaking of the Bank pursuant to the Facility A Commitment and the Facility B Commitment. "Conversion Date" means the date on which the Borrowers' right to borrow, repay and reborrow amounts under Facility A shall terminate as provided in Section 3.3 and on which the outstanding Principal Amount of the Facility A Loans shall become a Term Loan, subject to the Term Note, payable in installments as provided in Section 3.3. The Conversion Date will be April 1, 1996, unless the parties elect to extend the Conversion Date by mutual written agreement or, if earlier, the date on which the Revolving Loans terminate pursuant to Section 3.3. "Draw" means funds paid by the Bank to beneficiaries of and pursuant to Letters of Credit, which funds shall constitute Facility A Loans or Facility B Loans depending upon the facility pursuant to which the Letter of Credit was issued under which the Draw occurs. "Debt" means (i) indebtedness for borrowed money or for the deferred purchase price of property or services; (ii) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, regarded as capital leases; (iii) obligations under direct or indirect guarantees in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligation of others of the kinds referred to in clause (i) or (ii) above; and (iv) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Default Interest Rate" means a rate of interest per annum equal to (i) the Prime Rate in effect from time to time, plus (ii) four percent (4%). "Eligible Accounts Receivable" has the meaning specified in Section 4.4. "Environmental Laws" mean any federal, state or local law, statute, rule, regulation, ordinance, order or determination pertaining to health or the environment in effect in any and all jurisdictions in which the Borrowers are conducting or at any time have conducted business, or where any property of the Borrowers is located, or where any Hazardous Materials generated by or disposed of by the Borrowers are located, including, without limitation, the Clean Air Act, as amended; the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended; the Federal Water Pollution Control Act, as amended; the Resource Conservation and Recovery Act ("RCRA") as amended, the Safe Drinking Water Act, as amended; the Toxic Substances Control Act, as amended; the Oil Pollution Act of 1990, 4 as amended; the Hazardous Materials Transportation Act, as amended; and any other environmental conservation or protection laws. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" means any one of the events described in Section 9.1. "Face Amount" means the maximum amount the Bank is contingently obligated to pay to the beneficiary of a Letter of Credit. "Facility A Commitment" means (A) prior to the Conversion Date, the undertakings of the Bank to Advance Facility A Loans to the Borrowers on a joint and several liability basis from time to time on a revolving basis and to issue Letters of Credit for the account of the Borrowers on a joint and several liability basis from time to time; and (B) effective on the Conversion Date, the undertaking of the Bank to extend the Principal Amount of Loans outstanding on the Conversion Date on a nonrevolving, amortizing basis as a Term Loan maturing on the Facility A Maturity Date, with the aggregate Principal Amount of such Loans and Face Amount of such Letters of Credit at no time to exceed the lesser of (i) the Maximum Credit Amount for Facility A or (ii) the Production Borrowing Base from time to time. "Facility A Loans" mean Loans Advanced to the Borrowers prior to the Conversion Date pursuant to the Facility A Commitment and Draws under Letters of Credit issued pursuant to the Facility A Commitment. "Facility A Note" means the Revolving Note in the form of Exhibit A-1 hereto, which evidences the Facility A Loans. "Facility A Maturity Date" means the earlier of (i) the Facility A Scheduled Maturity Date and (ii) the date on which the Facility A Loans are payable by reason of Event of Default and an acceleration of the due date of such Loans by the Bank pursuant to Section 9.2. "Facility A Prepayment Fee" means the fee payable by the Borrowers to the Bank pursuant to Section 3.1(d). "Facility A Scheduled Maturity Date" means April 1, 2001. "Facility B Commitment" means the undertakings of the Bank to Advance Facility B Loans on a revolving basis solely to BFMC and BFM Corp. (but as the joint and several liability of all the Borrowers) as demand Loans and to issue Letters of Credit solely for the account of BFMC and BFM Corp. (but as the joint and several liability of all the Borrowers) from time to time prior to the Facility B Maturity Date, with the aggregate Principal Amount of such Loans and Face Amount of such Letters of Credit at no time to exceed the lesser of (i) the Maximum Credit Amount for Facility B or the (ii) A/R Borrowing Base from time to time. 5 "Facility B Loans" mean Loans Advanced to BFMC and BFM Corp. (but as the joint and several liability of all the Borrowers) pursuant to the Facility B Commitment and Draws under Letters of Credit issued pursuant to the Facility B Commitment. "Facility B Note" means the promissory note in the form of Exhibit A-2 hereto, which evidences the Facility B Loans. "Facility B Maturity Date" means the earlier of (i) the date on which demand for payment of the Facility B Loans is made by the Bank and (ii) April 1, 1995 or such later date as may be established by mutual agreement of the Parties pursuant to Section 2.3. "Facility Fee" means the fee payable by the Borrowers to the Bank pursuant to Section 3.1(a). "Governmental Acts" has the meaning specified in Section 3.10. "Governmental Authority" means any nation or government, any state, county, municipality or other political subdivision thereof, or any governmental body, agency, authority, department or commission, or any instrumentality or officer thereof exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Gross Revenue" means an amount determined by multiplying (y) the amount of each unit of hydrocarbons sold from and attributable to the Borrowers' net revenue interests in the Mortgaged Properties by (z) the respective gross sales prices paid to the Borrowers by the first purchasers of production at the well head for the corresponding period, which prices may be net of gathering, processing, transportation and marketing charges in accordance with the terms of applicable sales agreements. "Hazardous Materials" means hazardous substance as that term is defined in CERCLA at 42 U.S.C. Section 9601(14) and hazardous waste as that term is defined in RCRA at 42 U.S.C. Section 6903(5). "Initial Advance" means the Advance to be made on the Closing Date under this Agreement. "Interest Period" means, with respect to any LIBOR Loan, a period from the Advance Date or date of renewal with respect to such LIBOR Loan to a date which is one (1), two (2) or three (3) months thereafter; provided that: (i) the Interest Period for any LIBOR Loan shall commence on the Advance Date or date of renewal with respect to such LIBOR Loan; (ii) if any Interest Period in respect of a LIBOR Loan would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; 6 (iii) any Interest Period in respect of a LIBOR Loan which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clauses (ii) above and (iv) below, end on the last Business Day of a calendar month; (iv) no Interest Period for any LIBOR Loan shall extend beyond the Conversion Date; (v) there shall be no more than five (5) different Interest Periods outstanding at any one time; and (vi) if fail to request an Interest Period with respect to a LIBOR Loan pursuant to Section 3.2(b), the Borrowers shall be deemed to have selected an Interest Period of one (1) month for such LIBOR Loan. "Initial Production Borrowing Base" has the meaning specified in Section 4.1(a). "Interest Period/Conversion Notice" means a notice from the Borrowers to the Bank regarding the Borrowers, election concerning an Interest Period for a LIBOR Loan to take effect on the completion of a current Interest Period, or regarding the conversion of a Prime Rate Loan to a LIBOR Loan, or vice versa, in the form of Exhibit D hereto. "Interest Rate" means the rates of interest payable by the Borrowers on the Principal Amount of Loans from time to time, which shall be the LIBOR Loan Interest Rate or the Prime Rate Loan Interest Rate, as applicable to various portions of the Loans, or the Default Interest Rate. "Letter of Credit" means a standby letter of credit issued by the Bank hereunder at the request of the Borrowers and for the account of the Borrowers in accordance with Section 2.3. "Letter of Credit Fee" means the fee payable by the Borrowers to the Bank pursuant to Section 3.1(c). "LIBOR Loan" means a Facility A Loan for which interest is calculated at the LIBOR Loan Interest Rate. "LIBOR Loan Interest Rate" means, with respect to an Interest Period pertaining to a LIBOR Loan prior to the Conversion Date, an interest rate per annum equal to the sum of (y) the LIBOR Rate in effect on the first day of the Interest Period, plus (z) two percent (2%). "LIBOR Rate" means, relative to an Interest Period pertaining to a LIBOR Loan, the London Interbank Offered Rate (rounded upwards if necessary to the nearest whole one-sixteenth of one percent (1/16 of 1%)) as quoted in the Wall Street Journal two (2) Business Days prior to the beginning of such Interest Period, for a loan amount 7 approximately equal to the Principal Amount of such LIBOR Loan, for a period approximately equal to such Interest Period and as adjusted for reserve requirements and other charges that may be imposed on the Bank. "Loan" means (i) the funds Advanced to the Borrowers by the Bank hereunder as Facility A Loans and Facility B Loans; (ii) the Term Loan; and (iii) Draws, as evidenced by the Notes. "Loan Documents" mean this Agreement, the Notes, the Request for Credit, the Interest Period/Conversion Notice, the Collateral Documents and any other documents executed by the Borrowers and delivered to the Bank pursuant hereto. "Materially Adverse Effect" means, with respect to the Borrowers, an effect, resulting from any occurrence or state of affairs of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), which the Bank, in its sole discretion, reasonably exercised, determines is materially adverse to the ability of the Borrowers to repay the Loans or perform any other material obligation required under this Agreement or any of the Loan Documents. "Maximum Credit Amount" means (i) for Facility A Twenty Million Dollars ($20,000,000) and (ii) for Facility B one Million Dollars ($1,000,000), or, in either case, such lesser amounts elected by the Borrowers pursuant to Section 2.6. "Mortgaged Properties" mean the interests of the Borrowers in the wells and production units therefor identified in the Collateral Documents. "Net Revenue" means an amount determined by subtracting from Gross Revenue for a given period the sum of (x) all Operating Expenses for such period, plus (y) all production, severance, real property, ad valorem and other production- related taxes (but not taxes based upon the income of the Borrowers) for such period, plus (z) any Operating Expenses and production, severance real property, ad valorem and other production-related taxes relating to previous periods which have not already been included in the calculation of Net Revenue for a previous period. "Notes" mean the Facility A Note, the Facility B Note and the Term Note, which Notes evidence the Loans. "Omnibus Certificate" means the certificate from each of the Borrowers, in substantially the form of Exhibit G hereto. "Operating Expenses" means all reasonable and necessary expenses incurred by the Borrowers in connection with the operation and maintenance of the Mortgaged Properties (excluding expenses which are capitalized by the Borrowers for federal income tax purposes unless approved in writing by the Bank for inclusion as Operating Expenses), together with all gathering, processing, transportation and marketing charges not already deducted from the gross sales prices used to determine Gross Revenue. 8 "Opinion of Borrowers' Counsel" means the form of opinion of Welborn Sullivan Meck & Tooley, P.C., counsel for the Borrowers, in the form of Exhibit E hereto. "Party" means one or more of the Borrowers and the Bank, and their permitted successors and assigns. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Plan" means an employee benefit or other plan, including a multi-employer plan, which is covered by Title IV of ERISA. "Prime Rate" means an index rate which the Bank establishes and quotes from time to time for pricing certain of its loans. Information on the index rate currently in effect is announced publicly and can be obtained by contacting the Bank. The Bank's Prime Rate is not necessarily the best rate charged to Bank customers and the Bank may make loans at, above, or below this stated index rate. Changes in the index are effective without notice to the Borrowers. "Prime Rate Loan" means Loans for which the Prime Rate Loan Interest Rate is applicable. "Prime Rate Loan Interest Rate" means an interest rate per annum pertaining to a Prime Rate Loan. With respect to Facility A Loans, the Prime Rate Loan Interest Rate is the Prime Rate in effect from time to time. With respect to Facility B Loans, the Prime Rate Loan Interest Rate is equal to (i) the Prime Rate in effect from time to time plus (ii) one percent. "Principal Amount" means the principal amount of Loans outstanding hereunder from time to time. "Production Borrowing Base" has the meaning specified in Sections 4.1 and 4.2. "Quarter" means each three-month period ending each March 31, June 30, September 30 and December 31 during the term hereof. "Request for Credit" means a request by the Borrowers for an Advance of a Facility A Loan, or for an Advance of a Facility B Loan, or for the issuance of a Letter of Credit under Facility A or Facility B, in the form of Exhibit B hereto. "Revolving Loans" mean the funds Advanced to the Borrowers by the Bank hereunder (i) as Facility A Loans and Draws prior to the Conversion Date and (ii) as Facility B Loans and Draws during the Revolving Period. The Borrowers may borrow, repay and reborrow funds which are Advanced as Revolving Loans. 9 "Revolving Notes" mean the Facility A Note and the Facility B Note. "Revolving Period" means the periods during which the Bank will Advance Revolving Loans hereunder being (i) for Facility A the period commencing on the Closing Date and ending on the Conversion Date and (ii) for Facility B the period commencing on the Closing Date and ending on the Facility B Maturity Date. "Security Opinion" means the legal opinion or legal opinions substantially in the form of Exhibit F hereto, which will be delivered by the Borrowers pursuant to Section 6.3. "Term Loan" means the Principal Amount of the Facility A Loans on the Conversion Date, which are evidenced by the Term Note. "Term Note" means the promissory note in the form of Exhibit A-3 hereto, which evidences the Term Loan. "Unmatured Event of Default" means any facts, condition or state of affairs which, with the passage of time, shall constitute an Event of Default. "Year" means the fiscal year of the Borrowers. Section 1.2 Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." Section 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 7.1(f). ARTICLE II THE CREDIT Section 2.1 The Advances. The Bank agrees, subject to the terms and conditions of this Agreement, during the Revolving Period to Advance Loans to the Borrowers in multiple Advances as Revolving Loans and to issue Letters of Credit for the account of the Borrowers; provided, however, (a) that the aggregate Principal Amount of all Facility A Loans and Face Amount of all Letters of Credit issued under Facility A at no time exceeds the lesser of the Maximum Credit Amount for Facility A and the Production Borrowing Base and (b) that the aggregate Principal Amount of all Facility B Loans and Face Amount of all Letters of Credit issued under Facility B at no time exceeds the lesser of the Maximum Credit Amount for Facility B and the A/R Borrowing Base. 10 Section 2.2 Loans. Each Advance of a Loan under Facility A shall be in the minimum Principal Amount of $100,000. Each Advance of a Loan under Facility B shall be in the minimum Principal Amount of $10,000. Subject to all terms and conditions of this Agreement, the Borrowers may borrow, repay and, during the Revolving Period, reborrow funds which are Advanced as Revolving Loans; provided, however, that the Borrowers shall be liable for any Breakage Costs incurred by the Bank in connection with the Borrowers' repayment of a LIBOR Loan on any date other than the end of an Interest Period. Section 2.3 Letters of Credit. Each Letter of Credit issued by the Bank shall be a standby Letter of Credit, in form reasonably satisfactory to the Bank and shall be in the minimum amount of $1,000. Each Letter of Credit issued under Facility A shall have an expiry date no later than the Conversion Date. Each Letter of Credit issued under Facility B shall have an expiry date no later than the Facility B Maturity Date; provided, however, that at the Borrowers' written request the expiry date of any such Letters of Credit may be extended for up to six (6) months beyond the Facility B Maturity Date but to no later than October 1, 1995. All Draws under Letters of Credit shall constitute Loans hereunder for all purposes. Section 2.4 Credit Utilization Procedures. (a) Loans and Letters of Credit. Not later than 10:00 a.m. Denver, Colorado time two (2) Business Days prior to the desired date of an Advance of a Loan or six (6) Business Days prior to the desired date of the issuance of a Letter of Credit, the Borrowers shall submit a Request for Credit to the Bank, in the form of Exhibit B hereto, specifying the manner in which the Borrowers desire to utilize the credit facilities provided under this Agreement and, in the case of the issuance of a Letter of Credit, an executed application and agreement for a standby letter of credit in a form acceptable to the Bank. If the Request for Credit pertains to an Advance of a Loan, the Bank shall Advance the Loan at the Borrowers direction either by crediting the applicable Borrowers' account with the Bank on the desired date of the Advance or by wire transfer thereof on the desired date of the Advance to the account designated in the Request for Credit. If the Request for Credit pertains to the issuance of a Letter of Credit, the Bank will issue the Letter of Credit and will deliver the Letter of Credit to the beneficiary thereof on the desired date of issuance. (b) Conversion of Facility A Prime Rate Loans. Subject to the terms and conditions hereof, at any time no Unmatured Event of Default or Event of Default is outstanding under Facility A, the Borrowers may elect to convert outstanding Prime Rate Loans to LIBOR Loans. Any such election shall be effected by the Borrowers' delivery to the Bank of an Interest Period/Conversion Notice in the form of Exhibit D hereto, not less than two (2) Business Days prior to the desired date of the conversion. Unless the Bank notifies the Borrowers that there is an impediment to any such conversion of which notice is so given by the Borrowers, the conversion of the Prime Rate Loan referenced in such notice shall be effective on the date specified in the Interest Period/Conversion Notice. 11 Section 2.5 Conditions to Advances/Letters of Credit. Notwithstanding any other provision of this Agreement, the Bank shall not be required to make any Advance or to issue any Letter of Credit if the conditions precedent thereto specified in Article V hereof have not been satisfied. Section 2.6 Voluntary Termination of the Commitment or Reduction of Maximum Credit Amounts. At any time, and from time to time, the Borrowers may elect (a) to terminate entirely either or both of the Facility A Commitment or the Facility B Commitment, or (b) to reduce the Maximum Credit Amount for either or both of Facility A and Facility B by notice of any such election to the Bank; provided, however, that in no event may the Commitment be terminated while any Loans are outstanding or Letters of Credit are in effect, nor may the Maximum Credit Amount be reduced to an amount less than the aggregate Principal Amount of outstanding Loans and Face Amount of outstanding Letters of Credit. Any such election shall be effective two (2) Business Days after receipt by the Bank of the Borrowers' election to such effect. Any election to terminate the Commitment or reduce the Maximum Credit Amount shall be irrevocable. ARTICLE III FEES, PROCEDURES AND PAYMENT Section 3.1 Fees. (a) Facility Fee . The Borrowers agree to pay the Bank a one- time, nonrefundable fee (the "Facility Fee") in connection with the establishment of the Commitment in the amount of one-half of one percent (1/2 of 1%) of the Initial Production Borrowing Base. The Facility Fee is payable by the Borrowers to the Bank on the Closing Date. (b) Borrowing Base Commitment Fees. The Borrowers agree to pay to the Bank a fee (the "Borrowing Base Commitment Fees") under each Facility As follows. The Borrowing Base Commitment Fees with respect to Facility A shall be determined and paid quarterly in arrears until the Conversion Date at the rate of one-quarter of one percent (1/4 of 1%) per annum of the amount by which the average daily aggregate Principal Amount of Facility A Loans and Face Amount of Letters of Credit issued under Facility A during the Quarter is less than the Production Borrowing Base applicable for such Quarter. The Borrowing Base Commitment Fees with respect to Facility B shall be determined and paid quarterly in arrears at the rate of one-quarter of one percent (1/4 of 1%) per annum of the amount by which the average daily aggregate Principal Amount of Facility B Loans and Face Amount of Letters of Credit issued under Facility B during the Quarter is less than the Maximum Credit Amount for Facility B. The Commitment Fees will be payable by the Borrowers promptly after receipt of quarterly invoices therefor from the Bank. (c) Letter of Credit Fees. The Borrowers agree to pay a fee (the "Letter of Credit Fee") with respect to each Letter of Credit issued pursuant hereto in the amount of one and one-quarter percent (1 1/4%) per annum of the Face Amount of the 12 Letter of Credit or $225, whichever is greater. The Letter of Credit Fee will be payable concurrently with the issuance of each Letter of Credit and is not refundable if the Letter of Credit is terminated or released prior to its expiry date. In addition, the Borrowers agree to pay the usual and customary processing and issuance fees for Letters of Credit charged by the Bank for issuance of letters of credit and any amendments thereto. (d) Facility A Prepayment Fee. If pursuant to Section 2.6, the Borrowers prepay and terminate Facility A during the first twelve (12) months of the Revolving Period, the Borrowers agree to pay to the Bank a fee (the "Facility A Prepayment Fee") equal to one-half of one percent (1/2 of 1%) of the most recent Production Borrowing Base as determined by the Bank pursuant to Sections 4.1 and 4.2. Section 3.2 Interest. (a) General. The Borrowers shall pay interest on the outstanding Principal Amount of the Loans at the applicable Interest Rate. Subject to Section 9.2 pursuant to which the Default Interest Rate may become applicable, (i) interest on Facility A Loans may be calculated at the Prime Rate Loan Interest Rate or the LIBOR Loan Interest Rate, as elected by Borrowers or as otherwise provided herein; and (ii) interest on Facility B Loans and the Term Loan will be calculated at the Prime Rate Loan Interest Rate. Interest payable shall be calculated daily. Interest on LIBOR Loans shall be payable on the last day of each Interest Period. Interest on Prime Rate Loans shall be payable monthly, in arrears, on the first Business Day of each month with respect to the preceding month. Interest accruing