As filed with the Securities and Exchange Commission on August 5, 2005
Registration Number 333-____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CONSOLIDATED ENERGY, INC.
(Name of Small Business Issuer in its Charter)
Wyoming 3630 86-0852222
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
12508 WEST ATLANTIC BLVD.
CORAL SPRINGS, FLORIDA 33071
(954) 575-1471
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
DAVID GUTHRIE, PRESIDENT
12508 WEST ATLANTIC BLVD.
CORAL SPRINGS, FLORIDA 33071
(954) 575-1471
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
WITH COPIES TO:
RICHARD A. FRIEDMAN, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLOOR
NEW YORK, NEW YORK 10018
Tel: (212) 930-9700
Fax: (212) 930-9725
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please 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(c) under
the Securities Act, please 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 number of the earlier effective registration statement for the same
offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(COVER CONTINUES ON FOLLOWING PAGE)
CALCULATION OF REGISTRATION FEE
Title of Each Class of Proposed Maximum
Securities to be Amount To Be Offering Price Per Proposed Maximum Amount of Registration
Registered Registered(1) Share (2) Aggregate Offering Price Fee
- -------------------------- ------------------------- ----------------------- ------------------------- ------------------------
Common Stock, $0.001 par
value (3) 8,088,235 $2.61 $ 21,110,293.35 $ 2,484.68
- -------------------------- ------------------------- ----------------------- ------------------------- ------------------------
Common Stock, $0.001 par
value (4) 2,573,529 $2.61 $ 6,716,910.69 $ 790.58
- -------------------------- ------------------------- ----------------------- ------------------------- ------------------------
Common Stock, $0.001 par
value (5) 652,140 $2.61 $ 1,702,085.40 $ 200.34
- -------------------------- ------------------------- ----------------------- ------------------------- ------------------------
Total 11,313,904 $2.61 $ 29,529,289.44 $ 3,475.60 (6)
- -------------------------- ------------------------- ----------------------- ------------------------- ------------------------
(1) Includes shares of our common stock, $0.001 par value per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of our 6% senior secured convertible promissory notes and the
exercise of warrants held by the selling shareholders. In addition to the shares
set forth in the table, the amount to be registered includes an indeterminate
number of shares issuable upon conversion of the 6% senior secured convertible
promissory notes and exercise of the warrants, as such number may be adjusted as
a result of stock splits, stock dividends and similar transactions in accordance
with Rule 416. The number of shares of common stock registered hereunder
represents a good faith estimate by us of the number of shares of common stock
issuable upon conversion of the 6% senior secured convertible promissory notes
at a conversion price of $1.70 per share and upon exercise of the warrants.
Should the conversion ratio result in our having insufficient shares, we will
not rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary. In addition,
should a decrease in the exercise price as a result of an issuance or sale of
shares below the then current market price, result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended. The average of the
high and low price per share of the Registrant's Common Stock on the Over the
Counter Bulletin Board as of July 29, 2005 was $2.61 per share.
(3) Represents shares issuable upon conversion of our 6% senior secured
convertible promissory notes.
(4) Represents shares issuable upon exercise of common stock purchase warrants
issued in connection with our 6% senior secured convertible promissory notes.
(5) Represents shares issued to placement agents in connection with our 6%
senior secured promissory note financing and a previous financing.
(6) $2,734.82 was previously paid on May 16, 2005, which has been applied
towards this registration fee.
The registrant hereby amends this registration statement on such date or date(s)
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the commission acting pursuant to said Section
8(a) may determine.
The information in this prospectus is not complete and may be changed. The
securities may not be sold 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.
PROSPECTUS
Subject to Completion, Dated August 5, 2005
CONSOLIDATED ENERGY, INC.
11,313,904 Shares of Common Stock
The selling shareholders named in this prospectus are offering to sell up
to 11,313,904shares of common stock including up to 8,088,235shares of common
stock of Consolidated Energy, Inc. underlying 6% senior secured convertible
promissory notes and warrants to purchase up to 2,573,529shares that were
previously issued by us to the selling shareholders in private transactions. We
will not receive any proceeds from the conversion of our 6% senior secured notes
or the resale of shares of our common stock. We will, however, receive proceeds
from the exercise of our common stock purchase warrants.
Our common stock currently trades on the Over the Counter Bulletin Board
("OTC Bulletin Board") under the symbol "CEIW"
On July 29, 2005, the last reported sale price for our common stock on the
OTC Bulletin Board was $2.70 per share.
The securities offered in this prospectus involve a high degree of risk.
See "Risk Factors" beginning on page 2 of this prospectus to read about factors
you should consider before buying shares of our common stock.
The selling shareholders are offering these shares of common stock. The
selling shareholders may sell all or a portion of these shares from time to time
in market transactions through any market on which our common stock is then
traded, in negotiated transactions or otherwise, and at prices and on terms that
will be determined by the then prevailing market price or at negotiated prices
directly or through a broker or brokers, who may act as agent or as principal or
by a combination of such methods of sale. The selling shareholders will receive
all proceeds from the sale of the common stock. For additional information on
the methods of sale, you should refer to the section entitled "Plan of
Distribution."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ___, 2005
TABLE OF CONTENTS
Page
Prospectus Summary...................................................... 1
Risk Factors............................................................ 2
Forward Looking Statements.............................................. 10
Use of Proceeds......................................................... 10
Management's Discussion and Analysis of
Financial Condition or Plan of Operation................................ 10
Description of Business................................................. 14
Description of Property................................................. 19
Legal Proceedings....................................................... 21
Directors and Executive Officers........................................ 22
Executive Compensation.................................................. 22
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 23
Market for Common Equity and Related
Shareholder Disclosure.................................................. 23
Security Ownership of Certain Beneficial Owners
and Management.......................................................... 24
Selling Shareholders.................................................... 26
Certain Relationships and Related Transactions.......................... 29
Description of Securities............................................... 30
Plan of Distribution....................................................
Legal Matters........................................................... 32
Experts................................................................. 32
Where You Can Find More Information..................................... 32
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.......................................... 33
Index to Consolidated Financial Statements.............................. F-1
You may only rely on the information contained in this prospectus or that
we have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common stock. Consolidated
Energy, Inc.is referred to throughout this prospectus as "Consolidated Energy,"
"we" or "us."
GENERAL
We were incorporated in Nevada on December 18, 1996, under the name
Barbeque Capital Corporation. In September 2002, we filed our articles of
incorporation in the State of Wyoming, and in October 2002, Barbeque Capital
Corporation merged with and into Consolidated Energy, Inc. Our principal
executive office is located at 12580 West Atlantic Boulevard, Coral Springs,
Florida 33071 and our telephone number is (954) 575-1471.
This Offering
Shares offered by Selling
Shareholders................................ 11,313,904 shares of common stock, of which 8,088,235 shares
are issuable upon the conversion of the 6% senior secured
promissory notes and 2,573,529 are issuable upon the
exercise of warrants.
Use of Proceeds............................. We will not receive any proceeds from the conversion of the
6% senior secured promissory notes or the sale of the common
stock. We will however receive proceeds from the exercise of
common stock purchase warrants.
Risk Factors................................ The purchase of our common stock involves a high degree of
risk. You should carefully review and consider "Risk
Factors" beginning on page 2.
OTC Bulletin Board
Trading Symbol.............................. CEIW
1
RISK FACTORS
An investment in our shares involves a high degree of risk. Before making
an investment decision, you should carefully consider all of the risks described
in this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. If this were to happen, the price of our
shares could decline significantly and you may lose all or a part of your
investment. The risk factors described below are not the only ones that may
affect us. Additional risks and uncertainties that we do not currently know
about or that we currently deem immaterial may also adversely affect our
business, financial condition and results of operations. Our forward-looking
statements in this prospectus are subject to the following risks and
uncertainties. Our actual results could differ materially from those anticipated
by our forward-looking statements as a result of the risk factors below. See
"Forward-Looking Statements."
RISKS RELATED TO OUR BUSINESS
OUR MINING OPERATIONS ARE RELATIVELY NEW AND WE HAVE NO EXTENSIVE HISTORY OF
OPERATING COAL MINES.
Our mining operations began in September 2003 when we acquired our current
mining operation in Kentucky. Since that time, we have managed relatively small
production and development operations that have not yet produced revenues
exceeding the cost of operations. Accordingly, our success is dependent on our
ability to manage further mine development, increase production levels and
achieve profitable sales with the resources we have available or can secure. In
addition, we will have to adjust our planning to changing conditions in the
highly competitive coal industry. None of these requirements for success can be
demonstrated by our performance to date and there is no assurance we will be
able to accomplish them in order to sustain the company.
BECAUSE OUR AUDITORS HAVE EXPRESSED A GOING CONCERN OPINION, OUR ABILITY TO
OBTAIN ADDITIONAL FINANCING COULD BE ADVERSELY AFFECTED.
We have not established revenues sufficient to cover our operating costs
and our financial statements included in our Form 10-KSB for the year ended
December 31, 2004 include a section addressing substantial doubt about our
ability to continue as a going concern. This going concern paragraph could
adversely affect our ability to obtain favorable financing terms in the future
or to obtain any additional financing, if needed. Lack of such financing may
delay mine development, decrease our ability to add production capacity and
adversely affect revenues.
OUR MANAGEMENT AND AUDITORS HAVE IDENTIFIED SIGNIFICANT DEFICIENCIES IN OUR
INTERNAL CONTROLS THAT, IN AGGREGATE, CONSTITUTED A MATERIAL WEAKNESS IN THE
DESIGN AND OPERATION OF OUR INTERNAL CONTROLS AS OF DECEMBER 31, 2004, WHICH, IF
NOT PROPERLY REMEDIATED COULD RESULT IN MATERIAL MISSTATEMENTS IN OUR FINANCIAL
STATEMENTS IN FUTURE PERIODS.
Our independent auditors, Killman, Murrell & Company, P.C. issued a letter
to the audit committee of our board of directors and our management in which
they identified certain matters that they consider to constitute a material
weakness in the design and operation of our internal controls as of December 31,
2004. A material weakness is defined by the Public Company Accounting Oversight
Board (United States) as a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. A significant deficiency is a control deficiency, or combination of
control deficiencies, that results in more than a remote likelihood that a
misstatement of the financial statements that is more than inconsequential will
not be prevented or detected. A control deficiency exists when the design or
operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect
misstatements on a timely basis.
Our auditors based their material weakness determination on the following
significant deficiencies:
o Assets purchases and asset custody by individuals that were not officers
directors or employees of our company;
o Improper valuation of related party transactions;
o Improper valuation of common stock issued to individuals in exchange for
services; and
o Cash advances recorded as notes payable were proceeds from the sale of
mineral interests and not loans.
2
In addition, our auditors cited a number of reportable conditions which
were not believed to be material weakness. We are in the process of addressing
each of the above material weaknesses and we intend to remediate these
weaknesses through enhanced supervisory review and improvements in our internal
accounting processes and procedures. If we are not able to adequately address
the material weaknesses in our internal controls, it is possible that a material
misstatement of our annual or interim financial statements will not be prevented
or detected. Any failure in preventing or detecting a material misstatement of
our annual or interim financial results could have a material adverse effect on
our stock price and on our results of operations.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT, WHICH LIMITS OUR FLEXIBILITY AND IMPOSES
RESTRICTIONS ON US, AND A DOWNTURN IN ECONOMIC OR INDUSTRY CONDITIONS MAY
MATERIALLY AFFECT OUR ABILITY TO MEET OUR FUTURE FINANCIAL COMMITMENTS AND
LIQUIDITY NEEDS.
As of December 31, 2004, we had current liabilities totaling $5,737,990 and
long-term liabilities totaling $168,962. To date in 2005, we have issued secured
convertible notes totaling $7,000,000, increasing our debt obligations. We also
have significant lease and royalty obligations. Our ability to satisfy our debt,
lease and royalty obligations, and our ability to refinance our indebtedness,
will depend upon our future operating performance, which will be affected by
prevailing economic conditions in the markets that we serve and financial,
business and other factors, many of which are beyond our control. We may be
unable to generate sufficient cash flow from operations and future borrowings or
other financing may be unavailable in an amount sufficient to enable us to fund
our future financial obligations or our other liquidity needs.
The amount and terms of our debt could have material consequences to our
business, including, but not limited to:
o making it more difficult for us to satisfy our debt covenants and debt
service, lease payment and other obligations;
o increasing our vulnerability to general adverse economic and industry
conditions;
o limiting our ability to obtain additional financing to fund future
acquisitions, working capital, capital expenditures or other general
operating requirements;
o reducing the availability of cash flow from operations to fund
acquisitions, working capital, capital expenditures or other general
operating purposes;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
o placing us at a competitive disadvantage when compared to competitors
with less relative amounts of debt.
In addition to our current significant levels of indebtedness, we may incur
additional indebtedness in the future, which would heighten the risks described
above.
OUR PROFITABILITY MAY BE ADVERSELY AFFECTED BY THE STATUS OF OUR LONG-TERM COAL
SUPPLY CONTRACTS.
We intend to sell a substantial portion of our coal under a long-term coal
supply agreement, which is a contract with a term greater than 12 months. The
prices for coal shipped under these contracts may be below the current market
price for similar-type coal at any given time. Due to the substantial volume of
our potential sales that are subject to these long-term agreements, we may have
less coal available with which to capitalize on higher coal prices if and when
they arise. In addition, because long-term contracts typically allow the
customer to elect volume flexibility, our ability to realize the higher prices
that may be available in the spot market may be restricted when customers elect
to purchase higher volumes under such contracts. Our exposure to market-based
pricing may also be increased should customers elect to purchase fewer tons. In
addition, the increasingly short terms of sales contracts and the consequent
absence of price adjustment provisions in such contracts make it more likely
that we will not be able to recover inflation related increases in mining costs
during the contract term.
3
WE HAVE SHUT DOWN MINING OPERATIONS AT OUR WARFIELD MINE AND WE WILL NOT BE ABLE
TO GENERATE ANY REVENUE FROM SUCH MINE UNTIL MINING OPERATIONS RECOMMENCE.
In January 2005, we shut down production at our Warfield Mine to construct
three slopes and the ancillary ventilation necessary to allow us to access the
Pond Creek coal seam. As a result, there has been no production at the mine
since February 2005. We expect that we will be able to restart production at the
mine during August 2005. If we are not able to commence mining operations at our
Warfield Mine when expected, it could have a material adverse effect on our
results of operations.
THE LOSS OF, OR SIGNIFICANT REDUCTION IN, PURCHASES BY OUR LARGEST CUSTOMER
COULD ADVERSELY AFFECT OUR REVENUES.
We have a long term contract for coal sales to one large customer, American
Electric Power, for the period beginning in June 2005 for the next three years.
We estimate that for the year ending December 31, 2005, sales to American
Electric Power will account for approximately 80% of our estimated production
capacity and a significant percentage our total anticipated coal revenues. We
intend to discuss the extension of existing agreements or entering into new
long-term agreements with American Electric Power and other customers, but the
negotiations may not be successful, and those other customers may not agree to
purchase coal from us under long-term coal supply agreements, or at all. If
American Electric Power were to significantly reduce their purchases of coal
from us, or if we were unable to sell coal to them on terms as favorable to us
as the terms under our current agreements, and we were unable to secure
agreements with other customers, our revenues and profitability could suffer
materially.
OUR PROFITABILITY MAY FLUCTUATE DUE TO UNANTICIPATED MINE OPERATING CONDITIONS
AND OTHER FACTORS THAT ARE NOT WITHIN OUR CONTROL.
Our mining operations are inherently subject to changing conditions that
can affect levels of production and production costs for varying lengths of time
and can result in decreases in our profitability. We are exposed to commodity
price risk related to our purchase of diesel fuel, explosives and steel. In
addition, weather conditions, equipment replacement or repair, fires, variations
in thickness of the layer, or seam, of coal, amounts of overburden, rock and
other natural materials and other geological conditions have had, and can be
expected in the future to have, a significant impact on our operating results.
Prolonged disruption of production at our mine would result in a decrease in our
revenues and profitability, which could be material. Other factors affecting the
production and sale of our coal that could result in decreases in our
profitability include:
o continued high pricing environment for our raw materials, including,
among other things, diesel fuel, explosives and steel;
o expiration or termination of, or sales price redeterminations or
suspension of deliveries under, coal supply agreements;
o disruption or increases in the cost of transportation services; o changes
in laws or regulations, including permitting requirements;
o litigation;
o work stoppages or other labor difficulties;
o mine worker vacation schedules and related maintenance activities; and
o changes in coal market and general economic conditions.
Decreases in our profitability as a result of the factors described above
could adversely impact our quarterly or annual results materially.
Agreements to which we are a party contain limitations on our ability to
manage our operations exclusively and impose significant potential
indemnification obligations on us.
In order to obtain financing to develop and expand operations at our
Warfield Mine, we have agreed to limit certain capital expenditures and maintain
certain cash reserves subject to anticipated operating revenues and other
benchmarks.
4
RISKS RELATING TO OUR INDUSTRY
THE DEMAND FOR AND PRICING OF OUR COAL IS GREATLY INFLUENCED BY CONSUMPTION
PATTERNS OF THE DOMESTIC ELECTRIC GENERATION INDUSTRY, AND ANY REDUCTION IN THE
DEMAND FOR OUR COAL BY THIS INDUSTRY MAY CAUSE OUR PROFITABILITY TO DECLINE.
Demand for our coal and the prices that we may obtain for our coal are
closely linked to coal consumption patterns of the domestic electric generation
industry, which has accounted for approximately 92% of domestic coal consumption
in recent years. These coal consumption patterns are influenced by factors
beyond our control, including the demand for electricity, which is significantly
dependent upon general economic conditions, summer and winter temperatures in
the United States, government regulation, technological developments and the
location, availability, quality and price of competing sources of coal,
alternative fuels such as natural gas, oil and nuclear and alternative energy
sources such as hydroelectric power. Demand for our low sulfur coal and the
prices that we will be able to obtain for it will also be affected by the price
and availability of high sulfur coal, which can be marketed in tandem with
emissions allowances in order to meet Clean Air Act requirements. Any reduction
in the demand for our coal by the domestic electric generation industry would
result in a decline in our revenues and profit, which could be material.
EXTENSIVE ENVIRONMENTAL LAWS AND REGULATIONS AFFECT THE END-USERS OF COAL AND
COULD REDUCE THE DEMAND FOR COAL AS A FUEL SOURCE AND CAUSE THE VOLUME OF OUR
SALES TO DECLINE.
The Clean Air Act and similar state and local laws extensively regulate the
amount of sulfur dioxide, particulate matter, nitrogen oxides, and other
compounds emitted into the air from electric power plants, which are the largest
end-users of our coal. Such regulations, which can take a variety of forms, may
reduce demand for coal as a fuel source because they may require significant
emissions control expenditures for coal-fired power plants to attain applicable
ambient air quality standards, which may lead these generators to switch to
other fuels that generate less of these emissions and may also reduce future
demand for the construction of coal-fired power plants. The U.S. Department of
Justice, on behalf of the EPA, has filed lawsuits against several investor-owned
electric utilities and brought an administrative action against one
government-owned utility for alleged violations of the Clean Air Act. We supply
coal to some of the currently-affected utilities, and it is possible that other
of our customers will be sued. These lawsuits could require the utilities to pay
penalties, install pollution control equipment or undertake other emission
reduction measures, any of which could adversely impact their demand for our
coal.
