-----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, PpDl28/nJH0jhXGfuiEIjVejL6fLafBhFrwHOccwXarbiLYT950vP88iXNHR0my8 nDm8cMQ9PkUBCrMWfqJCyQ== 0001021408-00-000044.txt : 20000110 0001021408-00-000044.hdr.sgml : 20000110 ACCESSION NUMBER: 0001021408-00-000044 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20000107 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: CEC RESOURCES LTD CENTRAL INDEX KEY: 0000933435 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 980018241 STATE OF INCORPORATION: A0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: SEC FILE NUMBER: 005-45363 FILM NUMBER: 503608 BUSINESS ADDRESS: STREET 1: 1700 BRAODWAY SUITE 1150 CITY: DENVER STATE: CO ZIP: 80290 BUSINESS PHONE: 3038601575 MAIL ADDRESS: STREET 1: 1700 BRAODWAY SUITE 1150 CITY: DENVER STATE: CO ZIP: 80290 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: CEC RESOURCES LTD CENTRAL INDEX KEY: 0000933435 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 980018241 STATE OF INCORPORATION: A0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 1700 BRAODWAY SUITE 1150 CITY: DENVER STATE: CO ZIP: 80290 BUSINESS PHONE: 3038601575 MAIL ADDRESS: STREET 1: 1700 BRAODWAY SUITE 1150 CITY: DENVER STATE: CO ZIP: 80290 SC 14D9 1 SCHEDULE 14D-9 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 (Amendment No. _____) CEC RESOURCES LTD (Name of Subject Company) CEC RESOURCES LTD (Name of Person(s) Filing Statement) COMMON STOCK WITHOUT PAR VALUE (Title of Class of Securities) 124980 103 (CUSIP Number of Class of Securities) Patrick R. McDonald President and Chief Executive Officer CEC Resources Ltd. 1700 Lincoln Street, Suite 1150 Denver, Colorado 80290-1101 (303) 860-1575 (Name, address and telephone number of person authorized to receive notice and communications on behalf of the person(s) filing statement) With a copy to: Mark R. Levy, Esq. Holland & Hart LLP 555 17/th/ Street, Suite 3200 Denver, Colorado 80202 (303) 295-8000 Page 1 of 5 Pages ITEM 1. Security and Subject Company The name of the subject company is CEC Resources, Ltd., an Alberta corporation (the "Company"), and the address of the principal executive offices of the Company is 1700 Lincoln Street, Suite 1150, Denver, Colorado 80290-1101. The title of the class of equity securities to which this statement relates is the common stock, without par value, of the Company (the "Common Stock"). ITEM 2. Tender Offer of the Bidder This statement relates to an offer by Carbon Energy Corporation, a Colorado corporation (the "Purchaser"), disclosed in a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1"), dated January 7, 2000, to exchange one share of the Purchaser's Common Stock for each outstanding share of the Company's Common Stock, upon the terms and subject to the conditions set forth in the Prospectus dated ______________, 2000 (the "Prospectus") and the related Letter of Transmittal (which together constitute the "Exchange Offer"). The principal executive offices of the Purchaser are located at 1700 Lincoln Street, Suite 1150, Denver, Colorado 80290-1101. The Exchange Offer is being made pursuant to an Exchange and Financing Agreement, dated as of October 14, 1999 (the "Exchange Agreement"), among Yorktown Energy Partners III, L.P. ("Yorktown"), the Purchaser and the Company. A copy of the Exchange Agreement is filed as Exhibit 1 to this Schedule 14D-9 and is incorporated herein by reference. The Exchange Agreement is described under the heading "The Exchange Offer - Description of Exchange Agreement" in the portions of the Prospectus which makes the Exchange Offer (the "Prospectus"), and is Exhibit 2 to this Schedule 14D-9. ITEM 3. Identity and Background (a) The name and business address of the Company, which is the person filing this statement, are set forth in Item 1 above. (b) Certain contracts, agreements, arrangements, and understandings, and any actual or potential conflicts of interest, between the Company or its affiliates and (i) the Company's executive officers, directors or affiliates, or (ii) the Purchaser or its executive officers, directors or affiliates, are described in the sections entitled "The Exchange Offer - Background of the Exchange Offer/Exchange Agreement," "The Exchange Offer - Interests of Certain Persons In The Exchange Offer," "The Exchange Offer - Description of Exchange Agreement," "The Exchange Offer - Possible Effects of the Exchange Offer," "The Exchange Offer - Second Step Merger," and "Certain Relationships and Transactions" in the Prospectus, which are incorporated herein by reference. Page 2 of 5 Pages Except as described or incorporated by reference herein, as of the date hereof, there exists no material contract, agreement, arrangement or understanding and no material actual or potential conflict of interest between the Company or its affiliates and (i) the Company's executive officers, directors or affiliates, or (ii) the Purchaser or its executive officers, directors or affiliates. ITEM 4. The Solicitation or Recommendation The Company's Board of Directors believe that the terms of the Exchange Offer are fair to and in the best interests of the Company and its shareholders. In reaching its conclusion to approve the BFC stock purchase agreement, the Exchange Agreement and the Exchange Offer, the Company's Board consulted with management, as well as its legal and accounting advisors, and considered the factors set forth in "The Exchange Offer - CEC's Reason for Recommending the Exchange Offer" in the Prospectus, which information is incorporated herein by this reference. ITEM 5. Persons Retained, Employed or to be Compensated Neither the Company nor any person acting on its behalf currently intends to employ, retain or compensate any other person to make solicitations or recommendations to security holders on its behalf concerning the Exchange Offer. ITEM 6. Recent Transactions and Intent with Respect to Securities (a) No transactions in shares of the Company's Common Stock have been effected during the past 60 days by the Company, or, to the best of the Company's knowledge, by any