at the Default Interest Rate shall be payable on demand. (b) Interest Periods. The Borrowers will select an Interest Period for each LIBOR Loan by giving notice to the Bank in the Request for Credit and thereafter (with respect to outstanding LIBOR Loans to be continued as LIBOR Loans) by giving notice in an Interest Period/Conversion Notice at least two (2) Business Days prior to the expiry date of the Interest Period then in effect. With respect to existing LIBOR Loans, if the Borrowers fail to give timely notice of an Interest Period selection, then the Borrowers shall be deemed to have elected to convert the LIBOR Loan to a Prime Rate Loan effective as of the end of the then current Interest Period for such LIBOR Loan. Section 3.3 Conversion of Facility A Loans; Amortization of Term Loan. Upon the occurrence of the Conversion Date, the Borrowers shall have no further right hereunder to receive Advances under Facility A. The Principal Amount of the Facility A Loans on the Conversion Date shall automatically become a Term Loan and will be evidenced by the Term Note in the form of Exhibit A-3 hereto. Subject to Sections 4.3 and 9.2, the Term Loan will be repaid beginning on May 1, 1996 according to a minimum monthly principal payment schedule to be determined by the Bank as of the Conversion Date. The minimum monthly principal payment schedule will provide for repayment of the Term Loan over a period equal to the lesser of (a) the economic half-life of the Mortgaged Properties as determined by the Bank as of the Conversion Date in accordance with its normal parameters for oil and gas production-based loans in effect at 13 the time or (b) five (5) years; provided, however, that the Term Loan shall be paid in full no later than the Facility A Scheduled Maturity Date. Section 3.4 Payments of Principal During the Revolving Period. During the Revolving Period, and in addition to any payments of principal required pursuant to Section 4.3, payments of the Principal Amount of the Revolving Loans may be made by the Borrowers in whole or in part on any Business Day (a) for Facility A through and including the Conversion Date and (b) for Facility B through and including the Facility B Maturity Date; provided, however, in the event the Bank makes demand for payment under Facility B prior to the Facility B Maturity Date, the Borrowers shall have the lesser of sixty (60) days or until the Facility B Maturity Date (i) to repay cash Advances and (ii) to secure outstanding Letters of Credit with cash collateral. Payments made hereunder shall be in the minimum amount of $50,000 and shall be without premium or penalty except as provided otherwise in Section 3.1(d). Payments shall be accompanied by interest accrued on the amount prepaid through the date of the payment, plus, in the case of LIBOR Loans, Breakage Costs, if any, for any prepayment which is not at the end of an Interest Period. Section 3.5 Prepayment of the Term Loan. During the Amortizing Period, the Borrowers shall have the right to prepay the Principal Amount of the Term Loan on any Business Day as provided herein, upon at least two (2) Business Days' notice to the Bank. Prepayments shall be in the minimum amount of $50,000. Prepayments shall be without premium or penalty. Prepayments will be applied, at Borrowers' option, to installment payments of principal due hereunder in inverse order of or in order of approaching maturity and shall be accompanied by a payment of accrued interest on the Principal Amount prepaid through the date of the prepayment. Section 3.6 Payments and Computations. (a) The Borrowers shall make each payment hereunder and under the Notes not later than 12:00 noon (Denver, Colorado time) on the day when due in lawful money of the United States of America to the Bank at its office at 633 Seventeenth Street, Denver, Colorado, or at any other location designated by the Bank. (b) All computations of interest under the Prime Rate Loans and the Borrowing Base Commitment Fees set forth in Section 3.1(b) shall be made by the Bank on the basis of a year of 365 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or Borrowing Base Commitment Fees is payable. All computations of interest under the LIBOR Loans shall be made by the Bank on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the Interest Period. Whenever any payment to be made hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or the Borrowing Base Commitment Fees, as the case may be. 14 Section 3.7 Evidence of Debt. (a) Prior to the Conversion Date the indebtedness of the Borrowers resulting from all Advances made from time to time under Facility A or Draws under Letters of Credit issued under Facility A shall be evidenced by the Facility A Note of the Borrowers delivered to the Bank pursuant to Article V. On and after the Conversion Date, the total indebtedness of the Borrowers under Facility A which has not been repaid as of the Conversion Date shall be evidenced by the Term Note of the Borrowers delivered to the Bank pursuant to Article V. (b) Prior to the Facility B Maturity Date the indebtedness of the Borrowers resulting from all Advances made from time to time under Facility B or Draws under Letters of Credit issued under Facility B shall be evidenced by the Facility B Note of the Borrowers delivered to the Bank pursuant to Article V. Section 3.8 Use of Proceeds. All Advances shall be used by the Borrowers exclusively in the following manner: (a) Facility A. Proceeds drawn under the Facility A Commitment shall be used by the Borrowers: (i) For cash advances to repay all amounts owing by BFC to Chase pursuant to the Chase Loan. (ii) For cash advances to be used by the Borrowers in operations in the ordinary course of business, including without limitation (A) for working capital, (B) for capital expenditures relating to acquisition, exploration and development of oil and gas properties and (C) to cure an A/R Borrowing Base deficiency or payment default under Facility B as provided under Section 4.4. (iii) For cash advances or for the issuance of Letters of Credit (with expiry dates no later than the Conversion Date) used to meet the margin requirements of commodity brokers or financial intermediaries in connection with the Borrowers' commodity price hedging activities. (b) Facility B. Proceeds drawn under the Facility B Commitment shall be used solely by BFMC and BFM Corp.: (i) For the issuance of standby Letters of Credit to support BFMC's and BFM Corp.'s natural gas marketing activities, including guaranteeing payment for the purchase and transportation of natural gas. (ii) For cash advances used by BFMC and BFM Corp. to meet working capital requirements relating to their natural gas marketing activities, including the payment of amounts due for natural gas purchases and transportation services. 15 (iii) For cash advances or for the issuance of standby Letters of Credit used to meet the margin requirements of commodity brokers or financial intermediaries in connection with BFMC's and BFM Corp.'s commodity price hedging activities. Section 3.9 Inability to Honor Commitment. The Bank shall not be liable for any failure to comply with its obligations under or pursuant to the Commitment if and to the extent such failure is caused directly or indirectly, wholly or partly, by act or omission of any government or other competent authority beyond the reasonable control of the Bank. Section 3.10 Increased Costs and Reduction in Return. If due to (a) the introduction of, or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in, or in the interpretation of, any law or regulation or (b) the compliance by the Bank with any guideline or request from any central bank or other governmental authority having jurisdiction over the Bank (whether or not having the force of law) collectively referred to as "Governmental Acts," there shall be an increase in the cost or reduction in return to the Bank of agreeing to make or making, funding or maintaining the Loans, then the Borrowers shall from time to time, upon notice and demand by the Bank, pay to the Bank additional amounts sufficient to indemnify it against such increased costs or reduction in return accruing to or otherwise realized by the Bank commencing on the day which is ninety (90) days after such notice and demand by the Bank. Such increased costs or reduction in return shall be determined by the Bank's reasonable allocation of the aggregate of such increased costs or reduction in return resulting from such Governmental Acts. A certificate as to the amount of such increased cost or reduced return, submitted to the Borrowers by the Bank, identifying the increased cost or reduced return in reasonable detail, shall be conclusive absent manifest error. ARTICLE IV BORROWING BASE Section 4.1 Initial Borrowing Base. (a) Facility A. During the period from the Closing Date to the date of the first determination of the Production Borrowing Base pursuant to Section 4.2, the amount of the Production Borrowing Base for Facility A shall be Eight Million Five Hundred Thousand Dollars ($8,500,000), which is the Initial Production Borrowing Base. (b) Facility B. During the period from the Closing Date to the date of the first determination of the A/R Borrowing Base pursuant to Section 4.4, the amount of the A/R Borrowing Base for Facility B shall be Dollars ($570,287.00). 16 Section 4.2 Production Borrowing Base Determinations. The Production Borrowing Base under Facility A shall be redetermined (a) during the Revolving Period by the Bank as of (i) each April 1, commencing April 1, 1995 (based upon the Bank's evaluation of annual independent engineering reports to be provided to the Bank by the Borrowers as more fully described in Section 4.5(a)) and (ii) each October 1, commencing October 1, 1994 (based upon the Bank's evaluation of the Borrowers' actual production, revenue and expense data to be provided to the Bank by the Borrowers as more fully described in Section 4.5(b)) and (b) during the Amortizing Period by the Bank as of each April 1 (based upon the aforementioned independent engineering reports) and (c) otherwise may be redetermined by the Bank from time to time during the term of this Agreement at the Bank's option and in the sole discretion of the Bank in accordance with the Bank's standard parameters for making oil and gas production based loans in effect at the time of such redetermination, together with such adjustments as the Bank determines to be appropriate, in its sole discretion reasonably exercised, to reflect the impact on the value of such properties of breaches of Environmental Laws, if any, by the Borrowers or their predecessors in ownership of any of the Mortgaged Properties. Any increase in the Production Borrowing Base from the Initial Production Borrowing Base as contemplated in Section 4.1 shall require prior written approval of the Bank's credit committees which may be given or withheld in the Bank's sole discretion and, as long as Bonneville Pacific Corporation is involved as a debtor in a United States Bankruptcy Court proceeding, any increase in the Production Borrowing Base above Ten Million Dollars ($10,000,000) shall require prior written approval by the Bankruptcy Court. The Bank shall notify the Borrowers of each change in the Production Borrowing Base under Facility A and the amount set forth in such notice shall be the amount of the Production Borrowing Base for all purposes of this Agreement until notice of a new Production Borrowing Base is given by the Bank to the Borrowers; provided, however, that the Borrowers may, by written notice to the Bank within ten (10) Business Days after the Borrowers receive notice of a change in the Production Borrowing Base from the Bank, reduce the amount of the Production Borrowing Base from the amount set forth in the Bank's notice to the Borrowers to any lesser amount which is equal to or in excess of the aggregate Principal Amount of Facility A Loans and Face Amount of Letters of Credit issued under Facility A. Any notice given by the Borrowers to reduce the Production Borrowing Base, shall be effective ten (10) Business Days following the receipt of such notice by the Bank, and the amount set forth in such notice shall be the amount of the Production Borrowing Base for all purposes of this Agreement until notice of a new Production Borrowing Base is given by the Bank to the Borrowers. However, if the Production Borrowing Base is reduced by the Borrowers pursuant to this Section 4.2, the Borrowers may, upon ten (10) Business Days' prior written notice given to the Bank, increase the Production Borrowing Base up to the amount originally specified in the Bank's notice to the Borrowers on which such reduction was based. Such notice of increase must be accompanied by payment to the Bank of an amount equal to the Borrowing Base Commitment Fees specified in Section 3.1(b) which would have accrued and been invoiced by the Bank on the amount of the increase to the date of reinstatement if the amount of such increase had been included within the Production Borrowing Base at all 17 times from the date of the Bank's notice to the Borrowers. Any such amounts which are payable by the Borrowers but which would not have been invoiced by the Bank shall be payable at the next scheduled invoice for Borrowing Base Commitment Fees. Section 4.3 Mandatory Action When Facility A Loans And Letters Of Credit Issued Under Facility A Exceed The Production Borrowing Base. In the event the aggregate unpaid Principal Amount of the Facility A Loans and Face Amount of the Letters of Credit issued under Facility A shall, at the time of any determination of the Production Borrowing Base pursuant to Section 4.2, be in excess of the Production Borrowing Base, the Bank shall so notify the Borrowers, and the Borrowers shall within ten (10) Business Days thereof notify the Bank of the Borrowers' election to implement one or a combination of the following alternatives to eliminate such excess. (a) The Borrowers may elect to pay, within thirty (30) days of such notice, as much of the Facility A Loans and/or replace Letters of Credit as necessary in order that the aggregate Principal Amount and Face Amount thereof outstanding shall not exceed the Production Borrowing Base. (b) The Borrowers may elect to amortize such excess in six (6) equal monthly installments of principal beginning on the first day of the month following the date of such notice. (c) The Borrowers may increase the Production Borrowing Base to an amount equal to the aggregate unpaid Principal Amount of the Facility A Loans and Face Amount of the Letters of Credit issued pursuant to Facility A by presenting, within thirty (30) days after date of such notice, at the Borrowers' option, (i) an independent engineer's report to the Bank, in form and substance reasonably satisfactory to the Bank, or (ii) actual production, revenue and expense data reasonably satisfactory to the Bank, regarding additional producing oil and gas properties to be subjected to the first lien of the Collateral Documents, which report or data indicate that the value of such properties will eliminate the excess of the Facility A Loans and Letters of Credit over the Production Borrowing Base. The Bank shall determine, in accordance with Section 4.2, whether any such additional properties will increase the Production Borrowing Base, and the extent of any such increase. The increase in the Borrowing Base based upon such additional properties shall be effective only when such properties have been added to the Collateral and the Bank has been satisfied with respect to the Borrowers' title thereto. If the Borrowers fail to eliminate such excess of the Facility A Loans and Letters of Credit over the Production Borrowing Base within such thirty (30) day period pursuant to subsections (a) or (c) above, or fail to begin amortizing such excess pursuant to subsection (b) above, the Bank may, at its option, declare that an Unmatured Event of Default shall have occurred hereunder and the Bank shall be entitled to exercise its rights under Article IX. Section 4.4 A/R Borrowing Base Determinations. The A/R Borrowing Base under Facility B shall be an amount equal to 60% of the Eligible Accounts Receivable as 18 redetermined by the Bank in the exercise of its sole discretion on the fifteenth day of each month (an "A/R Borrowing Base Redetermination") based upon BFMC's and BFM Corp.'s most recent Accounts Receivable Report. The A/R Borrowing Base will be effective from the date of an A/R Borrowing Base Redetermination until the date of the next A/R Borrowing Base Redetermination. "Eligible Accounts Receivable" means those accounts receivable of BFMC and BFM Corp., for sales made according to usual contract sales terms, which are less than thirty (30) days old from the date of invoice, together with (i) accounts from related or affiliated entities to the extent the respective Borrower has in its possession cash pre-payments or deposits from such entities and for which such Borrower has the right to offset such prepayments or deposits for payment of such accounts, and (ii) accounts anticipated to be billed during the next month for sales made during the current month, and for which the respective Borrower has made prepayments (or has guaranteed payment through the Bank's issuance of letters of credit on behalf of such Borrower) for purchases anticipated to be made and/or transportation services anticipated to be utilized during the current month. Specifically not included in Eligible Accounts Receivable are (a) disputed accounts, (b) finance charges, (c) accounts subject to offset or counterclaim by account debtors, (d) U.S. Government accounts, (e) foreign accounts, (f) cash-on-delivery (COD) accounts, (g) employee receivables, (h) receivables from related or affiliated entities for which the respective Borrower does not have in its possession offsetting pre-payments or deposits, or (i) any other accounts the Bank, exercising reasonable discretion, deems ineligible. In addition, account concentrations in excess of fifteen percent (15%) from an account debtor (excluding accounts due under the American Atlas Contract) would be limited to an amount equal to fifteen percent (15%) of the total accounts used to calculate the A/R Borrowing Base, unless specifically approved for inclusion in the A/R Borrowing Base calculation by the Bank. Section 4.5 Engineering Reports; Production and Income Projections. (a) Promptly after each December 31 hereafter, commencing December 31, 1994, occurring prior to the Facility A Maturity Date, and in all events within sixty (60) days after each such date, the Borrowers shall furnish to the Bank a report in form and substance reasonably satisfactory to the Bank by an independent petroleum engineer reasonably acceptable to the Bank concerning the Mortgaged Properties. Such report shall set forth the estimated proven and producing and proven and nonproducing oil and gas reserves attributable to all of the Borrowers, properties, including, but not limited to, the Mortgaged Properties, and to any additional properties which the Borrowers propose to add to the Collateral, and shall include a projection of the rate of production therefrom for the life of such properties. In the event the Borrowers are unable to provide production data to the Bank in magnetic form compatible with the Bank's hardware and engineering software (Garrett's Aries), the Borrowers agree to reimburse the Bank for any out-of-pocket expenses relating to obtaining production data from Dwight's Energy Data Service or a comparable service as chosen by the Bank in its sole discretion. 19 (b) Promptly after each June 30 hereafter, commencing June 30, 1994, occurring prior to the Conversion Date, and in all events within sixty (60) days after each such date, the Borrowers shall furnish to the Bank the Borrowers' actual monthly production, revenue and expense data in accordance with Section 8.1(b). ARTICLE V CONDITIONS OF LENDING Section 5.1 Conditions Precedent to the Initial Advance. The obligation of the Bank to make its Initial Advance is subject to the satisfaction of the following conditions precedent: (a) The Bank shall have received, on or before the day of the Advance, the following in form, substance and date satisfactory to the Bank: (i) this Agreement, executed by the Borrowers; (ii) the Notes, executed by the Borrowers, dated as of the date of this Agreement; (iii) an "Omnibus Certificate" of the Secretary and the President of each of the Borrowers substantially in the form of Exhibit G hereto, which shall contain the names and signatures of the officers of the Borrowers entitled to execute the Loan Documents and to request Advances and which shall certify the truthfulness, correctness and completeness of the following attachments thereto: (1) a copy of the articles of incorporation of each of the Borrowers and all amendments thereto, (2) a copy of the bylaws of each of the Borrowers, and (3) a copy of the resolutions duly adopted by the Board of Directors of each of the Borrowers authorizing the Borrowers to enter into this Agreement, to execute all documents related hereto and to carry out the transactions contemplated herein; (iv) the Collateral Documents, executed by the Borrowers; (v) a certificate of the due incorporation, valid existence and good standing of each of the Borrowers in their respective states of incorporation, issued by the appropriate authorities in such jurisdiction; (vi) a certificate evidencing each of the Borrowers' good standing and due qualification as a foreign corporation to do business in each jurisdiction in which such qualification is necessary, including in the case of BFC, but not limited to, New Mexico, Texas and Utah, issued by appropriate authorities in such jurisdictions; (vii) the Opinion of Borrowers' Counsel in the form of Exhibit E hereto; 20 (viii) evidence of written approval by the United States Bankruptcy Court having jurisdiction over the bankruptcy proceedings of Bonneville Pacific Corporation that Borrowers are authorized to enter into this Agreement and otherwise in form reasonably satisfactory to the Bank; (ix) the Chase Transfer Documents, duly executed by Chase; (x) evidence satisfactory to the Bank of the Borrowers' title to the Mortgaged Properties subject to the Collateral Documents and to the other Collateral, which title shall be free and clear of liens, encumbrances and defects except those in favor of Chase in connection with the Chase Loan which have been transferred to the Bank and those acceptable to the Bank in its sole discretion as listed in Schedule 7.1(n); and (xi) any other documents and instruments that the Bank shall have reasonably requested, which the Parties anticipate may include (A) an opinion of legal counsel for Borrowers that the Chase Transfer Documents when properly executed will vest in the Bank those rights currently owned by Chase in the Chase Documents and the Mortgaged Property; (B) corporate documents and records; and (C) certificates of officers and representatives of Borrowers as to the accuracy and validity of or compliance with all representations, warranties and covenants made by Borrowers in this Agreement. (b) The Bank shall have conducted an examination of and have been satisfied (in its sole discretion, reasonably exercised) with BFMC's and BFM Corp.'s gas marketing, accounting and billing systems. Section 5.2 Conditions Precedent to all Advances. The obligation of the Bank to make each Advance (including the Initial Advance) shall be subject to the further conditions precedent that: (a) the Borrowers shall have performed and complied with all agreements and conditions herein required to be performed or complied with on or prior to the date of such Advance; (b) the Bank shall have received a Request for Credit, duly executed by the Borrowers; (c) on the date of such Advance the Bank shall have received such other approvals, opinions or documents as required under the terms of this Agreement; (d) on the date of