A regional haze program initiated by the EPA to protect and to improve
visibility at and around national parks, national wilderness areas and
international parks restricts the construction of new coal-fired power plants
whose operation may impair visibility at and around federally protected areas
and may require some existing coal-fired power plants to install additional
control measures designed to limit haze-causing emissions.
The Clean Air Act also imposes standards on sources of hazardous air
pollutants. For example, the EPA has announced that it would regulate hazardous
air pollutants from coal-fired power plants. Under the Clean Air Act, coal-fired
power plants will be required to control hazardous air pollution emissions by no
later than 2009, which likely will require significant new investment in
controls by power plant operators. These standards and future standards could
have the effect of decreasing demand for coal.
Other proposed initiatives, such as the Bush administration's announced
Clear Skies Initiative, may also have an effect upon coal operations. As
proposed, this initiative is designed to further reduce emissions of sulfur
dioxide, nitrogen oxides and mercury from power plants. Other so-called
multi-pollutant bills, which could regulate additional air pollutants, have been
proposed by various members of Congress. If such initiatives are enacted into
law, power plant operators could choose other fuel sources to meet their
requirements, reducing the demand for coal.
BECAUSE OUR INDUSTRY IS HIGHLY REGULATED, OUR ABILITY TO CONDUCT MINING
OPERATIONS IS RESTRICTED AND OUR PROFITABILITY MAY DECLINE.
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as:
o the discharge of materials into the environment;
5
o employee health and safety;
o mine permits and other licensing requirements;
o reclamation and restoration of mining properties after mining is
completed;
o management of materials generated by mining operations;
o surface subsidence from underground mining;
o water pollution;
o legislatively mandated benefits for current and retired coal miners;
o air quality standards;
o protection of wetlands;
o endangered plant and wildlife protection;
o limitations on land use;
o storage of petroleum products and substances that are regarded as
hazardous under applicable laws; and
o management of electrical equipment containing polychlorinated
biphenyls, or PCBs.
Extensive regulation of these matters could have a significant effect on
our costs of production and competitive position. Further regulations,
legislation or orders may also cause our sales or profitability to decline by
hindering our ability to continue our mining operations, by increasing our costs
or by causing coal to become a less attractive fuel source.
Mining companies must obtain numerous permits that strictly regulate
environmental and health and safety matters in connection with coal mining, some
of which have significant bonding requirements. Regulatory authorities exercise
considerable discretion in the timing of permit issuance. Also, private
individuals and the public at large possess rights to comment on and otherwise
engage in the permitting process, including through intervention in the courts.
Accordingly, the permits we need for our mining operations may not be issued,
or, if issued, may not be issued in a timely fashion, or may involve
requirements that may be changed or interpreted in a manner which restricts our
ability to conduct our mining operations or to do so profitably. Under the
federal Clean Water Act, state regulatory authorities must conduct an
antidegradation review before approving permits for the discharge of pollutants
into waters that have been designated by the state as high quality. This review
involves public and intergovernmental scrutiny of permits and requires
permittees to demonstrate that the proposed activities are justified in order to
accommodate significant economic or social development in the area where the
waters are located. If the plaintiffs are successful, the exemption from the
antidegradation review policy is revoked and we discharge into waters designated
as high quality by the state, the cost, time and difficulty associated with
obtaining and complying with Clean Water Act permits for our affected surface
mining operations would increase and may hinder our ability to conduct such
operations profitably.
WE MAY NOT BE ABLE TO OBTAIN OR RENEW SURETY BONDS ON ACCEPTABLE TERMS.
Federal and state laws require us to obtain surety bonds to guaranty
performance or payment of certain long-term obligations, including mine closure
or reclamation costs, federal and state workers' compensation costs, coal leases
and other miscellaneous obligations. Many of these bonds are renewable on a
yearly basis. It may be increasingly difficult for us to secure new surety bonds
or retain existing bonds without the posting of collateral, which could limit
our available working capital. In addition, the market terms of such bonds have
generally become more unfavorable. For example, it may become increasingly
difficult to obtain adequate coverage limits, and surety bonds increasingly
contain additional cancellation provisions in favor of the surety.
MINING IN CENTRAL APPALACHIA IS COMPLEX AND INVOLVES EXTENSIVE REGULATORY
CONSTRAINTS.
The geological characteristics of Central Appalachia coal reserves, such as
depth of overburden and coal seam thickness, make them complex and costly to
mine. As mines become depleted, replacement reserves may not be available when
required or, if available, may not be capable of being mined at costs comparable
to those characteristic of the depleting mines. In addition, as compared to
mines in other coal producing regions, permitting and licensing and other
environmental and regulatory requirements are more costly and time-consuming to
satisfy. These factors could materially adversely affect the mining operations
and cost structures of, and customers' ability to use coal produced by,
operators in Central Appalachia, including us.
6
INTENSE COMPETITION AND EXCESS INDUSTRY CAPACITY IN THE COAL PRODUCING REGIONS
IN WHICH WE OPERATE HAS ADVERSELY AFFECTED MINING REVENUES AND PROFITABILITY IN
PAST YEARS AND MAY AGAIN DO SO IN THE FUTURE.
The coal industry is intensely competitive, primarily as a result of the
existence of numerous producers in the coal producing regions in which we
operate. We compete with a large number of coal producers in the markets that we
serve. Additionally, we are subject to the continuing risk of reduced
profitability as a result of excess industry capacity and weak power demand by
the industrial sector of the economy, which affected many of our competitors in
the years prior to our commencement of operations. If economic conditions change
substantially from the current relatively high demand and low available supply
levels, it could require us to reduce the rate of coal production from planned
levels and adversely impacted our profitability.
DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY MAY CAUSE OUR CUSTOMERS TO BE MORE
PRICE-SENSITIVE IN PURCHASING COAL, WHICH COULD CAUSE OUR PROFITABILITY TO
DECLINE.
Electric utility deregulation is expected to provide incentives to
generators of electricity to minimize their fuel costs and is believed to have
caused electric generators to be more aggressive in negotiating prices with coal
suppliers. To the extent utility deregulation causes our customers to be more
cost-sensitive, deregulation may have a negative effect on our profitability.
BECAUSE OUR PROFITABILITY IS SUBSTANTIALLY DEPENDENT ON THE AVAILABILITY OF AN
ADEQUATE SUPPLY OF COAL RESERVES THAT CAN BE MINED AT COMPETITIVE COSTS, THE
UNAVAILABILITY OF THESE TYPES OF RESERVES WOULD CAUSE OUR PROFITABILITY TO
DECLINE.
Our profitability depends substantially on our ability to mine coal
reserves that have the geological characteristics that enable them to be mined
at competitive costs. Replacement reserves may not be available when required
or, if available, may not be capable of being mined at costs comparable to those
characteristic of the depleting mines. We may not be able to accurately assess
the geological characteristics of any reserves that we acquire, which may
adversely affect our profitability and financial condition. Exhaustion of
reserves at existing mines also may have an adverse effect on our operating
results.
DISRUPTION IN, OR INCREASED COSTS OF, TRANSPORTATION SERVICES COULD ADVERSELY
AFFECT OUR PROFITABILITY.
The coal industry depends on rail, barge and trucking transportation to
deliver shipments of coal to customers, and transportation costs are a
significant component of the total cost of supplying coal. Disruptions of these
transportation services could temporarily impair our ability to supply coal to
our customers and thus adversely affect our business and the results of our
operations. In addition, increases in transportation costs associated with our
coal, or increases in our transportation costs relative to transportation costs
for coal produced by our competitors or of other fuels, could adversely affect
our business and profitability.
WE FACE NUMEROUS UNCERTAINTIES IN ESTIMATING OUR ECONOMICALLY RECOVERABLE COAL
RESERVES, AND INACCURACIES IN OUR ESTIMATES COULD RESULT IN LOWER THAN EXPECTED
REVENUES, HIGHER THAN EXPECTED COSTS OR DECREASED PROFITABILITY.
We base our reserve information on geological data assembled and analyzed
by our staff and outside consultants, which includes various engineers and
geologists. The reserve estimates are periodically updated to reflect production
7
of coal from the reserves and new drilling or other data received. There are
numerous uncertainties inherent in estimating quantities of recoverable
reserves, including many factors beyond our control. Estimates of economically
recoverable coal reserves and net cash flows necessarily depend upon a number of
variable factors and assumptions, such as geological and mining conditions which
may not be fully identified by available exploration data or which may differ
from experience in current operations, historical production from the area
compared with production from other producing areas, the assumed effects of
regulation by governmental agencies and assumptions concerning coal prices,
operating costs, severance and excise tax, development costs and reclamation
costs, all of which may vary considerably from actual results.
For these reasons, estimates of the economically recoverable quantities
attributable to any particular group of properties, classifications of reserves
based on risk of recovery and estimates of net cash flows expected from
particular reserves prepared by different engineers or by the same engineers at
different times may vary substantially. Actual coal tonnage recovered from
identified reserve areas or properties and revenues and expenditures with
respect to our reserves may vary materially from estimates. These estimates thus
may not accurately reflect our actual reserves.
DEFECTS IN TITLE OR LOSS OF ANY LEASEHOLD INTERESTS IN OUR PROPERTIES COULD
LIMIT OUR ABILITY TO MINE THESE PROPERTIES OR RESULT IN SIGNIFICANT
UNANTICIPATED COSTS.
We conduct our mining operations on properties that we lease. The loss of
any lease could adversely affect our ability to mine the associated reserves.
Because title to most of our leased properties and mineral rights is not usually
verified until we make a commitment to develop a property, which may not occur
until after we have obtained necessary permits and completed exploration of the
property, our right to mine some of our reserves has in the past, and may again
in the future, be adversely affected if defects in title or boundaries exist. In
order to obtain leases or mining contracts to conduct our mining operations on
property where these defects exist, we have had to, and may in the future have
to, incur unanticipated costs. In addition, we may not be able to successfully
negotiate new leases or mining contracts for properties containing additional
reserves, or maintain our leasehold interests in properties where we have not
commenced mining operations during the term of the lease.
ACQUISITIONS THAT WE MAY UNDERTAKE WOULD INVOLVE A NUMBER OF INHERENT RISKS, ANY
OF WHICH COULD CAUSE US NOT TO REALIZE THE BENEFITS ANTICIPATED TO RESULT.
We continually seek to expand our operations and coal reserves through
acquisitions of businesses and assets, including leases of coal reserves.
Acquisition transactions involve various inherent risks, such as:
o uncertainties in assessing the value, strengths, weaknesses, contingent
and other liabilities and potential profitability of acquisition or other
transaction candidates;
o the potential loss of key personnel of an acquired business;
o the ability to achieve identified operating and financial synergies
anticipated to result from an acquisition or other transaction;
o problems that could arise from the integration of the acquired business;
o unanticipated changes in business, industry or general economic
conditions that affect the assumptions underlying the acquisition or other
transaction rationale; and
o unexpected development costs that adversely affect our profitability.
Any one or more of these factors could cause us not to realize the benefits
anticipated to result from the acquisition of businesses or assets.
THE FOLLOWING RISKS RELATE PRINCIPALLY TO OUR COMMON STOCK AND ITS MARKET VALUE:
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"CEIW.OB" There is a limited trading market for our common stock. Accordingly,
there can be no assurance as to the liquidity of any markets that may develop
for our common stock, the ability of holders of our common stock to sell our
common stock, or the prices at which holders may be able to sell our common
stock.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock is likely to be highly volatile and
could fluctuate widely in price in response to various factors, many of which
are beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o additions or departures of key personnel;
o sales of our common stock
o our ability to integrate operations, technology, products and services;
o our ability to execute our business plan;
8
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we have a limited operating history with little revenues to date,
you may consider any one of these factors to be material. Our stock price may
fluctuate widely as a result of any of the above.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON
STOCK.
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. The payment of dividends on our
common stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.
OUR COMMON STOCK MAY BE DEEMED PENNY STOCK WITH A LIMITED TRADING MARKET.
Our common stock is currently listed for trading on the OTC Bulletin Board
which is generally considered to be a less efficient market than markets such as
NASDAQ or other national exchanges, and which may cause difficulty in conducting
trades and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
rules apply to non-NASDAQ companies whose common stock trades at less than $5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded in the OTC
Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to
obtain coverage for significant news events because major wire services, such as
the Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.
If our shareholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options
or warrants, the market price of our common stock could fall. These sales also
may make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem reasonable or appropriate.
Approximately 2,510,326 million shares of our restricted common stock is
eligible for sale pursuant to Rule 144. In addition, the 11,313,904shares of
common stock to be registered under this registration statement will be freely
tradeable upon effectiveness of this registration statement.
9
FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make written or oral
statements that are "forward-looking," including statements contained in this
prospectus and other filings with the Securities and Exchange Commission,
reports to our shareholders and news releases. All statements that express
expectations, estimates, forecasts or projections are forward-looking statements
within the meaning of the Act. In addition, other written or oral statements
which constitute forward-looking statements may be made by us or on our behalf.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
important factors on which such statements are based are assumptions concerning
uncertainties associated with product development, the risk that we will not
obtain approval to market our products, the risk that our technology will not
gain market acceptance, our ability to obtain additional financing, our ability
to attract and retain key employees, our ability to protect intellectual
property, and our ability to adapt to economic, political and regulatory
conditions affecting the healthcare industry.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock.
However, we will receive the proceeds from the exercise of warrants which we
intend to use for general working capital purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes to those statements. In addition to
historical information, the following discussion and other parts of this
quarterly report contain forward-looking information that involves risks and
uncertainties.
OVERVIEW
On September 12, 2003, we signed an agreement to acquire Eastern
Consolidated Energy, Inc., a privately-held Kentucky corporation. The mining
equipment was delivered to the site the last week of August 2003 and mining
operations started in September 2003.
Since the above acquisition, we, through our wholly owned subsidiary
Eastern Consolidated Energy, Inc., which we refer to as "Eastern," are a
producer and marketer of Appalachian coal, which is supplied to domestic
electric utilities. Coal sales are made through the spot market and through
long-term supply contracts.
We are also involved in gas and oil exploration and development through our
wholly owned subsidiary Consolidated Oil and Gas, Inc. We have interests in one
producing gas well drilled in November 2004 with additional wells planned.
In June 2003, we signed an agreement to acquire Saudi American Minerals,
Inc., a company with a so-called "clean coal" technology. The effective date of
the acquisition is subject to a registration statement being filed and
effective, which filing has been delayed due to financing and other
considerations. Once the acquisition is completed, we intend to complete
development of the technology and seek licensing arrangements.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2005 COMPARED TO THE
QUARTER ENDED MARCH 31, 2004
For the period ended March 31, 2005, we had revenues of $443,033 with cost
of revenues of $385,499 for a gross profit of $47,534. Operating expenses
totaled 678,139 for a net loss of $630,605, or $.05 per share. For the period
ended March 31, 2004, we had revenues of $671,584 with cost of revenues of
$797,526, for a loss of $125,942. Expenses for the three months ended March 31,
2004 totaled $900,147 for net loss of $1,026,089, or $.13 per share.
10
Revenues and expenses were down in the current quarter compared to the
prior year period because management suspended mining operations in February and
began preparation to mine an additional coal seam in its Warfield mine.
Management expects that mining operations in should resume in May or June 2005
but not later than August 2005, and anticipates that production from the two
coal seams should be sufficient to allow us to earn a profit from operations. We
are currently exploring ways in which to finance a coal washing plant at the
Warfield mine to further enhance the sales value of the mined coal.
In January 2005, we issued 2,500,000 shares of common stock to acquire
rights to additional reserves in the Coal Burg Seam, Taylor Seam, Richardson
Seam and Broas Seam of coal on the Dempsey Heirs Leases estimated at
approximately 21,500,000 tons. The acquisition was booked at $2,500, the par
value of the stock issued. Management hopes to begin mining these new reserves
in the next 12 to 15 months.
RESTATEMENT OF FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
In the course of preparing financial statements for the year ended December
31, 2004, we changed auditors effective April 1, 2005 (See Current Report on
Form 8-K filed with the Commission on April 5, 2005). The new auditors have
applied significant adjustments to the previously issued financial statements
and restated the financial statements for the period ended December 31, 2003.
The effects of the restatement include: substantial reductions to fixed assets
due to a reduction in the value applied to shares issued in connection with the
acquisition of Eastern; and reductions in other assets due to reclassification
of Deferred Royalty and Prepaid Royalty items. These reductions have resulted in
a reduction in total assets from the reported $6,036,626 to $1,590,647. These
substantial reductions in assets are partially offset by reductions in Current
and Long-Term liabilities for the same period, resulting in a decrease in total
liabilities from the reported $3,862,355 to $2,426,121. Reported revenues also
decreased and cost of revenue and expenses increased, resulting in an increase
in net loss from the previously reported $(1,057,706) to $(1,401,722). Details
of the accounting adjustments are included in footnote 3 to the financial
statements included in this report. Results of Operations below reflect the
restated numbers for fiscal 2003.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO
THE FISCAL YEAR ENDED DECEMBER 31, 2003
For the year ended December 31, 2004, we had a net loss of $6,413,900
compared to a net loss for the year ended December 31, 2003, of $1,401,722. We
had revenues of $2,746,983 for the year ended December 31, 2004 compared to
revenues of $649,606 for the year ended December 31, 2003. The cost of revenues
for 2004 was $3,737,162 compared to $1,035,295 for 2003. The increase in
revenues for 2004 was the result of considerably increased mining and production
activities, especially in the first three quarters of fiscal 2004. The increase
in net loss was due primarily to large increases in operating expenses due to
increased operations, expenses for shares issued for director and consultant
services, increased interest expenses for loans and debentures, and increased
depreciation and amortization due to the acquisition of additional equipment.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded operations through the issuance of notes payable
and convertible debentures. We have also issued stock for services in lieu of
cash.
FISCAL YEAR ENDED DECEMBER 31, 2004
For the year ended December 31, 2004, we issued an aggregate of 1,205,310
shares of our common stock for the conversion of debentures (principal and
interest) valued at $1,085,840, 670,000 shares to consultants for services
rendered valued at $1,254,499, and 700,000 shares for a lease acquisition valued
at $700. We also sold 394,118 shares for cash of $275,000.
At December 31, 2004, we had a working capital deficit of $5,658,198. We
have not established revenues sufficient to cover our operating costs, and,
accordingly, the report of our auditor contains a statement that there is
substantial doubt about our ability to continue as a going concern. We intend to
11
address this working capital deficit and fund operations as necessary by
obtaining long term financing capable of allowing us to access, prepare and mine
the Pond Creek coal seam. We will also seek adequate capital to upgrade the
equipment necessary to substantially increase the production capability of the
Alma section(s).
As of December 31, 2004, we had total assets of $1,787,692 and total
liabilities of $5,906,952.
During the year ended December 31, 2004 our operating activities used
$883,164 of cash compared to $248,283 for the year ended December 31, 2003.