executive officer, director, affiliate, or subsidiary of the Company. (b) The directors and executive officers of the Company who own, in the aggregate, 580,346 Shares of the outstanding Common Stock, representing approximately 38.1% of the Company's outstanding shares, have started they intend to accept the Exchange Offer. ITEM 7. Certain Negotiations and Transactions by the Subject Company (a) Except as described in Items 3 and 4 of this Schedule 14D-9, and as described in the Prospectus in the sections entitled "The Exchange Offer - Possible Effects of the Exchange Offer" and "The Exchange Offer--Second Step Merger," which are incorporated herein by reference, the Company is not now engaged in any discussions or negotiations in response to the Exchange Offer which relate to, or would result in, (i) an extraordinary transaction such as a merger or reorganization involving the Company or any subsidiary of Company, (ii) a purchase, sale or transfer of a material amount of assets by Company or any subsidiary of Company, (iii) a tender offer for or other acquisition or securities by, or of, Company, or (iv) any material change in the present capitalization or dividend policy of Company. Page 3 of 5 Pages (b) Except as described in Items 3 and 4 of this Schedule 14D-9, and as described in the Prospectus in the section entitled "The Exchange Offer--Second Step Merger" which is incorporated herein by reference, there are no transactions, board resolutions, agreements in principle or signed contracts in response to the Exchange Offer which relate to or would otherwise result in one or more of the matters referred to in paragraph (a) of this Item 7. ITEM 8. Additional Information to be Furnished Not applicable. ITEM 9. Material to be Filed as Exhibits Exhibit 1 - Exchange and Financing Agreement, dated October 14, 1999, among Yorktown Energy Partners III, L.P., CEC Resources Ltd. And Carbon Energy Corporation (incorporated by reference to Exhibit 10.3 to Registration Statement No. 333-89783). Exhibit 2 - Portions of Preliminary Prospectus, dated January 7, 2000, of Carbon Energy Corporation. Exhibit 3 - Letter of the President of CEC Resources Ltd. regarding the Exchange Offer. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. CEC RESOURCES LTD Dated: January 7, 2000 By: /s/ Patrick R. McDonald --------------------------------- Patrick R. McDonald, President and Chief Executive Officer Page 4 of 5 Pages Exhibit Index Exhibit 1 Exchange and Financing Agreement, dated October 14, 1999, by and among Yorktown Energy Partners III, L.P., CEC Resources Ltd., and Carbon Energy Corporation (incorporated by reference to Exhibit 10.3 to Registration Statement No. 333-89783) Exhibit 2 Portions of Preliminary Prospectus, dated January 7, 2000 of Carbon Energy Corporation Exhibit 3 Letter of the President of CEC Resources Ltd. regarding the Exchange Offer Page 5 of 5 Pages EX-99.2 2 PORTIONS OF PRELIM. PROSPECTUS JAN. 6, 2000 EXHIBIT 2 THE EXCHANGE OFFER General We are offering to exchange one share of our common stock for each share of CEC common stock. If all CEC shareholders accept our offer, in the aggregate we will issue approximately 1,521,400 shares of our common stock. Our common stock has been approved for listing on the AMEX, upon issuance of the shares after the exchange offer, under the symbol " ." CEC's Board of Directors has approved this exchange offer. The exchange offer is open to all holders of CEC common stock. We are sending this prospectus and related exchange offer documents to persons who held CEC common stock at the close of business on , 2000. On that date, there were shares of CEC common stock outstanding, which were held of record by approximately shareholders. We will also furnish this prospectus and related exchange offer documents to brokers, banks and similar persons whose names or the names of whose nominees appear on CEC's shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of CEC common stock. Background Of The Exchange Offer/Exchange Agreement CEC furnished the information in this section regarding the deliberations of CEC's Board of Directors and the actions of CEC's management and legal and financial advisors. This exchange offer results from an acquisition of Bonneville Fuels Corporation, originally proposed by CEC and completed by Carbon. In order to combine with BFC, obtain financing for the acquisition of BFC and avoid adverse income tax consequences to CEC and its shareholders, the following actions were taken: . CEC entered into an agreement to purchase the shares of BFC from BPC; . CEC assigned the agreement to Carbon in return for Carbon's agreement to make this exchange offer and comply with other terms of an exchange and financing agreement; . Carbon closed an equity financing of $24,750,000 from Yorktown for the purpose of Carbon's purchase of all BFC shares; . Carbon completed the purchase of the BFC shares; and . Carbon has made this exchange offer. The overall goal of CEC and Carbon is to provide each CEC shareholder with the opportunity to own shares in a company that consists of both BFC and CEC. The background information stated below explains the long-standing desire of CEC to increase its size through a business combination. It also describes negotiations for the acquisition of BFC from BPC and the separate, although concurrent, discussions by CEC's President with Yorktown Partners for a financing of the purchase of the BFC shares. Prior to the purchase of the BFC shares and this exchange offer, CEC, BPC and Yorktown (including its manager, Yorktown Partners) did not have any affiliations or relationships. CEC's Prior Efforts for a Business Combination CEC was acquired by the former parent of Columbus Energy Corp. ("Columbus") in 1969 and was acquired by Columbus on July 31, 1984. In February, 1995, Columbus spun off CEC by means of a rights offering. As stated in public reports, since becoming a public company by this spin-off, CEC has pursued a potential business combination. CEC publicly stated that it preferred a company directed by Canadian-based