such Advance the Bank shall have satisfied itself of the absence of a Materially Adverse Effect; (e) such Advance shall not cause the aggregate Principal Amount of the Facility A Loans and the Facility B Loans and Face Amount of issued Letters of Credit to exceed the Commitment; 21 (f) there shall exist no Unmatured Event of Default or Event of Default; (g) all representations and warranties made by the Borrowers shall be true and correct on the date of such Advance, except for (i) such changes therein as shall be acceptable to the Bank and (ii) such changes therein as do not have a Materially Adverse Effect on the Borrowers; and (h) all governmental requirements and all material approvals and consents (including, without limitation, all material approvals and consents required in connection with any Environmental Laws) of Governmental Authorities or other Persons, if any, required in connection with the operation of the Collateral, shall have been complied with or obtained and remain in effect. ARTICLE VI SECURITY Section 6.1 Security. Payment of the Notes and all other obligations of the Borrowers hereunder shall be secured by liens on and security interests in the Collateral pursuant to the Collateral Documents. The Bank will record or file the Collateral Documents at the Borrowers' expense promptly after execution and delivery thereof. Section 6.2 Perfection and Protection of Security Interests and Liens. The Borrowers will cause to be delivered to the Bank from time to time as determined to be necessary or desirable by the Bank any mortgages, deeds of trust, financing statements, continuation statements, extension agreements and other documents, properly completed and executed (and acknowledged when required) by the Borrowers, in form and substance satisfactory to the Bank for the purpose of perfecting or protecting the Bank's liens, pledges, security interests and assignments in and of the Collateral. Section 6.3 Security-Opinions. Not more than one hundred twenty (120) days after the Closing Date, the Borrowers shall furnish to the Bank an opinion or opinions (the "Security opinion") from Borrowers' counsel, in form of Exhibit F hereto, confirming that the nature and extent of the Borrowers' title to the portion of the Mortgaged Properties identified in Schedule 6.3 hereto (with such opinions expressly to include the Borrowers, working and net revenue interests therein) conform to the assumptions used by the Bank in determining the Production Borrowing Base and confirming that the Collateral Documents have duly created and perfected a first enforceable lien thereon in favor of the Bank. In addition, from time to time during the term hereof, the Borrowers will deliver such additional opinions regarding the Mortgaged Properties, from Borrowers' counsel and in form and content reasonably satisfactory to the Bank, as the Bank may reasonably request with respect to (i) actual or potential material defects in the Borrowers' title to a particular Mortgaged Property or, (ii) additional producing oil and gas properties included in the Production Borrowing Base. 22 Section 6.4 Banker's Lien; Offset. The Borrowers hereby confirm the Bank's banker's lien and grant to the Bank a right of offset to secure the payment of the Borrowers' obligations hereunder to the Bank, which right of offset shall be upon any and all monies, securities or other property (and the proceeds therefrom) of the Borrowers, now or hereafter held or received by or in transit to the Bank from or for the account of the Borrowers, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and also upon any and all deposits (general or special), credits and claims of the Borrowers, at any time existing against the Bank. Upon the occurrence of any Event of Default, the Bank is authorized at any time and from time to time, without notice to the Borrowers, to offset, appropriate, and apply any and all items hereinabove referred to against the Borrowers' obligations to the Bank under the Loan Documents. Section 6.5 Deposit Accounts. The Bank reserves the right to require, at the Bank's sole discretion, the Borrowers to maintain deposit account(s) with the Bank for the deposit of (a) production proceeds from the Mortgaged Properties and (b) proceeds from BFMC's and BFM Corp.'s accounts and contracts. The Bank agrees that such accounts will be interest-bearing to the extent the Bank is reasonably able to do so. ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.1 Representations and Warranties of the Borrowers. The Borrowers represent and warrant as follows: (a) Existence; Standing. BFC is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado. BFM Corp., BFOC, BFMC and CGC are each corporations duly incorporated, validly existing, and in good standing under the laws of the State of Utah. (b) Qualification to Do Business. Each Borrower is in good standing and duly qualified as a foreign corporation to do business in each jurisdiction in which such qualification is necessary and in which a failure to so qualify would have a Materially Adverse Effect on its business. (c) Due Authorization. The execution, delivery and performance by the Borrowers of this Agreement, the Notes and the Collateral Documents are within each of the Borrowers, corporate powers, have been duly authorized by all necessary corporate action by each of the Borrowers, and do not contravene. (i) the Borrowers' organizational documents, charter or bylaws or (ii) any law or any contractual restriction binding on or affecting the Borrowers. 23 (d) Approvals. Except as provided in Schedule 7.1(d), no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the due execution, delivery and performance by the Borrowers of the Loan Documents. (e) Binding Obligations. This Agreement is, and the Notes and the Collateral Documents and all other Loan Documents when executed and delivered hereunder will be, legal, valid and binding obligations of the Borrowers, enforceable against the Borrowers in accordance with their respective terms, except (i) that such enforcement may be subject to bankruptcy, insolvency, moratorium or similar laws affecting creditors, rights and (ii) that the remedy of specific performance and injunctive and other forms of equitable relief are subject to certain equitable defenses and to the discretion of the court before which any proceedings therefor may be brought. (f) Financial Statements. The balance sheets of the Borrowers, dated as of December 31, 1993, and the related statements of income and retained earnings of the Borrowers for the Year then ended, copies of which have been furnished to the Bank, fairly present the financial condition of the Borrowers as at such date and the results of the operations of the Borrowers for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied, and since such date there has been no material adverse change in such condition or operations which has not been disclosed to the Bank in writing. (g) Use of Proceeds. (i) No proceeds of any Advance will be used to acquire any security in any transaction which is subject to Sections 13 and 14 of the Securities Exchange Act of 1934 and (ii) no proceeds will be used to make loans or advances to, dividends to, stock purchase from, or payments against advances from BPC. (h) Regulation U. The Borrowers are not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. (i) Investment Company Act. The Borrowers are not, and the Borrowers are not directly or indirectly controlled by, or acting on behalf of any Person which is, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (j) Other Obligations. Except as shown in Schedule 7.1(j), the Borrowers have no outstanding indebtedness, obligations, liabilities (including contingent, indirect and secondary liabilities and obligations), tax assessments or unusual forward or long-term commitments, with respect to the Mortgaged Properties which are, in the aggregate, material (defined as being in excess of $100,000.00) with respect to the financial condition of the Borrowers, and in either case, not shown in the financial 24 statements referred to in Section 7.1(f) or in any other writings heretofore delivered by the Borrowers to the Bank. (k) Full Disclosure. No certificate, statement or other information delivered herewith or heretofore by the Borrowers to the Bank in connection with the negotiation of this Agreement or in connection with any transaction contemplated hereby contains any untrue statement of a material fact or omits to state any material fact known to the Borrowers necessary to make the statements contained herein or therein not misleading as of the date presented. There is no fact known to the Borrowers that the Borrowers have not disclosed to the Bank in writing which could materially and adversely affect the properties, business, prospects or condition (financial or otherwise) of the Borrowers. (l) No Litigation. Except as identified in Schedule 7.1(l) hereto, there are no actions, suits or legal, equitable, arbitrative or administrative proceedings pending or, to the knowledge of the Borrowers, threatened against the Borrowers at law or in equity or before any federal, state, municipal or other governmental department, commission, body, board, bureau, agency, or instrumentality, domestic or foreign, and there are no outstanding judgments, injunctions, writs, rulings or orders by any court or governmental body against the Borrowers, any of the Borrowers' stockholders, directors or officers, which relate to the Collateral, or, with respect to their Borrowers generally, which do or may materially and adversely (defined as being in excess of $500,000 in the aggregate) affect the Borrowers, their ownership or use of any of their assets or properties, their businesses or financial conditions or prospects, or the right or ability of the Borrowers to enter into this Agreement or to consummate the transactions contemplated hereby or to perform their obligations hereunder. (m) No ERISA Liability. The Borrowers have no knowledge of the occurrence of any event with respect to any ERISA Plan which could result in a liability of the Borrowers to the Pension Benefit Guaranty Corporation, other than the payment of premiums (but no late payment charge) pursuant to Section 4007 of ERISA. (n) Title to Mortgaged Properties. BFC and BFOC have good and defensible title to the interests in oil and gas wells and other interests which comprise the Mortgaged Properties, and BFMC and BFM Corp. have good title to their accounts receivable, in each case free and clear of all liens, encumbrances, options, charges and assessments other than those identified in Schedule 7.1(n) and in Section 8.1(q) hereto, or as otherwise disclosed to the Bank in writing prior to the execution hereof by the Borrowers. (o) Existing Subsidiaries. The Borrowers have no existing subsidiaries, except that BFMC, CGC, BFOC and BFM Corp. are subsidiaries of BFC. (p) Drilling and Operations. To the best of the Borrowers' knowledge, the oil and gas wells identified in the Collateral Documents have been drilled and operated in all material respects in accordance with the terms of relevant leases and 25 agreements and applicable federal, state and local laws and regulations and are bottomed on and producing from the drilling and spacing units or blocks therefor. (q) Qualification to Hold Federal Oil and Gas Leases. The Borrowers are duly qualified to hold interests in oil and gas leases issued by the United States pursuant to the 1920 Mineral Leasing Act. (r) Environmental. Except as indicated in Schedule 7.1(r), the Mortgaged Properties are, and at all times have been, operated by the Borrowers, and to the knowledge of Borrowers, by the Borrowers' predecessors in interest, in material compliance with all Environmental Laws then applicable; and no conditions exist which are due to ownership and operation by the Borrowers, or to the knowledge of Borrowers, which are due to ownership and operation by Borrowers, predecessors in interest that would subject the Borrowers or the Bank to any damages (including without limitation actual, consequential, exemplary and punitive damages), penalties, injunctive relief or cleanup costs under any Environmental Law, or that require or are likely to require cleanup, removal, remedial action or other response by the Borrowers or the Bank pursuant to Environmental Laws. The Borrowers are not a party to any pending or threatened litigation or administrative proceeding that asserts or alleges that the Borrowers or their predecessors violated or are violating Environmental Laws or that the Borrowers or their predecessors are required to clean up, remove or take remedial or other responsive action due to the use, storage, treatment, disposal, discharge, leaking or release of any Hazardous Materials. Neither the Borrowers, nor to the Borrowers' knowledge their predecessors, nor any part of the Mortgaged Properties is subject to any judgment, decree, order or citation related to or arising out of Environmental Laws, and the Borrowers have not been named or listed as a potentially responsible party by any governmental or other entity in a matter arising under or relating to any Environmental Law. The Borrowers and, to the Borrowers' knowledge their predecessors, have obtained all permits, licenses and approvals required under Environmental Laws. There are not now, nor have there ever been materials discharged, leaked, spilled or released, under or at the surface, or stored, treated or recycled at or in tanks or other facilities thereon or related thereto which require cleanup, removal or some other remedial action under Environmental Laws which arise from the Borrowers' ownership and operations, or to the Borrowers' knowledge which arise from ownership or operations of the Borrowers' predecessors in interest. The Borrowers undertook, at the time of acquisition of the Mortgaged Properties, all appropriate inquiry into the previous ownership and uses of the Mortgaged Properties consistent with good commercial and industry practice. The Borrowers have taken all reasonable steps necessary to determine that (i) no Hazardous Materials have been used or stored on, in or in connection with the Mortgaged Properties, or disposed from the Mortgaged Properties, except in full compliance with all Environmental Laws then applicable, and (ii) no Hazardous Materials have been treated, processed, discharged or released on, in, to or from the Mortgaged Properties except in full 26 compliance with all Environmental Laws then applicable. The use which the Borrowers make and intend to make of the Mortgaged Properties will not result in (x) the use or storage of any Hazardous Materials on, in or in connection with the Mortgaged Properties, or disposal from the Mortgaged Properties, except in full compliance with all Environmental Laws then applicable, or (y) the treatment, processing, discharge or release of any Hazardous Materials on, in, to or from the Mortgaged Properties. Operation and closure of underground storage tanks on the Mortgaged Properties shall be in compliance with Environmental Laws. To the Borrowers' knowledge there are no underground storage tanks located on or in the Mortgaged Properties. As used in this Section 7.1(r) and in the definition of Environmental Laws, the term "release" shall have the meaning specified in CERCLA, and the term "disposal" or "disposed" shall have the meaning specified in RCRA. In the event CERCLA, RCRA or any other applicable Environmental Law is amended so as to broaden the meaning of any terms defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment; and to the extent that the laws of any state in which the Mortgaged Properties are located establish a meaning for "hazardous substance," "release," "solid waste," "hazardous waste," "disposal" or "disposed" that is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply. ARTICLE VIII COVENANTS OF THE BORROWERS Section 8.1 Affirmative Covenants. So long as the Notes or any other amounts due the Bank hereunder shall remain unpaid or any Letter of Credit remains outstanding or the Bank shall have any Commitment hereunder, the Borrowers will, unless the Bank shall otherwise consent in writing: (a) Payment and Performance. Pay all amounts due under the Loan Documents in accordance with the terms thereof and observe, perform and comply with every covenant, term and condition therein expressed or implied. (b) Books, Financial Statements and Reports. Maintain a standard system of accounting in accordance with generally accepted accounting principles, consistently applied, and furnish to the Bank the following statements and reports at the Borrowers' expense: (i) As soon as available, and in any event within ninety (90) days after the end of each Year, complete financial reports for the Borrowers, together with all notes thereto, prepared in reasonable detail, together with an opinion by an independent certified public accountant selected by the Borrowers and reasonably acceptable to the Bank, that such reports have been so prepared. These reports shall contain balance sheets as of the end of such Year and statements of earnings, of cash flows, of changes in financial position, and of changes in stockholders, equity for such Year, setting forth in comparative form the corresponding figures for the preceding Year. Such reports shall be accompanied by a certificate signed by the President or Controller of the Borrowers which confirms (A) that there existed no condition or event at the end of such Year or at the time of the auditor's report which constituted an 27 Unmatured Event of Default, or, if any such condition or event existed, specifying the nature and period of existence of any such condition or event, (B) the authenticity of the financial statements and (c) the calculations of and compliance with the financial covenants as described in Section 8.1(e). (ii) Within sixty (60) days after the end of each Quarter except the last Quarter of each Year, a copy of an unaudited consolidated and consolidating financial statement of the Borrowers prepared in accordance with generally accepted accounting principles (with such variations as the Bank may approve in writing), signed by a proper accounting officer of the Borrowers and consisting of at least a balance sheet as at the close of such Quarter, and statements of earnings, of cash flows, changes in financial position and changes in stockholders, equity for such Quarter and for the period from the beginning of the Year to the close of such Quarter. Such reports shall be accompanied by a certificate signed by the President or Controller of the Borrowers which confirms (A) that there existed no condition or event at the end of such Quarter or at the time of the auditor's report which constituted an Unmatured Event of Default, or, if any such condition or event existed, specifying the nature and period of existence of any such condition or event, (B) the authenticity of the financial statements and (C) the calculations of and compliance with the financial covenants as described in Section 8.1(e). (iii) Within seventy-five (75) days after the end of each Quarter, commencing June 30, 1994, a production revenue and expense data report for such Quarter on a month-by-month and property-by-property basis for all oil and gas properties and interests owned by the Borrowers, indicating amounts and types of production sold, the unit sales price, and the gross and net proceeds of such sales and operating expenses, in a form consistent with Borrowers' lease operating statements previously provided to the Bank. (iv) Within thirty (30) days after the filing thereof, copies of the annual federal income tax returns of the Borrowers other than BFC to the extent not consolidated in the returns of BFC. (v) Within sixty (60) days after the end of each Year, commencing December 31, 1994, a copy of the independent engineering report described in Section 4.5(a) and, within sixty (60) days after each June 30, commencing June 30, 1994, the production, revenue and expense data described in Section 4.5(b). (vi) Promptly upon their becoming available and at the request of the Bank, copies of all financial statements, reports, notices and proxy statements sent by the Borrowers to their stockholders and all registration statements, periodic reports and other statements and schedules filed by the Borrowers with any securities exchange, the Securities and Exchange Commission or any similar Governmental Authority. 28 (vii) Within fifteen (15) days after the end of each month, commencing on July 15, 1994, an Accounts Receivable Report. (viii) Promptly upon receipt, notice of material violations by the Borrowers of any Environmental Laws. (c) Other Information and Inspections. Furnish to the Bank any information which the Bank may from time to time reasonably request concerning the Mortgaged Properties or other Collateral, or any covenant, provision or condition of the Loan Documents or any matter in connection with the business, operations or financial condition of the Borrowers. In addition, the Borrowers will permit representatives appointed by the Bank, including independent accountants, agents, attorneys, appraisers and any other Persons, upon prior notice, to visit and inspect during normal business hours any of the Borrowers' properties, including books of account, other books and records, and any facilities or other business assets, and to make copies therefrom, photocopies and photographs thereof, and to write down and record any information such representatives obtain. The Borrowers shall permit the Bank or its representatives to investigate and verify the accuracy of the information furnished to the Bank under or in connection with the Loan Documents and to discuss all such matters with the Borrowers, officers, employees and representatives. (d) Notice of Material Events. Promptly notify the Bank (i) of any material adverse change in the financial condition of the Borrowers, or any subsidiary of the Borrowers; (ii) of the occurrence of an Unmatured Event of Default hereunder; (iii) of the occurrence of any acceleration of the maturity of any indebtedness owed by the Borrowers, or of any default under any indenture, mortgage, agreement, contract or other instrument to which the Borrowers are a party or by which they are bound, if such acceleration or default might have a material adverse claim (which shall include, without limitation, any claim of $500,000 or more) asserted against the Borrowers or with respect to any of their respective properties; (iv) of the occurrence of a Reportable Event (as such term is defined in Title IV of ERISA) with respect to any ERISA Plan; and (v) of the filing of any suit or proceeding against the Borrowers in which an adverse decision could have a material adverse effect upon their respective financial condition, business or operations. Without limitation, any suit involving a claim of $500,000 or more against the Borrowers (which is not covered by effective insurance) shall be considered a suit or proceeding in which an adverse decision could have a material adverse effect upon the financial condition of the Borrowers. The Borrowers will also notify the Bank in writing at least thirty (30) Business Days prior to the date that any of the Borrowers changes its name or the location of its chief executive office or principal place of business or the place where it keeps its books and records concerning the Collateral. The Borrowers hereby advise the Bank that the address of their chief executive office and principal place of business is 1660 Lincoln Street, Suite 1800, Denver, Colorado 80264. 29 (e) Financial Covenants. Comply, on a consolidated basis, as of the end of each Quarter, beginning June 30, 1994 with the following financial tests, all determined in accordance with generally accepted accounting principles:
During The During The Revolving Amortizing Period Period ---------- ------------ Minimum working Capital (1): $ 500,000 $ 500,000 Minimum Current Ratio (1): 1.25x 1.25x Minimum Net Worth (2): $5,600,000 $ 7,000,000 Minimum Net Worth (3): $9,200,000 $10,600,000 Maximum Debt/Worth (2) 2.5x 2.0x Maximum Debt/Worth (3) 1.25x 1.0x Min. Fixed Charge Cover. (4): 1.00x 1.00x
(1) With the current portion of Facility A treated as a non-current liability. (2) With advances from BPC ($3.6 million currently) treated as liability. (3) With advances from BPC ($3.6 million currently) treated as equity. (4) (i) Net income after tax plus interest expense plus depreciation, depletion and amortization, plus other non-cash charges, divided by (ii) interest expenses plus required principal payments, calculated on a fiscal year-to-date basis. (f) Maintenance of Existence and Qualifications. Maintain and preserve each of the Borrowers' corporate existence and the Borrowers' rights and franchises which pertain to the Collateral in full force and effect and cause the Borrowers to qualify to do business as a foreign corporation in all states or jurisdictions in which their properties, including the Mortgaged Properties, are located as required by the laws of each such jurisdiction. (g) Maintenance of Properties. Preserve, operate and maintain, or cause to be preserved, operated and maintained, their respective properties, including the Mortgaged Properties, in a good and workmanlike manner as a prudent operator in accordance with good oil and gas industry practices. The Borrowers will maintain, preserve, protect and keep all property used or useful in the conduct of the Borrowers' business in good condition and in compliance with all applicable laws, rules and regulations, and will from time to time make all repairs, renewals and replacements needed to enable the business and operations carried on in connection therewith to be promptly and advantageously conducted at all times. The Borrowers will cause the Mortgaged Properties and the other properties and interests included in the Collateral to be kept free and clear of liens, charges, security interests, encumbrances, adverse claims and title defects of every character other than (i) the lien and security interest created by 30 the Collateral Documents; (ii) taxes constituting a lien but not due and payable; (iii) defects or irregularities in title which are not such as to interfere materially with the development, operation or value of the Mortgaged Properties and not such as to materially affect title thereto; (iv) obligations under the leases that comprise the Mortgaged Properties; (v) those set forth or referred to in the Collateral Documents; (vi) those being contested in good faith by the Borrowers and which do not, in the judgment of the Bank, jeopardize the Bank's rights in and to the Mortgaged Properties; and (vii) those consented to in writing by the Bank. (h) Payment of Taxes, Etc. File or cause to be filed all required tax returns and pay or cause to be paid all taxes and other governmental charges or levies imposed upon the Borrowers or upon the Borrowers' income, profits or property before the same shall become in default, and will pay or cause to be paid all lawful claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon the Borrowers' property or any part thereof, and pay and discharge when due all material debts, accounts, liabilities and charges now or hereafter owed by them, and maintain appropriate accruals and reserves for all such liabilities in a timely fashion in accordance with generally accepted accounting principles; provided, however, that the Borrowers may delay paying or discharging any such taxes, charges, claims or liabilities so long as the validity thereof is contested in good faith by appropriate proceedings and they have set aside on their books adequate reserves therefor. (i) Insurance. Keep or cause to be kept, with financially sound and reputable insurers, insurance reasonably acceptable to the Bank against the Borrowers, liability on account of damages to persons or property. (j) Books and Records. Maintain at all times complete and accurate books of account and records. (k) Payment of Expenses. Regardless of whether or not the transactions contemplated by this Agreement are consummated, pay all reasonable costs and expenses of the Bank (including, without limitation as to type of expense, reasonable attorneys, fees) in connection with (i) the preparation, execution and delivery of the Loan Documents and any and all amendments, modifications, supplements, consents, waivers or other documents or instruments relating thereto; (ii) the filing, recording, refiling and rerecording of any Collateral Documents and all amendments, supplements or modifications thereto, and any and all other documents or instruments or further assurances required to be filed or recorded or refiled or rerecorded by the terms hereof or of any Collateral Document; (iii) the evaluation and confirmation of the Borrowers' title to the Mortgaged Properties as requested by the Bank; (iv) the borrowings hereunder and other action reasonably required in the administration hereof; and (v) the enforcement, after the occurrence of an Unmatured Event of Default, of the Loan Documents. (l) Performance on the Borrowers' Behalf. If the Borrowers fail to pay any taxes, insurance or other amounts required to be paid under any Loan 31 Documents, the Bank may pay the same and shall be entitled to immediate reimbursement by the Borrowers therefor and each amount paid shall constitute a part of the Borrowers, indebtedness to the Bank, shall be secured by the Collateral Documents and shall bear interest from the date such amount is paid by the Bank until the date such amount is repaid to the Bank at the Prime Rate plus four percent (4%). (m) Compliance with Agreements and Law. Perform all material obligations required to be performed by the Borrowers under the terms of each indenture, mortgage, deed of trust, security agreement, lease, franchise, agreement, contract or other instrument or obligation relating to the Mortgaged Properties to which the Borrowers are a party or by which the Borrowers or any of the Mortgaged Properties are bound, and conduct the Borrowers, business and affairs in compliance with the laws and regulations applicable thereto. (n) Evidence of Compliance. Furnish to the Bank at the Borrowers, expense all evidence which the Bank may from time to time reasonably request, as to the accuracy and validity of or compliance with all representations, warranties and covenants made by the Borrowers in the Loan Documents, the satisfaction of all conditions contained therein, and all other matters pertaining thereto. (o) Further Assurances. Do such further acts and execute such further instruments as the Bank may reasonably determine to be necessary or desirable to carry out the purposes of this Agreement, and maintain and perfect the liens and security interests created by the Collateral Documents. (p) Production Purchasers. Upon written request by the Bank, advise the Bank of the names and addresses of all purchasers of production from the Mortgaged Properties. (q) Environmental Laws. (i) Comply with all applicable Environmental Laws and obtain and comply with and maintain any and all licenses, approvals, registrations or permits required by the Environmental Laws. (ii) Defend, indemnify and hold harmless the Bank and its employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of or noncompliance with any Environmental Law applicable to the Mortgaged Properties owned or operated by the Borrowers, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, attorneys, and consultant's fees, investigation and laboratory fees, environmental response and cleanup costs, court costs and litigation expenses, except to the extent that any of the foregoing arise 32 out of the gross negligence or willful misconduct of the party seeking indemnification therefor. (iii) Complete and return to the Bank, at the request of the Bank in its sole discretion, an environmental questionnaire for each of the Mortgaged Properties, the form of which shall be specified by the Bank. In no event will such questionnaire require information beyond that required in connection with ASTM Standard E 1527 for Phase I Environmental Site Assessments. Section 8.2 Negative Covenants. So long as the Notes or any other amounts due the Bank hereunder shall remain unpaid, any Letter of Credit remaining outstanding or the Bank shall have any Commitment hereunder, the Borrowers will not, without the prior written consent of the Bank: (a) Limitation on Dividends and Distributions. Declare or pay any dividends on, or make any other distributions in respect of shares of Borrowers' capital stock to the holders of any class of such capital stock (including BPC), except (i) dividends to other Borrowers and (ii) with the Bank's prior written consent, dividends from BFC to its shareholders not exceeding the greater of (A) ten percent (10%) of its after-tax net income or (B) five percent (5%) of its net cash flow (defined as after-tax net income plus depreciation, depletion and amortization, and other non-cash charges). (b) Limitation on Stock Repurchase. Directly or indirectly make any capital contributions to or purchase, redeem, acquire or retire any shares of the capital stock of the Borrowers (whether such interests are now or hereafter issued, outstanding or created), or cause or permit any reduction or retirement of the capital stock of the Borrowers. (c) Limitation on Indebtedness. Create, incur, assume, guarantee, endorse, become or be liable in any manner with respect to or suffer to exist any Debt, liability or obligation (including, without limitation, all Debt and all contingent or secondary, or direct or indirect, debts, liabilities or obligations whatsoever), including additional advances from BPC, except: (i) the Borrowers, indebtedness to the Bank hereunder; (ii) existing Debt identified in Schedule 8.2(c) hereto; (iii) current debts, obligations and liabilities to pay vendors, suppliers, and Persons (including shareholders and other affiliates) providing goods and services normally required in the ordinary course of business (including forward sales) and on ordinary trade terms which are not delinquent or which are being contested in good faith; (iv) taxes, assessments and governmental charges or levies which are not delinquent or which are being contested in good faith; 33 (v) contingent liabilities arising out of the endorsement in the ordinary course of business of negotiable instruments in the course of collection; (vi) Debt to shareholders of the Borrowers which is subordinated to the Borrowers' Debt to the Bank upon prior written approval by the Bank; and (vii) obligations to reimburse BPC for statutory, federal or state income taxes which are based upon taxable income of BFC, even though BPC may not be required to pay such taxes as a result of net operating losses or net operating loss carryforwards or other tax credits available to BPC and its subsidiaries on a consolidated basis. (d) Limitation on Liens. Create, assume or permit to exist any mortgage, deed of trust, pledge, encumbrance, lien or charge of any kind (including any security interest in or vendor's lien on property purchased under conditional sales or other title retention agreements and including any lease in the nature of a title retention agreement) upon the Mortgaged Properties, equipment thereon, or production therefrom, except: (i) liens and security interests at any time existing in favor of the Bank; (ii) statutory liens for taxes and other sums, and liens for materials and services under standard operating agreements for sums, which are not delinquent or which are being contested in good faith; and (iii) mechanics' and materialmen's liens with respect to obligations which are not delinquent or which are being contested in good faith. (e) Limitation on Mergers. Merge or consolidate the Borrowers with or into any other entity (including, but not limited to, Portland General Corporation) without the prior written consent of the Bank, which consent may be conditioned upon satisfaction of such reasonable conditions as the Bank may specify to insure continuing liability and obligation for payment of the Loans and for the continued perfection and priority of the liens and security interests securing the Loans, except with each other Borrower. (f) Limitation on Sales of Property. Sell, transfer, lease, exchange, alienate or dispose of any portion of the Mortgaged Properties or any material interest therein, except sale of oil and gas production in the ordinary course of business. (g) Fiscal Year. Change the fiscal year currently in effect for the Borrowers, which is a calendar year. (h) Amendment of Contracts. Amend or permit any amendment to any contract (expressly including the American Atlas Contract) which releases, qualifies, 34 limits, makes contingent or otherwise detrimentally affects the rights and benefits pledged and assigned to and acquired by the Bank pursuant to any Collateral Document. (i) Limitation on Investments and New Businesses. (i) Make any expenditure or commitment or incur any obligation or enter into or engage in any transaction except in the ordinary course of business; (ii) engage directly or indirectly in any business or conduct any operations except in connection with or incidental to the present business and operations conducted by them; (iii) make any acquisitions of or capital contributions to or other investments in any business entities; or (iv) make any significant acquisitions or investments in any properties other than actual or prospective oil and gas properties and related gathering, transportation, processing and marketing assets. (j) Limitation on Credit Extensions. Extend credit, make advances or make loans to any Person or entity other than normal and prudent extensions of credit to customers buying goods and services in the ordinary course of business, which extensions shall not be for longer periods than those extended by similar businesses operated in a normal and prudent manner. (k) ERISA Compliance. Permit any Plan maintained by it to (i) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended; (ii) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA; or (iii) terminate in a manner which could result in the imposition of a lien on the property of the Borrowers pursuant to Section 4068 of ERISA. (l) Limitation on Certain Repayments. Repay any advances, or interest thereon, owing to related or affiliated entities (including the $3,600,000 advance from BPC shown on BFC's balance sheets dated September 30, 1993 and December 31, 1993 in the event such advance is not converted to equity), except (i) to each other Borrower, and (ii) security deposits and advances received by the Borrowers for the purchase and transportation of natural gas in the ordinary course of business. (m) Limitation on Payments to BPC. Make payments to BPC for the payment of BFC's statutory income taxes for a given year, except to the extent of the lesser of (i) BFC's statutory income taxes for that year, or (ii) BPC,s actual income tax liability for that year. 35 ARTICLE IX EVENTS OF DEFAULT AND THEIR EFFECT Section 9.1 Events of Default. Each of the following events shall constitute an Event of Default under this Agreement: (a) Nonpayment of Notes. The Borrowers shall fail to pay any Principal Amount of, or interest on, the Notes within ten (10) days of the date when due. (b) Collateral Documents. A default shall occur under the terms of any of the Collateral Documents, or the Borrowers shall dispute the existence, first priority or binding or enforceable nature of any lien established pursuant to the Collateral Documents. (c) Representations And Warranties. Any written representation or warranty made by the Borrowers herein or by the Borrowers (or any of the Borrowers' officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made and remains so at the time the Bank elects to act with respect to such Event of Default pursuant to Section 9.2. (d) Noncompliance With Specific Provisions Of This Agreement. The Borrowers shall fail to perform or observe any term, covenant or obligation set forth in Section 4.3 and Section 8.2(a), (b), (c), (d), (e), (f), (h), (i), (j), (l), and (m) of this Agreement. (e) Noncompliance With This Agreement. The Borrowers shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on their part to be performed or observed, and any such failure shall remain unremedied for thirty (30) days after written notice thereof shall have been given to the Borrowers by the Bank. (f) Nonpayment Of Other Indebtedness For Borrowed Money. Any of the Borrowers shall fail to pay any Debt or any interest or premium thereon when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt, or any other event, shall occur and shall continue after the acceleration of the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; provided, however, that no such failure shall constitute an Event of Default so long as the validity of the Debt or payment obligation is being contested in good faith by appropriate proceedings and the Borrowers have set aside on their books adequate reserves therefor. (g) Bankruptcy, Insolvency, Etc. Any of the Borrowers shall (i) generally not pay its debts as such debts became due; or (ii) admit in writing its 36 inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or (iii) institute any proceeding seeking to adjudicate itself bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for itself or for any substantial part of its property; or (iv) suffer any proceeding to be instituted against it for the purposes specified in the foregoing clause (iii) which shall continue for more than sixty (60) days without discharge or dismissal thereof; or (v) take any corporate or individual action to authorize any of the actions set forth above in this Section 9.1(q). (h) Material Adverse Change. A material adverse change in any Borrowers, condition (financial or otherwise), including changes due to violations, or applications, of Environmental Laws to the Borrowers or their properties, or a change in the key management personnel of BFC, which the Bank determines, in its sole discretion, would have a Materially Adverse Effect on the operations of the Borrowers. "Key management" includes Steven H. Stepanek, current President of BFC. (i) Judgment. Any judgment or order for the payment of money in excess of $500,000 shall be rendered against any of the Borrowers and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of ten (10) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; provided, in either case, that the Borrower in question has not made bonding, surety or other arrangements acceptable to the Bank. (j) American Atlas Contract. A material adverse change in the American Atlas Contract. A "material adverse change," as used in this Section 9.1(j) means a change in the status of the American Atlas Contract which the Bank determines in its sole discretion would have a Materially Adverse Effect on the financial condition and operations of the Borrowers. Section 9.2 Effect of the Occurrence of an Event of Default. If any Event of Default described in Section 9.1 shall occur, the Bank may, by notice to the Borrowers, (i) declare its obligation to make the Advances and to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and/or (ii) elect to have the Default Interest Rate apply to the Loans, and/or (iii) declare the Loans and the Notes, all interest thereon and all other amounts owing under this Agreement to be forthwith due and payable, whereupon the Loans and the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Borrowers. In addition to the foregoing, following an Event of Default, so long as any Letter of Credit has not been fully drawn and has not been cancelled or expired, upon written demand by the Bank, the Borrowers shall deposit and maintain with the Bank an account with cash in an amount and currency equal to the aggregate undrawn Face Amount of all outstanding Letters of Credit, together with all fees and other amounts due or which may 37 become due with respect thereto. The Borrowers shall have no control over funds in such cash deposit account. The Bank agrees that any such cash deposit account will be interest-bearing to the extent the Bank is reasonably able to do so. Such funds shall be promptly applied by the Bank to reimburse itself for drafts drawn under the Letters of Credit. Such funds, if any, remaining in such cash deposit account following the payment in full of all Draws due hereunder or under the Notes shall be promptly paid over to the Borrowers. If the Bank does not accelerate the due date of the Loans, the Bank may elect in its sole discretion to require the Borrowers to make each monthly payment of principal and interest with respect to the Term Loan payments equal to the greatest of the following, which right the Bank may exercise at any time during the Amortizing Period after the occurrence of an Event of Default by notice to the Borrowers: A. accrued interest plus the principal payments set forth in the minimum monthly principal payment schedule in Section 3.3; or B. up to seventy percent (70%) of the Borrowers' Gross Revenue from the Mortgaged Properties applied first to accrued interest, then to principal; or C. up to one hundred (100%) of the Borrowers' Net Revenue from the Mortgaged Properties applied first to accrued interest, then to principal. In the event the Bank elects to exercise the right to receive the maximum payment allowed above, the Borrowers shall provide to the Bank all information the Bank reasonably determines to be necessary to calculate the payments which are due under alternative clauses B. and C. above. ARTICLE X MISCELLANEOUS Section 10.1 Amendments, Etc. No amendment of any provision of the Loan Documents, nor consent to any departure by the Borrowers therefrom, shall in any event be effective unless the same shall be in writing and signed by all of the parties hereto. No waiver by the Bank of any provision of the Loan Documents, or the Bank's consent to any departure by the Borrowers therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 10.2 Notices, Etc. Any notice and other communications provided for hereunder shall be in writing and shall be deemed to have been given when personally delivered, when received if sent by facsimile, when delivered if sent by Federal Express or Express Mail, or three (3) Business Days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the party for whom it is intended at the following addresses: 38 Borrowers: Bonneville Fuels Corporation 1660 Lincoln Street Suite 1800 Denver, Colorado 80264 Attn: Mr. Steven H. Stepanek, President Facsimile: (303) 863-1558 with a copy to: Mr. Roger Segal Cohen, Rappaport & Segal 515 E. 100 South, Suite 500 Salt Lake City, UT 84102 Facsimile: (801) 355-1813 Bank: First Interstate Bank of Denver, N.A. 633 Seventeenth Street Denver, Colorado 80270 Attn: Mr. Mark E. Thompson, Vice President Energy Banking Facsimile: (303) 293-5467 Any party may change its address for purposes of receipt of any such communication by giving ten (10) Business Days' prior written notice of such change to the other party in the manner above prescribed. Section 10.3 Damage Limitation. Neither Party shall be liable to the other for consequential damages, whatever the nature of a breach by the other party in its obligations relating to the transactions governed or contemplated by this Agreement. Section 10.4 Release. Upon full payment and satisfaction of the Loans and the interest thereon, as provided herein, the parties shall thereupon automatically each be fully, finally, and forever released and discharged from any further claim, liability or obligation in connection with the Loans. Section 10.5 Lost Note. Upon receipt by the Borrowers of evidence of the loss, theft, destruction or mutilation of the Notes and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Borrowers (with the Bank's indemnity in case of loss, theft or destruction of the Notes owned by the Bank to be reasonably