Investing activities for 2004 used $1,075,132 primarily for the purchase of
equipment, compared to $1,583,321 the prior year primarily for equipment
purchases.
A total of $1,956,372 of cash was provided from financing activities,
including proceeds from notes payable, convertible debentures, advances from
related parties and proceeds from stock sales. A total of $1,837,920 of cash was
provided from financing activities during the year ended December 31, 2003,
including proceeds from notes payable, convertible debentures and advances from
related parties.
FISCAL QUARTER ENDED MARCH 31, 2005
On January 3, 2005, we issued 550,000 shares of our common stock for
services rendered during the year that ended December 31, 2004.The value of the
stock issued, $1,072,500 (which approximates the value quoted in the OTCBB) has
been recorded as an expense in the year ended December 31, 2004, with a
corresponding increase in accrued liabilities.
On January 11, 2005, we closed a financing transaction for $2,500,000 in
bridge financing to be used exclusively for the purchase of equipment and to
fund expenditures for the consummation of mining activities at our Warfield
Mine. The financing consisted of a senior secured promissory note for the face
amount of $2,500,000 with an interest rate of 9% per annum and a payment date
(principal and interest) of March 31, 2005. Gryphon Master Fund, LP and GSSF
Master Fund, LP, both Bermuda limited partnerships, are collectively the payees
on the note. The note was repaid with the proceeds from our February 2005
financing.
In consideration for the above note, we paid a commitment fee of $50,000 to
the Gryphon Master Fund and GSSF Master Fund and a flat fee of $10,000 as
reimbursement for fees and expenses incurred in connection with the negotiation,
preparation and delivery of the note, all deducted from the proceeds of funding
the note. As additional consideration, we issued issued to Gryphon Master Fund
and GSSF Master Fund a warrant for the purchase of an aggregate of 514,706
shares of our common stock at an exercise price of $1.70 per share, exercisable
for five years. The warrant also contains so-called "piggyback" registration
provisions under which the warrant holder may request that the shares underlying
the warrant be included in a registration with respect to an offering of our
securities.
In addition to the above fees and warrants, we paid Stonegate Securities,
Inc., a Texas corporation, which we refer to as Stonegate, a total of $200,000
cash and issued warrants for the purchase of an aggregate of 51,470 shares of
our common stock on the same terms as the warrants issued to Gryphon Master Fund
and GSSF Master Fund. The warrant issuances were in the form of a warrant issued
to Scott R. Griffith and a warrant issued to Jesse B. Shelmire IV, each for the
purchase of 25,735 shares. The cash paid and warrants issued were per the terms
of a non-exclusive Placement Agency Agreement between us and Stonegate (filed as
an exhibit to our Current Report on Form 8-K dated January 11, 2005).
On February 24, 2005, we entered into a financing transaction for aggregate
gross proceeds of $7,000,000, with additional investment rights of up to an
additional $7,000,000, such financing to be used for the purchase of equipment
and to fund expenditures for the consummation of mining activities at our
Warfield Mine. The financing is in the form of 6% senior secured convertible
promissory notes for an aggregate total face amount of $7,000,000 and a term of
three years. The 6% senior secured promissory notes may be converted to common
stock at a conversion price of $1.70 per share. Holders of such notes are
Gryphon Master Fund, L.P., GSSF Master Fund, LP, Lonestar Partners, L.P., WS
Opportunity International Fund, Ltd., WS Opportunity Fund (QP), L.P., WS
Opportunity Fund, L.P., Renaissance US Growth Investment Trust PLC, and BFS US
Special Opportunities Trust PLC. As additional consideration, we issued to each
of such holders warrants for the purchase of an aggregate of 3,242,647 shares of
our common stock at an exercise price of $1.70 per share, exercisable for five
years. The conversion price of such notes, and the exercise price of such
warrants, are subject to certain normal and customary anti-dilution adjustment
provisions and also include a one-time reset date provision with a floor price
of $1.00 per share.
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During March 2005, two investors in our February 2005 private placement
exercised their additional investment rights for an aggregate of $750,000 in 6%
senior secured promissory notes that may be convertible into 441,176 shares of
the Company's common stock at an exercise price of $1.70 upon the occurrence of
certain events. In connection with the additional investment, we issued warrants
for the purchase of 44,116 shares of our common stock at an exercise price of
$1.70 to the placement agent. In April 2005, the placement agent exercised all
of the 713,223 warrants issued to date to the placement agent through a cashless
exercise provision in exchange for the issuance of 485,850 shares of our common
stock.
On March 23, 2005, we authorized the issuance of 200,000 shares of our
common stock for services, which were performed during the year that ended
December 31, 2002. The value of the stock to be issued, $1,010,000 (which
approximates the value quoted in the OTCBB) has been recorded as an expense in
the year that ended December 31, 2004, with a corresponding increase in accrued
liabilities.
As of May 10, 2005, we have used approximately $2,527,000 of the proceeds
of the above offering to repay an outstanding bridge loan (principal and
interest) from Gryphon Master Fund and GSSF Master Fund. We also paid a flat fee
of $30,000 to Gryphon Master Fund and GSSF Master Fund as reimbursement for fees
and expenses incurred in connection with the negotiation, preparation and
delivery of the 6% senior secured promissory notes and related investment
documents.
In addition to the above fees and warrants, we paid Stonegate a total of
$340,000 cash and issued warrants for the purchase of an aggregate of 617,647
shares of our common stock on the same terms as the Warrants issued to the
Holders above. The warrant issuances are in the form of a Warrant issued to
Scott R. Griffith and a warrant issued to Jesse B. Shelmire IV, each for the
purchase of 102,941 shares. The cash paid and warrants issued were per the terms
of a non-exclusive Placement Agency Agreement between the Company and Stonegate
referenced above.
In connection with the above transaction, we executed a security agreement
(the "Security Agreement") giving the Holders a security interest in and to any
and all of our assets and properties ("Collateral" as defined in the Security
Agreement). Each of our subsidiaries have also executed a Guaranty for our
obligations under the Notes.
We intend to apply the net proceeds received from the financing transaction
to the following:
- access the Pond Creek coal seam at Warfield;
- acquire the equipment necessary to mine the Pond Creek seam;
- construction of a coal washing facility at Warfield;
- begin engineering and permitting of other coal seams at Warfield; and
- invest up to $250,000 to pursue further development of our clean coal
technology.
A portion of the money received from the transaction is currently being
used to provide working capital and materials necessary to construct three
slopes and the ancillary ventilation necessary to allow the Company to access
the Pond Creek coal seam. This construction project is scheduled to be complete
by the end of the second quarter of 2005.
A portion of the money received from the transaction was used to secure the
equipment which will be used to mine the Pond Creek coal seam. This equipment is
scheduled to arrive in May of 2005 or sooner.
A portion of the net proceeds has been used to prepare the site and to
secure the equipment associated with the planned coal washing facility. This
facility is scheduled to be completed in time to wash the coal being produced
from the Pond Creek coal seam.
At March 31, 2005, we had current assets of $2,940,244 consisting of cash
of $2,864,851, $75,000 in accounts receivable and $493 in prepaid expenses. We
had liabilities of $4,074,876, consisting of $699,596 in accounts payable,
$501,805 in accrued liabilities, $350,898 in royalties payable, $1,045,000 in
current capital lease, $561,528 in convertible debentures, $256,711 payable to
related parties, and $659,339 in a note payable to a related party, for a
working capital deficit of $1,134,532.
At March 31, 2005, we had long-term liabilities of $166,501 in deferred
royalties payable, $492,030 for the long term portion of a capital lease, and
$5,581,735 for our senior 6% secured notes payable. We had fixed assets of
building and equipment of $5,790,220 (net of depreciation) and coal leases of
13
$1,343,226 (net of amortization). We had other assets of $124,367, consisting of
restricted cash, prepaid royalty and other assets.
For the period ended March 31, 2005, cash flows used by operating
activities totaled $652,973. Cash used by investing activities totaled
$2,959,666, primarily for the purchase of mining equipment, plus the capitalized
cost of a coal lease. Cash provided by financing activities totaled $6,473,098,
primarily from the proceeds of the senior 6% convertible notes, offset by
payment of notes payable, payments to related parties, and payment of capital
leases.
SUBSEQUENT EVENT
During June 2005, seven investors exercised their additional investment
rights for an aggregate of $6,000,000 in 6% senior secured promissory notes that
may be convertible into 3,529,411 shares of the Company's common stock at an
exercise price of $1.70 upon the occurrence of certain events.
As of July 31, 2005, Consolidated has invested approximately $7.3 million
in plant and equipment and approximately $1.9 million in leasehold costs
associated with the current mining property. Consolidated expects to invest an
additional $4.0 million in equipment purchases and $1.0 million in leasehold
costs to increase the production potential of the property.
BUSINESS
We are a company engaged in coal mining operations, gas and oil exploration
and development, and development of related clean energy technologies that are
environmentally friendly. Our main business focus in the immediate future will
be in operating our mining subsidiary, Eastern Consolidated Energy, Inc., which
we refer to as "Eastern." Through our acquisition of Eastern in September 2003,
we are committed to the successful development of a profitable coal mining
operation in eastern Kentucky. We have also begun operations through our gas and
oil subsidiary, Eastern Consolidated Oil & Gas, Inc., which we refer to as "Cons
Oil & Gas" with one well drilled and operating and additional development
planned subject to funding. Through the signing of a definitive agreement to
acquire Saudi American Minerals, Inc. in June 2003, we are also committed to the
development; implementation and distribution of a clean-coal technology that we
hope will provide an improved and environmentally friendly form of coal that can
be cost effectively employed in all utility, industrial and commercial domestic
and international markets.
HISTORY AND ORGANIZATION
We were incorporated in Nevada on December 18, 1996, under the name
Barbeque Capital Corporation, to engage in the manufacture and distribution of
commercial size barbecues for individual, groups, and restaurant use. After two
seasonal business cycles of trying to develop a market for our barbecues, we
ceased business operations and began looking for alternative businesses. In
October 2002, a majority of our shareholders approved a change in domicile from
Nevada to Wyoming and a change of name to Consolidated Energy, Inc.
CURRENT BUSINESS
COAL
On September 12, 2003, we entered into an agreement to acquire Eastern
Consolidated Energy, Inc., a privately-held Kentucky Corporation ("Eastern"),
through the issuance of 3,000,000 shares of our common stock in exchange for all
of the issued and outstanding stock of Eastern. Eastern is being operated as our
wholly-owned subsidiary.
The assets of Eastern that we acquired include a coal lease in Martin
County, Kentucky. Eastern developed the Alma coal seam at Warfield, Martin
14
County, Kentucky during 2003 and much of 2004. Eastern began to mine coal and
increase mine development and production by adding additional production shifts
for most of the first three quarters of 2004. However, Eastern entered into a
long-term coal supply contract with American Electric Power in September of
2004. This contact provides that Eastern will supply American Electric Power
with 40,000 tons of coal per month for 36 months at a selling price of $51 per
ton. The coal quality required to satisfy the American Electric Power contract
and which Eastern has under an active permit, is contained in the Pond Creek
coal reserves held by Eastern. The Pond Creek coal seam is located 90 feet below
the Alma coal seam. Our management decided to obtain financing necessary to
allow Eastern to access the Pond Creek coal seam and to fund the ancillary
equipment necessary to mine, prepare and satisfy the American Electric Power
coal supply order.
In January 2005, we obtained a $2,500,000 bridge loan which was used to
begin the process of gaining access to the Pond Creek coal seam. This loan
allowed us to initiate the construction of the proposed slope project at
Warfield Kentucky. This construction project will allow us to gain access to the
Pond Creek coal seam. Our management directed that all mining operations be
suspended until after the construction of the slopes is near completion. We also
used a portion of the bridge loan to begin the process of designing and building
a coal washing facility at Warfield.
On February 24, 2005, we entered into a financing agreement which provided
us with gross proceeds of $7,000,000. We used a portion of these proceeds to
retire the $2,500,000 bridge loan which we had obtained in January of 2005.
After payment of transaction fees and expenses, the balance of the funds will be
used by Eastern to finish the construction of the slopes which are designed to
provide access to the Pond Creek seam. A portion of the proceeds will also be
used to purchase equipment necessary to mine the Pond Creek seam and to build
the coal washing facility scheduled to wash the coal produced from the Warfield
mining operation. Eastern anticipates that the initial delivery to American
Electric Power will occur as early as June of 2005.
Eastern acquired additional coal reserves on the Dempsey Heir Lease in the
Coalburg Seam, Taylor Seam, Richardson Seam, and Broas Seam containing proven
reserves of 21,530,909 tons of low sulfur, high BTU coal to be mined by surface
and underground mining methods. Production from some of these surface mine
reserves is expected to commence by the fourth quarter of 2005.
OIL AND GAS
We acquired 400 acres which are permitted in Morgan County, Kentucky, to
explore and develop the gas reserves. Cons Oil & Gas drilled a gas well into the
Devonian Shale gas formation in mid November of 2004. This well recorded an open
flow measurement of 472,000 cubic feet per day. We commenced gas deliveries from
this well in the first quarter of 2005. The gas from this well is currently
being delivered to market via Jefferson Gas Company at a rate of greater than
30,000 cubic feet per day. We have several more gas wells scheduled to be
drilled on the 400 acre reserve, several of which are direct offset locations to
this well. These wells will be drilled as soon as we can obtain adequate capital
for these projects.
CLEAN COAL TECHNOLOGY AND SAUDI AMERICAN MINERALS, INC.
In June 2003, we entered into a definitive agreement with Saudi American
Minerals, Inc., which we refer to as "Saudi American," to acquire 100% ownership
of Saudi American with an effective date to coincide with an effective date of
the S-4 which is being prepared and will be filed with the SEC. The acquisition
of Saudi American will be accomplished with a stock exchange of two shares of
our common stock for three Saudi American shares. The total number of Saudi
American shares owned and outstanding is 20,685,517. The total number of shares
of our common stock used to obtain all of the Saudi American shares will be
13,791,420. The acquisition will have the effect of transferring to CEI
Holdings, our wholly owned subsidiary, one hundred percent (100%) of the
ownership and rights to the items owned by or assigned to Saudi American,
including USA patent #6,447,559 issued on September 10th of 2002 for so-called
clean coal technology. The filing of the registration statement has been delayed
while we have been seeking funding for operations. We intend to complete the
acquisition transaction by filing a registration statement on Form S-4 as soon
as the registration statement of which this prospectus is a part has been
completed.
The technology to be acquired is a process for treating coal to enhance its
rank, wherein the temperature of the material is gradually increased in a
15
controlled set of atmospheres, to allow for the reduction of surface and
inherent moisture and the controlled reduction of volatile matter while
maintaining the coal's natural structural integrity. We believe that the process
can reduce the time, capitalization, and production costs required to produce
coal of enhanced rank, thus substantially increasing the cost effectiveness and
production rate over prior processes.
We elected to focus most of our management's time on the coal mining
operations during 2004, however, we resumed design, research and development
work on the clean coal technology in March of 2005. Pursuant to our financing
agreements entered into in February 2005, we can apply up to $250,000 of the
proceeds from such financing to research and development work on clean coal
technology. Subject to such limits, we have scheduled further development for
2005.
PRINCIPAL PRODUCTS
Our principal product currently is high grade coal mined through Eastern,
our operating subsidiary. The coal is being mined at the Warfield property in
Eastern Kentucky. At this filing date, Eastern owns 80% of the operations at
Warfield. The Warfield property consists of approximately 3,200 coal acres and
has an existing coal mine, the "Alma" seam, and the Pond Creek seam which is
currently being developed. The Warfield property also contains the Coalburg
Seam, Taylor Seam, Richardson Seam, and Broas Seam. Mining operations are being
conducted in the Alma seam. The coal from each of these reserves is high BTU or
high grade coal with low to medium sulfur and low to marginal ash content.
The coal reserves currently under lease by Eastern consist of high quality
coal. The current market for such coal is a seller's market and the trend
suggests that the coal market will remain strong for the foreseeable future. The
Warfield mine began producing coal in September of 2003. In January 2004,
Eastern took delivery of a larger, more appropriately suited miner for the Alma
seam of the Warfield mine. This new miner has replaced the earlier miner and
early indications show that this new piece of equipment is capable of producing
twice the amount of coal that the earlier miner was producing.
DISTRIBUTION METHODS
Coal, ready to be shipped to customers, can either be shipped via river
barge truck or rail. Coal produced in 2004 was loaded on trucks and delivered to
the river where it is loaded on to a barge for shipping to the end user. Coal
production has been suspended from the Warfield operation during the slope
construction project. However, the coal that will be sold to American Electric
Power under the 36 month supply contract will be delivered to the Louisa power
production facility which is 38 miles from the mine site via truck. Eastern is
currently negotiating with others for a favorable truck delivery rate. Early
negotiations have disclosed that favorable delivery rates are available.
We use a contract consultant, Kentucky Energy Consultants, for mining
consultation, coal reserve study and appropriation, coal sales, marketing and
distribution consultation and coal venture and acquisition consultation.
Kentucky Energy Consultants is owned by Jeff Miller and Larry Hunt who are
related parties.
Kentucky Energy Consultants is under contract to Eastern for five years and
is contractually obligated to consult with us with respect to:
o the marketing and selling of all coal produced from our Eastern Kentucky
coal mining operations; and
o the preparation of all proposal documents required for acquiring coal
sales and contracts along with assisting in the transportation
arrangements, contract negotiations and contract administration.
For these services, effective February 2005, Kentucky Energy Consultants
will receive fees or commissions equal to two and one half (2.5%) percent of the
gross sales price received by Eastern for any and all coal sold by Eastern on
purchase orders and/or contracts on either the spot or contract arrangements.
Prior to February 2005, Kentucky Energy Consultants received a five (5%) percent
commission.
We use a sales agent "New River Energy Sales Company, Inc.", 8887 Indian
Bluff Dr., Cincinnati, OH 45242 to provide us sales services, including, but not
limited to, the following:
16
o comprehensive monitoring of opportunities to sell coal on a spot or term
basis;
o consulting advisory services in connection with the solicitation of coal
sales;
o preparation of all proposal documents and assistance in transportation
arrangements, contract negotiations and contract administration; and
o New River will also assist in the sourcing of venture capital and assist
in the review and construction proposals submitted in conjunction with the
venture capital.
New River is responsible for all office and customary sales and
administrative expenses incurred by New River. ECEI and New River consult
frequently to discuss general conditions and outlook in order to determine coal
availability, sales opportunities and the best contract administration for ECEI.
For these services, as of February, 2005, ECEI will pay to New River, a
commission of 5 percent (5 %) of the selling price (f.o.b. mine market loading
point) on all coal sold by contract or otherwise when the selling price (f.o.b.
mine market loading point) is greater than $45.00 per ton. If and when the
selling price (f.o.b. mine market loading point) is $44.99 per ton or less, the
commission percentage will not remain at 5% but will be renegotiated in good
faith by both ECEI and New River.