enterpreneurial management who would manage the surviving entity. CEC's management believed that it may be desirable for the surviving entity, if there was sufficient Canadian ownership, to have a dual listing by continuing a listing of common stock on the American Stock Exchange and adding a listing on the Toronto Stock 16 Exchange. In the spring and fall of 1996, CEC assembled information about CEC's business and properties and spoke with five Canadian oil and gas companies selected by CEC's management about a possible combination. None of these contacts went beyond preliminary discussions for several reasons, including lack of interest on the part of two companies and in one case a differing view of valuations. CEC then put on hold further efforts for a combination until CEC could assign a reasonable asset value to an oil discovery in Canada involving at least several oil-bearing sand formations. In the spring of 1997, CEC restarted its efforts. CEC discussed for approximately four months in 1997 a potential business combination with a Canadian private company whose size was approximately five times that of CEC. The management of CEC deferred discussions with other prospective companies because of the likelihood of reaching a possible transaction with that party. Ultimately, the private company made continuous sales of shares in an active program to acquire other companies; and these activities would have made difficult the preparation of a registration statement to be filed with the United States Securities and Exchange Commission for any shares that the private company would have issued to CEC shareholders. In the view of CEC's management, the focus of the private company on other acquisitions, together with their effects on any registration statement, prevented the parties from reaching 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. 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. 17 In 1998 and early 1999, CEC, through visits by Mr. McDonald as its President, approached institutional investors about providing capital to CEC. CEC is a small oil and gas, exploration and development company with most of its assets in Canada and all of its operations in Canada. CEC has a significant portion of its shares owned by its Board of Directors, a relatively small public float of shares and inactive trading in its common stock on the American Stock Exchange. Potential institutional investors in the United States and Canada expressed to Mr. McDonald disinterest in making a capital investment in CEC because of one or more of these attributes. For example, United States investors expressed concern about the size of CEC and the location of its properties in Canada; Canadian investors expressed concern that CEC was small, that trading of its public stock was in the United States, and that most holders were United States persons. Potential investors were also concerned about a lack of liquidity in the shares. Purchase of BFC Shares In early May, 1999, an employee of CEC contacted an employee of BFC for advice about an unrelated matter and learned that BPC planned to sell the stock of its Denver-based 100% owned subsidiary, BFC. The CEC employee provided this information to Mr. McDonald, and Mr. McDonald contacted an investment banking firm which represented BPC and was conducting the sale of BFC. As part of the process established by BPC, on May 10, 1999, CEC executed a confidentiality letter and received information relating to the oil and gas wells and reserves owned by BFC. In accordance with the schedule established by BPC, CEC submitted an initial non-binding expression of interest in purchasing BFC for a total of $24,500,000 in cash, plus net debt remaining at BFC equal to approximately $6,500,000. BPC advised CEC that several other parties had also submitted proposals and that BPC would conduct a sale process designed to result in a transaction with the most preferred buyer. BPC also informed CEC that parties who would participate in the next phase of the sales process would be notified between May 19 and May 21, 1999, that the potential bidders could participate in due diligence presentations and a review of information in a data room from May 26 to June 9, 1999, and that final binding bids were due on June 21, 1999. On May 21, 1999, CEC was notified that it should conduct additional due diligence and on May 27 and 28, 1999, CEC met with management of BFC and reviewed the business and operations of BFC. On June 9, 1999, based on the results of due diligence, CEC advised BPC that if BPC would negotiate on an exclusive basis, CEC would be willing to discuss a transaction to acquire BFC in the range of $28,500,000 in cash plus $6,500,000 in net debt remaining with BFC. Based on discussions with Yorktown, the proposal was not subject to a financing contingency. BPC informed CEC that it would not accept CEC's offer to negotiate exclusively and requested that CEC continue to participate in the sale process. On June 18, 1999, BPC advised CEC that a final offer for BFC would be due June 28, 1999. On June 28, 1999, CEC submitted an offer to BPC in the amount of $20,000,000 in cash for the assets of BFC plus the assumption of $6,500,000 in net debt outstanding at March 31, 1999. BPC informed CEC in early July that BPC had decided to negotiate a stock purchase agreement with another party. In mid-July, CEC inquired as to whether BPC's position had changed and whether BPC would be willing to discuss further CEC's June 28, 1999 offer. BPC indicated that it would consider that offer if CEC would submit for review comments on the form of the stock purchase agreement prepared by BPC and increase the price it was willing to pay for BFC. On July 27, 1999, CEC submitted comments on the form of the stock purchase agreement to BPC for review. During the period July 28 to July 30, BPC and CEC conducted additional negotiations relating to the terms of the proposed stock purchase agreement and the price to be paid for the stock of BFC. BPC advised CEC that CEC's June 28 offer would not be sufficient