satisfactory to Borrowers), and upon surrender and cancellation of the Notes if mutilated, the Borrowers will pay any unpaid principal and interest (and any prepayment charge) then or theretofore due and payable on the Notes and will at the request of the Bank promptly execute and deliver in lieu of the Notes a replacement Notes of like tenor for any remaining balance due. Section 10.6 No Waiver; Remedies. No failure on the part of the Bank to exercise, and no delay in exercising, any right under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right under the Loan 39 Documents preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 10.7 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Borrowers and the Bank and their respective successors and assigns, except that the Borrowers shall not assign their rights hereunder or any interest herein without the prior written consent of the Bank. The Bank may assign to one or more banks or other entities all or any part of, or may grant participations to one or more banks or other entities in or to all or any part of, the Advance or Advances and the Notes. To the extent of any such assignment (unless otherwise stated therein), the assignee shall have the same rights and benefits hereunder and under the Notes as it would have if it were the Bank hereunder. Section 10.8 GOVERNING LAW AND SUBMISSION TO JURISDICTION. THE SUBSTANTIVE LAW OF COLORADO SHALL GOVERN ALL THE TERMS, CONDITIONS AND INTERPRETATIONS OF THIS AGREEMENT, THE NOTES, THE LOANS AND ALL OTHER INSTRUMENTS, DOCUMENTS OR AGREEMENTS EXECUTED PURSUANT HERETO, EXCEPT FOR THE REAL AND PERSONAL PROPERTY LAW, INCLUDING SECURED TRANSACTION LAW, THAT MAY BE CONTROLLING IN SITUATIONS WHERE THE REAL AND/OR PERSONAL PROPERTY IS LOCATED IN STATES OTHER THAN COLORADO. IN THE EVENT OF LITIGATION CONCERNING THIS AGREEMENT, THE NOTES, THE LOANS OR ANY OTHER INSTRUMENTS, DOCUMENTS OR AGREEMENTS EXECUTED OR DELIVERED PURSUANT HERETO, EXCEPT LITIGATION FOR THE EXERCISE OF REMEDIES BY THE BANK WITH RESPECT TO PROPERTY LOCATED IN STATES OTHER THAN COLORADO, AND SUBJECT TO THE PROVISIONS OF SECTION 10.11, THE PARTIES HERETO AGREE THAT THE EXCLUSIVE PLACE OF JURISDICTION SHALL BE THE STATE OF COLORADO, CITY AND COUNTY OF DENVER, AND THE VENUE SHALL BE ANY STATE OR FEDERAL COURT LOCATED THEREIN. FURTHER, THE BORROWERS CONSENT TO AND AGREE TO FILE A GENERAL APPEARANCE IN THE EVENT THEY RECEIVE A SERVICE OF PROCESS. Section 10.9 Relationship to Other Documents. In the event any provision hereof is in conflict with any provision of the Collateral Documents, the provisions hereof shall be controlling. Section 10.10 Severability. In the event any provision of this Agreement, the Notes or any of the other instruments, documents or agreements executed pursuant hereto shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof or thereof or affect the validity or enforceability of such provision in any other jurisdiction. Section 10.11 Arbitration. Subject to the provisions of the next paragraph below, the Bank and the Borrowers agree to submit to binding arbitration any and all 40 claims, disputes and controversies between them or among them (and their respective employees, officers, directors, attorneys, and other agents) relating to the Loans and its negotiation, execution, collateralization, administration, repayment, modification, extension or collection. Such arbitration shall proceed in Denver, Colorado, shall be governed by Colorado law (including without limitation the provisions of C.R.S. (S) 13-21-102(5)) and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). Any award entered in an arbitration, whether on motions or at a hearing with or without testimony from witnesses, shall be made by a written opinion stating the reasons for the award made. The decisions of any arbitration pursuant to this Agreement shall be made based on Colorado law without reference to any choice of law rules. Judgment on any award hereunder may be entered in any court having jurisdiction. Nothing in the preceding paragraph, nor the exercise of any right to arbitrate thereunder, shall limit the right of any party hereto (a) to foreclose against any real or personal property Collateral by the exercise of the power of sale under a deed of trust, mortgage, or other security agreement, or instrument, or applicable law; (b) to exercise self-help remedies such as setoff or repossession; or (c) to obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment, or appointment of a receiver from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding. The institution and maintenance of any action for such judicial relief, or pursuit of provisional or ancillary remedies, or exercise of self-help remedies shall not constitute a waiver of the right or obligation of any party to submit any claim or dispute to arbitration, including those claims or disputes arising from exercise of any judicial relief, or pursuit of provisional or ancillary remedies, or exercise of self-help remedies. Arbitration hereunder shall be before a three-person panel of neutral arbitrators, consisting of one person from each of the following categories: (1) an attorney who has practiced in the area of commercial law for at least ten (10) years or a retired judge at the Colorado or United States District Court or an appellate court level; (2) a person with at least ten (10) years' experience in commercial lending; and (3) a person with at least five (5) years, experience in the petroleum industry. The AAA shall submit a list of persons meeting the criteria outlined above for each category of arbitrator, and the parties shall select one person from each category in the manner established by the AAA. Section 10.12 Table of Contents, Headings. The Table of Contents and the headings for the Articles and Sections hereof are for convenience of reference only and shall not affect the meaning or construction hereof. Section 10.13 Counterparts. This Agreement may be executed in any number of counterpart copies. Each fully executed counterpart shall be considered an original, but together such copies shall constitute one and the same instrument. Section 10.14 Joint and Several Liability. All obligations of the Borrowers hereunder or under the Notes shall be joint and several. 41 Section 10.15 Confidentiality. The Bank shall use reasonable efforts to maintain the confidentiality of information provided by the Borrowers to the Bank which (a) the Borrowers request be treated as confidential, and (b) which is not otherwise available to the public. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. BORROWERS:
BONNEVILLE FUELS CORPORATION BONNEVILLE FUELS OPERATING CORPORATION By:_____________________________ By:______________________________ Name: Steven H. Stepanek Name: Steven H. Stepanek Title: President Title: President BONNEVILLE FUELS MARKETING CORPORATION BONNEVILLE FUELS MANAGEMENT CORPORATION By:_____________________________ By:______________________________ Name: Steven H. Stepanek Name: Steven H. Stepanek Title: President Title: President COLORADO GATHERING CORPORATION By:_____________________________ Name: Steven H. Stepanek Title: President BANK: FIRST INTERSTATE BANK OF DENVER, N.A. By:_____________________________ Mark E. Thompson Vice President
42 FORM OF FACILITY A NOTE REVOLVING NOTE $20,000,000 May 31, 1994 FOR VALUE RECEIVED, the undersigned, BONNEVILLE FUELS CORPORATION, as Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation and BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively the "Borrowers"), HEREBY JOINTLY AND SEVERALLY PROMISE TO PAY to the order of FIRST INTERSTATE BANK OF DENVER, N.A. (the "Bank") on or before the Facility A Maturity Date (as defined in the Credit Agreement identified below) the Principal Amount of Twenty Million Dollars ($20,000,000), or such lesser amount as has been Advanced by the Bank to the Borrowers as Facility A Loans pursuant to the Credit Agreement (as defined below). Subject to the Credit Agreement, the Borrowers may borrow, repay and reborrow amounts hereunder until the Conversion Date (as defined in the Credit Agreement) The Borrowers promise to pay interest on the Principal Amount of each Advance from the date of such Advance until such Principal Amount is paid in full, at such Interest Rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to the Bank at 633 Seventeenth Street, Denver, Colorado (or at such other location as the Bank may designate), in same day funds. Each Advance made by the Bank to the Borrowers and the maturity thereof, and all payments made on account of principal hereof, shall be recorded by the Bank and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Note. This Note is the Facility A Note referred to in and is entitled to the benefits of the Amended and Restated credit Agreement dated as of May 31, 1994 (the "Credit Agreement"), between the Borrowers and the Bank, which Credit Agreement, among other things, (i) provides for the making of Advances by the Bank to the Borrowers from time to time in an aggregate amount not to exceed at any time outstanding the amount first above mentioned or such reduced amount as set forth in the Credit Agreement, and (ii) contains provisions for acceleration of the maturities hereof upon the happening of certain stated events. Terms used herein which are defined in the Credit Agreement shall have the meanings specified in the Credit Agreement. This Note represents an extension and renewal of the outstanding principal amount of, and a replacement and substitution for, a certain Promissory Note of Bonneville Fuels Corporation, dated August 30, 1991 (the "Prior Note"), payable to the order of Chase Manhattan Bank (National Association). The Prior Note has been transferred to the Bank. The Indebtedness evidenced by the Prior Note is a continuing indebtedness and nothing contained herein shall be construed to deem paid the Prior Note or to replace or terminate any lien or security interest given to secure payment of the Prior Note. Demand, presentment for payment, notice of dishonor and protest are hereby expressly waived by the Borrowers. BONNEVILLE FUELS CORPORATION By: ------------------------------------ Name: Steven H. Stepanek Title: President BONNEVILLE FUELS MARKETING CORPORATION By: ------------------------------------ Name: Steven H. Stepanek Title: President COLORADO GATHERING CORPORATION By: ------------------------------------ Name: Steven H. Stepanek Title: President BONNEVILLE FUELS OPERATING CORPORATION By: ------------------------------------ Name: Steven H. Stepanek Title: President BONNEVILLE FUELS MANAGEMENT CORPORATION By: ------------------------------------ Name: Steven H. Stepanek Title: President PROMISSORY NOTE $1,000,000.00 Denver, Colorado May 31, 1994 FOR VALUE RECEIVED, the undersigned (referred to, collectively if more than one, as "Borrower") jointly and severally hereby promises to pay to the order of FIRST INTERSTATE BANK OF DENVER, N.A., (referred to, together with any subsequent holder of this note, as "Holder"), at 633 Seventeenth Street, Denver, Colorado 80270, or at such other address as may be specified by any Holder, upon demand the principal sum of ONE MILLION DOLLARS ($1,000,000.00), or so much thereof as may be advanced to or for the benefit of Borrower, together with interest on the balance of principal outstanding from time to time at a floating rate which is one percent (1%) per annum higher than the "Bank's Prime Rate" (as that term is defined below), in lawful money of the United States of America. Interest shall be calculated based on a three hundred sixty-five (365) day year and charged for the actual number of days elapsed. The principal balance of this note represents a revolving credit, all or any part of which may be advanced to Borrower, repaid by Borrower, and re- advanced to Borrower from time to time, subject to the other terms hereof and the conditions contained in the Credit Agreement (defined below), and provided that Borrower shall not be entitled to any advances that would cause the principal balance outstanding at any one time to exceed the Facility B Commitment (defined in the Credit Agreement). The revolving credit evidenced by this note is to be used for cash advances and for the issuance of standby letters of credit as set forth in the Credit Agreement. This note also evidences any other sums payable under the Credit Agreement with respect to Facility B Loans or any document securing this note. As used in this note, the term "Bank's Prime Rate" means the prime commercial lending rate established and announced from time to time by First Interstate Bank of Denver, N.A., its successors and assigns ("Bank"). Bank's Prime Rate is an index rate that Bank establishes and quotes from time to time for pricing certain of its loans. Information on the index rate currently in effect is announced publicly or can be obtained by contacting Bank. Bank's Prime Rate is not necessarily the lowest rate charged to Bank's customers and Bank may make loans at, above or below this state index rate. The rate of interest borne by the outstanding principal balance of this note shall change from time to time on the effective date of, and in conformity with, changes in the Bank's Prime Rate. Changes in the interest rate on this note shall be effective without notice to Borrower. Interest and principal shall be payable in accordance with the provisions of the Credit Agreement. If not sooner paid, the entire unpaid balance of principal and interest shall be due and payable in full on April 1, 1995. The inclusion of specific default provisions or rights of Holder in the Credit Agreement shall not preclude Holder's right to declare payment of this note on Holder's demand in accordance with the terms of the Credit Agreement. All payments on this note shall be applied first to the payment of any costs, fees, late charges or other charges incurred in connection with the indebtedness evidenced hereby, next to the payment of accrued interest and then to the reduction of the principal balance. This note may be prepaid in whole or in part, at any time, without fee or premium. This note is the Facility B Note referred to in and is entitled to the benefits of the Amended and Restated Credit Agreement date as of May 31, 1994 (the "Credit Agreement"), between the Borrower and Holder, which Credit Agreement, among other things, (i) provides for the making of Advances by the Holder to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the amount first above mentioned or such reduced amount as set forth in the Credit Agreement, and (ii) contains provisions for acceleration of the maturities hereof upon the happening of certain stated events. Capitalized terms used herein which are not specifically defined herein shall the meanings specified in the Credit Agreement. In the event any provision of this note is inconsistent with any provision of the Credit Agreement, the Credit Agreement provision shall apply. Time is of the essence of each and every provision of this note. Borrower and all parties now or hereafter liable for payment of this note, primarily or secondarily, directly or indirectly, and whether as endorser, guarantor, surety or otherwise, hereby severally (a) waive presentment, demand, protest, notice of protest, notice of dishonor and all other notices and demands whatever, other than any notice which may be required pursuant to any provision of the Credit Agreement, (b) consent to impairment or release of collateral, extensions of time for payment, and acceptance of late or partial payments before, at or after maturity, (c) agree that Holder's acceptance of one or more partial payments after acceleration of the maturity of this note will not constitute a waiver of such acceleration, regardless of any contrary notice or statement of condition which may accompany any such partial payment, (d) waive any right to require Holder to proceed against any security for this note before proceeding hereunder, and (e) agree to pay all costs and expenses, including, without limitation, attorneys' fees, which may be incurred by Holder in collecting this note or in enforcing and realizing upon any security for this note. The provisions of this note and of all agreements now or hereafter existing between Borrower and Holder are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of the maturity of this note or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance or detention of the sums evidenced by this note exceed the maximum amount permissible under Colorado 2 law. If, from any circumstances whatsoever, the performance or fulfillment of any obligation of this note, or of any other agreement between Borrower and Holder, at the time performance of such obligation shall be due, shall exceed the limitation prescribed by law, then, ipso facto, the obligation to be performed or fulfilled shall be reduced to the limitation, and, if from any such circumstance, Holder shall ever receive anything of value which is deemed to be interest by Colorado law which would exceed the highest lawful rate, an amount equal to any excessive interest shall be applied to the reduction of principal amount of this note or on account of any other principal indebtedness of Borrower to Holder and to the payment of interest thereon or, if such excessive interest exceeds the unpaid balance of principal of this note and such other indebtedness, such excess shall be refunded to Borrower. This note shall be binding upon Borrower and its successors and assigns and shall inure to the benefit of Holder and its successors and assigns. All notices required or permitted in connection with this note shall be given at the place and in the manner provided in the Credit Agreement for the giving of notices. Wherever possible, each provision of this note shall be interpreted so as to be effective and valid under applicable law. If any provision of this note is, for any reason and to any extent, invalid or unenforceable, then neither the remainder of this note, nor any other document referred to in this note, nor the application of the provision to other persons or in other circumstances, shall be affected by such invalidity or unenforceability. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF COLORADO. BORROWER HEREBY CONSENTS TO THE EXERCISE OF JURISDICTION OVER IT BY ANY FEDERAL COURT SITTING IN COLORADO OR ANY COLORADO DISTRICT COURT SELECTED BY LENDER, FOR THE PURPOSES OF ANY AND ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE NOTE, THE CREDIT AGREEMENT AND ALL OTHER LOAN DOCUMENTS (DEFINED IN THE CREDIT AGREEMENT). BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT, ANY CLAIM BASED ON THE CONSOLIDATION OF PROCEEDINGS IN SUCH COURTS IN WHICH PROPER VENUE MAY LIE IN DIVERGENT JURISDICTIONS, AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 3 BONNEVILLE FUELS CORPORATION By:_____________________________ Steven H. Stepanek, President BONNEVILLE FUELS MARKETING CORPORATION By:_____________________________ Steven H. Stepanek, President COLORADO GATHERING CORPORATION By:_____________________________ Steven H. Stepanek, President BONNEVILLE FUELS OPERATING CORPORATION By:_____________________________ Steven H. Stepanek, President BONNEVILLE FUELS MANAGEMENT CORPORATION By:_____________________________ Steven H. Stepanek, President 4 FORM OF TERM NOTE ----------------- TERM NOTE --------- $20,000,000 May 31, 1994 FOR VALUE RECEIVED, the undersigned, BONNEVILLE FUELS CORPORATION, as Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation and BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively the "Borrowers"), HEREBY JOINTLY AND SEVERALLY PROMISE TO PAY to the order of FIRST INTERSTATE BANK OF DENVER, N.A. (the "Bank") on or before the Facility A Maturity Date (as defined in the Credit Agreement identified below) the Principal Amount of Twenty Million Dollars ($20,000,000), or such lesser amount of unrepaid Facility A Loans under the Credit Agreement in effect on the Conversion Date (as defined in the Credit Agreement). The Principal Amount hereof shall be repaid by the Borrowers in monthly installment payments on a schedule which is established as provided in the Credit Agreement. The Borrowers promise to pay interest on the unpaid Principal Amount hereof in full monthly installment payments from the Conversion Date until such Principal Amount is paid in full, at such Interest Rates and as otherwise provided in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to the Bank at 633 Seventeenth Street, Denver, Colorado (or at such other location as the Bank may designate), in same day funds. Each principal payment or prepayment and the resulting principal balance hereof shall be recorded by the Bank and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Note. This Note is the Term Note referred to in and is entitled to the benefits of the Amended and Restated credit Agreement dated as of May 31, 1994 (the "Credit Agreement"), between the Borrowers and the Bank, which Credit Agreement, among other things, contains provisions for acceleration of the maturities hereof upon the happening of certain stated events. Terms used herein which are defined in the Credit Agreement shall have the meanings specified in the Credit Agreement. This Note represents an extension and renewal of the outstanding principal amount of, and a replacement and substitution for, a certain Promissory Note of Bonneville Fuels Corporation, dated August 30, 1991 (the "Prior Note"), payable to the order of Chase Manhattan Bank (National Association) and the Revolving Note. The Prior Note has been transferred to the Bank. The Indebtedness evidenced by the Prior Note and by the Revolving Note is a continuing indebtedness and nothing contained herein shall be construed to deem paid the Prior Note or the Revolving Note or to replace or terminate any lien or security interest given to secure payment of the Prior Note or the Revolving Note. Demand, presentment for payment, notice of dishonor and protest are hereby expressly waived by the Borrowers. BONNEVILLE FUELS CORPORATION By: ___________________________ Name: Steven H. Stepanek Title: President BONNEVILLE FUELS MARKETING CORPORATION By: ___________________________ Name: Steven H. Stepanek Title: President COLORADO GATHERING CORPORATION By: ___________________________ Name: Steven H. Stepanek Title: President BONNEVILLE FUELS OPERATING CORPORATION By: ___________________________ Name: Steven H. Stepanek Title: President BONNEVILLE FUELS MANAGEMENT CORPORATION By: ___________________________ Name: Steven H. Stepanek Title: President NOTE MODIFICATION AGREEMENT ================================================================================ Borrowers: Bonneville Fuels Corporation, Bonneville Fuels Marketing Corporation, Colorado Gathering Corporation, Bonneville Fuels Operating Corporation, and Bonneville Fuels Management Corporation (referred to herein, collectively if more than one, as "Borrower") 1660 Lincoln Street, Suite 1800, Denver, Colorado 80264 Lender: First Interstate Bank of Denver, N.A. (referred to herein, together with any subsequent holder of this Note Modification Agreement, as "Holder") 633 17th Street, Denver, CO 80270 ================================================================================ Denver, Colorado April 1, 1995 DESCRIPTION OF THE PROMISSORY NOTED MODIFIED BY THIS NOTE MODIFICATION AGREEMENT: That certain Promissory Note in the original principal amount of $1,000,000.00 dated May 31, 1994, from Borrower in favor of Holder (the "Facility B Note"). Capitalized terms used herein, which are not specifically defined herein, shall have the meanings given them in the Promissory Note. DESCRIPTION OF TERMS MODIFIED BY THIS NOTE MODIFICATION AGREEMENT: The final payment date of "April 1, 1995" contained in the fourth paragraph of the Facility B Note, is hereby replaced by a new final payment date of "May 1, 1996." CONTINUING VALIDITY: Except as expressly modified by this Note Modification Agreement, the terms of the original obligation(s), including the Facility B Note, the Credit Agreement, and all other agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by the Holder to this Note Modification Agreement does not waive Holder's right to strict performance of the obligation(s) as modified, nor obligate the Holder to make any future modification of the terms of the obligation(s). Nothing in this Note Modification Agreement will constitute a satisfaction of the obligation(s). BORROWERS: - --------- BONNEVILLE FUELS CORPORATION BONNEVILLE FUELS OPERATING CORPORATION By: ____________________________ By: _______________________________ Steven H. Stepanek, President Steven H. Stepanek, President BONNEVILLE FUELS MARKETING CORPORATION By: ____________________________ Steven H. Stepanek, President COLORADO GATHERING CORPORATION BONNEVILLE FUELS MANAGEMENT CORPORATION By: ____________________________ By: _______________________________ Steven H. Stepanek, President Steven H. Stepanek, President LENDER: - ------ FIRST INTERSTATE BANK OF DENVER, N.A. By: ____________________________ Mark E. Thompson, Vice President AMENDMENT TO CREDIT AGREEMENT ----------------------------- This AMENDMENT TO CREDIT AGREEMENT, dated as of April 1, 1995, is made and entered into in Denver, Colorado, by and between BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, and BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, the "Borrowers"), whose address and principal location of their business is 1660 Lincoln, Suite 1800, Denver, Colorado, 80264, and FIRST INTERSTATE BANK OF DENVER, N.A., a national banking association (the "Bank"), whose address is 633 Seventeenth Street, Denver, Colorado 80270. RECITALS: -------- WHEREAS, the Borrowers and the Bank entered into that certain Amended and Restated Credit Agreement dated as of May 31, 1994 (referred to herein as the "Credit Agreement") wherein the Bank agreed to provide to the Borrowers two credit facilities referred to as "Facility A" and "Facility B" (collectively, the "Loans") subject to the terms and conditions set forth in the Credit Agreement (capitalized terms not specifically defined herein shall have the meanings given them in the Credit Agreement); WHEREAS, the Borrowers have requested that (i) modifications be made to certain financial covenants set forth in Section 8.1(e) of the Credit Agreement, and that (ii) the final payment date of Facility B be extended to May 1, 1996, subject to the terms of the Credit Agreement, as amended by this Amendment to Credit Agreement; WHEREAS, the Bank, as an accommodation to the Borrowers, is willing to make modifications to certain financial covenants, and to extend the final payment date of Facility B, subject to the terms of the Credit Agreement as amended by this Amendment to Credit Agreement; and WHEREAS, the parties desire to amend and reaffirm the Credit Agreement and to enter into this Amendment to Credit Agreement to reflect the terms and conditions of, and to describe their respective rights and obligations with respect to, the Loans. NOW THEREFORE, in consideration of the mutual covenants and agreements set forth in the Credit Agreement and in this Amendment to Credit Agreement, the parties hereto agree as follows effective as of April 1, 1995: 1. The definition of "Facility B Maturity Date" in Section 1.1 (page 6) of the Credit Agreement is hereby modified by replacing the date "April 1, 1995" with the date "May 1, 1996", effective as of April 1, 1995. 