COMPETITION
COAL
Eastern is smaller and has far less capital and resources when compared to
dominant industry coal producers such as Penn Virginia Coal Co., Westmoreland,
or Arch Coal. However, management believes that the current coal mining market
is a sellers' market with the potential for a secure place for a small to medium
sized coal producer. Current and expected future coal production is below that
of last year and substantially below current and expected demand. The current
pipeline and current coal stock piles are diminished when compared to the same
time as last year. Management expects that these stock piles will continue to
diminish due to the reduction in coal production and the expected increase in
demand. Several independent coal producers did not survive the past decade when
the coal market was depressed. Several of the larger coal producers curtailed
production and have not made significant plans to increase production. Several
other domestic suppliers of coal have committed sizable amounts of their
production to export. This export activity contributes additional upward
pressure to the price of the current elevated coal market as the amount of coal
available to satisfy the domestic demand is reduced.
The time and cost associated with obtaining coal mining permits continues
to elevate. The current cost and time required to obtain a permit substantially
reduces the opportunity for new competition to enter the market place in the
near future. The added pressure on equipment suppliers and the resulting
extended ship times required to ascertain mining equipment makes for a difficult
environment for new and existing competition. The limited number of skilled
personnel required to mine coal limits the opportunity for new competition to
enter the coal industry.
GAS AND OIL
We have not identified an increase in the number of competitors operating
in Central Appalachia. The price for natural gas continues to remain elevated.
The oil market also continues to remain elevated.
TECHNOLOGY
Several companies are working toward developing new clean coal
technologies. We are not aware of any new competitors with an affective
alternative to the patented clean coal process owned by Saudi American.
RAW MATERIALS
COAL
The Warfield mine operation is an underground operation that uses several
consumables such as roof bolts, rock dust, concrete block, grease and bolt
rosin. Each of the aforementioned is readily available from several sources
17
within a reasonable delivery distance from the Warfield mine. Water for the
mining operation is readily available from a mountain stream. Eastern has a
collection pond which insures available water in case there is a drought.
Electricity required for mining is available from the local power provider that
has sufficient power capacity for the current operation and is capable of
supplying any planned expansion. Spare parts are used on a regular basis and
Eastern has not had any difficulty finding several suppliers capable and willing
to provide spare parts on an as needed basis. Belt structure for belt
advancement and belt for belt advancement is readily available from several
available local sources also. The elevated cost of steel has resulted in an
elevated cost of several of the raw materials required to mine coal. However, we
have not experienced any particular delays in the supply of raw materials.
GAS AND OIL
The raw material related to gas and oil exploration is minimal. The cost of
the steel casing used when drilling and securing a gas well has increased as a
result of the increase cost of steel. However we have not experienced any lack
of prompt supply of raw materials.
TECHNOLOGY
We have several available sources for the few raw materials required to
support Saudi American's clean coal technology. The cost of steel at the time
when we begin fabricating the commercial apparatus will add to the price of the
equipment. However, we do not anticipate any unusual lead time to obtain the
required raw materials.
DEPENDENCE ON MAJOR CUSTOMERS
Eastern's coal production operation has a varied and quite versatile number
of potential customers for the coal mined and made available for sale. Eastern
has elected to sell the current coal production on the spot market. This
strategy has provided Eastern with a number of viable sales opportunities. The
Company will solicit an additional contract for a portion of its coal production
via long term (1-5 years) contracts.
Eastern has committed approximately one third of its current anticipated
overall run-rate to American Electric Power. Eastern is also negotiating for an
additional contract which is anticipated to commit an additional one third of
Eastern's anticipated overall run-rate. Management is satisfied with the
stability of its contracted customer and the current list of potential customers
with whom Eastern is negotiating.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR
LABOR CONTRACTS, INCLUDING DURATION
The Warfield mining project, which is operated by Eastern, is authorized
under several lease agreements. One of these agreements, which is referred to as
the "Dempsey Lease" was entered into in March of 2002, and provides for the free
and uninterrupted use and possession of, and rights-of-way into, upon, over,
across, and through, the leased premises for the construction, operation,
repair, maintenance, and reclamation of the mining operations, roads, haulways,
exploration sites, work and service areas, pollution control structures,
telephone, water, electrical and other utility lines devices and structures,
coal tipples, coal processing and storage areas, and all other machinery,
devices, improvements, structures and appurtenances which at such points, and in
such manners, by incidental in or for its exploration, development, mining,
removal, processing, marketing, and /or shipping said leased coal and /or other
coal.
The underground lease provides for Eastern to access and to mine the Alma
seam reserves for an initial period of eighteen months and thereafter until
Eastern fails to mine the coal reserves, or Eastern chooses not to continue to
mine the coal reserves, or until the coal reserves have been exhausted. The
surface lease allows Eastern the right to mine the coal reserves "above
drainage" as long as Eastern begins to mine coal within three years of the
signing of this lease and continues to actively pursue mining these coal
reserves until these coal reserves have been exhausted. Eastern has agreed to
pay to the Lessor the greater of a minimum annual amount or a royalty payment of
6% of the selling price but not less than $1.85 for each and every net ton of
two thousand pounds of coal mined and sold from the leased premises.
The second lease agreement is a lease on the Pond Creek seam. This seam is
located directly under the Alma seam. Plans have been developed which utilize a
18
slope in order to reach the Pond Creek reserves. Eastern expects to complete the
planned slope construction sometime in June 2005.
NEED FOR GOVERNMENT APPROVAL OF PRODUCTS AND SERVICES
The Warfield mining operation is bonded as a part of the Warfield mining
permit. The Warfield property is operating under a permit issued by the state of
Kentucky which allows Eastern to lawfully engage in the underground mining
operations at Warfield. Eastern has engaged a local engineering company to
update all appropriate mining maps as Eastern advances the mine. Eastern is
current on all permit obligations.
EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON BUSINESS
Existing regulations on mining are extensive and require time and personnel
to insure compliance. Eastern has employed full time personnel capable of
responding to any and all state or federal inspection personnel. These persons
are charged with insuring that all mining personnel have been trained and
instructed in safe mining operations. These persons are also charged with
insuring that all other personnel are conducting themselves in a safe and
acceptable manner. Eastern has also hired as part of the Eastern team, a risk
management consulting company, to offer preventative and ongoing compliance
support to help insure that Eastern remains in compliance with all state and
federal mandates.
Eastern is not aware of any new regulations that may impact the business,
but expects that any new regulations will apply across the industry and not
impact Eastern more than any other coal mining operation.
RESEARCH AND DEVELOPMENT EXPENSES
None.
COSTS AND EFFECTS OF COMPLIANCE WITH FEDERAL, STATE, LOCAL ENVIRONMENTAL LAWS
Underground mining is highly scrutinized and regulated by the federal
government and the state government. Eastern is subject to comply with all state
and federal requirements, many of which are outlined in the Code of Federal
Regulations, Title 30, Volume 3, Parts 700 to end. Some of these regulations can
also be found in more detail at: http://www.access.gpo.gov/nara/cfr/waisidx_00/
30cfrv3_00.html.
Detailed regulations cover mining operations, potential subsidence issues,
and reclamation of mining areas. Eastern anticipates that such costs will
increase over the next fiscal year due to expanded operations.
EMPLOYEES
As of July 29, 2005 we had no employees. Eastern has approximately 24
employees. All employees are full time. We believe or employee relations are
satisfactory.
DESCRIPTION OF PROPERTY
Administrative offices are located at Consolidated Energy, Inc. 12508 W.
Atlantic Boulevard, Coral Springs, FL. 33071. Effective February 15, 2005, we
had a one year lease for the above offices with an option to renew for one
additional year. The lease rate is approximately $2,391 per month plus utilities
fees of approximately $350 per month. The space provided is adequate for our
needs.
OPERATING PROPERTY
COAL
19
Martin County - As of December 31, 2004, we are in possession of one
material mineral property located at 820 Hode Road, in Warfield, Martin County,
Kentucky. Access to this property is via Kentucky State Route 292 one half mile
north of Warfield. The coal is transported via truck via Kentucky State Route
292, Kentucky Route 3, and US 23 at Catlitsburg, Kentucky where it is delivered
to the end user, American Electric Power, at the Big Sandy Power Plant. An
alternative delivery point would be the river Barge facility at Catlitsburg
Kentucky which is located approximately 60 miles from the mine site via the same
route.
Consistent with industry practice, we conducted a limited investigation of
title to our coal properties prior to leasing and the property owners provided
title warranties. Prior to initiating mining, title to lands and reserves of the
lessors or grantors and the boundaries of our leased properties are more
completely verified. We utilize a registered professional surveyor to confirm
the meets and bounds and also advertised the property and the proposed mining
operation in the largest circulation newspaper in the county in which the
property is located.
The property is in the Eastern Kentucky Central Appalachian Mountain Range,
in rock formation consisting primarily of shale, sandstone and blue slate. Coal
seams of economic significance on the property include the Alma, Pond Creek,
Taylor, Richardson, Broas and Coalburg seams. Continuing exploration of the
property is being conducted by an independent contractor on an ongoing basis.
The Alma Seam mine is operational and in good mining condition. The Pond Creek
Seam is in the developmental stage. Currently, three slopes are being
constructed within the current Alma Seam to allow access to the Pond Creek Seam.
The Taylor Seam which will be mined via the underground method is currently in
the permitting process. The Richardson, Broas and Coalburg seams are all to be
mined using the surface mining method and have been explored and proven. Mining
permits for these seams have not yet been submitted.
We rehabilitated the Alma Seam which is currently mine ready. The Alma Seam
is currently being mined by the continuous mining method using (1) Joy 14 CM-10
AA continuous miner, (1) Fletcher dual head roof bolter, (5) Long Air-dox
Uni-haulers and various other underground mining equipment normally used in this
method of mining. Substantially all of the current operating equipment has been
refurbished or rebuilt and is in near new condition. The slope construction
project which allows access to the Pond Creek from the mine ready Alma Seam lies
approximately 93 feet below the Alma. The slope project is better than 50%
complete. In February, 2005, we began purchasing equipment for a coal washing
facility to be located on the property. Construction of the plant is currently
underway and should be completed by end of third quarter 2005.
As of December 31, 2004, we had invested $113,157.42 in leases associated
with the Warfield property. We had invested approximately $25,000 for permits
and approximately $1,761,982 in property, plant and equipment associated with
the mining of coal on the above mentioned property.
As of December 31, 2004, we plan to invest $4 million to $5 million or more
to increase the production potential of the property, depending on the success
of proposed fund raising.
Electric power for the current and future operations on the property is
supplied by American Electric Power. This power source is readily available and
upgradeable when and as power demand increases. In the past three years we have
rehabilitated the Alma seam mine and commenced production, and have recently
begun construction of a coal preparation plant. There have been no other
material events and no adverse material events within the past three years.
All information provided in the table below represents current minerals
under lease located on the Warfield property. All mineral is leased and none is
owned by us.
20
Proven & Probable
Tons in Place Average Total
As of BTU Sulfur Recovery % Inc. Recoverable
Seam Dec 31, 2004 Type Per lb. Content Processing Tons
- ------------ ------------ ---- ------- ------------- -------------- -----------
Pond Creek 5,400,000 Steam 12,500 less than 1.0 40% 2,160,000
Alma 14,600,000 Steam 12,500 more than 1.5 45% 6,570,000
Taylor 5,220,300 Steam 12,500 less than 1.0 35% 1,827,105
Coalburg 13,105,855 Steam 12,500 more than 1.0 48% 6,290,810
Richardson 941,000 Steam 12,500 less than 1.0 50% 470,500
Broas 3,437,250 Steam 12,500 less than 1.0 85% 2,921,663
Totals 42,704,405 20,240,078
========== ==========
Our estimate of the economic recoverability of our reserves is based upon a
comparison of unassigned reserves to assigned reserves currently in production
in the same geologic setting to determine an estimated mining cost. These
estimated mining costs are compared to existing market prices for the quality of
coal expected to be mined and taking into consideration typical contractual
sales agreements for the region and product. Where possible, we also review
production by competitors in similar mining areas. Only reserves expected to be
mined economically and with an acceptable profit margin are included in our
reserve estimates. Finally, our reserve estimates include reductions for
recoverability factors to estimate a saleable product. Approximately 40% of the
reserves in the table above is compliance coal.
Our reserve estimates are prepared by Company employees with years of
experience within the mining or engineering industry. From time to time we
engage independent third party engineering firms or mining consultants to review
our policies and procedures concerning reserve estimates. The latest independent
review was performed in July 2005 and confirmed that we were in control of
approximately 20.2 million recoverable coal tons.
Morgan County - we recently acquired a lease, permit and the equipment to
begin surface mining in Morgan County, Kentucky. This acquisition allows us to
immediately begin surface mining. Management projects that it will be able to
mine and sell over 60,000 tons of coal from this initial permit at a rate of
15,000 tons per month. The Morgan County acquisition also provides an option to
purchase a pending permit that contains over 1,000,000 tons of high quality coal
also located in Morgan County. This pending permit is expected to be released by
the time we have completed mining the currently permitted 60,000 tons.
GAS AND OIL
The gas and oil reserves held by us consist of approximately 400 acres. We
acquired the lease from the mineral holder, in exchange for a working interest
of all future wells constructed on the leased area. We also obtained an interest
in an existing gas well that was on the 400 acre lease. This first well placed
in operation by us was developed with a funding partner, Cascade Corporate
Services, LLC. The partner owns 15% of the working interest in the well; the
company from whom the lease was obtained owns 75% and we own the balance of 10%.
On future wells, if we fund the drilling and completion, we will own 75% of the
working interest. We may choose to offer a portion of such wells' working
interest to others who fund the development of the wells.
LEGAL PROCEEDINGS
In the fourth quarter of 2004, we settled a fee dispute over services
rendered with an attorney for a settlement amount of approximately $20,000 (Case
No. CACE05001104, filed in the Seventeenth Circuit Court, Broward County,
Florida).
21
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our executive officers and
directors as of May 10, 2005:
Name Age Positions
David Guthrie...................... 52 President and Director
Barry Tackett...................... 30 Chief Financial Officer and Director
Joseph Jacobs...................... 58 Secretary and Director
Edward Jennings.................... 68 Director
Carl Baker......................... 63 Director
Mr. Guthrie has spent the majority of his life in entrepreneurial
endeavors. He began his career in construction where he was the founder of the
first home center in Indianapolis. He developed the business into a sizable
contractor supply facility serving the Greater Indianapolis area. From 1976 to
1998, he was the founder and operator of Guthrie Building materials. From 1990
to 1996, he founded and co-managed Guthrie Rental Station. From 1991 to the
present, he founded and operated Royal Custom Homes, LLC. He also served as a
board member to TruServe (formerly American Hardware & ServiStar) from 1994 to
1996, one of the largest cooperatives in the United States. During his tenure as
a board member, this company grew from less than $1 billion in revenue to $5
billion. From 1996 to the present, Mr. Guthrie has served as President of Saudi
American Minerals, Inc. Mr. Guthrie has recently sold his lumber interest and
retired from his TruServe responsibilities. Mr. Guthrie, who holds a BA from
Purdue University (1976), is currently President of Consolidated Energy, Inc.
Dr. Edward H. Jennings is President Emeritus and Professor Emeritus of
Finance at Ohio State University. Dr. Jennings has served in university
leadership assignments including President, Ohio State University (1981-1990),
President, University of Wyoming (1979-1981), and Vice President of Finance and
University Studies, University of Iowa (1976-1979). He has had faculty
assignments at the University of Iowa (1973-1979, University of Dar Es Salaam
(1972-1973), and the University of Hawaii (1974). Dr. Jennings has been widely
published in major academic journals and is the co-author of a basic investment
textbook now in its fourth printing. Prior to his academic career, from 1963 to
1965, he served as production planner, production supervisor and senior
industrial engineer for Merck & Company, Pennsylvania. He has traveled
extensively in the Far East, Europe, and Africa on various trade missions, and
assisted in the development of academic ties with numerous international
universities. He holds degrees from the University of North Carolina, BS in
Industrial Management (1959), Case Western Reserve University, MBA in Finance
(1963), and the University of Michigan, Ph.D. in Finance (1969).
Mr. Baker has been chairman of the board of Harvard Design Group, Ltd.,
Monaco, Pennsylvania, since 1996. He brings 25 years of experience in design and
management. From 1992-1996, he was president of BTI, Moon Township,
Pennsylvania. Form 1990 to 1992; he was a principal in Global Design
Incorporated, Pittsburgh, Pennsylvania. He has been involved in the design and
management of $300 million in healthcare facilities, $250 million in
transportation facilities, $200 million in educational facilities, and four
million square feet of commercial, retail, office, and recreational facilities.
Mr. Baker is a registered architect in Ohio, Pennsylvania, Virginia and West
Virginia. Other experiences include acting as master planner, managing and
developing business plans for corporate growth, coordinating large-volume
projects, and managing all phases of construction detailing and coordination.
Mr. Baker holds a degree from Carnegie Mellon University, BA in Architecture
(1965), and has studied architectural design management and business development
at Pennsylvania State University and Geneva College, and management at
Massachusetts Institute of Technology.
Joseph G. Jacobs has held various positions in the coal industry since 1970
including Vice President of the Kentucky Mining Institute and Coal Operators and
Associates from 1999 to the present. He also served as a member of the Kentucky
Mining Board from 1997 to 2002 and currently serves as Vice Chairman of the
Kentucky Coal Producers. Mr. Jacobs is a graduate of the University of Kentucky
in 1969 and is presently the owner of Jacobs Risk Management serving as a mining
consultant to a variety of clients in Kentucky, Virginia and West Virginia.
22
Barry W. Tackett is a Certified Public Accountant and owns his C.P.A. firm
in Stanville, Kentucky from April 2003 to Current. He comes from a family of
coal operators and has worked for clients in the coal industry for over ten
years. He received his Masters of Accounting from the University of Tennessee in
August 2000 and is a member of the Kentucky Society of Certified Public
Accountants.
AUDIT COMMITTEE
We have not yet established an audit committee. Our board of directors acts
as the audit committee.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer and our four most
highly paid executive officers (the "Named Executive Officers") whose total
annual salary and bonus for services rendered in all capacities for the year
ended December 31, 2004 was $100,000 or more.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
-------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------------ ------------
Restricted Securities All
Other
Annual Under-lying Other
Name and Compen- Stock Options/ SARs LTIP Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) (#) Payouts ($) sation ($)
- --------------------------- --------- ------------- ---------- ------------ -------------- --------------- ------------ -----------
David Guthrie, 2004 -0- -0- -0- -0- -0- -0- -0-
President 2003 -0- -0- -0- -0- -0- -0- -0-
2002 -0- -0- -0- -0- -0- -0- -0-
OPTION GRANTS IN FISCAL YEAR 2004
We did not grant options in 2004.
Aggregated Option Exercises in 2005 and Year End Option Values
None
COMPENSATION OF DIRECTORS.
The Company has not implemented a formal compensation plan for its
directors. In January 2005, Carl Baker, Joseph Jacobs, Edward Jennings and Barry
Tackett each received 25,000 shares of our common stock for service as directors
during fiscal 2004. It is anticipated that a similar compensation arrangement
for directors will be approved for fiscal 2005.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
There are no compensatory plans or arrangements, including payments to be
received from us, with respect to any person named in Cash Compensation set out
above which would in any way result in payments to any such person because of
his resignation, retirement, or other termination of such person's employment
with us or our subsidiaries, or any change in control of us, or a change in the
person's responsibilities following a changing in control of us.