to ensure the purchase of BFC. Based on discussions with the Board of CEC and Yorktown, on July 30, 1999 CEC agreed to increase its offer for BFC to $24,000,000 in cash for the stock of BFC plus $6,500,000 of net debt remaining with BFC. On July 31, 1999, CEC and BPC 18 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. At about the same time, Mr. McDonald also discussed with several directors of CEC the interest of CEC in acquiring BFC and seeking financing from Yorktown Partners. All discussions between Yorktown and CEC were conducted by Mr. McDonald with managers of Yorktown Partners. Mr. McDonald informed Yorktown Partners of significant steps being taken by CEC to acquire BFC. In July, 1999 and early August, 1999, Yorktown Partners indicated that a partnership managed by Yorktown Partners was willing to purchase common stock of CEC or economically equivalent shares for a total of $24,750,000 at $5.50 per share in order to provide equity financing for the purchase of BFC shares. Yorktown Partners also stated that it wished to have this investment made through a United States corporation. In late July and August, 1999, advisors of CEC reviewed possible transactions for CEC's acquiring BFC through a United States corporation. They concluded that a merger of CEC into a United States corporation would have materially adverse Canadian income tax consequences for CEC and that the exchange offer now being made was the best form for the transaction. The formation of a new Colorado corporation and the assignment of the BFC stock purchase agreement to the new corporation would allow the investment by Yorktown in a United States corporation, Carbon; the exchange offer would permit CEC shareholders to become shareholders of Carbon; and the exchange offer should be tax-free for shareholders of CEC, except for a small number of shareholders who reside in Canada. CEC informed BPC that its financing may require that the purchase of BFC stock be made by a United States corporation. As a result, the parties provided in the BFC stock purchase agreement for the possible assignment of the stock purchase agreement to an entity controlled by CEC or a party providing financing for the purchase of the BFC shares. CEC did not seriously consider financing sources other than Yorktown Partners for the BFC purchase. Mr. McDonald and the Board of Directors had confidence in the ability and willingness of Yorktown to provide the financing. Yorktown Partners indicated that it was receptive to the idea of a Rocky Mountain based oil and gas exploration and development company, with both Canadian and United States operations. Mr. McDonald and the Board of Directors believed that having Yorktown Partners as the financing party had a number of advantages, including: Yorktown's willingness to provide the financing in the form of common stock; Yorktown's long-term view of investments in businesses like CEC and BFC; Yorktown Partners' focus on energy companies, with all investments made by entities controlled by Yorktown Partners in these types of companies; Yorktown's track record of successes in these investments; Yorktown's successful dealings in the past with Mr. McDonald; and intangible benefits from association with Yorktown Partners. These intangible benefits include enhancing the reputation of Carbon and CEC in the oil and gas industry, because of Yorktown Partners' past successes in investing in energy companies, and thereby improving Carbon's access to opportunities to acquire oil and gas properties. 19 Board Actions The Board of CEC was advised of actions taken by CEC in discussing and negotiating the acquisition of BFC and requesting and obtaining financing from Yorktown Partners. On July 22, 1999, the Board of Directors of CEC met at a regularly scheduled Board meeting. Among items discussed at the meeting, Mr. McDonald explained the then current status of the proposed purchase of BFC stock, including the history of the BFC transaction. The Board reviewed the status of a proposed financing of the BFC purchase by Yorktown Partners, including Yorktown Partners' general willingness to go forward with the financing on the basis of acquiring common stock at $5.50 per share and Yorktown Partners' desire for a United States corporation in which to make the equity financing. The Board discussed the nature of BFC's oil and gas properties, including the location of most of BFC's properties in the Rocky Mountain region where the management of CEC has experience and which is geologically similar to properties in the southern part of Alberta, Canada, the fact that BFC has principally natural gas properties as is the case with CEC, BFC's undeveloped acres where additional reserves may be discovered, and opportunities for recompletion or workover of some existing wells of BFC. CEC's Board directed Mr. McDonald to continue discussions with BPC and Yorktown Partners and to report back to the Board as to the results of those discussions. On August 11, 1999, CEC conducted a special Board of Directors meeting during which the BFC transaction and the Yorktown financing were discussed and the purchase of BFC was approved. The Board considered the factors described in "--CEC's Reasons For Recommending The Exchange Offer." The Board reviewed the valuation of CEC and BFC by Yorktown based on what would be the economic equivalent of paying $5.50 per share of CEC. The Board believed that this price was fair and consistent with valuation of independent oil and gas companies of similar size based on the experience of the Board, the current market price for the stock of CEC and by the Board's view of general industry guidelines of value including discounted cash flow and multiple cash flow methods. 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. 