2. The table and related footnotes in Section 8.1(e) (page 33) of the Credit Agreement is hereby replaced in its entirety by the following table and footnotes, effective as of January 1, 1995:
During The During The Revolving Amortizing Period Period ---------- ---------- Minimum Working Capital (1): $250,000 $500,000 Minimum Current Ratio (1): 1.05x 1.25x Minimum Net Worth (2): $2,300,000 $3,000,000 Minimum Net Worth (3): $5,900,000 $6,600,000 Maximum Debt/Worth (2): 6.00x 5.00x Maximum Debt/Worth (3): 2.00x 1.75x Minimum Fixed Charge Coverage (4): 1.00x 1.00x
1) With the current portion of Facility A treated as a non-current liability, and the undrawn and available portion of Facility A treated as a current asset. 2) With advances from BPC ($3.6 million currently) treated as a liability. 3) With advances from BPC ($3.6 million currently) treated as equity. 4) (i) Net income after tax plus interest expense plus depreciation, depletion and amortization, plus other non-cash charges, divided by (ii) interest expenses plus required principal payments, calculated quarterly on a fiscal year-to-date basis. 3. Miscellaneous: a. Except as specifically amended, all of the terms, conditions and provisions of the Credit Agreement and any and all documents executed in connection therewith shall remain in full force and effect. b. THIS AMENDMENT TO CREDIT AGREEMENT IS ACCEPTED AND ENTERED INTO IN THE STATE OF COLORADO AND SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO. c. The Borrowers represent and warrant to the Bank that the execution and delivery of this Amendment to Credit Agreement and the performance by the Borrowers of their obligations hereunder are within the Borrowers' powers, have been duly authorized by all necessary corporate action, and will not contravene or conflict with any provision of law or of the articles or bylaws of the Borrowers, or of any agreement binding upon the Borrowers. d. The Borrowers represent and warrant to the Bank that all of the representations and warranties of the Borrowers contained in the Credit Agreement, as amended by this Amendment to Credit Agreement, are true and correct in all material respects on the date hereof as though made as of the date hereof, provided, however, that any reference to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended by this Amendment to Credit Agreement. e. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended by this Amendment to Credit Agreement. f. This Amendment to Credit Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which are identical, and all such counterparts shall together constitute but one and the same Amendment to Credit Agreement. 2 IN WITNESS WHEREOF, the Borrowers and the Bank have executed this Agreement to Credit Agreement effective as of April 1, 1995. BORROWERS: - --------- BONNEVILLE FUELS CORPORATION BONNEVILLE FUELS OPERATING CORPORATION By: __________________________ By: _____________________________ Steven H. Stepanek, President Steven H. Stepanek, President BONNEVILLE FUELS MARKETING CORPORATION By: _________________________ Steven H. Stepanek, President COLORADO GATHERING CORPORATION BONNEVILLE FUELS MANAGEMENT CORPORATION By: __________________________ By: _____________________________ Steven H. Stepanek, President Steven H. Stepanek, President BANK: - ---- FIRST INTERSTATE BANK OF DENVER, N.A. By: __________________________ Mark E. Thompson, Vice President 3 NOTE MODIFICATION AGREEMENT ================================================================================ Borrowers: Bonneville Fuels Corporation, Bonneville Fuels Marketing Corporation, Colorado Gathering Corporation, Bonneville Fuels Operating Corporation, and Bonneville Fuels Management Corporation (referred to herein, collectively if more than one, as "Borrower") 1660 Lincoln Street, Suite 1800, Denver, Colorado 80264 Lender: First Interstate Bank of Denver, N.A. (referred to herein, together with any subsequent holder of this Note Modification Agreement, as "Holder") 633 17th Street, Denver, CO 80270 ================================================================================ Denver, Colorado May 1, 1996 DESCRIPTION OF THE PROMISSORY NOTED MODIFIED BY THIS NOTE MODIFICATION AGREEMENT: That certain Promissory Note in the original principal amount of $1,000,000.00 dated May 31, 1994, as previously amended by that certain Note Modification Agreement dated April 1, 1995, from Borrower in favor of Holder (the aforementioned Promissory Note as previously amended by the aforementioned Note Modification Agreement is herein referred to as the "Facility B Note"). Capitalized terms used herein, which are not specifically defined herein, shall have the meanings given them in the Facility B Note. DESCRIPTION OF TERMS MODIFIED BY THIS NOTE MODIFICATION AGREEMENT: The final payment date of "May 1, 1996" contained in the fourth paragraph of the Facility B Note, is hereby replaced by a new final payment date of "May 1, 1998." CONTINUING VALIDITY: Except as expressly modified by this Note Modification Agreement, the terms of the original obligation(s), including the Facility B Note, the Credit Agreement, and all other agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by the Holder to this Note Modification Agreement does not waive Holder's right to strict performance of the obligation(s) as modified, nor obligate the Holder to make any future modification of the terms of the obligation(s). All references to the Facility B Note in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Facility B Note as previously amended and as amended by this Note Modification Agreement. BORROWERS: - --------- BONNEVILLE FUELS CORPORATION BONNEVILLE FUELS OPERATING CORPORATION By: _________________________ By: ___________________________ Steven H. Stepanek, President Steven H. Stepanek, President BONNEVILLE FUELS MARKETING CORPORATION By: __________________________ Steven H. Stepanek, President COLORADO GATHERING CORPORATION BONNEVILLE FUELS MANAGEMENT CORPORATION By: __________________________ By: ___________________________ Steven H. Stepanek, President Steven H. Stepanek, President LENDER: - ------ FIRST INTERSTATE BANK OF DENVER, N.A. By: __________________________ Mark E. Thompson, Vice President SECOND AMENDMENT TO CREDIT AGREEMENT ------------------------------------ This SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of April 1, 1996, is made and entered into in Denver, Colorado, by and between BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, the "Borrowers"), whose address and principal location of their business is 1660 Lincoln, Suite 1800, Denver, Colorado, 80264, and FIRST INTERSTATE BANK OF DENVER, N.A., a national banking association (the "Bank"), whose address is 633 Seventeenth Street, Denver, Colorado 80270. RECITALS: -------- WHEREAS, the Borrowers and the Bank entered into that certain Amended and Restated Credit Agreement dated as of May 31, 1994, wherein the Bank agreed to provide to the Borrowers two credit facilities referred to as "Facility A" and "Facility B" (collectively, the "Loans") subject to the terms and conditions set forth in the Credit Agreement; WHEREAS, the Amended and Restated Credit Agreement was amended by the Borrowers and the Bank pursuant to the certain Amendment to Credit Agreement dated as of April 1, 1995 (the Amended and Restated Credit Agreement as previously amended is referred to herein as the "Credit Agreement," and capitalized terms not specifically defined herein shall have the meanings given them in the Credit Agreement); WHEREAS, the Borrowers have requested the extension of the Conversion Date of Facility A and the Facility B Maturity Date, as well as the modification of certain other Credit Agreement terms, conditions, covenants, requirements, and events of default; WHEREAS, the Bank, as an accommodation to the Borrowers, is willing to agree to the extension of the Conversion Date of Facility A and the Facility B Maturity Date, as well as the modification of certain other Credit Agreement terms, conditions, covenants, requirements and events of default, subject to the terms of the Credit Agreement as amended by this Second amendment to Credit Agreement; and WHEREAS, the parties desire to amend and reaffirm the Credit Agreement and to enter into this Second Amendment to Credit Agreement to reflect the terms and conditions of, and to describe their respective rights and obligations with respect to, the Loans. NOW THEREFORE, in consideration of the mutual covenants and agreements set forth in the Credit Agreement and in this Second Amendment to Credit Agreement, the parties hereto agree as follows effective as of April 1, 1996: 1. The definition of "Conversion Date" in Section 1.1 Certain Defined Terms (page 4) of the Credit Agreement is hereby modified by replacing the date "April 1, 1996" in the last sentence of this definition with the date "April 1, 1998". 2. The definition of "Facility B Maturity Date" in Section 1.1 Certain Defined Terms (page 6) of the Credit Agreement is hereby modified by replacing the date "April 1, 1996" with the date "May 1, 1998". 3. The first sentence of Section 4.4 A/R Borrowing Base Determinations (page 20) of the Credit Agreement is hereby modified by replacing "60%" with "75%". 4. The first sentence of section 8.1(b) Books, Financial Statements and Reports, (i) (page 30) of the Credit Agreement is hereby modified by replacing "ninety (90) days" with "one hundred twenty (120) days". 5. Section 9.1(h) Material Adverse Change (page 40) of the Credit Agreement is hereby modified by eliminating the phrase "or a change in the key management personnel of BFC,". 6. Miscellaneous: a. Except as specifically amended, all of the terms, conditions and provisions of the Credit Agreement and any and all documents executed in connection therewith shall remain in full force and effect. b. THIS SECOND AMENDMENT TO CREDIT AGREEMENT IS ACCEPTED AND ENTERED INTO IN THE STATE OF COLORADO AND SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO. c. The Borrowers represent and warrant to the Bank that the execution and delivery of this Second Amendment to Credit Agreement and the performance by the Borrowers of their obligations hereunder are within the Borrowers' powers, have been duly authorized by all necessary corporate action, and will not contravene or conflict with any provision of law or of the articles or bylaws of the Borrowers, or of any agreement binding upon the Borrowers. d. The Borrowers represent and warrant to the Bank that all of the representations and warranties of the Borrowers contained in the Credit Agreement, as amended by this Second Amendment to Credit Agreement, are true and correct in all material respects on the date hereof as though made as of the date hereof; provided, however, that any reference to the Credit Agreement shall be deemed to refer to the Credit Agreement as previously amended and as amended by this Second Amendment to Credit Agreement. e. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as previously amended and as amended by this Second Amendment to Credit Agreement. f. This Second Amendment to Credit Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which are 2 identical, and all such counterparts shall together constitute but one and the same Second Amendment to Credit Agreement. IN WITNESS WHEREOF, the Borrowers and the Bank have executed this Second Amendment to Credit Agreement effective as of April 1, 1996. BORROWERS: - --------- BONNEVILLE FUELS CORPORATION BONNEVILLE FUELS OPERATING CORPORATION By: _________________________ By: ___________________________ Steven H. Stepanek, President Steven H. Stepanek, President BONNEVILLE FUELS MARKETING CORPORATION By: _________________________ Steven H. Stepanek, President COLORADO GATHERING CORPORATION BONNEVILLE FUELS OPERATING CORPORATION By: _________________________ By: ___________________________ Steven H. Stepanek, President Steven H. Stepanek, President BANK: - ---- FIRST INTERSTATE BANK OF DENVER, N.A. By: _________________________ Mark E. Thompson, Vice President 3 LOAN TRANSFER AGREEMENT ----------------------- THIS LOAN TRANSFER AGREEMENT (this "Agreement"), dated as of September 18, 1996, is by and among BONNEVILLE FUELS CORPORATION, BONNEVILLE FUELS MARKETING CORPORATION, COLORADO GATHERING CORPORATION, BONNEVILLE FUELS OPERATING CORPORATION, and BONNEVILLE FUELS MANAGEMENT CORPORATION (collectively, "Borrower"), WELLS FARGO BANK (COLORADO), N.A., a national banking association, f/k/a FIRST INTERSTATE BANK OF DENVER, N.A. ("Wells Fargo"), and COLORADO NATIONAL BANK ("CNB"). RECITALS A. Pursuant to the provisions of an Amended and Restated Credit Agreement dated as of May 31, 1994, as amended by amendments dated as of April 1, 1995 and April, 1996 (such Credit Agreement, as amended, together with all prior credit agreements and amendments thereto which were amended and restated thereby, being herein collectively called the "Wells Fargo Credit Agreement"), Wells Fargo made two loans (the "Loans") to Borrower. B. Borrower, Wells Fargo and CNB wish to enter into this Agreement in order to provide for the terms upon which the Loans, the Wells Fargo Credit Agreement, any and all related notes and all other related loan documents, including without limitation any and all related security documents, are being transferred from Wells Fargo to CNB. AGREEMENT NOW THEREFORE, in consideration of $10.00 and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Purchase Price. If the purchase of the Loans is to occur on September 18, 1996, CNB will wire-transfer to Wells Fargo on that date, as consideration for the purchase by CNB of the Loans, $2,509,606.16 (the "9/18 Purchase Price"), representing $2,500,000.00 of principal and $9,606.16 of interest outstanding on the Loans as of that date (wiring instructions: Wells Fargo Bank, N.A., ABA #121-000-248, Credit GL Account #2712-507201, Ref: Bonneville Fuels, Obligor #0944220986, Obligation: 42, 18, 83). The consideration to be paid by CNB to Wells Fargo for the purchase of the Loans (the "Final Purchase Price") shall be the 9/18/ Purchase Price plus, if the purchase of the Loans is delayed beyond September 18, 1996, $565.06849 for each day after September 18, 1996 until the day that the appropriate amount is wire-transferred to Wells Fargo; provided that if the purchase is not made on or before September 30, 1996, this Agreement shall terminate and be of no further force or effect. 2. Loan Documents. Effective as of the date of the receipt by Wells Fargo of the Final Purchase Price from CNB ( the "Assignment Date") and conditional upon its receipt of such amount on or before September 30, 1996, Wells Fargo agrees to transfer, and does hereby transfer (conditional upon the receipt by Wells Fargo of such amount), to CNB, WITHOUT RECOURSE, REPRESENTATION OR WARRANTY (except that Wells Fargo represents and warrants that it has not heretofore transferred any interest in the Loans or in any related documents to any third party), the Loans, the Wells Fargo Credit Agreement, the related notes and all other related loan documents, including without limitation the security documents listed on Exhibit A attached hereto and made a part hereof and any and all other security documents securing the Loans (collectively, the "Loan Documents"). 3. Delivery of Loan Documents. Upon its receipt of the Final Purchase Price, Wells Fargo will deliver to CNB (or as CNB may direct) all loan documents relating to the Loans, including without limitation: (a) any and all original promissory notes, endorsed to the order of CNB, without recourse, by Wells Fargo, (b) appropriate assignments, in recordable form, of any and all security documents securing the Loans, and (c) the original recorded counterparts of mortgages, acknowledgment copies of financing statements and any and all other security documents, to the extent possessed by or on behalf of Wells Fargo. 4. Further Assurances. Upon and after the receipt by Wells Fargo of the final Purchase Price, Wells Fargo agrees to promptly do or cause to be done such further acts and to execute such further instruments as CNB may reasonably request in order to carry out the purposes of this Agreement. 5. Expenses. Borrower shall pay any and all reasonable out-of-pocket expenses incurred by Wells Fargo and/or CNB in connection with the transactions contemplated by this Agreement, including without limitation any and all filing and recording fees, charges and expenses. 6. Assumption. CNB will, from and after the Assignment Date, perform all of the obligations of Wells Fargo under or in connection with the Loan Documents. From and after the Assignment Date: (a) Wells Fargo shall be released from the obligations of Wells Fargo in respect of the Loan documents, and (b) CNB shall be entitled to all of the rights, powers and privileges of Wells Fargo under the Loan Documents. 7. Disclaimer. Wells Fargo does not make any representation or warranty, nor shall it have any responsibility to CNB, with respect to the accuracy of any recitals, statements, representations or warranties contained in the Loan Documents or in any certificate or other document referred to or provided for in, or received by Wells Fargo under, the Loan Documents, or for legality, enforceability, collectibility or sufficiency of the Loan Documents or any other document referred to or provided for therein or for any failure by Borrower or any other person or entity to perform any of its obligations there under or for the existence, value, perfection or priority of any collateral security or the financial or other condition of Borrower, or any other matter relating to the Loan Documents or any extension of credit thereunder. 8. Release. Borrower forever releases Wells Fargo and each of its directors, officers, employees, agents, affiliates, successors and assigns (except CNB) from and against any and all claims, covenants, promises, agreements, obligations, controversies, losses, damages, costs, expenses, demands, causes of action, judgments or liabilities of any kind or character whatsoever, whether matured or contingent or known or unknown, that such party may have arising out of, or with respect to, directly or indirectly, the Loan documents and the transactions covered thereunder (including, but not limited to, Wells Fargo's commitments and obligations under the Loan Documents). 