EMPLOYMENT AGREEMENTS
Effective January 2005, we entered into an oral agreement with David
Guthrie, our President and a director, pursuant to which we agreed to pay to Mr.
Guthrie $8,000 per month as compensation for his services as our President.
23
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We have had no disagreements with our certified public accountants with
respect to accounting practices or procedures or financial disclosure. On April
1, 2005, we accepted the resignation of Clyde Bailey, PC as our independent
auditor. Also on April 1, 2005, we engaged Killman Murrell & Company, PC as our
successor independent audit firm. Neither us, nor anyone acting on our behalf,
consulted Killman Murrell regarding any matters specified in Items 304(a)(2)(i)
or 304(a)(2)(ii) of Regulation S-B. Our acceptance of Bailey's resignation and
subsequent engagement of Killman Murrell was approved by our Board of Directors.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Since October 18, 2002, our common stock has been quoted on the National
Association of Securities Dealers Electronic Bulletin Board under the symbol
"CEIW." Prior to that date, our common stock was quoted under the symbol "BBQA."
Set forth below are the high and low bid prices for the our common stock for the
last two fiscal years. Although our common stock is quoted on the Electronic
Bulletin Board it has traded sporadically with no significant volume.
Consequently, the information provided below may not be indicative of our common
stock price under different conditions.
At July 29, 2005, the high and low price for our common stock was $2.70 and
$2.56, respectively. All prices listed herein reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual
transactions.
Quarter Ended High Low
----- -----
June 2005 $ 2.24 $ 2.16
March 2005 $ 3.27 $ 3.06
Quarter Ended High Low
----- -----
December 2004 $2.20 $1.40
September 2004 $2.30 $1.01
June 2004 $1.93 $1.20
March 2004 $2.05 0.75
Quarter Ended High Low
----- -----
December 2003 $1.38 $0.68
September 2003 $1.89 $0.21
June 2003 $0.69 $0.13
March 2003 $0.40 $0.11
NUMBER OF SHAREHOLDERS
As of July 29, 2005, there were 83 holders of record of our common stock.
DIVIDEND POLICY
Historically, we have not paid any dividends to the holders of our common
stock and we do not expect to pay any such dividends in the foreseeable future
as we expect to retain our future earnings for use in the operation and
expansion of our business.
24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of July 29, 2005, the name, address and
the number of shares of our Common Stock, par value $0.001 per share, held of
record or beneficially by each person who held of record, or was known by us to
own beneficially, more than 5% of the issued and outstanding shares of our
Common Stock, and the name and shareholdings of each director and of all
officers and directors as a group.
Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws, where applicable. Unless other indicated,
the address of each beneficial owner listed below is c/o Consolidated Energy
12508 West Atlantic Blvd., Coral Springs, Florida 33071.
Percentage of Shares
Name of Beneficial Owner Number of Shares Beneficially Owned (1)
------------------------ ---------------- ----------------------
Executive officers and directors:
David Guthrie 808,150 5.74%
President, Director
Barry W. Tackett, 350,000 2.48%
CFO, Director
Joseph G. Jacobs 351,000 2.49%
Secretary, Director
Edward H. Jennings 25,000 *
Director
Carl G. Baker 25,000 *
Director
All Directors and Executive Officers as a group 1,559,150 11.06%
(5 persons)
Other 5% Shareholders:
Diatom Energy, LLC (4) 1,320,502 8.46%
1030 Coral Ridge Dr.
Coral Springs, FL 33071
Gryphon Master Fund, LP 3,694,852 (2) 24.29%
100 Crescent Court, Suite 490
Dallas, TX 75201
GSSF Master Fund, LP 1,231,618 (3) 8.49%
100 Crescent Court, Suite 475
Dallas, TX 75201
* less than 1%
(1) Applicable percentage ownership as of July 29, 2005 is based upon
14,361,956 shares of common stock outstanding. Beneficial ownership is
determined in accordance with Rule 13d-3 of the Securities Exchange Act of
1934, as amended. Under Rule 13d-3, shares issuable within 60 days upon
exercise of outstanding options, warrants, rights or conversion privileges
("Purchase Rights") are deemed outstanding for the purpose of calculating
the number and percentage owned by the holder of such Purchase Rights, but
not deemed outstanding for the purpose of calculating the percentage owned
by any other person. "Beneficial ownership" under Rule 13d-3 includes all
shares over which a person has sole or shared dispositive or voting power.
(2) Includes 2,647,058 shares of common stock underlying our 6% Senior
25
Secured Convertible Notes Due 2008, and (ii) warrants to purchase 1,047,793
shares common stock; which shares, pursuant to Rule 13d-3(d)(1)(i)(D)
promulgated under the Securities Exchange Act of 1934, as amended, are
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares of our common stock.
(3) Includes (i) 1,231,618 shares of common stock underlying our 6% Senior
Secured Convertible Notes Due 2008, and (ii) warrants to purchase 349,264
shares of common stock; which shares, pursuant to Rule 13d-3(d)(1)(i)(D)
promulgated under the Securities Exchange Act of 1934, as amended, are
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares of our common stock.
(4) Jay Lasner, a principal of Diatom Energy, LLC, is an indirect
beneficial owner of such shares.
SELLING SHAREHOLDERS
The following table lists certain information with respect to the selling
shareholders as follows: (i) each selling shareholder's name, (ii) the number of
outstanding shares of common stock beneficially owned by the selling
shareholders prior to this offering; (iii) the number of shares of common stock
to be beneficially owned by each selling shareholder after the completion of
this offering assuming the sale of all of the shares of the common stock offered
by each selling shareholder; and (iv) if one percent or more, the percentage of
outstanding shares of common stock to be beneficially owned by each selling
shareholder after the completion of this offering assuming the sale of all of
the shares of common stock offered by each selling shareholder. Except as noted,
none of the selling shareholders have had any position, office, or other
material relationship with us or any of our predecessors or affiliates within
the past three years.
The selling shareholders may sell all, or none of their shares in this
offering. See "Plan of Distribution."
Shares Beneficially Owned
After the Offering
Shares Being
Shares Beneficially Offered Pursuant ---------------------------
Owned Prior to to this Number of
Selling Shareholder Offering Percent Prospectus(1) Shares Percentage
- ----------------------------- -------------------- --------- ----------------- ---------- -----------
Gryphon Master Fund, L.P. 3,694,852 24.93% 3,694,852 (2) 0 *
100 Crescent Court
Suite 490
Dallas, Texas 75201
GSSF Master Fund, LP 1,231,618 8.56% 1,231,618 (3) 0 *
100 Crescent Court
Suite 475
Dallas, Texas 75201
Lonestar Partners, L.P. 3,235,294 21.51% 3,235,294 (4) 0 *
c/o Lonestar Capital Management,
LLC
One Maritime Plaza, Suite 2555
San Francisco, California 94111
WS Opportunity International Fund 90,353 * 90,353 (5) 0 *
Ltd.
300 Crescent Court, Suite 1111
Dallas, Texas 75201
WS Opportunity Fund (QP), L.P. 67,500 * 67,500 (6) 0 *
300 Crescent Court, Suite 1111
Dallas, Texas 75201
WS Opportunity Fund, L.P. 62,736 * 62,736 (7) 0 *
300 Crescent Court, Suite 1111
Dallas, Texas 75201
Renaissance US Growth Investment 441,176 3.86% 441,176 (8) 0 *
Trust PLC
c/o RENN Capital Group, Inc.
8080 N. Central Expressway
Suite 210, LB-59
Dallas, Texas 75206
26
BFS US Special Opportunities Trust 441,176 3.86% 441,176 (8) 0 *
PLC
c/o RENN Capital Group, Inc.
8080 N. Central Expressway
Suite 210, LB-59
Dallas, Texas 75206
Scott R. Griffith 326,070 2.29% 326,070 0 *
Stonegate Securities, Inc.
5940 Sherry Lane, Suite 410
Dallas, Texas 75225
Jesse B. Shelmire IV 326,070 2.29% 326,070 0 *
Stonegate Securities, Inc.
5940 Sherry Lane, Suite 410
Dallas, Texas 75225
Enable Grouth Partners, LP 382,353 2.70% 382,353 0 *
One Ferry Building, Suite 255
San Francisco, CA 94111
Enable Opportunity Partners, LP 58,824 * 58,824 0 *
One Ferry Building, Suite 255
San Francisco, CA 94111
Gamma Opportunity Capital Partners L.P. 205,882 1.45% 205,882 0 *
275 Seventh Avenue, Suite 2000
New York, NY 10001
Bushido Capital Master Fund L.P. 205,882 1.45% 205,882 0 *
275 Seventh Avenue, Suite 2000
New York, NY 10001
Cordillera Fund, LP 294,118 2.08% 294,118 0 *
8201 Preston Road, Suite 400
Dallas, TX 75225
Newgrange Partners, LP 29,412 * 29,412 0 *
8201 Preston Road, Suite 400
Dallas, TX 75225
* less than 1%.
(1) Includes 4,117,647 shares of common stock issuable upon conversion of
the 6% senior secured promissory notes based upon a conversion price of
$1.70 per share. Because the number of shares of common stock issuable upon
conversion of the 6% senior secured convertible promissory notes is
dependent in part upon the market price of the common stock prior to a
conversion, the actual number of shares of common stock that will be issued
upon conversion may fluctuate and cannot be determined at this time. Under
the terms of the 6% senior secured convertible promissory notes, the
conversion price may be reset to a lower price, based upon the price of our
common stock, with a limit of $1.00 per share. However the selling
shareholders have contractually agreed to restrict their ability to convert
their 6% senior secured convertible promissory notes or exercise their
warrants and receive shares of our common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates
after such conversion or exercise does not exceed 9.9% of the then issued
and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of
common stock set forth in the table for the selling shareholders exceeds
the number of shares of common stock that the selling shareholders could
own beneficially at any given time through their ownership of the 6% senior
secured convertible promissory notes and the warrants. In that regard, the
beneficial ownership of the common stock by the selling shareholder set
forth in the table is not determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended.
(2) Includes 2,647,059 shares issuable upon the conversion of 6% senior
secured notes and 1,047,793 shares issuable upon the exercise of warrants.
(3) Includes 882,353 shares issuable upon the conversion of 6% senior
secured notes and 349,265 shares issuable upon the exercise of warrants.
27
(4) Includes 2,352,941shares issuable upon conversion of our 6% senior
secured notes and 882,353 shares issuable upon the exercise of warrants.
(5) Includes 60,235 shares issuable upon conversion of 6% senior secured
notes and 30,118 shares issuable upon the exercise of warrants.
(6) Includes 45,000 shares issuable upon conversion of 6% senior secured
notes and 22,500 shares issuable upon the exercise of warrants.
(7) Includes 41,824 shares issuable upon conversion of 6% senior secured
notes and 20,912 shares issuable upon the exercise of warrants.
(8) Includes 441,176shares issuable upon conversion of 6% senior secured
notes and 110,294 shares issuable upon the exercise of warrants.
TERMS OF 6% SENIOR SECURED PROMISSORY NOTES DUE 2008
On February 24, 2005, we executed a financing transaction for aggregate
gross proceeds of $7,000,000, with additional investment rights of up to an
additional $7,000,000, such financing to be used for the purchase of equipment
and to fund expenditures for the consummation of mining activities at the
Warfield Mine. The financing is in the form of 6% senior secured convertible
promissory notes (the "Notes") for an aggregate total face amount of $7,000,000
and a term of three years. The Notes may be converted to common stock at a
conversion price of $1.70 per share. Holders of the Notes are Gryphon Master
Fund, L.P. and GSSF Master Fund, LP ("Gryphon"), Lonestar Partners, L.P., WS
Opportunity International Fund, Ltd., WS Opportunity Fund (QP), L.P., WS
Opportunity Fund, L.P., Renaissance US Growth Investment Trust PLC, and BFS US
Special Opportunities Trust PLC (all collectively the "Holders"). As additional
consideration, we have issued to the Holders warrants (the "Warrants") for the
purchase of an aggregate of 2,058,824 shares of the Company's common stock at an
exercise price of $1.70 per share, exercisable for five years. The conversion
price of the Notes, and the exercise price of the Warrants, are subject to
certain normal and customary anti-dilution adjustment provisions and also
include a one-time reset date provision with a floor price of $1.00 per share.
The Holders have registration rights in connection with the transaction. We
are required to register all of the shares underlying the Notes if converted,
the shares underlying the Warrants and the shares underlying the additional
investment rights, if exercised, a total of 10,500,000 shares. We will also be
required to register the shares underlying warrants issued to Gryphon and to the
Company's placement agent in a previous bridge loan financing, a total of
566,176 shares. The registration must be filed not later than 45 days following
the closing of the financing and effective not later than 270 days following
closing. If the effective date is later than 120 days (if there are no comments
from the Commission) or 150 days (if comments are received), we will be liable
for cash penalty payments in the form of liquidated damages of 2% of the Notes
for each thirty day period of delay.
Additionally, during March and June 2005 we received additional investments
totaling $6,750,000 from the following investors who exercised their additional
investment rights: Gryphon Master Fund, L.P., GSSF Master Fund, L.P., Lonestar
Partners, L.P., Renaissance US Growth, BFS US Special Opportunities Trust PLC,
Enable Capital, Bushido Capital, AC Capital, and Newgrange Advisors, LLC.
The 6% senior secured promissory notes bear interest at 6%, mature in
February, 2008, and are convertible into our common stock, at the selling
shareholder's option. The 6% senior secured notes are convertible into the
number of our shares of common stock at an initial conversion price of $1.70 per
share, subject to adjustment. The conversion price of the 6% senior secured
promissory notes is subject to adjustment in the event we issue additional stock
below the then current market price or declare a stock split or stock dividend.
In addition, the conversion price is subject to a one time adjustment on the
Reset Date, which is defined as the earlier to occur of (i) February 24, 2006,
or (ii) the later of (A) the effectiveness date of the registration statement of
which this prospectus is a part and, and (B) the nine-month anniversary of
February 24, 2004. In the event that the 30-day moving average closing price of
our common stock ending on the Reset Date is less than the Conversion Price in
effect immediately prior to the Reset Date, then the Conversion Price shall be
adjusted so that the Conversion Price immediately following the Reset Date shall
equal such 30-day moving average closing price of the Common Stock, provided
however that the conversion price shall not be adjusted below $1.00 per share.
28
In addition, we issued to the selling shareholders warrants to purchase up
to 2,573,529 shares of our common stock at an exercise price of $1.70 per share.
The exercise price of the warrants is subject to the same adjustments and reset
provisions as the 6% senior secured promissory notes.
Pursuant to the terms of the 6% senior secured notes and the warrants, the
selling shareholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 9.9% of the then issued and
outstanding shares of common stock.
A complete copy of the Securities Purchase Agreement and related documents
were filed with the SEC as exhibits to our Form SB-2 relating to this
prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the transactions listed below, during the fiscal years ended
December 31, 2004 and 2003, there were no material transactions, or series of
similar transactions, since the beginning of our last fiscal year, or any
currently proposed transactions, or series of similar transactions, to which we
were or are to be party, in which the amount involved exceeds $60,000, and in
which any of our directors or executive officers, or any security holders who is
known by us to own of record or beneficially more than 5% of any class of our
common stock, or any member of the immediate family of any of the foregoing
persons, has an interest.
Barry Tackett, appointed as a director and CFO in February 2004, was paid a
total of $10,610 for accounting services in fiscal 2003, and $37,509 in fiscal
2004. In January 2005, Mr. Tackett also received a total of 225,000 shares for
consulting services in fiscal 2004 valued at $438,750.
Joseph Jacobs, appointed as a director and Secretary in February 2004, was
paid a total of $7,146 for business consulting services in fiscal 2003, and
$25,543 in fiscal 2004. In January 2005, Mr. Jacobs also received 225,000 shares
for consulting services in fiscal 2004 valued at $438,750.
Steven Hicks, appointed as a director in February 2004, is the owner of
CVS, Inc., a coal consulting company. CVS was paid a total of $15,000 for
consulting services in fiscal 2003. Mr. Hicks resigned as a director in October
2004.
Clear Focus, Inc., one of our major shareholders, was paid $15,500 for
business and management consulting services in fiscal 2004, and $37,800 in
fiscal 2003.
In anticipation of the completion of our planned acquisition, we paid a
total $15,000 in patent fees for Saudi American in fiscal 2004. We paid $24,146
in expenses for Saudi American during fiscal 2003, including $16,595 for
advertising and promotional materials for the clean coal technology, $751 for
freight delivery on coal to be tested, and $6,800 for laboratory testing.
We paid $2,814 to Kentucky Energy Consultants for services and accrued an
additional $29,666 for services through December 31, 2003. The Company accrued
an additional $133,092 for services through December 31, 2004. Principals of
Kentucky Energy Consultants are minority shareholders of us and major
shareholders of Saudi American.
In fiscal 2003, we paid $55,344.29 to Midwest Energy Transport for
services. In fiscal 2004, we paid $35,875 to Midwest Energy Transport.
Principals of Midwest Energy are minority shareholders of us and major
shareholders of Saudi American.
In 2004, Cons Oil & Gas engaged in a series of transactions related to oil
and gas leases with Buckeye Energy Development, LLC. See Note 14: Related
Parties. Principals of Buckeye Energy Development are minority shareholders of
us and major shareholders of Saudi American.
29
In 2004, we engaged in a series of transactions related to coal sales with
Eastern Consolidated Mining, Inc. See Note 14 Related Parties to our
consolidated financial statements. Principals of Eastern Consolidated Mining are
minority shareholders of us and major shareholders of Saudi American.
DESCRIPTION OF SECURITIES
The following description of our capital stock and provisions of our
articles of incorporation and bylaws, each as amended, is only a summary. Our
authorized capital stock consists of 50,000,000 shares of common stock, par
value $0.001 per share. As of July 29, 2005, there are 14,361,956shares of
common stock issued and outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of our shareholders. Holders of our common stock
are entitled to receive dividends ratably, if any, as may be declared by the
board of directors out of legally available funds, subject to any preferential
dividend rights of any outstanding preferred stock. Upon our liquidation,
dissolution or winding up, the holders of our common stock are entitled to
receive ratably our net assets available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of our common stock have no preemptive, subscription, redemption
or conversion rights. The outstanding shares of common stock are fully paid and
nonassessable. The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future without further shareholder approval.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Pacific Stock
Transfer Company, 500 East Warm Springs Road, Suite 240, Las Vegas, NV 89119.
PLAN OF DISTRIBUTION
The selling shareholders, or their pledgees, donees, transferees, or any of
their successors in interest selling shares received from a named selling
shareholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be selling
shareholders) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. The selling shareholders may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt to
sell the common stock as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling shareholder to
its partners, members or shareholders;
30
o By pledge to secure debts of other obligations;
o In connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions in
standardized or over-the-counter options;
o Purchases by a broker-dealer as principal and resale by the broker-dealer
for its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which the
same broker acts as an agent on both sides of the trade. The selling
shareholders may also transfer the common stock by gift. We do not know of any
arrangements by the selling shareholders for the sale of any of the common
stock.