20 CEC's Reasons For Recommending The Exchange Offer CEC's Board of Directors believe that the terms of the exchange offer are fair to and in the best interests of CEC and its shareholders. In reaching its conclusion to approve the BFC stock purchase agreement, the exchange and financing agreement and the exchange offer, CEC's Board consulted with management, as well as its legal and accounting advisors, and considered the following factors: . The acquisition of BFC and the exchange offer would result in Carbon being led by the existing management team which has a strong track record in the oil and gas industry. The Board of Directors of CEC believes that the management is a significant component for the future success of Carbon. . The structure of the transaction with CEC's current shareholders having the opportunity to participate in the future value of both BFC and CEC as part of Carbon by accepting the exchange offer. . Reasons for the acquisition of BFC, including potential growth, the nature of BFC's properties and cost savings that may be realized in the operation of BFC by Carbon. CEC is currently a small independent oil and gas company, with operations in Canada, United States shareholders and limited access to outside capital. . The terms of the BFC stock purchase agreement, including the parties' representations, warranties and covenants and the conditions to their respective obligations. . United States and Canadian tax consequences of the transaction. . The requirement of Yorktown that its equity financing be made through a United States corporation. . The valuation of CEC involved in the equity financing made by Yorktown; alternatives to Yorktown's proposal that had been considered or sought in the past; a previous search by CEC for a business combination, which was conducted prior to Patrick R. McDonald's becoming a significant shareholder, and resulted in no offers. . Valuation methods applicable to CEC and BFC, including (1) the value of the discounted future net revenues of the estimated oil and gas reserves after deduction of royalties, production taxes, operating expenses and capital costs, but before general and administrative expenses, (2) values based on multiples of EBITDA (earnings before interest, taxes and depreciation, depletion and amortization) and (3) public stock market values for oil and gas exploration and production companies. The Board decided not to engage an investment banker for a fairness opinion regarding the equity financing proposed by Yorktown Partners because of the expense and because of the experience of CEC's directors in the valuation of oil and gas properties, the valuation of oil and gas exploration and production companies and the buying and selling of oil and gas companies. The Board knew the discounted future net revenue of CEC's estimated reserves as publicly reported and as set forth in "Information About CEC--Properties" as of November 30, 1998. The Board also knew an estimate of CEC's discounted future net revenues as of November 30, 1998, and from significant acquisitions after that date, prepared for internal use by an independent engineering firm using expected future oil and gas prices and expected operating expenses and capital costs. The Board discussed the discounted future net revenue of BFC's estimated reserves, including the amount publicly reported and set forth in "Information About Carbon--Properties" as of December 31, 1998 and the estimate by CEC's management of BFC's future net revenues using expected future oil and gas prices, operating expenses and capital costs and including estimates of reserves which had been established by BFC through exploration and production activities conducted in the first two quarters of 1999. CEC's Board of Directors was aware of multiples of EBITDA as another method commonly used in valuing oil and gas businesses, but did not discuss multiples used in specific comparable transactions. In regard to public market prices, the price of $5.50 per share offered by Yorktown was a premium of 26% over the market price for CEC common stock on August 11, 1999, the date prior to announcing the proposed BFC acquisition. Further, the Board recognized that Yorktown's investment in Carbon or CEC had other benefits, as described above under "Background of the Exchange Offer/Exchange Agreement." 21 . 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 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 22 Yorktown), or (2) the acquisition of Carbon by merger after which Carbon shareholders do not own more than 2/3 of the outstanding voting securities of the surviving corporation in substantially the same proportion as they owned Carbon prior to the merger, or any sale or exchange or other disposition of all or substantially all of our assets, (3) or the sale or other disposition of more than 50% in fair market value of our assets other than in the ordinary course of business, whether in a single transaction or related transactions, or (4) there is a change in more than a majority of our Board of Directors as a result of a proxy contest waged by a third party unaffiliated with the officer who is the party to the employment agreement and not endorsed by that officer. In the event of a change in control not supported by a majority of our then-existing Board of Directors, Mr. McDonald is to be paid 400% of his compensation upon termination of the employment agreement. In the event of a change in control supported by our then-existing Board of Directors, Mr. McDonald is to be paid 300% of his compensation upon termination of the employment agreement by us or 200% of his compensation upon termination of his employment by him. For this purpose, the term compensation means the average of Mr. McDonald's annual base salary and incentive compensation for the three years prior to the termination date (or such lesser period as he has been employed), taking his base salary and incentive compensation into account at their full annualized rates for any partial year or years. In addition, upon a change in control, any restrictions on outstanding incentive awards (including restricted stock and performance shares) granted to Mr. McDonald will lapse and such incentive awards will become 100% vested. Further, in the event of a change in control, any stock options and stock appreciation rights held by