9. Letters of Credit. As to any and all letters of credit issued by Wells Fargo and currently outstanding under the Loan Documents (the "Wells Fargo LC's"), CNB will promptly issue substitute letters of credit and Borrower will promptly thereafter obtain cancellations of the Wells Fargo LC's from the beneficiaries thereof. Until such cancellations are obtained, Borrower and CNB will indemnify, save and hold harmless Wells Fargo from any and all obligations to make payments under the Wells Fargo LC's and Borrower will at all times maintain: (a) a certificate of deposit issued by Wells Fargo and pledged to Wells Fargo in an amount at least equal to the aggregate of the face amounts of any and all Wells Fargo LC's, or (b) alternative security arrangements acceptable to Wells Fargo as to Borrower's obligations with respect to the Wells Fargo LC's. CNB agrees that the interests of Wells Fargo in and to 2 such certificate of deposit or alternative security under any such documents shall be superior to any claim or right that CNB may have to such certificate of deposit or alternative security under any of the security documents being assigned to CNB. 10. Miscellaneous. This Agreement shall be governed by and construed under the laws of the State of Colorado and shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Delivery of this Agreement by any party may be effected, without limitation, by faxing a signed counterpart of this Agreement to Borrower, Wells Fargo and CNB (any party that effects delivery in such manner hereby agreeing to transmit promptly to each of the other parties an actual signed counterpart): Borrower: 801-363-9557 (Attn: Steven H. Stepanek) Wells Fargo: 303-293-5467 (Attn: Mr. H. Allen Rheem, Jr.) CNB: 303-585-4362 (Attn: Mr. Mark Thompson) Executed as of the date first above written. WELLS FARGO BANK (COLORADO), N.A. f/k/a FIRST INTERSTATE BANK OF DENVER, N.A. By:____________________________________ Vice President BONNEVILLE FUELS CORPORATION By:____________________________________ President BONNEVILLE FUELS MARKETING CORPORATION By:____________________________________ President 3 COLORADO GATHERING CORPORATION By:______________________________ President BONNEVILLE FUELS OPERATING CORPORATION By:______________________________ President BONNEVILLE FUELS MANAGEMENT CORPORATION By:______________________________ President COLORADO NATIONAL BANK By:______________________________ 4 Exhibit A --------- Security Documents ------------------ 1. Amended and Restated Mortgage, Deed of Trust, Assignment of Proceeds, Security Agreement and Financing Statement dated as of May 31, 1994, from Bonneville Fuels Corporation to Scott E. Isaacson, as trustee, and First Interstate Bank of Denver, N.A. 2. Amended and Restated Mortgage, Deed of Trust, Assignment of Proceeds, Security Agreement and Financing Statement dated as of May 31, 1994, from Bonneville Fuels Corporation to Michael H. Fiuzat, as trustee, and First Interstate Bank of Denver, N.A. 3. Amended and Restated Mortgage, Assignment of Proceeds, Security Agreement and Financing Statement dated as of May 31, 1994, from Bonneville Fuels Corporation to First Interstate Bank of Denver, N.A. 4. Amended and Restated Mortgage, Assignment of Proceeds, Security Agreement and Financing Statement dated as of May 31, 1994, from Colorado Gathering Corporation to First Interstate Bank of Denver, N.A. 5. Second Amended and Restated Assignment and Security Agreement dated as of May 31, 1994, from Bonneville Fuels Corporation to First Interstate Bank of Denver, N.A. 6. Financing Statements relating to Items 1 through 5 above. THIRD AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of September 18, 1996, is by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and COLORADO NATIONAL BANK ("CNB") Recitals A. Borrower and First Interstate Bank of Denver, N.A. ("FIDN") entered into an Amended and Restated Credit Agreement dated as of May 31, 1994, as amended by amendments dated as of April 1, 1995 and April 1, 1996 (the "Credit Agreement"). Capitalized terms used herein but not defined herein shall have the same meanings as set forth in the Credit Agreement. B. Pursuant to a Loan Transfer Agreement dated as of September 18, 1996, the Credit Agreement has been transferred by FIDN to CNB. C. Borrower and CNB wish to enter into this Amendment in order to amend certain terms and provisions of the Credit Agreement. Amendment NOW, THEREFORE, in consideration of $10.00 and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Credit Agreement. The Credit Agreement shall be, and hereby is, amended as follows as of the date hereof: (a) All references in the Credit Agreement to "First Interstate Bank of Denver, N.A." or the "Bank" shall be deemed to refer to Colorado National Bank. (b) In line 7 of the definition of "Conversion Date" in Section 1.1 on page 4 of the Credit Agreement, "April 1, 1998" shall be changed to "July 1, 1998." (c) In line 2 of the definition of "Facility A Scheduled Maturity Date" in Section 1.1 on page 6 of the Credit Agreement, "April 1, 2001" shall be changed to "July 1, 2003." (d) In line 3 of the definition of "Facility B Maturity Date" in Section 1.1 on page 6 of the Credit Agreement, "May 1, 1998" shall be changed to "July 1, 1998." (e) In lines 2 and 3 of the definition of "LIBOR Loan Interest Rate" in Section 1.1 on page 8 of the Credit Agreement, "prior to the Conversion Date" shall be deleted. In line 4 of the definition of "LIBOR Loan Interest Rate" in Section 1.1 on page 8 of the Credit Agreement, clause (a) shall be revised to read as follows: "(z)(1) during the Revolving Period, 1.75 percentage points, and (2) during the Amortizing Period, 2.00 percentage points." (f) All references in the Credit Agreement to "Prime Rate," "Prime Rate Loan" and "Prime Rate Loan Interest Rate" (including without limitation the definitions of the foregoing terms) shall be changed to refer to "Reference Rate," "Reference Rate Loan" and "Reference Rate Loan interest Rate," respectively. (g) The following shall be substituted for the definition of "Prime Rate Loan Interest Rate" in Section 1.1 on page 10 of the Credit Agreement: "Reference Rate Loan Interest Rate" means the interest rate per annum pertaining to a Reference Rate Loan, which interest rate shall be, for Reference Rate Loans under Facility A and for Reference Rate Loans under Facility B, the Reference Rate in effect from time to time. (h) In line 11 of Section 2.3 on page 12 of the Credit Agreement, "October 1, 1995" shall be changed to "January 1, 1999." (i) In line 8 of Section 3.3 on page 15 of the Credit Agreement, "May 1, 1996" shall be changed to "August 1, 1998." In lines 12 and 13 of Section 3.3 on page 15 of the Credit Agreement, "economic half-life" shall be changed to "revenue half-life." (j) In lines 4 and 5 of Section 3.6(a) on page 16 of the Credit Agreement, "633 Seventeenth Street" shall be changed to "950 Seventeenth Street." (k) In line 4 of Section 3.6(b) on page 16 of the Credit Agreement, "365" shall be changed to "360." (l) The following shall be inserted at the end of Section 4.1(a) on page 18 of the Credit Agreement: "During each of the time periods set forth below, the amount of the Production Borrowing Base for Facility A shall be as set forth below: 2
Production Time Period Borrowing Base ----------- -------------- 09/18/96-09/30/96 $5,100,000 10/01/96-10/31/96 $4,900,000 11/01/96-11/30/96 $4,700,000 12/01/96-12/31/96 $4,500,000"
(m) In line 4 of Section 4.2 on page 18 of the Credit Agreement, "April 1, commencing April 1, 1995" shall be changed to "July 1, commencing July 1, 1997." (n) In lines 7 and 8 of Section 4.2 on page 18 of the Credit Agreement, "October 1" shall be changed to "January 1, commencing January 1, 1997." (o) In line 11 of Section 4.2 on page 18 of the Credit Agreement, "April 1" shall be changed to "July 1." (p) The following shall be substituted for Section 8.1 (e) on page 33 of the Credit Agreement: (e) Financial Covenants. Comply, on a consolidated basis, as of the end of each Quarter, beginning June 30, 1996, with the following financial tests, all determined in accordance with generally accepted accounting principles: Minimum Working Capital (1): $250,000 Minimum Current Ratio (1): 1.05x Minimum Net Worth (2): $2,300,000 Minimum Net Worth (3): $5,900,000 Maximum Debt/Worth (2): 6.00x Maximum Debt/Worth (3): 2.00x Minimum Fixed Charge Coverage (2): l.00x
(1) With the current portion of Facility A treated as a non-current liability, and with the unused portion of Facility A treated as a current asset. (2) With advances from BPC ($3,600,000 currently) treated as a liability. (3) With advances from BPC ($3,600,000 currently) treated as an equity. 3 (4) (i) Net income after tax plus interest expense plus depreciation, depletion and amortization plus other non-cash charges, divided by (ii) interest expenses plus required principal payments, calculated on a fiscal year-to-date basis. (q) The following shall be substituted for Section 9.1(h) on page 40 of the Credit Agreement: (h) Material Adverse Change. A material adverse change in any of Borrowers' condition (financial or otherwise), including changes due to violations of Environmental Laws or applications of Environmental Laws to the Borrowers or their properties, which the Bank determines, in its sole discretion, would have a Materially Adverse Effect on the operations of the Borrowers. (r) The following shall be substituted for the address of the Bank in Section 10.2 on page 43 of the Credit Agreement: Bank: Colorado National Bank 950 Seventeenth Street Denver, Colorado 80202 Attention: Mr. Mark E. Thompson, Energy Group Facsimile: (303) 585-4362 2. The Notes. The Facility A Note, the Facility B Note and the Term Note shall be amended, such amendments to be effected by Allonges (the "Allonges"), between Borrower and CNB, to be attached to the Facility A Note, the Facility B Note and the Term Note, respectively, and to be substantially in the form of Exhibits A-1, A-2 and A-3 attached hereto and made a part hereof. 3. Loan Documents. All references in any document to the Credit Agreement, the Facility A Note, the Facility B Note or the Term Note shall refer to the Credit Agreement, the Facility A Note, the Facility B Note or the Term Note, as amended pursuant to this Amendment and the Allonges. 4. Conditions Precedent. The obligations of the parties under this Amendment are subject, at the option of CNB, to the prior satisfaction of the condition that Borrower shall have delivered to CNB the following (all documents to be satisfactory in form and substance to CNB and, if appropriate, duly executed and/or acknowledged on behalf of the parties other than CNB): (a) This Amendment. 4 (b) The Allonges. (c) Any and all other loan documents required by CNB, including without limitation such amendments and supplements to the Collateral Documents as may be required by CNB. (d) Such title opinions, supplemental title opinions, UCC searches and other title information concerning Borrower's title to the Collateral or any portions thereof as may be satisfactory to CNB. 5. Representations and Warranties. Borrower hereby certifies to CNB that, as of the date of this Amendment, all of Borrower's representations and warranties contained in the Credit Agreement are true, accurate and complete in all material respects, no Event of Default has occurred and no event has occurred which, with the giving of notice, the lapse of time, or both, would constitute an Event of Default. 6. Continuation of the Credit Agreement. Except as specified in this Amendment and the Allonges, the provisions of the Credit Agreement, the Facility A Note, the Facility B Note and the Term Note shall remain in full force and effect, and if there is a conflict between the terms of this Amendment or the Allonges and those of the Credit Agreement, the Facility A Note, the Facility B Note or the Term Note or any other document executed and delivered in connection therewith, the terms of this Amendment and the Allonges shall control. 7. Miscellaneous. This Amendment shall be governed by and construed under the laws of the State of Colorado and shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Executed as of the date first above written. BONNEVILLE FUELS CORPORATION By: _______________________________________ President BONNEVILLE FUELS MARKETING CORPORATION By: _______________________________________ President 5 COLORADO GATHERING CORPORATION By: ___________________________________ President BONNEVILLE FUELS OPERATING CORPORATION By: ___________________________________ President BONNEVILLE FUELS MANAGEMENT CORPORATION By: ___________________________________ President COLORADO NATIONAL BANK By: ___________________________________ Vice President 6 Exhibit A-1 Allonge Reference is made to the Third Amendment of Amended and Restated Credit Agreement dated as of September 18, 1996 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and COLORADO NATIONAL BANK ("CNB"). The Revolving Note dated May 31, 1994, made by Borrower payable to the order of First Interstate Bank of Denver, N.A., in the face amount of $20,000,000 (the "Revolving Note") is hereby modified as follows: 1. All references in the Revolving Note to "First Interstate Bank of Denver, N.A." or the "Bank" shall be deemed to refer to Colorado National Bank. 2. In lines 2 and 3 of the third paragraph on page 1 of the Revolving Note, "633 Seventeenth Street" shall be changed to "950 Seventeenth Street." 3. All references in the Revolving Note to the "Credit Agreement" shall be deemed to refer to the Amended and Restated Credit Agreement dated as of May 31, 1994, between Borrower and First Interstate Bank of Denver, N.A., as assigned by Wells Fargo Bank (Colorado), N.A. f/k/a First Interstate Bank of Denver, N.A. to Colorado National Bank, as heretofore or hereafter amended, extended, modified, or amended and restated. Executed as of the date first above written. BONNEVILLE FUELS CORPORATION By: ----------------------------- President BONNEVILLE FUELS MARKETING CORPORATION By: ------------------------------ President A-1-1 COLORADO GATHERING CORPORATION By: --------------------------------- President BONNEVILLE FUELS OPERATING CORPORATION By: --------------------------------- President BONNEVILLE FUELS MANAGEMENT CORPORATION By: --------------------------------- President COLORADO NATIONAL BANK By: --------------------------------- Vice President A-1-2 Exhibit A-2 Allonge Reference is made to the Third Amendment of Amended and Restated Credit Agreement dated as of September 18, 1996 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and COLORADO NATIONAL BANK ("CNB"). The Promissory Note dated May 31, 1994, made by Borrower, payable to the order of First Interstate Bank of Denver, N.A., in the face amount of $1,000,000 (the "Facility B Note") is hereby modified as follows: 1. All references in the Facility B Note to "First Interstate Bank of Denver, N.A.," the "Bank" or "Holder" shall be deemed to refer to Colorado National Bank. 2. In line 4 of the first paragraph on page 1 of the Facility B Note, "633 Seventeenth Street, Denver, Colorado 80270" shall be changed to "950 Seventeenth Street, Denver, Colorado 80202." 3. In line 8 of the first paragraph on page 1 of the Facility B Note, "which is one percent (1%) per annum higher than the `Bank's Prime Rate'" shall be changed to "equal to the `Bank's Reference Rate.'" 4. In line 10 of the first paragraph on page 1 of the Facility B Note, "three Hundred sixty-five (365)" shall be changed to "three hundred sixty (360)." 5. All references in the Facility B Note to "Bank's Prime Rate" shall be changed to be references to "Bank's Reference Rate." 6. In line 3 of the first paragraph on page 2 of the Facility B Note, the maturity date of the Facility B Note shall be changed to July 1, 1998. 7. All references in the Facility B Note to the "Credit Agreement" shall be deemed to refer to the Amended and Restated Credit Agreement dated as of May 31, 1994, between Borrower and First Interstate Bank of Denver, N.A., as assigned by Wells Fargo Bank (Colorado), N.A. f/k/a First Interstate Bank of Denver, N.A. to Colorado National Bank, as heretofore or hereafter amended, extended, modified, or amended and restated. Executed as of the date first above written. A-2-1 BONNEVILLE FUELS CORPORATION By: -------------------------------- President BONNEVILLE FUELS MARKETING CORPORATION By: -------------------------------- President COLORADO GATHERING CORPORATION By: -------------------------------- President BONNEVILLE FUELS OPERATING CORPORATION By: -------------------------------- President BONNEVILLE FUELS MANAGEMENT CORPORATION By: -------------------------------- President COLORADO NATIONAL BANK By: -------------------------------- Vice President A-2-2 Exhibit a-3 Allonge Reference is made to the Third Amendment of Amended and Restated Credit Agreement dated as of September 18, 1996 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and COLORADO NATIONAL BANK ("CNB"). The Term Note dated May 31, 1994, made by Borrower, payable to the order of First Interstate Bank of Denver, N.A., in the face amount of $20,000,000 (the "Term Note") is hereby modified as follows: 1. All references in the Term Note to "First Interstate Bank of Denver, N.A." or the "Bank" shall be deemed to refer to Colorado National Bank. 2. In lines 2 and 3 of the third paragraph on page 1 of the Term Note, "633 Seventeenth Street" shall be changed to "950 Seventeenth Street." 3. All references in the Term Note to the "Credit Agreement" shall be deemed to refer to the Amended and Restated Credit Agreement dated as of May 31, 1994, between Borrower and First Interstate Bank of Denver, N.A., as assigned by Wells Fargo Bank (Colorado), N.A. f/k/a First Interstate Bank of Denver, N.A. to Colorado National Bank, as heretofore or hereafter amended, extended, modified, or amended and restated. Executed as of the date first above written. BONNEVILLE FUELS CORPORATION By: -------------------------------- President BONNEVILLE FUELS MARKETING CORPORATION By: -------------------------------- President A-3-1 COLORADO GATHERING CORPORATION By: ------------------------------------- President BONNEVILLE FUELS OPERATING CORPORATION By: ------------------------------------- President BONNEVILLE FUELS MANAGEMENT CORPORATION By: ------------------------------------- President COLORADO NATIONAL BANK By: ------------------------------------- Vice President 26002202_1.DOC A-3-2 FOURTH AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT THIS FOURTH AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of May 15, 1998, is by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and u.s. sang NATIONAL ASSOCIATION, a national banking association ("USA"), f/k/a COLORADO NATIONAL BANK, a national banking association ("CNB"). RECITALS A. Borrower and First Interstate Bank of Denver, N.A. ("FIDN") entered into an Amended and Restated Credit Agreement dated as of May 31, 1994, as amended by amendments dated as of April 1, 1995 and April 1, 1996 (the "FIDN Credit Agreement"). B. Pursuant to a Loan Transfer Agreement dated as of September 18, 1996, the FIDN Credit Agreement was transferred by FIDN's successor to CNB. Pursuant to a Third Amendment of Amended and Restated Credit Agreement dated as of September 18, 1996, the FIDN Credit Agreement was further amended. The FIDN Credit Agreement, as so assigned and amended, is herein called the "Credit Agreement." C. USB is the successor to CNB. D. Borrower and USB wish to enter into this Amendment in order to amend certain terms and provisions of the Credit Agreement. AMENDMENT NOW, THEREFORE, in consideration of $10.00 and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Credit Agreement. The Credit Agreement shall be, and hereby is, amended as follows, effective as of the date of this Amendment: (a) All references in the Credit Agreement to "Colorado National Bank" shall be changed to be references to "U.S. Bank National Association." (b) In line 3 of the definition of "Accounts Receivable Report" in Section 1.1 on page 2 of the Credit Agreement and in lines 3 and 5 of the definition of "Facility B Commitment" in Section 1.1 on page 6 of the Credit Agreement, "BFMC and BFM Corp." shall be changed to "any of the Borrowers." (c) In line 7 of the definition of "Conversion Date" in Section 1.1 on page 4 of the Credit Agreement, "July 1, 1998" shall be changed to "July 1, 2001." (d) In line 2 of the definition of "Facility A Scheduled Maturity Date" in Section 1.1 on page 6 of the Credit Agreement, "July 1, 2003" shall be changed to "July 1, 2006." (e) In line 3 of the definition of "Facility B Maturity Date" in Section 1.1 on page 6 of the Credit Agreement, "July 1, 1998" shall be changed to "July 1, 1999." (f) In lines 2 and 3 of the definition of "Maximum Credit Amount" in Section 1.1 on page 9 of the Credit Agreement, the maximum amount specified for Facility B in clause (ii) shall be changed to "One Million Five Hundred Thousand Dollars ($1,500,000)." (g) In line 11 of Section 2.3 on page 12 of the Credit Agreement, "January 1, 1999" shall be changed to "January 1, 2000." (h) The following shall be substituted for the last sentence of Section 2.6 on page 13 of the Credit Agreement: Any election to terminate the Commitment or reduce the Maximum Credit Amount shall be irrevocable, except as otherwise provided in Sections 4.2 and 4.4 below. (i) In line B of Section 3.3 on page 15 of the Credit Agreement, "August 1, l998" shall be changed to "August 1, 2001." (j) In lines 4 and 5 of Section 3.6(a) on page 16 of the Credit Agreement, "950 Seventeenth Street" shall be changed to "918 Seventeenth Street." (k) The following shall be substituted for the second sentence of Section 3.1(c) on page 14 of the Credit Agreement: "The Letter of Credit Fee will be payable concurrently with the issuance of each Letter of Credit; provided that, if any Letter of Credit is terminated or released prior to its expiry date, the Letter of Credit Fee determined as set forth in the prior sentence shall be recalculated based upon the actual term of the Letter of Credit, and, if such recalculation results in a lesser Letter of Credit Fee, the Bank shall refund to Borrower the excess of the amount originally paid over the recalculated amount." (l) The following shall be substituted for Section 4.2 on pages 18 and l9 of the Credit Agreement: Section 4.2 Production Borrowing Base Determinations. The Production Borrowing Base under Facility A shall be redetermined (a) during the Revolving 2 Period by the Bank as of (i) each July 1, commencing July 1, 1997 (based upon the Bank's evaluation of annual independent engineering reports to be provided to the Bank by the Borrowers as more fully described in Section 4.5(a)) and (ii) each January 1, commencing January 1, l997 (based upon the Bank's evaluation of the Borrowers' actual production, revenue and expense data to be provided to the Bank by the Borrowers as more fully described in Section 4.5(b)) and (b) during the Amortizing Period by the Bank as of each July 1 (based upon the aforementioned independent engineering reports) and (c) otherwise may be redetermined by the Bank from time to time during the terms of this Agreement at the Bank's option and in the sole discretion of the Bank in accordance with the Bank's standard parameters for making oil and gas production based loans in effect at the time of such redetermination, together with such adjustments as the Bank determines to be appropriate, in its sole discretion reasonably exercised, to reflect the impact on the value of such properties of breaches of Environmental Laws, if any, by the Borrowers or their predecessors in ownership of any of the Mortgaged Properties and (d) so long as the Borrowers have not previously elected to reduce the Production Borrowing Base as described below since the previous regular redetermination of the Production Borrowing Base pursuant to clause (a) or (b) above (or only with the prior written consent of the Bank, if the Borrowers have previously so elected to reduce the Production Borrowing Base), upon the request of the Borrowers by written notice to the Bank, not more than once during each time period between two consecutive regular redeterminations of the Production Borrowing Base pursuant to clauses (a) and (b) above. Any increase in the Production Borrowing Base above $11,500,000 shall require prior written approval of the Bank's credit committees, which may be given or withheld in the Bank's sole discretion. The Bank shall notify the Borrowers of each change in the Production Borrowing Base under Facility A and the amount set forth in such notice shall be the amount of the Production Borrowing Base for all purposes of this Agreement until notice of a new Production Borrowing Base is given by the Bank to the Borrowers; provided, however, that the Borrowers may, by written notice to the Bank, not more than once during each time period between two consecutive regular redeterminations of the Production Borrowing Base pursuant to clauses (a) and (b) above, reduce the amount of the 3 Production Borrowing Base from the amount set forth in the Bank's notice to the Borrowers to any lesser amount which is equal to or in excess of the aggregate Principal Amount of Facility A Loans and the Face Amount of Letters of Credit issued under Facility A. Any notice given by the Borrowers to reduce the Production Borrowing Base, shall be effective two (2) Business Days following the receipt of such notice by the Bank, and the amount set forth in such notice shall be the amount of the Production Borrowing Base for all purposes of this Agreement until notice of a new Production Borrowing Base is given by the Bank to the Borrowers. However, if the Production Borrowing Base is reduced by the Borrowers pursuant to this Section 4.2, so long as no Event of Default has occurred and is continuing, the Borrowers may, not more than once during each time period between two consecutive regular redeterminations of the Production Borrowing Base pursuant to clauses (a) and (b) above, upon two (2) Business Days' prior written notice given to the Bank, increase the Production Borrowing Base up to the amount originally specified in the Bank's notice to the Borrowers on which such reduction was based. Such notice of increase must be accompanied by payment to the Bank of an amount equal to the Borrowing Base Commitment Fees specified in Section 3.1(b) which would have accrued and been invoiced by the Bank on the amount of the increase to the date of reinstatement if the amount of such increase had been included within the Production Borrowing Base at all times from the date of the Bank's notice to the Borrowers. Any such amounts which are payable by the Borrowers but which would not have been invoiced by the Bank shall be payable at the next scheduled invoice for Borrowing Base Commitment Fees. (m) In line 6 of the first paragraph of Section 4.4 on page 20 of the Credit Agreement, "BFMC's and BFM Corp.'s" shall be changed to "Borrowers.'" In line 2 of the second paragraph of Section 4.4 on page 20 of the Credit Agreement, "BFMC and BFM Corp." shall be changed to "Borrowers." (n) The following shall be inserted as a new third paragraph of Section 4.4, immediately after the second paragraph of Section 4.4 on page 21 of the Credit Agreement: The Borrowers may, by written notice to the Bank, reduce the Maximum Credit Amount for Facility B to any lesser amount which is equal to or in excess of the aggregate Principal Amount of Facility B Loans and the Face Amount 4 of Letters of Credit issued under Facility B. Any notice given by the Borrowers to reduce the Maximum Credit Amount for Facility B shall be effective two (2) Business Days following the receipt of such notice by the Bank, and the amount set forth in such notice shall be the Maximum Credit Amount for Facility B. However, if the Maximum Credit Amount for Facility B is reduced by the Borrowers pursuant to this Section 4.4, so long as no Event of Default has occurred and is continuing, the Borrowers may, not more than once prior to the Facility B Maturity Date, upon two (2) Business Days' prior written notice given to the Bank, increase the Maximum Credit Amount for Facility B up to $1,500,000. Such notice of increase must be accompanied by payment to the Bank of an amount equal to the Borrowing Base Commitment Fees specified in Section 3.1(b) which would have accrued and been invoiced by the Bank on the amount of the increase to the date of reinstatement if the amount of such increase had been included within the Maximum Credit Amount for Facility B at all times from the effective date of the reduction by Borrowers. Any such amounts which are payable by the Borrowers but which would not have been previously invoiced by the Bank shall be payable at the next scheduled invoice for Borrowing Base Commitment Fees. (o) The following shall be substituted for Section 8.1(e) on page 33 of the Credit Agreement: (e) Financial Covenants. Comply, on a consolidated basis, as of the end of each Quarter, beginning June 30, 1998, with the following financial tests, all determined in accordance with generally accepted accounting principles: Minimum Working Capital (1): $250,000 Minimum Current Ratio (1): 1.05x Minimum Net Worth: $8,000,000 Maximum Debt/Worth: 2.00x Minimum Fixed Charge Coverage (2): 1.00x