The selling shareholders may engage brokers and dealers, and any brokers or
dealers may arrange for other brokers or dealers to participate in effecting
sales of the common stock. These brokers or dealers may act as principals, or as
an agent of a selling shareholder. Broker-dealers may agree with a selling
shareholder to sell a specified number of the stocks at a stipulated price per
share. If the broker-dealer is unable to sell common stock acting as agent for a
selling shareholder, it may purchase as principal any unsold shares at the
stipulated price. Broker-dealers who acquire common stock as principals may
thereafter resell the shares from time to time in transactions in any stock
exchange or automated interdealer quotation system on which the common stock is
then listed, at prices and on terms then prevailing at the time of sale, at
prices related to the then-current market price or in negotiated transactions.
Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling shareholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
In order to comply with the securities laws of some states, if applicable, the
shares of common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers.
From time to time, one or more of the selling shareholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling shareholders. The number of a selling shareholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling shareholder's shares will otherwise remain
unchanged. In addition, a selling shareholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount of
selling shareholders' shares being offered and the terms of the offering, the
names of any agents, brokers, dealers or underwriters, any applicable commission
and other material facts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling shareholder and/or purchasers of
selling shareholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling shareholder can presently estimate the
amount of any such compensation.
The selling shareholders and any underwriters, brokers, dealers or agents
that participate in the distribution of the common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the securities sold by them may be deemed to be underwriting discounts and
commissions. If a selling shareholder is deemed to be an underwriter, the
selling shareholder may be subject to certain statutory liabilities including,
but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. Selling shareholders who are deemed underwriters within
the meaning of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The SEC staff is of a view that selling
shareholders who are registered broker-dealers or affiliates of registered
broker-dealers may be underwriters under the Securities Act. We will not pay any
compensation or give any discounts or commissions to any underwriter in
connection with the securities being offered by this prospectus.
31
A selling shareholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with that selling
shareholder, including, without limitation, in connection with distributions of
the common stock by those broker-dealers. A selling shareholder may enter into
option or other transactions with broker-dealers, who may then resell or
otherwise transfer those common stock. A selling shareholder may also loan or
pledge the common stock offered hereby to a broker-dealer and the broker-dealer
may sell the common stock offered by this prospectus so loaned or upon a default
may sell or otherwise transfer the pledged common stock offered by this
prospectus.
The selling shareholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling shareholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling shareholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We cannot assure you that the selling shareholders will sell all or any
portion of the common stock offered by this prospectus. In addition, we cannot
assure you that a selling shareholder will not transfer the shares of our common
stock by other means not described in this prospectus.
LEGAL MATTERS
The validity of the common stock has been passed upon by Sichenzia Ross
Friedman Ference LLP, New York, New York.
EXPERTS
The financial statements included in the Prospectus have been audited by
Killman, Murell & Company, P.C., independent certified public accountants to the
extent and for the periods set forth in their report appearing elsewhere herein
and are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form SB-2 under the
Securities Act for the common stock to be sold in this offering. This prospectus
does not contain all of the information in the registration statement and the
exhibits and schedules that were filed with the registration statement. For
further information with respect to the common stock and us, we refer you to the
registration statement and the exhibits and schedules that were filed with the
registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the SEC's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, Woolworth Building, 233 Broadway New York, New York. Copies of all or any
part of the registration statement may be obtained from the SEC upon payment of
the prescribed fee. Information regarding the operation of the public reference
rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
32
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation provide that, to the fullest extent permitted
by law, none of our directors or officers shall be personally liable to us or
our shareholders for damages for breach of any duty owed to our shareholders or
us.
In addition, we have the power, by our by-laws or in any resolution of our
shareholders or directors, to undertake to indemnify the officers and directors
of ours against any contingency or peril as may be determined to be in our best
interest and in conjunction therewith, to procure, at our expense, policies of
insurance. At this time, no statute or provision of the by-laws, any contract or
other arrangement provides for insurance or indemnification of any of our
controlling persons, directors or officers that would affect his or her
liability in that capacity.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer 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 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities, other than the payment by us
of expenses incurred or paid by our directors, officers or controlling persons
in the successful defense of any action, suit or proceedings, is asserted by
such director, officer, or controlling person in connection with any securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issues.
33
CONSOLIDATED ENERGY, INC.
TABLE OF CONTENTS
Page
Reports of Independent Registered Public Accounting Firm
Killman, Murrell & Co., P.C. - Year Ended December 31, 2003 F-2
Killman, Murrell & Co., P.C. - Year Ended December 31, 2004 F-3
Consolidated Balance Sheets as of December 31, 2003 and 2004 and
March 31, 2005 (Unaudited) F-4
Consolidated Statements of Operations for the Years Ended December 31, 2003 and 2004
and the Three Months Ended March 31, 2004 and 2005 (Unaudited) F-6
Consolidated Statement of Changes in Stockholders' Deficit for the Years Ended
December 31, 2003 and 2004 and the Three Months Ended March 31, 2005 (Unaudited) F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2004
and the Three Months Ended March 31, 2004 and 2005 (Unaudited) F-8
Notes to Consolidated Financial Statements F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Consolidated Energy, Inc.
Coral Springs, Florida
We have audited the accompanying consolidated balance sheet of Consolidated
Energy, Inc. as of December 31, 2003, and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Consolidated Energy, Inc. as of December 31, 2003, and the consolidated results
of its operations and its cash flows for the year then ended in conformity with
United States generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and its limited capital resources raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 4. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Killman, Murrell & Company, P.C.
- -----------------------------------
KILLMAN, MURRELL & COMPANY, P.C.
Houston, Texas
July 18, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Consolidated Energy, Inc.
Coral Springs, Florida
We have audited the accompanying consolidated balance sheet of Consolidated
Energy, Inc. as of December 31, 2004, and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Consolidated Energy, Inc. as of December 31, 2004, and the consolidated results
of its operations and its cash flows for the year then ended in conformity with
United States generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and its limited capital resources raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 4. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Killman, Murrell & Company, P.C.
- -----------------------------------
KILLMAN, MURRELL & COMPANY, P.C.
Houston, Texas
April 11, 2005
F-3
CONSOLIDATED ENERGY, INC
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
--------------------------------- March 31,
2003 2004 2005
--------------- -------------- --------------
(Unaudited)
CURRENT ASSETS
Cash $ 6,316 $ 4,392 $ 2,864,851
Accounts Receivable - Other - 75,000 75,000
Prepaid Expenses 19,141 400 493
--------------- -------------- --------------
TOTAL CURRENT ASSETS 25,457 79,792 2,940,344
--------------- -------------- --------------
BUILDING, EQUIPMENT AND
COAL LEASES
Building, Equipment, Net of Depreciation 1,368,817 1,515,677 5,790,220
Coal Leases, Net of Amortization 107,458 98,157 1,343,226
--------------- -------------- --------------
TOTAL BUILDING, EQUIPMENT
AND COAL LEASES, NET 1,476,275 1,613,834 7,133,446
--------------- -------------- --------------
OTHER ASSETS
Restricted Cash - 49,900 51,200
Prepaid Royalty 44,111 11,666 46,167
Other Assets 44,804 32,500 27,000
--------------- -------------- --------------
TOTAL OTHER ASSETS 88,915 94,066 124,367
--------------- -------------- --------------
TOTAL ASSETS $ 1,590,647 $ 1,787,692 $ 10,198,157
============== ============== ===============
The accompanying notes are an integral part of
these consolidated financial statements.
(Continued)
F-4
CONSOLIDATED ENERGY, INC
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31, March 31,
----------------------------------- -----------------
2003 2004 2005
---------------- --------------- -----------------
(Unaudited)
CURRENT LIABILITIES
Cash Overdrafts $ 56,884 $ 400,623 $ -
Accounts Payable 311,030 426,427 699,595
Accrued Liabilities 152,728 2,550,574 501,805
Royalties Payable 48,786 369,374 350,898
Notes Payable 514,017 182,737 -
Current Portion Capital Lease - - 1,045,000
Convertible Debentures 1,266,400 588,010 561,528
Payable to Related Parties 76,276 560,906 256,711
Note Payable to Related Party - 659,339 659,339
---------------- --------------- ----------------
TOTAL CURRENT LIABILITIES 2,426,121 5,737,990 4,074,876
---------------- --------------- ----------------
LONG-TERM LIABILITIES
Deferred Royalties Payable - 168,962 166,501
Senior 6% Secured Notes Payable - - 5,581,735
Long Term Portion Capital Lease - - 492,030
---------------- --------------- ----------------
TOTAL LIABILITIES 2,426,121 5,906,952 10,315,142
---------------- --------------- ----------------
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' DEFICIT
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, 7,358,000, 10,327,428 and
13,606,776 Shares Issued and
Outstanding 7,358 10,327 13,607
Additional Paid-In-Capital 558,890 3,686,035 8,315,536
Retained Deficit (1,401,722) (7,815,622) (8,446,128)
---------------- --------------- -----------------
TOTAL STOCKHOLDERS' DEFICIT (835,474) (4,119,260) (116,985)
---------------- --------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 1,590,647 $ 1,787,692 $ 10,198,157
================ =============== =================
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, Three Months Ended March 31,
------------------------------------ --------------------------------------
2003 2004 2004 2005
----------------- ---------------- ---------------- -----------------
(Unaudited) (Unaudited)
REVENUES
Coal Sales $ 649,606 $ 2,746,983 $ 671,584 $ 433,033
----------------- ---------------- ---------------- -----------------
TOTAL REVENUES 649,606 2,746,983 671,584 433,033
COST OF REVENUE 1,035,295 3,727,162 797,526 385,499
----------------- ---------------- ---------------- -----------------
GROSS INCOME (LOSS) (385,689) (980,179) (125,942) 47,534
----------------- ---------------- ---------------- -----------------
EXPENSES
Operating Expenses 659,076 4,205,518 785,338 555,800
Depreciation and Amortization 110,046 265,394 66,348 115,829
----------------- ---------------- ---------------- -----------------
TOTAL EXPENSES 769,122 4,470,912 851,686 671,629
----------------- ---------------- ---------------- -----------------
LOSS FROM
OPERATIONS (1,154,811) (5,451,091) (977,628) (624,095)
----------------- ---------------- ---------------- -----------------
OTHER EXPENSES
Loss on Sale of Assets - 83,861 - -
Interest Expense, Net of $1,098,868
Capitalized Interest in 2005 246,911 878,948 48,461 6,411
----------------- ---------------- ---------------- -----------------
TOTAL OTHER
EXPENSES 264,911 962,809 48,461 6,411
----------------- ---------------- ---------------- -----------------
LOSS BEFORE
INCOME TAXES (1,401,722) (6,413,900) (1,026,089) (630,506)
----------------- ---------------- ---------------- -----------------
PROVISION FOR INCOME TAXES - - - -
----------------- ---------------- ---------------- -----------------
NET LOSS $ (1,401,722) $ (6,413,900) $ (1,026,089) $ (630,506)
================= ================ ================ =================
BASIC AND DILUTED LOSS PER
COMMON SHARE$ (.29) $ (.67) $ (.13) $ (.05)
================= ================ ================ =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
Basic and Diluted 4,841,750 9,529,560 7,918,000 12,686,939
================= ================ ================ =================
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Additional
Common Stock Paid-In- Retained
----------------------------
Shares Par Value Capital Deficit Total
-------------- -------------- ------------ --------------- -------------
BALANCE, JANUARY 1, 2003 2,668,000 $ 2,668 $ 263,802 $ (285,243) $ (18,773)
Shares Issued For Services 1,690,000 1,690 394,160 - 395,850
Interest Cost Associated With
Beneficial Conversion Features
of Debentures - - 186,171 - 186,171
Transfer of Retained Deficit Upon
Reverse Merger - - (285,243) 285,243 -
Shares Issued in Connection With
Reverse Merger 3,000,000 3,000 - - 3,000
Net Loss - - - (1,401,722) (1,401,722)
------------ -------------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 2003 7,358,000 7,358 558,890 (1,401,722) (835,474)
Shares Issued For Services 670,000 670 1,253,829 - 1,254,499
Shares Sold For Cash 394,118 394 274,606 - 275,000
Shares Issued Upon Conversion
of Convertible Debentures and
Accrued Interest 1,205,310 1,205 1,084,635 - 1,085,840
Interest Cost Associated With
Beneficial Conversion Features
of Debentures - - 514,075 - 514,075
Shares Issued For Copley Lease 700,000 700 - - 700
Net Loss - - - (6,413,900) (6,413,900)
------------ -------------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 2004 10,327,428 10,327 3,686,035 (7,815,622) (4,119,260)
Shares Issued For Settlement
of Accrued Liabilities 750,000 750 2,081,750 - 2,082,500
Shares Issued Upon Conversion
of Convertible Debentures and
Accrued Interest 29,348 30 53,854 - 53,884
Shares Issued For Coal Lease 2,500,000 2,500 - - 2,500
Interest Cost Associated With
Beneficial Conversion Features
of Debentures - - 2,493,897 - 2,493,897
Net Loss - - - (630,506) (630,506)
------------ -------------- ------------ --------------- --------------
BALANCE, MARCH 31, 2005
(UNAUDITED) 13,606,776 $ 13,607 $ 8,315,536 $ (8,446,128) $ (116,985)
============= ============== ============ =============== ==============
The accompanying notes are an integral part of
these consolidated financial statements.
(Continued)
F-7
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, Three Months Ended March 31,
---------------------------------- ----------------------------
2003 2004 2004 2005
-------------- --------------- --------------- ---------------
CASH FLOWS FROM OPERATING (Unaudited) (Unaudited)
ACTIVITIES
Net Loss $ (1,401,722) $ (6,413,900) $ (1,026,089) $ (630,506)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities
Depreciation and Amortization 110,046 265,394 66,348 115,829
Stock Issued for Services 395,850 1,254,499 624,000 -
Amortization of Debt Discount - - - 2,875
Interest Due to Beneficial Conversion Feature 186,171 485,001 - -
Loss on Sale of Assets - 83,861 - -
Changes in Operating Assets and Liabilities
Prepaid Expenses (19,141) 18,741 3,702 (93)
Accounts Receivable - - (102,879) -
Prepaid Royalties (44,111) 32,446 - (34,501)
Other Assets (44,804) 12,304 47,627 5,500
Cash Overdrafts 56,884 343,739 (33,007) (400,623)
Accounts Payable 311,030 85,731 103,380 273,168
Accrued Liabilities 152,728 2,509,370 414,873 37,615
Royalties Payable 48,786 303,602 (34,123) (18,476)
Deferred Royalties Payable - 185,948 - (2,461)
Purchase of Restricted Cash - (49,900) - (1,300)
-------------- --------------- ---------------- ---------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES (248,283) (883,164) 63,832 (652,973)
-------------- --------------- ---------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of Equipment (1,473,863) (1,075,132) (391,976) (1,933,883)
Interest Capitalized - - - (100,093)
Lease Cost Capitalized (109,458) - - (925,690)
-------------- --------------- --------------- ---------------
NET CASH USED BY
INVESTING ACTIVITIES (1,583,321) (1,075,132) (391,976) (2,959,666)
-------------- --------------- ---------------- ----------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds From Notes Payable 514,017 182,737 - (182,737)
Proceeds From Convertible Debentures 1,266,400 325,000 - 7,097,500
Advances From (Payments to) Related Parties 57,503 1,173,635 196,828 (304,195)
Proceeds From Stock Sales - 275,000 125,000 -
Payment on Capital Leases - - - (137,470)
-------------- --------------- --------------- ---------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 1,837,920 1,956,372 321,828 6,473,098
-------------- --------------- ---------------- ---------------
NET (DECREASE) INCREASE IN CASH 6,316 (1,924) (6,316) 2,860,459
CASH BALANCE, BEGINNING OF YEAR - 6,316 6,316 4,392
-------------- --------------- ---------------- ---------------
CASH BALANCE, END OF YEAR $ 6,316 $ 4,392 $ - $ 2,864,851
============== =============== ================ ===============
The accompanying notes are an integral part of
these consolidated financial statements.
(Continued)
F-8
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended December 31, Three Months Ended March 31,
---------------------------------- -----------------------------------
2003 2004 2004 2005
-------------- --------------- --------------- ---------------
NON-CASH INVESTING AND (Unaudited) (Unaudited)
FINANCING ACTIVITIES
Increase in Accounts Receivable Other $ - $ (75,000) $ - $ -
Reduction in Equipment - 75,000 - -
Reduction in Equipment - 514,017 - -
Decrease in Notes Payable - (514,017) - -
Increase in Lease Costs - (700) - -
Common Stock Issued For Lease - 700 - -
Accrued Interest Converted to
Debenture - (82,684) - -
Convertible Debenture From
Interest Addition - 82,684 - -
Debentures Converted to Common Stock - (1,057,000) (682,001) (50,000)
Accrued Interest Paid with Common Stock - (28,840) (160,927) (3,884)
Common Stock Issued for Debentures
and Accrued Interest - 1,085,840 947 30
Additional Paid-In-Capital From Stock
Issued For Debentures - - 841,981 53,854
Transfer of Retained Deficit to
Paid-In-Capital (285,243) - - -
Retained Deficit Transferred to
Paid-In-Capital 285,243 - - -
Debt Discount Capitalized as Equipment - - - (679,067)
Debt Discount Capitalized at Lease Cost - - - (319,708)
Reduction in Debt Discount - - - 998,775
Equipment From Capital Lease - - - (1,674,500)
Increase in Capital Lease - - - 1,674,500
Lease Cost From Stock Issued - - - (2,500)
Stock Issued For Lease - - - 2,500
Reduction in Accrued Liabilities for Stock Issued - - - (2,082,500)
Common Stock Issued For Settlement of
Accrued Liabilities - - - 750
Additional Paid-In-Capital From Stock Issued - - - 2,081,750
Debt Discount on Issuance of
Convertible Debentures - - - (2,493,897)
Additional Paid-In-Capital
From Debt Discount - - - 2,493,897
-------------- --------------- --------------- ---------------
$ - $ - $ - $ -
-------------- --------------- --------------- ---------------
SUPPLEMENTAL CASH FLOW
DISCLOSURES
Cash Paid During the Year For
Interest $ - $ 67,845 $ 48,461 $ 100,093
============== =============== =============== ===============
Income Taxes$ - $ - $ - $ -
============== =============== =============== ===============
The accompanying notes are an integral part of
these consolidated financial statements.
F-9
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
The Barbeque Capital Corp. was incorporated in Nevada on December 18, 1996, to
engage in the manufacturing and distribution of commercial size barbeques for
individual, groups, and restaurant use. After two seasonal business cycles of
trying to develop a market for the Company's barbeques, management of the
Company determined that without significant additional funding, the Company
would not be able to compete in the barbeque business. Accordingly, after
several unsuccessful attempts to obtain additional capital, the Company
determined that it was in the Company's and its shareholders best interest to
cease the barbeque business and search for an alternative business while the
Company was still solvent. On October 14, 2002, the Company effected a change in
its domicile from Nevada to Wyoming and a change in its name from Barbeque
Capital Corp. to Consolidated Energy, Inc. (the "Company") by entering into an
Agreement and Plan of Reincorporation and Merger (the "Agreement") with
Consolidated, its wholly-owned subsidiary. Under the terms of the Agreement all
outstanding shares of the Nevada Corporation were converted into shares of the
Wyoming Corporation.