Mr. McDonald will become immediately exercisable and 100% vested. If Mr. McDonald's employment is terminated by us for any reason other than "cause" (as defined below) or upon the death or disability of Mr. McDonald or if Mr. McDonald terminates his employment because of a material breach of the employment agreement by Carbon or because of a change in the position of Mr. McDonald with Carbon, then Mr. McDonald is to be paid a lump sum payment equal to 300% of his compensation as defined above. Also, in that event, all his options and restricted stock become 100% vested. "Cause" means (1) repeated refusal to obey written directions of our Board or a superior officer, (2) repeated acts of substance abuse which are materially injurious to Carbon, (3) fraud or dishonesty which is materially injurious to Carbon, (4) breach of any material obligation of nondisclosure or confidentiality owed to Carbon, (5) commission of a criminal offense involving our money or property, or (6) commission of a criminal offense that constitutes a felony. If a payment to Mr. McDonald is subject to an excise tax under the Internal Revenue Code, we will pay to Mr. McDonald an additional amount to cover the excise tax on an after-tax basis. As required by his employment agreement, Carbon has granted under its 1999 stock option plan to Mr. McDonald an option to acquire 70,000 shares of our common stock at $5.50 per share. Carbon has also granted to Mr. McDonald 30,000 shares of restricted common stock under its 1999 restricted stock plan. The shares subject to the option and the restricted stock vest over three years, with one-third of the stock vested on October 14, 2000 (which is one year from the date of grant) and one-third of the stock vested on each of the second and third anniversaries of the date of grant. In October, 1999, we entered into a two-year employment agreement with Mr. Struzeski, which provides for Mr. Struzeski to be the Chief Financial Officer of Carbon at a base salary of US$100,000 per year, together with all benefits offered by us to our employees generally. The employment agreement with Mr. Struzeski provides that either Carbon or Mr. Struzeski may terminate the contract if there is a change in control of Carbon. Change in control is defined in the same manner under this contract as our employment agreement with Mr. McDonald. In the event of a change in control not supported by a majority of our then-existing Board of 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 23 rates for any partial year or years), prorated to be a monthly amount and multiplied by the remaining months of the term of his agreement (but not less than 12 months). Also, in the event of a change in control, the restrictions on any outstanding incentive awards (including restricted stock and performance shares) granted to Mr. Struzeski will lapse and such awards and all stock options and stock appreciation rights granted to him will become immediately exercisable and will become 100% vested. If Mr. Struzeski's employment is terminated by us for any reason other than "cause" (defined the same as in Mr. McDonald's employment agreement) or upon the death or disability of Mr. Struzeski or if Mr. Struzeski terminates his employment because of a change in the position of Mr. Struzeski with Carbon, Carbon is pay Mr. Struzeski an amount equal to his compensation (pro rated on a monthly basis) multiplied by the remaining months of his employment agreement. Also, in that event, all his options and restricted stock become 100% vested. Carbon has also granted to Mr. Struzeski an option to acquire 25,000 shares of common stock at $5.50 per share under its 1999 stock option plan and 10,000 shares of restricted common stock under its 1999 restricted stock plan. The shares subject to the options and the restricted stock vest over three years, with one-third of the stock vested on October 14, 2000 (which is one year from the date of grant) and one-third of the stock vested on each of the second and third anniversaries of the date of grant. Messrs. McDonald and Struzeski negotiated with Yorktown for their employment agreements with Carbon and for their stock options and restricted stock grants from Carbon, and each of these items was approved by Carbon's full Board. The discussions with Yorktown on these items were held after CEC had entered into the agreement with BFC for the purchase of BFC shares and after Yorktown had stated the general terms for its investing in Carbon common stock. The employment agreements are similar to agreements existing with CEC, except that Mr. McDonald receives a base annual salary of $200,000 from Carbon (compared to $120,000 which he has received from CEC) and Mr. Struzeski receives a base salary of $100,000 from Carbon (compared to $75,000 from CEC). Messrs. McDonald and Struzeski also participate in a group life insurance program and a disability program for all employees of Carbon and BFC, which were not available from CEC. In recognition of Mr. McDonald's role in the purchase of BFC by Carbon and the exchange offer, the Board of Directors of CEC paid in October, 1999 to Mr. McDonald a bonus of $200,000 Canadian (approximately $134,000 U.S.). Similarly, Mr. Struzeski was paid a bonus of $30,000 Canadian (approximately $20,000 U.S.). Description of Exchange Agreement Under the Exchange Agreement, Yorktown agreed to acquire 4,500,000 shares of Carbon common stock at a purchase price of $24,750,000 in cash, or $5.50 per share. Carbon agreed to use these proceeds for the purchase of BFC shares under the BFC stock purchase agreement with any remaining proceeds to be added to its working capital. CEC agreed to assign to Carbon its rights and obligations under the BFC stock purchase agreement and Carbon agreed to assume those rights and obligations. Carbon, CEC and Yorktown agreed that Carbon would make the exchange offer to all CEC shareholders. CEC agreed that its Board would recommend acceptance of the exchange offer. The Exchange Agreement also provided for the adoption of our 1999 stock option plan and our 1999 restricted stock plan, and employment agreements with Mr. McDonald and Mr. Struzeski. Carbon, CEC and Yorktown agreed that the Board of Directors of Carbon would consist of five directors. Carbon, CEC and Yorktown agreed that the five directors initially would be David H. Kennedy, a person who passed away and was replaced by Cortlandt S. Dietler, Bryan H. Lawrence, Peter A. Leidel and Patrick R. McDonald. Upon completion of the exchange offer, if Harry A. Trueblood 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 24 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. 