(1) With the current portion of Facility A treated as a non-current liability, and with the unused portion of Facility A treated as a current asset. (2) (i) Net income after tax plus interest expense plus depreciation, depletion and amortization plus other non- 5 cash charges, divided by (ii) interest expenses plus required principal payments, calculated on a fiscal year-to-date basis. (p) The parenthetical expression in lines 3 through 5 of Section 8.2(1) on page 39 of the Credit Agreement shall be deleted. (q) Section 9.1(j) on page 41 of the Credit Agreement shall be deleted. (r) Borrower's suite number, as set forth in the address of Borrower in Section 10.2 on page 42 of the Credit Agreement, shall be changed to "Suite 2200." (s) The following shall be substituted for the address of the Bank in Section 10.2 on page 43 of the Credit Agreement: Bank: U.S. Bank National Association 918 Seventeenth Street Denver, Colorado 80202 Attention: Mr. Mark E. Thompson, Energy Group Facsimile: (303) 585-4362 2. The Notes. The Facility A Note, the Facility B Note and the Term Note shall be amended, such amendments to be effected by Allonges (the "Allonges"), among Borrower and USB, to be attached to the Facility A Note, the Facility B Note and the Term Note, respectively, and to be substantially in the form of Exhibits A-1, A-2 and A-3 attached hereto and made a part hereof. 3. Loan Documents. All references in any document to the Credit Agreement, the Facility A Note, the Facility B Note or the Term Note shall refer to the Credit Agreement, the Facility A Note, the Facility B Note or the Term Note, as amended pursuant to this Amendment and the Allonges. 4. Conditions Precedent. The obligations of the parties under this Amendment are subject, at the option of USB, to the prior satisfaction of the condition that Borrower shall have delivered to USB the following (all documents to be satisfactory in form and substance to USB and, if appropriate, duly executed and/or acknowledged on behalf of the parties other than USB): (a) This Amendment. (b) The Allonges. (c) Any and all other loan documents required by USB, including without limitation such amendments and supplements to the Collateral Documents as may be required by USB. 6 (d) Such title opinions, supplemental title opinions, UCC searches and other title information concerning Borrower's title to the Collateral or any portions thereof as may be satisfactory to USB. 5. Representations and Warranties. Borrower hereby certifies to USB that, as of the date of this Amendment, all of Borrower's representations and warranties contained in the Credit Agreement are true, accurate and complete in all material respects, no Event of Default has occurred and no event has occurred which, with the giving of notice, the lapse of time, or both, would constitute an Event of Default. 6. Continuation of the Credit Agreement. Except as specified in this Amendment and the Allonges, the provisions of the Credit Agreement, the Facility A Note, the Facility B Note and the Term Note shall remain in full force and effect, and if there is a conflict between the terms of this Amendment or the Allonges and those of the Credit Agreement, the Facility A Note, the Facility B Note or the Term Note or any other document executed and delivered in connection therewith, the terms of this Amendment and the Allonges shall control. 7. Miscellaneous. This Amendment shall be governed by and construed under the laws of the State of Colorado and shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. EXECUTED as of the date first above written. BONNEVILLE FUELS CORPORATION By: _______________________________________ President BONNEVILLE FUELS MARKETING CORPORATION By: _______________________________________ President COLORADO GATHERING CORPORATION By: _______________________________________ President 7 BONNEVILLE FUELS OPERATING CORPORATION By: ________________________________________ President BONNEVILLE FUELS MANAGEMENT CORPORATION By: ________________________________________ President U.S. BANK NATIONAL ASSOCIATION f/k/a COLORADO NATIONAL BANK By: ________________________________________ Vice President 8 Exhibit A-1 Allonge Reference is made to the Third Amendment of Amended and Restated Credit Agreement dated as of May 15, 1998 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("USA"), f/k/a COLORADO NATIONAL BANK ("CNB"). The Revolving Note dated May 31, 1994, as amended, made by Borrower, payable to the order of CNB, in the face amount of $20,000,000 (the "Revolving Note") is hereby modified as follows: 1. All references in the Revolving Note to Colorado National Bank or the "Bank" shall be deemed to refer to U.S. Bank National Association. 2. In lines 2 and 3 of the third paragraph on page 1 of the Revolving Note, "950 Seventeenth Street" shall be changed to "918 Seventeenth Street." Executed as of the date first above written BONNEVILLE FUELS CORPORATION By: _____________________________________ President BONNEVILLE FUELS MARKETING CORPORATION By: _____________________________________ President COLORADO GATHERING CORPORATION By: _____________________________________ President A-1-1 BONNEVILLE FUELS OPERATING CORPORATION By: ________________________________________ President BONNEVILLE FUELS MANAGEMENT CORPORATION By: ________________________________________ President U.S. BANK NATIONAL ASSOCIATION f/k/a COLORADO NATIONAL BANK By: ________________________________________ Vice President A-1-2 Exhibit A-2 Allonge Reference is made to the Third Amendment of Amended and Restated Credit Agreement dated as of May 15, 1998 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("USA"), f/k/a COLORADO NATIONAL BANK ("CNB"). The Promissory Note dated May 31, 1994, as amended, made by Borrower, payable to the order of CNB, in the face amount of $1,000,000 (the "Facility B Note") is hereby modified as follows: 1. All references in the Facility B Note to Colorado National Bank, the "Bank" or "Holder" shall be deemed to refer to U.S. Bank National Association. 2. In the caption of the Facility B Note and in lines 5 and 6 of the first paragraph on page 1 of the Facility B Note, the face amount of the Facility B Note shall be increased to $1,500,000. 3. In line 4 of the first paragraph on page 1 of the Facility B Note, "950 Seventeenth Street" shall be changed to "918 Seventeenth Street." 4. In line 3 of the first paragraph on page 2 of the Facility B Note, the maturity date of the Facility B Note shall be changed to July 1, 1999. Executed as of the date first above written. BONNEVILLE FUELS CORPORATION By: ______________________________________ President BONNEVILLE FUELS MARKETING CORPORATION By: ______________________________________ President A-2-1 COLORADO GATHERING CORPORATION By: _______________________________________ President BONNEVILLE FUELS OPERATING CORPORATION By: _______________________________________ President BONNEVILLE FUELS MANAGEMENT CORPORATION By: _______________________________________ President COLORADO NATIONAL BANK By: _______________________________________ Vice President A-2-2 Exhibit A-3 Allonge Reference is made to the Third Amendment of Amended and Restated Credit Agreement dated as of May 15, 1998 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("USA"), f/k/a COLORADO NATIONAL BANK ("CNB"). The Term Note dated May 31, 1994, as amended, made by Borrower, payable to the order of CNB, in the face amount of $20,000,000 (the term Note") is hereby modified as follows: 1. All references in the Term Note to Colorado National Bank or the "Bank" shall be deemed to refer to U.S. Bank National Association. 2. In lines 2 and 3 of the third paragraph on page 1 of the Term Note, "950 Seventeenth Street" shall be changed to "918 Seventeenth Street." Executed as of the date first above written. BONNEVILLE FUELS CORPORATION By: _______________________________________ President BONNEVILLE FUELS MARKETING CORPORATION By: _______________________________________ President COLORADO GATHERING CORPORATION By: _______________________________________ President A-3-1 BONNEVILLE FUELS OPERATING CORPORATION By: _______________________________________ President BONNEVILLE FUELS MANAGEMENT CORPORATION By: _______________________________________ President U.S. BANK NATIONAL ASSOCIATION f/k/a COLORADO NATIONAL BANK By: _______________________________________ Vice President A-3-2 FIFTH AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT THIS FIFTH AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of May 15, 1998, is by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("USB"), f/k/a COLORADO NATIONAL BANK, a national banking association ("CNB"). RECITALS A. Borrower and USB are parties to an Amended and Restated Credit Agreement dated as of May 31, 1994, as amended by amendments dated as of April 1, 1995, April 1, 1996, September 18, 1996 and May 15, 1998 (the "Credit Agreement"). B. Borrower and USB wish to enter into this Amendment in order to amend certain terms and provisions of the Credit Agreement. AMENDMENT NOW, THEREFORE, in consideration of $10.00 and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Credit Agreement. The Credit Agreement shall be, and hereby is, amended as follows, effective as of the date of this Amendment: a. In line 3 of the definition of "Facility B Maturity Date" in Section 1.1 on page 6 of the Credit Agreement, "July 1, l999" shall be changed to "July 1, 2001". b. In line 11 of Section 2.3 on page 12 of the Credit Agreement, "January 1, 2000" shall be changed to "January 1, 2002". c. The Production Borrowing Base under Facility A shall be $11,400,000 for the time period from June 1, 1999 until the effectiveness of the January 1, 2000 redetermination thereof pursuant to Section 4.2 of the Credit Agreement, unless the Production Borrowing Base under Facility A is redetermined prior to such date in accordance with the provisions of the Credit Agreement. 2. The Facility B Note. The Facility B Note shall be amended, such amendment to be effected by an Allonge (the "Allonge"), among Borrower and USB, to be attached to the Facility B Note and to be substantially in the form of Exhibit A attached hereto and made a part hereof. 3. Loan Documents. All references in any document to the Credit Agreement or the Facility B Note shall refer to the Credit Agreement or the Facility B Note, as amended pursuant to this Amendment and the Allonge. 4. Conditions Precedent. The obligations of the parties under this Amendment are subject, at the option of USB, to the prior satisfaction of the condition that Borrower shall have delivered to USA the following (all documents to be satisfactory in form and substance to USB and, if appropriate, duly executed and/or acknowledged on behalf of the parties other than USB): a. This Amendment. b. The Allonge. c. Any and all other loan documents required by USB, including without limitation such amendments and supplements to the Collateral Documents as may be required by USB. d. Such title opinions, supplemental title opinions, UCC searches and other title information concerning Borrower's title to the Collateral or any portions thereof as may be satisfactory to USB. 5. Representations and Warranties. Borrower hereby certifies to USB that, as of the date of this Amendment, all of Borrower's representations and warranties contained in the Credit Agreement are true, accurate and complete in all material respects, no Event of Default has occurred and no event has occurred which, with the giving of notice, the lapse of time, or both, would constitute an Event of Default. 6. Continuation of the Credit Agreement. Except as specified in this Amendment and the Allonge, the provisions of the Credit Agreement and the Facility B Note shall remain in full force and effect, and if there is a conflict between the terms of this Amendment or the Allonge and those of the Credit Agreement or the Facility B Note or any other document executed and delivered in connection therewith, the terms of this Amendment and the Allonge shall control. 7. Miscellaneous. This Amendment shall be governed by and construed under the laws of the State of Colorado and shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 2 EXECUTED as of the date first above written. BONNEVILLE FUELS CORPORATION By: ----------------------------- President BONNEVILLE FUELS MARKETING CORPORATION By: ----------------------------- President COLORADO GATHERING CORPORATION By: ----------------------------- President BONNEVILLE FUELS OPERATING CORPORATION By: ----------------------------- President BONNEVILLE FUELS MANAGEMENT CORPORATION By: --------------------------- President U.S. BANK NATIONAL ASSOCIATION f/k/a COLORADO NATIONAL BANK By: ----------------------------- President 3 EXHIBIT A ALLONGE Reference is made to the Fifth Amendment of Amended and Restated Credit Agreement dated as of June 1, 1999 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("USB"), f/k/a COLORADO NATIONAL BANK ("CNB"). The Promissory Note dated May 31, 1994, as amended, made by Borrower, payable to the order of CNB, in the original face amount of $1,000,000, subsequently increased to $1,500,000 (the "Facility B Note"), is hereby modified by substituting July 1, 2001 for July 1, 1999 as the maturity date of the Facility B Note in line 3 of the first paragraph on page 2 of the Facility B Note. EXECUTED as of June 1, 1999. BONNEVILLE FUELS CORPORATION By: ----------------------------- President BONNEVILLE FUELS MARKETING CORPORATION By: ----------------------------- President COLORADO GATHERING CORPORATION By: ----------------------------- President 4 BONNEVILLE FUELS OPERATING CORPORATION By: ----------------------------- President BONNEVILLE FUELS MANAGEMENT CORPORATION By: ----------------------------- President U.S. BANK NATIONAL ASSOCIATION f/k/a COLORADO NATIONAL BANK By: ----------------------------- Vice President 5 U.S. Bank National Association 918 - 17th Street Denver, CO 80202 Re: Year 2000 Compliance Dear Sir/Madam: As a condition to the extension or continuation of credit to the undersigned (the "Borrower") by you (the "Bank") under each existing or any contemplated credit agreement between Borrower and Bank and each related promissory note, Bank has required Borrower to make the following representations and agreements upon which Bank will rely. The Borrower has reviewed and assessed its business operations and computer systems and applications to address the "year 2000 problem" (that is, that computer applications and equipment used by the Borrower, directly or indirectly through third parties, may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). The Borrower reasonably believes that the year 2000 problem will not result in a material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects or ability to repay any indebtedness due to Bank. The Borrower agrees that this representation will be true and correct on each date the Borrower requests a loan or advance or delivers information to the Bank. In addition to the events of default in any of Borrower's agreements with Bank, it will be an event of default under each such agreement if (a) any representation in this letter is false or misleading when made, or becomes false or misleading at any time thereafter; (b) Borrower fails to perform or comply with any term, condition or obligation set forth herein; or (c) there is any material adverse change in Borrower's business condition (financial or otherwise), operations, prospects or ability to repay Bank which relates to or results from the year 2000 problem. The Borrower agrees to promptly deliver to Bank such information relating to this representation as Bank may request from time to time. Sincerely, Bonneville Fuels Corporation Bonneville Fuels Marketing Corporation By: By: --------------------------- ----------------------------- Steven H. Stepanek, President Steven H. Stepanek, President Colorado Gathering Corporation Bonneville Fuels Operating Corporation 6 By: By: ------------------------------ ----------------------------- Steven H. Stepanek, President Steven H. Stepanek, President Bonneville Fuels Management Corporation Date: ------------------------ By: ------------------------------ Steven H. Stepanek, President 7 Allonge Reference is made to the Fifth Amendment Restated Credit Agreement dated as of June 1, 1999 (the "Amendment"), by and among BONNEVILLE FUELS CORPORATION, a Colorado corporation, BONNEVILLE FUELS MARKETING CORPORATION, a Utah corporation, COLORADO GATHERING CORPORATION, a Utah corporation, BONNEVILLE FUELS OPERATING CORPORATION, a Utah corporation, BONNEVILLE FUELS MANAGEMENT CORPORATION, a Utah corporation (collectively, "Borrower"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("USB"), f/k/a COLORADO NATIONAL BANK ("CNB"). The Promissory Note dated May 31, 1994, as amended, made by Borrower, payable to the order of CNB, in the original face amount of $1,000,000, subsequently increased to $1,500,000 (the "Facility B Note"), is hereby modified by substituting July 1, 2001 for July 1, 1999 as the maturity date of the Facility B Note in line 3 of the first paragraph on page 3 of the Facility B Note. EXECUTED as of June 1, 1999. BONNEVILLE FUELS CORPORATION By: ----------------------------- President BONNEVILLE FUELS MARKETING CORPORATION By: ----------------------------- President COLORADO GATHERING CORPORATION By: ----------------------------- President BONNEVILLE FUELS OPERATING CORPORATION By: ----------------------------- President 8 BONNEVILLE FUELS MANAGEMENT CORPORATION By: ----------------------------- President U.S. BANK NATIONAL ASSOCIATION f/k/a COLORADO NATIONAL BANK By: ----------------------------- President 9 EX-23.2 5 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated October 21, 1999 (and to all references to our Firm) included in or made a part of this Registration Statement. ARTHUR ANDERSEN LLP Denver, Colorado December 20, 1999 EX-23.3 6 CONSENT OF HEIN & ASSOCIATES LLP EXHIBIT 23.3 INDEPENDENT AUDITOR'S CONSENT We consent to the use in the Registration Statement and Prospectus of Carbon Energy Corporation of our report dated February 26, 1999, accompanying the consolidated financial statements of Bonneville Fuels Corporation contained in such Registration Statement, and to the use of our name and the statements with respect to us, as appearing under the heading "Experts" in the Prospectus. Hein + Associates LLP Denver, Colorado December 17, 1999 EX-23.4 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-4 of Carbon Energy Corporation of our report dated February 16, 1999 relating to the financial statements of CEC Resources Ltd., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICEWATERHOUSECOOPERS, LLP Calgary, Canada December 20, 1999 EX-24.1 8 POWER OF ATTORNEY - DIETLER 12/8/99 POWER OF ATTORNEY Each of the undersigned directors and officers of Carbon Energy Corporation (the "Company") hereby authorizes Patrick R. McDonald and Kevin D. Struzeski and each of them as their true and lawful attorneys-in-fact and agents: (1) to sign in the name of each such person and file with the Securities and Exchange Commission a Registration Statement on an appropriate form, and any and all amendments (including post-effective amendments) to such Registration Statement, for the registration under the Securities Act of 1933, as amended, of common stock of the Company issuable in the exchange offer by the Company for shares of CEC Resources Ltd. (in which exchange offer each holder of shares of CEC Resources Ltd. will be offered shares of the Company); and (2) to take any and all actions necessary or required in connection with such Registration Statement and amendments to comply with the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Signature Title Date - --------- ----- ---- /s/ Cortlandt S. Dietler Director December 8, 1999 - --------------------------- Cortlandt S. Dietler EX-27.1 9 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 15,067,000 15,067,000 9,005,000 11,101,000 0 0 272,000 3,694,000 1,422,000 2,272,000 0 1,788,000 0 4,060,000 0 0
EX-27.2 10 FINANCIAL DATA SCHEDULE
5 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 2,742,000 544,000 0 0 4,972,000 2,818,000 0 0 0 0 8,489,000 3,666,000 32,921,000 28,870,000 18,891,000 16,863,000 22,840,000 16,054,000 7,677,000 2,175,000 0 0 0 0 0 0 0 0 9,313,000 9,591,000 22,840,000 16,054,000 21,092,000 16,539,000 21,092,000 16,539,000 16,815,000 11,829,000 22,970,000 15,445,000 0 0 0 0 238,000 83,000 0 0 (175,000) 279,000 (1,941,000) 732,000 0 0 0 0 0 0 (1,941,000) 732,000 0 0 0 0
EX-27.3 11 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 304,000 0 3,974,000 0 0 4,433,000 37,614,000 20,721,000 21,627,000 2,830,000 0 0 0 0 9,997,000 21,627,000 18,254,000 18,254,000 13,710,000 17,225,000 0 0 346,000 683,000 0 683,000 0 0 0 683,000 0 0
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