The Company leases and operates coal mines located in the eastern part of
Kentucky.
The Company is authorized to issue 50,000,000 shares of $0.001 par value common
stock.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Consolidated Energy Inc. and its wholly owned subsidiaries Eastern Consolidated
Energy Inc. ("Eastern"), CEI Holdings, Inc., Morgan Mining, Inc. and Eastern
Consolidated Oil & Gas, Inc. ("Eastern Oil") collectively Consolidated Energy,
Inc. ("the Company"). All significant intercompany transactions and balances
have been eliminated in consolidation.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method
The Company's financial statements are prepared using United States generally
accepted accounting principles. The Company has elected a year end of December
31.
Management of the Company has determined that the Company's operations are
compromised of one reportable segment as that term is defined by SFAS No. 131
"Disclosures About Enterprise and Related Information." Therefore, no separate
segment disclosures have been included in the accompanying notes to the
financial statement.
Long-Lived Assets
The Company routinely evaluates the carrying value of its long-lived assets. The
Company would record an impairment loss when events or circumstances indicate
that a long-lived asset's carrying value may not be recovered. The Company has
not recognized any impairment charges. (Continued)
F-10
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Comprehensive Income
The Company has no material components of other income (loss) and accordingly,
net loss is equal to comprehensive loss in all periods.
Income Taxes
The Company has adopted the provisions of Financial Accounting Standards Board
Statement No. 109 ("FASB 109"), Accounting for Income Taxes. The Company
accounts for income taxes pursuant to the provisions of FASB 109, which requires
an asset and liability approach to calculating deferred income taxes. The asset
and liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the income tax basis and the financial reporting basis of assets and
liabilities.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Estimates
The preparation of the financial statements of the Company in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported amounts. These
estimates are based on information available as of the date of the financial
statements. Therefore, actual results could differ from those estimates.
Net Loss Per Share
Basic and diluted net loss per share information is presented under the
requirements of SFAS No. 128, Earnings Per Share. Basic net loss per share is
computed by dividing the net loss by the weighted average number of shares of
common stock outstanding for the period. Diluted net loss per share reflects the
potential dilution of securities by adding other common stock equivalents,
including stock options, shares subject to repurchase, warrants and convertible
debentures, in the weighted-average number of common shares outstanding for a
period, if dilutive. All potentially dilutive securities have been excluded from
the computation, as their effect is anti-dilutive.
(Continued)
F-11
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenues from coal sales are recognized when title passes to the customer as
coal is shipped. Some coal supply agreements provide for price adjustments based
on variations in the quality characteristics of the coal shipped. In most cases,
the customer's analysis of the coal quality is binding and the results of the
analysis are received on a delayed basis. In that case, the Company estimates
the amount of the quality adjustment and adjusts the estimate to actual when
quality adjustments are received from a customer. Historically, such adjustments
have not been material.
Building, Equipment and Coal Leases
Property, plant and equipment are carried at cost. Expenditures that extend the
useful lives of existing buildings and equipment are capitalized. Maintenance
and repairs are expensed as incurred. Coal exploration costs are expensed as
incurred. Development costs applicable to the opening of new coal mines and
certain mine expansion projects are capitalized. When properties are retired or
otherwise disposed, the related cost and accumulated depreciation are removed
from the respective accounts and any profit or loss on disposition is credited
or charged to income.
The Company's coal reserves are controlled through leasing arrangements. Leased
mineral rights represent leased coal properties carried at the cost of acquiring
those leases. The leases are generally long-term in nature (original term 5 to
50 years or until the mineable and merchantable coal reserves are exhausted),
and substantially all of the leases contain provisions that allow for automatic
extension of the lease term as long as mining continues.
Depreciation of buildings, plant and equipment is calculated on the
straight-line method over their estimated useful lives, which generally range
from 7 to 10 years.
Amortization of mine development costs is computed using the units-of-production
method over the estimated proven and probable coal reserve tonnage.
Prepaid Mining Royalties
Coal leases, which require minimum annual or advance payments which are
recoverable from future production are generally deferred and charged to expense
as the coal is subsequently produced. On December 31, 2003 and 2004 and March
31, 2005, prepaid mining royalties included in other noncurrent assets totaled
$44,111, $11,666 and $46,167, respectively.
(Continued)
F-12
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclamation
The Federal Surface Mining Control and Reclamation Act ("SMCRA") establishes
operational, reclamation and closure standards for all aspects of surface mining
as well as many aspects of deep mining. Estimates of the Company's total
reclamation and mine-closing liabilities are based upon permit requirements and
the Company's engineering expertise related to these requirements. The Company
records its reclamation liabilities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations" ("Statement 143"). Statement 143 requires that asset retirement
obligations be recorded as a liability based on fair value, which is calculated
as the present value of the estimated future cash flows, in the period in which
it is incurred. The estimate of ultimate reclamation liability and the expected
period in which reclamation work will be performed, is reviewed periodically by
the Company's management and engineers. In estimating future cash flows, the
Company considers the estimated current cost of reclamation and applies
inflation rates and a third party profit, as necessary. The third party profit
is an estimate of the approximate markup that would be charged by contractors
for work performed on behalf of the Company. When the liability is initially
recorded, the offset is capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Accretion expense is included in cost of produced coal
revenue. To settle the liability, the obligation is paid, and to the extent
there is a difference between the liability and the amount of cash paid, a gain
or loss upon settlement is incurred. Additionally, the Company performs a
certain amount of required reclamation of disturbed acreage as an integral part
of its normal mining process. These costs are expensed as incurred.
Workers' Compensation
The Company is liable for workers' compensation benefits for traumatic injuries
under state workers' compensation laws in which it has operations. Workers'
compensation laws are administered by state agencies with each state having its
own set of rules and regulations regarding compensation that is owed to an
employee that is injured in the course of employment. The Company purchases it
workers compensation insurance from an unrelated insurance carrier.
Newly Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 is
an amendment of Accounting Research Bulletin ("ARB") No. 43, chapter 4,
paragraph 5 that deals with inventory pricing. SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expenses, freight, handling
costs and spoilage.
(Continued)
F-13
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Newly Issued Accounting Pronouncements (Continued)
Under previous guidance, paragraph 5 of ARB No. 43, chapter 4, items such as
idle facility expense, excessive spoilage, double freight, and rehandleing costs
might be considered to be so abnormal, under certain circumstances, as to
require treatment as current period charges. This Statement eliminates the
criterion of "so abnormal" and requires that those items be recognized as
current period charges. Also, SFAS No. 151 requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. The Company is analyzing the requirements of SFAS
No. 151 and believes that its adoption will not have any significant impact on
the Company's financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No.
123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and
supercedes APB 25. Among other items, SFAS No. 123R eliminates the use of APB 25
and the intrinsic value method of accounting and requires companies to recognize
the cost of employee services received in exchange for awards of equity
instruments, based on the grant date fair value of those awards in the financial
statements.
The effective date of SFAS No. 123R is the first fiscal year beginning after
June 15, 2005, and the Company expects to adopt SFAS No. 123R effective January
1, 2005. SFAS No. 123R permits companies to adopt its requirements using either
a "modified prospective" method, or a "modified retrospective" method. Under the
"modified prospective" method, compensation cost is recognized in the financial
statements beginning with the effective date, based on the requirements of SFAS
No. 123R for all share-based payments granted after that date and based on the
requirements of SFAS No. 123 for all unvested awards granted prior to the
effective date of SFAS No. 123R. Under the "modified retrospective" method, the
requirements are the same as under the "modified prospective" method, but also
permits entities to restate financial statements of previous periods based on
proforma disclosures made in accordance with SFAS No. 123. The Company is
currently evaluating the appropriate transition method. Through December 31,
2004, the Company had not had any stock-based compensation awards.
(Continued)
F-14
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 3: RESTATEMENT
During the course of the audit of the year ended December 31, 2004 financial
statements, errors were discovered in the previously issued financial
statements. The following table sets forth the capital section as reported and
reflects the adjustments to the previously reported amounts:
Common Stock Additional
---------------------------- Paid-In- Retained
Shares Par Value Capital Deficit Total
-------------- ------------- ------------ -------------- --------------
Balance, As Reported,
December 31, 2003 7,358,000 $ 7,358 3,509,862 $ (1,342,949) $ 2,174,271
Transfer of Retained Deficit
Upon Merger - - (285,243)(a) 285,243 (a) -
Increase in Cost Associated With
Shares Issued for Services - - 145,100 (b) (145,100)(b) -
Interest Cost Associated With
Beneficial Conversion Features
of Debentures - - 186,171 (c) (186,171)(c) -
Reduction in Value of Shares
Issued in Connection with
Reverse Merger - - (2,997,000)(d) - (2,997,000)
Reduction in Sale of
Royalty Interest - - - (110,000)(e) (110,000)
Increase In Coal Royalty Expense - - - (31,882)(f) (31,882)
Decrease in Amortization Expense - - - 129,137 (g) 129,137
-------------- ------------- ----------- --------------- --------------
Balance, as Restated,
December 31, 2003 7,358,000 $ 7,358 $ 558,890 $ (1,401,722) (835,474)
============== ============== =========== =============== ==============
The following sets fourth the Statement of Operations for the year ended
December 31, 2003 as previously reported and applicable restatement adjustments
for that year:
Restatement
As Reported Adjustments As Restated
---------------- ------------- ----------------
Revenues $ 759,606 $ (110,000) (e) $ 649,606
Cost of Revenues 1,003,413 31,882 (f) 1,035,295
---------------- ------------- ----------------
Gross Loss (243,807) (141,882) (385,689)
---------------- ------------- ----------------
Legal and Professional Fees 216,247 - 216,247
Consulting Fees 164,430 145,100 (b) 309,530
---------------- ------------- ----------------
Operating Expenses 380,677 145,100 525,777
Depreciation & Amortization 239,183 (129,137) (g) 110,046
Other Expenses 133,299 - 133,299
Interest Expense 60,740 186,171 (c) 246,911
---------------- ------------- ----------------
Total Expenses 813,899 202,134 1,016,033
---------------- ------------- ----------------
Net Loss $ (1,057,706) $ (344,016) $ (1,401,722)
================ ============== ================
(Continued)
F-15
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 3: RESTATEMENT (Continued)
(a) This represents the accumulated deficit of the Company before the reverse
merger effective on September 12, 2003.
(b) This represents the difference in the quoted market value of common stock
issued for services and the amount which was recorded as expense.
(c) This represents the beneficial conversion cost of common stock issued upon
the conversion of debentures.
(d) This represents the difference in the value assigned to the shares issued
in connection with the reverse merger and the historical cost of the assets
acquired.
(e) In 2003, the Company sold a $.10 per ton royalty interest in the Alma Seam
of the Warfield Mine which had been recorded as revenue. The receipt of
cash from the sale of the royalty interest should have reduced the
Company's basis in the Warfield Mine.
(f) During 2003, the Company had recorded as notes payable, cash received form
the sale of royalty interest and had recorded the royalty payments made as
a reduction of the notes payable. The Company should have reduced it's
basis in the Warfield Mine by the amount of cash received and recorded the
royalty payments as royalty expense. This adjustment reflects the royalty
interest paid or accrued to the royalty interest holders.
(g) This represents a reduction in amortization expense of the Warfield Mine
due to the decrease in lease cost. The reduction in lease costs is the
result of recording the cash received from the sale of royalty interests as
a reduction in lease cost of $1,410,000 and the reduction in lease costs of
$2,997,000 associated with recording the Warfield Lease at historical costs
rather than the fair value of the stock issued.
NOTE 4: GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has not established revenues sufficient to cover its
operating costs that raise substantial doubt about its ability to continue as a
going concern. However, during February of 2005, the Company sold $7,000,000 of
its 6% senior secured convertible notes to outside investors. Upon receipt of
the $7,000,000, the Company suspended mining operations and began preparations
to mine a new coal seam. After the preparations are partially complete to mine
the new seam, mining operations will commence again.
F-16
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 5: STOCK TRANSACTIONS
In March of 2003, a total of 1,515,000 shares of the Company's common stock were
issued for services to various individuals. The stock was valued at $212,100
which was approximately the value quoted in the Over the Counter Bulletin Board
Exchange ("OTCBB") and was expensed in the statement of operations.
In September and October of 2003, a total of 175,000 shares of common stock was
issued for legal services. The stock was valued at $183,750 (which was
approximately the value quoted in the OTCBB) and was expensed in the statement
of operations.
During the year ended December 31, 2004, the Company issued a total of 670,000
shares of its common stock in exchange for services received. The stock was
valued at $1,254,449, which was approximately the value quoted in the OTCBB and
was expensed in the statement of operations.
During the year ended December 31, 2004, the Company sold 394,118 shares of its
common stock for $275,000 in cash.
The Company issued 1,205,310 shares of it common stock upon the conversion of
$1,057,000 in debentures and $28,840 of accrued interest.
In March of 2004, the Company issued 700,000 shares of its common stock to
certain controlling shareholders for an option to lease the Copley Lease for a
term of two years. The 700,000 shares of stock were valued at par value of $700,
which approximated the cost basis of the Copley Lease in the hands of the
shareholders.
On January 3, 2005, the Company issued 550,000 shares of its common stock for
services rendered during the year that ended December 31, 2004. The value of the
stock issued, $1,072,00 (which approximates the value quoted on the OTCBB) has
been recorded as an expense in the year ended December 31, 2004, with a
corresponding increase in accrued liabilities.
On March 23, 2005, the Company authorized the issuance of 200,000 shares of its
common stock for services, which were performed during the year that ended
December 31, 2002. The value of the stock to be issued, $1,010,000 (which
approximates the value quoted in the OTCBB) has been recorded as an expense in
the year that ended December 31, 2004, with a corresponding increase in accrued
liabilities.
On January 3, 2005, the Company issued 2,500,000 shares of its common stock to
Eastern Land Development, LLC, an entity owned by Larry Hunt, Jeff Miller and
Jay Lasner for the acquisition of the Coal Burg Seam, Taylor Seam, Richardson
Seam, and the Broas Seam of coal on the Dempsey Heirs Leases. The 2,500,000
shares of stock were valued at a par value of $2,500, which approximated the
cost basis of the leases in the hands of the former owners.
During the three month period ended March 31, 2005, the Company issued 29,368
shares of its common stock upon conversion of $50,000 debenture and $3,885 of
accrued interest.
(Continued)
F-17
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 6: ACQUISITION
On September 12, 2003, the Company signed an agreement to acquire Eastern
Consolidated Energy, Inc.("Eastern"), a privately held Kentucky Corporation,
through the issuance of 3,000,000 shares of the Company's common stock in
exchange for all of the issued and outstanding stock of Eastern. This
transaction has been accounted for as a reverse merger, whereby the subsidiary,
Eastern, acquired the parent. As a result, the historical cost basis of the
assets of and liabilities are carried over from Eastern and Eastern's historical
operations are the operations presented in the financial statements. The
accumulated deficit of the parent, as of September 12, 2003, of $285,243 has
been transferred to additional paid-in-capital.
NOTE 7: INCOME TAXES
At December 31, 2004, the Company had net operating loss carryforwards of
approximately $7,800,000 that may be offset against future taxable income
through 2021. No tax benefits have been reported in the financial statements,
because the potential tax benefits of the net operating loss carry forwards are
offset by a valuation allowance of the same amount.
Deferred tax assets (liabilities) are comprised of the following:
December 31, March 31,
DEFERRED TAX ASSETS 2003 2004 2005
------------ ------------- -------------
(Unaudited)
Net Operating Loss Carryforward $ 476,282 $ 2,657,397 $ 2,876,264
Other 1,700 6,800 11,900
Valuation allowance (477,982) (2,664,197) (2,888,164)
------------ ------------- -------------
$ - $ - $ -
============ ============= =============
The income tax benefit differs from the amount computed at federal statutory
rates of approximately 34% as follows:
For the Years Ended Three Months Ended
December 31, March 31,
2003 2004 2004 2005
------------ ------------- ------------ ------------
(Unaudited) (Unaudited)
Income tax Benefit at Statutory Rate of 34% $ 476,585 $ 2,180,726 $ 348,870 $ 214,372
Other 1,397 5,489 1,632 9,595
Change in Valuation Allowance (477,982) (2,186,215) (350,502) (223,967)
------------ ------------- ------------ ------------
$ - $ - $ - $ -
============ ============= ============ ============
(Continued)
F-18
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 7: INCOME TAXES (CONTINUED)
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in the future.
NOTE 8: CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company sold coal to ten different customers during the year ended December
31, 2004, with approximately 51% of the coal sales going to two customers.
NOTE 9: BUILDING, EQUIPMENT AND COAL LEASES
Building, equipment and coal leases are comprised of the following:
December 31, March 31,
------------------------------ -------------
2003 2004 2005
------------ ------------- -------------
(Unaudited)
Buildings and Equipment $ 1,473,863 $ 1,761,983 $ 6,149,526
Less Accumulated Depreciation (105,046) (246,306) (359,306)
------------ ------------- -------------
Net Building and Equipment $ 1,368,817 $ 1,515,677 $ 5,790,220
============ ============= =============
Warfield Mine Improvements $ 112,458 $ 112,458 $ 1,357,855
Other Leases - 700 3,200
------------ ------------- -------------
112,458 113,158 1,361,055
Less Accumulated Depletion
and Amortization (5,000) (15,001) (17,829)
------------ ------------- -------------
Net Coal Leases $ 107,458 $ 98,157 $ 1,343,226
============ ============= =============
Depreciation and amortization expense for the years ended December 31, 2003 and
2004 and the three months ended March 31, 2004 and 2005 was $110,046, $265,394,
$66,348 and $115,829, respectively.
NOTE: 10 ACCRUED LIABILITIES
December 31, March 31,
------------------------------ -------------
2003 2004 2005
------------ ------------- -------------
(Unaudited)
Consulting and Director Fees $ - $ 2,082,500 $ -
Workers Compensation Premium - 111,630 48,693
Payroll Tax Liabilities 33,851 121,166 106,780
Interest 78,587 84,186 145,334
Taxes Payable on Coal Sales 39,864 118,687 96,236
Accrued Expenses 426 32,405 104,762
------------- ------------- -------------
$ 152,728 $ 2,550,574 $ 501,805
============= ============= =============
F-19
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2003 AND 2004
NOTE 11: NOTES PAYABLE
Notes payable on December 31, 2004 consist of a note payable to an individual in
the amount of $182,737. The note bears interest of 10% per annum, is secured by
certain mining equipment and was due October 13, 2004. The note, along with
interest, was fully paid on January 17, 2005.
Notes payable on December 31, 2003 consisted of a note payable to a partnership
in the amount of $514,017. The note bore interest at 8% per annum, was due in
monthly installments of $21,598 for twenty eight (28) months and was secured by
a Fairchild Continuous Mining System. During 2004, the Company determined that
the equipment did not perform as it was represented. The Company and the
Partnership agreed to a settlement of the note by the Company returning the
equipment to the Partnership. In return, the Partnership agreed to reimburse the
Company $102,012 for repairs the Company had incurred and to cancel the note. As
a result of the return of the equipment, the Company recognized a loss on the
equipment of $83,861.