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 25 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, 30 such as the short-swing recovery provisions of Section 16(b) and the requirement of furnishing a proxy statement pursuant to Section 14(a), no longer applicable to such shares. Upon completion of the exchange offer, if CEC becomes a majority-owned subsidiary, Carbon will have the ability to elect all directors of CEC and may decrease the size of the Board of Directors as well as change the persons who are directors of CEC. However, Carbon has not made any decision in regard to the composition of the Board of Directors of CEC after the exchange offer. Second Step Merger After the exchange, it is possible that we may merge CEC with a wholly- owned Canadian subsidiary of Carbon. In such a merger, shareholders of CEC may receive cash, shares of our stock, other securities or a combination of some or all of the foregoing. Whether we decide to proceed with a merger depends upon a number of factors which cannot be ascertained at the present time. These factors include the number of shares which are tendered in our offer, the relative attractiveness of completing the merger compared to investing our resources in other investments, the availability of financing to fund the cash portion of the consideration required to effect the merger, and the U.S. and Canadian tax consequences of the merger. The more CEC shares tendered in the exchange offer, the more likely it is that we will effect the merger as less cash will be required to pay for the remaining shares. The merger will have no effect on CEC shareholders who accept our current exchange offer. It will affect, however, CEC shareholders who do not accept our offer. If we proceed with a merger, we may give those shareholders cash for their shares of CEC common stock. We do not currently intend to engage in a second step merger. If we eventually decide to merge CEC with a wholly-owned Canadian subsidiary of Carbon, we will not engage in such a transaction without informing, and receiving approval from, our tax counsel, so that there will be no adverse tax effects on persons who accept the exchange offer. For a U.S. Shareholder (as defined in "United States Federal Income Tax Consequences--Scope and Limitation Advice") whose CEC common stock is not exchanged under the exchange offer and is disposed of in connection with a second step merger, the United States federal income tax consequences would depend on the circumstances of the second step merger including, without limitation, the consideration received by such U.S. Shareholder in the second step merger. For a Canadian Holder (as defined in "Canadian Federal Tax Consequences-- Holders Resident in Canada") whose CEC common stock is not exchanged under the exchange offer and is disposed of in connection with a second step merger, the consequences under the Canadian Tax Act would depend on the circumstances of the second step merger including, without limitation, the consideration received by such Canadian Holder in the second step merger. However, it is possible that both a U.S. Shareholder and a Canadian Holder will have a taxable event as a result of a second step merger. For example, this would be the case if cash were to be paid in the second step merger. CEC's shareholders will be entitled to dissenters' rights in connection with any such merger. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES Scope and Limitation Advice. In the opinion of Holland & Hart, LLP, tax counsel to CEC, the following are the material United States federal income tax considerations arising from and relating to the exchange of CEC common stock for Carbon common stock that are generally applicable to you if you are a "U.S. Shareholder" and, in some cases, if you are a "non-U.S. Shareholder." You are a U.S. Shareholder if you are a United States citizen or resident, domestic corporation, domestic partnership, estate subject to United States federal income tax on its income regardless of source, or trust, but only if a court within the United States is able to exercise primary supervision over the 31 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. 86 management services until new management was retained, either by merger, acquisition or direct employment. CEC paid no direct cash compensation to the officers of Columbus for the period that they served as officers of CEC. CEC was charged by Columbus on a monthly basis for the specific time each Columbus officer or employee devoted to the Company. As a result of Mr. McDonald's investment in CEC in July, 1998, and the election of new executive officers in fiscal 1998, the management agreement with Columbus was terminated in March, 1999. CEC paid to Columbus the following amounts for providing management services pursuant to the management agreement: $296,000 in 1996, $255,000 in 1997, and $218,000 in 1998. DESCRIPTION OF OUR CAPITAL STOCK Our authorized capital stock consists of 20,000,000 shares of common stock, no par value, and 10,000,000 shares of preferred stock, no par value. Common Stock The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of Carbon, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock. Holders of common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of the exchange offer will be, fully paid and nonassessable. A quorum for purposes of a meeting of shareholders consists of a majority of the shares entitled to vote at the meeting. After a quorum