NOTE 12: CONVERTIBLE DEBENTURES
During the year ended December 31, 2003, the Company issued $1,266,400 of its
convertible debentures for cash. The debentures were to mature one year from the
date of issuance, are unsecured and bear interest at the rate of 10% per annum.
During 2004, $832,000 of these debentures plus accrued interest of $10,928 were
converted into 946,609 shares of the Company's common stock. The remaining
$434,400 debentures plus accrued interest of $82,684 were renewed as a new
convertible debentures due in April of 2005. The new debentures bear interest at
15% per annum.
During the year ended December 31, 2004, the Company issued $325,000 of new
convertible debentures, due one year from the date of issuance. These debentures
are unsecured and bear interest at the rate of 15% per annum. During 2004,
$225,000 of these debentures plus accrued interest of $17,912 were converted
into 258,701 shares of the Company's common stock.
The convertible debenture are convertible into shares of the Company's common
stock at 60% to 70% of the asking price quoted in the OTCBB on the date of
conversion. Interest in the amount of $186,171 and $485,001 has been charged to
interest expense during the years ended December 31, 2003 and 2004,
respectively, as the cost of this beneficial conversion feature. Interest
expense in the amount of $23,518 has been recognized in the three months ended
March 31, 2005, applicable to the beneficial conversion feature. The liability
for convertible debentures on December 31, 2004 and March 31, 2005 is net of
$29,074 and $5,556 of debt discount.
NOTE 13: FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2003 and 2004, the carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
notes payable approximate fair value due to the short-term nature of these
instruments.
(Continued)
F-20
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 13: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
In connection with the conversion of a convertible debenture into common stock,
the Company gave the debenture holder a royalty payment of $3,000 per month so
long as coal is being mined and sold from the Alma Seam of the Warfield Lease.
The Company estimated that coal may be mined from the Alma Seam for a period of
ten (10) years. These future royalty payments were discounted at 15% per year,
giving a present value on the date of conversion, of $185,949, which has been
charged to interest expense. The present value of the future royalty payments at
December 31, 2004 was $168,962 and is shown as deferred royalties payable in the
balance sheet.
NOTE 14: RELATED PARTIES
On March 31, 2004, the Company issued 700,000 shares of its common stock to
related parties in exchange for an option to lease the Copley Lease for a term
of two years. The 700,000 shares of stock were valued at par value of $700,
which approximates the cost basis of the Copley lease in the hands of the
related party shareholders.
On January 6, 2004 the Company received $275,000 from a related party, Eastern
Consolidated Mining, Inc. ("Mining"). Mining has a coal sales contract between
Mining and a customer. Coal sale receipts applicable to sales of coal to
Mining's customer under the contract are received by Mining and then transferred
to the Company from Mining. During the year ended December 31, 2004, $751,450 of
coal sales were run through Mining's cash account and transferred to the
Company. On December 31, 2004, payable to a related party includes $110,450 due
to Mining.
During the year ended December 31, 2004, the Company paid Midwest Energy
Transportation (a transportation company owned by Jeff Miller and Larry Hunt who
are related parties) $ 35,875 for trucking costs.
The Company accrued charges to Kentucky Energy Consultants ("KEC") (a consulting
firm owned by Jeff Miller and Larry Hunt who are related parties) of $29,666,
$133,092 and $8,535 for consulting services during the years ended December 31,
2003 and 2004 and the three months ending March 31, 2005, respectively. Accrued
balances of $29,666, $162,758 and $171,293 are included in amounts due related
parties as of December 31, 2003 and 2004 and March 31, 2005, respectively.
On August 20, 2004, the following transactions were effected:
(a) Buckeye Energy Development LLC ("Buckeye"), an LLC owned by Larry Hunt, Jay
Lasner, Jeff Miller and Billy Reed, who are related parties, assigned to
Eastern Oil a 75% working interest in an oil and gas lease dated November
17, 2003. Buckeye remains the operator of the lease.
(b) Eastern Oil assigned a 12.5% overriding royalty interest back to Buckeye.
Eastern Oil has received an invoice from Buckeye for $287,500 for the cost of
drilling three (3) gas wells, which is included in amounts payable, related
parties at December 31, 2004.
On September 1, 2004, Eastern Oil sold a 15% working interest and a 9.45% net
revenue interest in the oil and gas lease to an unrelated party for $287,500
cash.
The $287,500 has been credited against Eastern Oil's basis in the oil and gas
lease.
(Continued)
F-21
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 14: RELATED PARTIES (Continued)
At December 31, 2003 and 2004, the Company was indebted to its President in the
amount of $15,199 and $199, respectively, for a loan on a piece if equipment
used by the Company.
At December 31, 2004, the Company has a note payable in the amount of $659,339
to Eastern Consolidated Coal Corp., a related party, for cash advances made to
the Company. The note bears no interest, is unsecured and is due December 30,
2005
NOTE 15: COMMITMENTS AND CONTENGENCIES
On January 31, 2005, the Company entered into a one-year lease for office space
in Coral Springs, Florida, which commenced on February 15, 2005. The lease
agreement calls for minimum rentals of $2,391 per month for twelve months.
On April 1, 2003, the Company sold a 20% working interest in the Warfield Mine
for $100,000. Since April 1, 2003, the Warfield Mine has been operating at a
loss and since the Company does not have the right to make cash calls form the
working interest holder, no benefit has been recorded applicable to the 20%
working interest which has been sold. On January 18, 2005, the Company issued
200,000 shares of the Company's common stock in exchange for an option to
acquire the 20% working interest for $1,000,000 cash before October 17, 2005.
On December 31, 2004, the Company had the following royalty commitments payable
as coal is mined and sold:
(a) $1.33 per ton on all coal mined and sold from the Warfield Mine until
such time as $330,739 is paid and $.67 per ton, thereafter.
(b) $1.00 per ton on all coal mined and sold from the Warfield Mine until
such time as the earlier of $372,735 is paid or until the second
mining section of the Warfield Mine begins production, and $.75 per
ton, thereafter.
(c) $.35 per ton on all coal mined and sold from the Alma Seam of the
Warfield Mine until such time as $264,991 is paid and $.10 per ton
thereafter from coal sold out of the Alma Seam.
(d) $.50 per ton on all coal mined and sold from the Alma Seam of the
Warfield Mine.
(e) The greater of 6% of gross sales or $1.85 per ton of all coal mined
and sold from the Warfield Lease.
F-22
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 16: STATUS OF SAUDI AMERICAN MINERALS, INC. ACQUISITION
In June of 2003, the Company signed a definitive agreement with Saudi American
Minerals Inc. ("SAMI") to acquire 100% ownership of SAMI with an effective date
to coincide with an effective date of the S-4, which is being prepared and will
be filed with the SEC. The acquisition of SAMI will be accomplished with a stock
exchange of two shares of the Company for every three shares of SAMI. The total
number of SAMI shares owned and outstanding is 20,685,517. The total number of
the Company's shares used to obtain all of the SAMI shares is 13,770,009. The
acquisition will have the effect of transferring to CEI Holdings, Inc., a wholly
owned subsidiary of the Company, one hundred percent (100%) of the ownership and
rights to the items owned by or assigned to SAMI. This includes a USA patent
#6,447,559 issued on September 10th of 2002 for so-called clean coal technology.
The Company is currently assembling a registration statement on Form S-4 which
will, when effective, register the shares to be issued to SAMI to complete this
transaction. The Company intends to file this registration statement with the
SEC as soon as practical.
NOTE 17: SUBSEQUENT EVENTS
During the first three months of 2005, the Company committed to acquire
$2,735,000 in equipment.
On February 22, 2005, the Company sold $7,000,000 of the Company's 6% senior
secured convertible notes, due in 2008 ("Notes"), warrants to purchase 2,058,824
shares of the Company's common stock and Additional Investment Rights ("AIR").
The warrants are exercisable for five years from the date of issuance and have
an initial exercise price of $1.70. The notes are secured by any and all assets
and properties of the Company, whether now owned or herein after acquired.
The AIRs give the purchasers of the notes the right to acquire an additional
$7,000,000 of notes prior to the later of (i) the earlier of (a) the 14th day
following the date the Company first executes a second coal supply contract with
American Electric Power, and (b) the 90th day following the date the
registration statement is declared effective and (ii) May 25, 2005.
The Company suspended mining operations on February 6, 2005 in order to start a
slope down to the Pond Creek Coal Seam, which is approximately ninety (90) feet
below the Alma Seam.
F-23
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Wyoming law permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if these directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agent in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnify for such expenses despite
such adjudication of liability.
Our Articles of Incorporation provide that, none of our directors shall be
liable to us or our stockholders for damages for breach of fiduciary duty,
unless such breach involves a breach of duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law or involve unlawful payment of dividends or unlawful stock purchases or
redemptions, or involves a transaction from which the director derived an
improper personal benefit.
In addition, our by-laws provide that we shall indemnify our officers,
directors and agents to the fullest extent permissible under Wyoming law, and in
conjunction therewith, to procure, at our expense, policies of insurance. In
addition, our by-laws provide that our directors shall have no liability for
monetary damages to the fullest extent permitted under Wyoming law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions or otherwise, we have been advised that in
the opinion of the Securities Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by
our director, officer, or controlling person 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 hereunder,
we will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses
payable by Consolidated Energy, Inc. in connection with the offering described
in this registration statement. All of the amounts shown are estimates except
the Securities and Exchange Commission registration fee:
Securities and Exchange Commission Registration Fee $ 3,475.60
Accounting Fees and Expenses $ 10,000*
Legal Fees and Expenses $ 15,000*
Miscellaneous $ 5,000*
Total $ 33,475.60*
*Estimated
II-I
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In March of 2003, a total of 1,515,000 shares of the Company's common stock
were issued for services to various individuals. The stock was valued at
$212,100 which was approximately the value quoted in the Over the Counter
Bulletin Board Exchange ("OTCBB") and was expensed in the statement of
operations. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").
In September and October of 2003, a total of 175,000 shares of common stock
was issued for legal services. The stock was valued at $183,750 (which was
approximately the value quoted in the OTCBB) and was expensed in the statement
of operations. Such issuances were considered exempt from registration by reason
of Section 4(2) of the Securities Act.
During the year ended December 31, 2004, the Company issued a total of
670,000 shares of its common stock in exchange for services received. The stock
was valued at $1,254,449, which was approximately the value quoted in the OTCBB
and was expensed in the statement of operations. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act.
During the year ended December 31, 2004, the Company sold 394,118 shares of
its common stock for $275,000 in cash. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act and Rule 506
promulgated under the Securities Act.
The Company issued 1,205,310 shares of it common stock upon the conversion
of $1,057,000 in debentures and $28,840 of accrued interest. . Such issuances
were considered exempt from registration by reason of Section 4(2) of the
Securities Act and Rule 506 promulgated under the Securities Act.
In March of 2004, the Company issued 700,000 shares of its common stock to
certain controlling shareholders for an option to lease the Copley Lease for a
term of two years. The 700,000 shares of stock were valued at par value of $700,
which approximated the cost basis of the Copley Lease in the hands of the
shareholders. Such issuances were considered exempt from registration by reason
of Section 4(2) of the Securities Act and/or Rule 506 promulgated under the
Securities Act.
During the quarter ended December 31, 2004, the Company issued a total of
552,819 shares of its restricted common stock for the conversion of outstanding
debentures totaling $542,911 (principal and interest). Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act and Rule 506 promulgated under the Securities Act. Also during the quarter,
the Company issued 210,000 shares to consultants for services rendered valued at
$378,000. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act.
The above shares were issued in reliance on the exemption from registration
and prospectus delivery requirements of the Act set forth in Section 3(b),
Section 4(2) and/or Rule 506 promulgated under the Securities Act and the
regulations promulgated thereunder.
In February 2005, the Company issued 2,500,000 shares of its restricted
common stock to Eastern Land Development, LLC, a private corporation in exchange
for the acquisition of rights to certain coal reserves in eastern Kentucky. In
connection with such acquisition, the Company issued warrants for the purchase
of an aggregate of 2,058,824 shares of the Company's common stock at an exercise
price of $1.70 per share, exercisable for five years, and 6% senior secured
promissory notes convertible into 4,117,647 shares of the Company's common stock
at conversion price of $1.70 per share upon the occurrence of certain events, to
accredited investors. The Company has also issued warrants for the purchase of
an aggregate of 102,941 shares to Scott R. Griffith and 102,941 shares to Jesse
B. Shelmire IV. The securities issued in the foregoing transaction were issued
in reliance on the exemption from registration and prospectus delivery
requirements set forth in Section 3(b) and/or Section 4(2) of the Securities Act
and/or Rule 506 promulgated under the Securities Act and the regulations
promulgated thereunder.
In June 2005, the Company issued 6% senior secured promissory notes
convertible into an additional 2,794,117.6 shares of the Company's common stock
at conversion price of $1.70 per share upon the occurrence of certain events, to
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accredited investors. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act and Rule 506 promulgated under the
Securities Act.
Except as expressly set forth above, for transactions exempt from
registration under Rule 506, the individuals and entities to whom we issued
securities are unaffiliated with us. For each of such sales, no advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors, business associates of ours or our executive officers, and transfer
was restricted by us in accordance with the requirements of the Securities Act.
Each of the above security holders who were not our executive officers
represented that they are accredited and sophisticated investors, that they are
capable of analyzing the merits and risks of their investment, and that they
understand the speculative nature of their investment. Furthermore, all of the
above-referenced persons had access to our Securities and Exchange Commission
filings.
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ITEM 27. EXHIBITS
Exhibit
Number Description
- --------- ----------------------------------------------------------------------
2.1 Placement Agent Agreement (incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K, filed with the SEC on
January 14, 2005).
3.1 Certificate of Incorporation of the Company.**
3.2 By-Laws of the Company.**
4.1 Form of Stock Certificate.**
4.2 Form of Warrant (incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K, filed with the SEC on February
24, 2005).
4.3 Form of Note (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K, filed with the SEC on February
24, 2005).
5.1 Opinion and Consent of Sichenzia Ross Friedman Ference LLP*
10.1 Lease Agreement, dated March 2002, between Eastern Consolidated
Energy, Inc. as Lessee and the Lessors signatory thereto (incorporated
by reference to Exhibit 10.1 to the Company's Annual Report on Form
10-KSB, filed with the SEC on March 30, 2004).
10.2 Surface Coal Lease Agreement, dated August 12, 2002, between Eastern
Consolidated Energy, Inc. as Lessee and the Lessors signatory thereto
(incorporated by reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-KSB, filed with the SEC on March 30, 2004).
10.3 Lease Agreement, dated October 3, 2003, between Eastern Land
Development, LLC as Lessee and the Lessors signatory thereto
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-KSB, filed with the SEC on March 30, 2004).
10.4 Sub-Lease Agreement, entered into on October 20, 2003, by and between
Eastern Consolidated Energy, Inc. and Eastern Consolidated Mining,
Inc. (incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-KSB, filed with the SEC on March 30, 2004).
10.5 Assignment Agreement, effective April 1, 2003, by and between Eastern
Consolidated Energy, Inc. and James Buchanan (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on Form
10-KSB, filed with the SEC on March 30, 2004).
10.6 Lease Assignment entered into and effective July 1, 2003, by and
between Eastern Consolidated Energy, Inc. and Eastern Consolidated
Coal Corp (incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-KSB, filed with the SEC on March 30, 2004).
10.7 Coal Sales Agreement entered into July 21, 2003 by and between Eastern
Consolidated Energy, Inc. and Kentucky Energy Consultants, Inc.
(incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-KSB, filed with the SEC on March 30, 2004).
10.8 Amendment to Coal Purchase and Sale Agreement (incorporated by
reference to Exhibit 10.15a to the Company's Annual Report on form
10-KSB, filed with the SEC on April 15, 2005).
10.9 Option to Lease Agreement, dated October 9, 2003, by and between James
Harris, Ronnie Harris, Gary R. Copley, Louella McDaniel, Romane
Conley, Eula Faye Copley, Howard D. Copley, and Joyce G. Conn, as
Lessor and Eastern Land Development, LLC., as Lessee (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on Form
10-KSB, filed with the SEC on March 30, 2004).
10.10 Memorandum of Agreement, dated October 10, 2003, by and between James
Harris and the other Lessors party thereto and Eastern Land
Development, LLC (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-KSB, filed with the SEC on March
30, 2004).
10.11 Assignment of Lease, dated January 12, 2004, between Eastern Land
Development LLC and Eastern Consolidated Energy, Inc. (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on Form
10-KSB, filed with the SEC on March 30, 2004).
10.12 Lease Agreement, dated October 3, 2003, by and between Eastern Land
Development, LLC as Lessee and the Lessors signatory thereto
(incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-KSB, filed with the SEC on March 30, 2004).
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10.13 Assignment of Lease, dated as of October 15, 2003, from Eastern Land
Development LLC to Eastern Consolidated Energy, Inc. (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form
10-KSB, filed with the SEC on March 30, 2004).
10.14 Coal Purchase and Sale Agreement entered into as of September 25, 2004
by and between Kentucky Power Company and Eastern Consolidated Energy,
Inc. (incorporated by reference to Exhibit 10.15 to the Company's
Quarterly Report on form 10-QSB, filed with the SEC on November 12,
2004).
10.15 Securities Purchase Agreement (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K, filed with the SEC
on February 24, 2005).
10.16 Registration Rights Agreement (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K, filed with the SEC
on February 24, 2005).
10.17 Security Agreement (incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K, filed with the SEC on February
24, 2005).
10.18 Form of Guaranty (incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K, filed with the SEC on February
24, 2005).
10.19 Form of Additional Investment Rights (incorporated by reference to
Exhibit 10.7 to the Company's Current Report on Form 8-K, filed with
the SEC on February 24, 2005).
10.20 Form of Lockup Agreement (incorporated by reference to Exhibit 10.8 to
the Company's Current Report on Form 8-K, filed with the SEC on
February 24, 2005).
21.1 List of Subsidiaries*
23.1 Consent of Sichenzia Ross Friedman Ference LLP (included in exhibit
5.1)*
23.2 Consent of Killman, Murell & Company, P.C.*
24.1 Powers of Attorney (Included on the signature page hereto)
* Filed herewith
** To be filed by amendment
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
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persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised 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. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company 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 Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Betsy Layne, State of Kentucky, on this 2nd day of
August 2005.
CONSOLIDATED ENERGY, INC.
By: /S/ David Guthrie
-------------------------------------
David Guthrie
President, Principal Executive Officer,
Chief Financial Officer and Principal
Accounting Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David Guthrie his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and any subsequent registration statements pursuant to Rule 462 of
the Securities Act of 1933 and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- ----------------------- ----------- --------------
/s/ David Guthrie Director August 5, 2005
- -----------------------
David Guthrie
/s/ Barry Tackett Director August 5, 2005
- -----------------------
Barry Tackett
/s/ Joseph Jacobs Director August 5, 2005
- -----------------------
Joseph Jacobs
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