has been established, a matter is approved by the shareholders if votes cast favoring the matter exceed the votes cast against the matter. Directors are elected by a plurality vote, with the nominees having the highest number of votes cast in favor of their election being elected to the Board of Directors. As a result, a majority of the outstanding shares has the ability to elect all of our directors. Under Colorado law, the affirmative vote of a majority of the shares entitled to vote is required to approve: . A sale, lease, exchange or other disposition of all or substantially all of our property and assets, with or without our good will, other than in the usual and regular course of our business. . A plan of merger of Carbon with or into another entity, or a share exchange for which shareholder approval is required. . Dissolution of Carbon. At December 31, 1999, there were 4,550,000 shares of our common stock outstanding. Preferred Stock The Board of Directors has the authority, without further vote or action by the shareholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of Carbon. There are no shares of preferred stock issued, and we have no present plans to issue any shares of preferred stock. 88 EX-99.3 3 EXCHANGE OFFER EXHIBIT 3 --------- CEC RESOURCES LTD. LETTERHEAD (303) 863-1555 (phone) (303) 863-1558 (fax) ____________, 2000 Re: Exchange Offer for Stock of CEC Resources Ltd. To the Shareholders of CEC Resources Ltd. We are enclosing materials relating to an exchange offer for your shares of CEC Resources Ltd. The exchange offer allows you to exchange your shares of CEC Resources Ltd. for Carbon Energy Corporation ("Carbon"), on a one-for-one basis. As you may recall from reading our press releases and quarterly reports, the exchange offer is the last step in our efforts to combine Bonneville Fuels Corporation and CEC Resources Ltd. The Board of Directors of CEC Resources Ltd. recommends that you accept the exchange offer. In this letter, I want to list what materials you are receiving, provide you some background information and also state some instructions for completing a letter of transmittal. Enclosures Enclosed are the following items relating to the exchange offer: (1) A Prospectus dated ______________, 2000, of Carbon which makes the exchange offer for your CEC Resources shares; (2) A letter of transmittal that must be completed for persons accepting the exchange offer; and (3) A Schedule 14D-9 which refers to the Prospectus and is a document filed with the Securities and Exchange Commission in connection with our Board's recommending the acceptance of the exchange offer. To the Shareholders of CEC Resources Ltd. ____________, 2000 Page 2 Background Information The exchange offer results from the acquisition of Bonneville Fuels Corporation, originally proposed by CEC Resources and completed by Carbon. In order to combine with Bonneville Fuels, obtain financing for the acquisition of Bonneville Fuels and avoid adverse income taxes to CEC Resources and its shareholders, the following steps were taken: . CEC entered into a stock purchase agreement for all outstanding Bonneville Fuels shares; . CEC Resources assigned the Bonneville Fuels stock purchase agreement to Carbon in return for Carbon's agreement to make the exchange offer and comply with other terms of an exchange and financing agreement; . Carbon closed an equity financing of $24,750,000 from Yorktown Energy Partners, III, on the basis of $5.50 per share of Carbon common stock, for the purpose of Carbon's purchasing all of Bonneville Fuels shares; . Carbon completed the purchase of the Bonneville Fuels shares; and . Carbon has now commenced the exchange offer. The overall goal is to provide each CEC shareholder with the opportunity to own shares in a company that consists of both Bonneville Fuels and CEC Resources. In the exchange offer, each share of your CEC Resources stock can be exchanged for one share of Carbon. Some Exchange Offer Terms The terms of the exchange offer are explained in the enclosed Prospectus. At the front of the Prospectus is a summary of the exchange offer, and there is more detail about the exchange offer in a section entitled "The Exchange Offer." All shares of CEC Resources common stock properly tendered and not withdrawn can be exchanged on a one-for-one basis for Carbon stock. The exchange offer will expire at 5:00 p.m., New York City time, on __________, 2000 unless extended by Carbon. You may withdraw tenders of your shares of CEC Resources common stock at any time before the exchange offer expires. To the Shareholders of CEC Resources Ltd. ____________, 2000 Page 3 Procedures for Accepting the Offer If you hold certificates for shares of CEC common stock in your name and you wish to receive the Carbon shares in your name at your address as shown in our records, you need only to do the following: . Complete and sign the letter of transmittal, by completing Box A (which includes the number of CEC shares you wish to tender) and signing the letter in Box D; . Send the letter of transmittal with your stock certificate to the exchange agent at one of the New York City addresses shown at the top of the letter of transmittal. If you hold shares of CEC common stock through a broker, you will receive instructions from your broker on how to accept the exchange offer. You will need to complete an instruction form for the broker. Recommendation The CEC Board of Directors believes that the terms of the exchange offer are fair to and in the best interests of CEC and its shareholders. The directors and executive officers of CEC Resources who own, in the aggregate, 580,346 shares of outstanding CEC common stock, representing approximately 38.1% of CEC's outstanding shares, have stated that they intend to accept the exchange offer. Please act now in regard to the exchange offer. Please contact me if you have any questions. Very truly yours, CEC RESOURCES LTD. By: /s/ Patrick R. McDonald ------------------------------------------ Patrick R. McDonald, President -----END PRIVACY-ENHANCED MESSAGE-----