As filed with the Securities and Exchange Commission on February 13, 2006
Registration Number 333-
UNITED STATES
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 1220 86-0852222
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
76 GEORGE ROAD, P.O. BOX 537
BETSY LAYNE, KENTUCKY 41605
(859) 488-0070
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
DAVID GUTHRIE, PRESIDENT
76 GEORGE ROAD, P.O. BOX 537
BETSY LAYNE, KENTUCKY 41605
(859) 488-0070
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
WITH COPIES TO:
RICHARD A. FRIEDMAN, ESQ.
DAVID SCHUBAUER, 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. [ ]
(COVER CONTINUES ON FOLLOWING PAGE)
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. [ ]
CALCULATION OF REGISTRATION FEE
===================================== ================= ====================== ==================== ===================
Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Amount of
to be Registered Registered(1) Share(2) Price Registration Fee
- ------------------------------------- ----------------- ---------------------- -------------------- -------------------
Common Stock, $0.001 par value (3) 15,277,778 $2.425 $37,048,611.65 $3,964.20
Common Stock, $0.001 par value (4) 2,573,528 $2.425 $6,240,805.40 $667.77
Common Stock, $0.001 par value (5) 1,654,892 $2.425 $4,013,113.10 $429.40
Common Stock, $0.001 par value (6) 6,933,256 $2.425 $16,813,145.80 $1,799.01
Common Stock, $0.001 par value (7) 9,046,694 $2.425 $21,938,232.95 $2,347.39
Common Stock, $0.001 par value (8) 150,000 $2.425 $363,750.00 $38.92
- ------------------------------------- ----------------- ---------------------- -------------------- -------------------
Total 35,636,148 $2.425 $86,417,658.90 $9,246.69_(9)
===================================== ================= ====================== ==================== ===================
(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 notes,
conversion of our 8% senior secured convertible notes and 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 notes, conversion of the 8% senior secured convertible 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.
(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 bid and ask price per share of our common stock on the OTC Bulletin
Board as of February 7, 2006 was $2.425 per share.
(3) Represents shares issuable upon conversion of $13,750,000.00 principal
amount of 6% senior secured convertible notes at a conversion price of
$0.90 per share.
(4) Represents shares issuable upon exercise of common stock purchase warrants
issued in connection with our 6% senior secured convertible notes.
(5) Represents presently outstanding shares of common stock.
(6) Represents shares issuable upon conversion of $6,239,930.00 principal
amount of 8% senior secured convertible notes at a conversion price of
$0.90.
(7) Represents shares issuable upon exercise of common stock purchase warrants
issued in connection with our 8% senior secured convertible note financing.
(8) Represents shares issuable upon exercise of warrants acquired as
consideration for financial consulting services
(9) $2,734.82 was previously paid on August 5, 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 February 13, 2006
CONSOLIDATED ENERGY, INC.
35,636,148 Shares of Common Stock
The selling shareholders named in this prospectus are offering to sell up
to 35,636,148 shares of common stock including up to 15,277,778 shares of common
stock of Consolidated Energy, Inc. underlying 6% senior secured convertible
notes, 6,933,256 shares of common stock underlying 8% senior secured convertible
notes and 11,770,222 shares of common stock underlying common stock purchase
warrants 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 convertible notes, from the conversion of our 8% senior
secured convertible notes or the resale of shares of our common stock. We will,
however, receive proceeds from the exercise of our common stock purchase
warrants if such warrants are exercised for cash.
Our common stock currently trades on the Over the Counter Bulletin Board
("OTC Bulletin Board") under the symbol "CEIW"
On February 7, 2006, the last reported sale price for our common stock on
the OTC Bulletin Board was $2.40 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. For additional information on the
methods of sale, you should refer to the section entitled "Plan of
Distribution."
Scott R. Griffith and Jesse B. Shelmire IV are registered representatives
of Stonegate Securities, Inc., a registered broker-dealer, and are
"underwriters" within the meaning of the Securities Act of 1933 in connection
with the sale of common stock under this prospectus. With the exception of
Messrs. Griffith and Shelmire, no other underwriter or person has been engaged
to facilitate the sale of shares of common stock in this offering.
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 __________, 2006
TABLE OF CONTENTS
Page
------
Prospectus Summary...................................................................... 1
Risk Factors............................................................................ 2
Forward-Looking Statements.............................................................. 10
Recent Developments..................................................................... 11
Use of Proceeds......................................................................... 17
Management's Discussion and Analysis of Financial Condition or Plan of Operation........ 17
Description of Business................................................................. 23
Description of Property................................................................. 33
Legal Proceedings....................................................................... 35
Directors and Executive Officers........................................................ 35
Executive Compensation.................................................................. 37
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 38
Market for Common Equity and Related Shareholder Disclosure............................. 38
Security Ownership of Certain Beneficial Owners and Management.......................... 39
Selling Shareholders.................................................................... 40
Certain Relationships and Related Transactions.......................................... 47
Description of Securities............................................................... 48
Plan of Distribution.................................................................... 49
Legal Matters........................................................................... 51
Experts................................................................................. 51
Where You Can Find More Information..................................................... 51
Disclosure of Commission Position on Indemnification for Securities Act Liabilities..... 52
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 76 George Road, Betsy Layne, Kentucky 41605 and
our telephone number is (859) 488-0070.
This Offering
Shares offered by Selling Shareholders.............................35,636,148 shares of common stock, of which
15,277,778 shares are issuable upon conversion
of 6% senior secured convertible notes,
6,933,256 shares are issuable upon conversion
of 8% senior secured convertible notes and
11,770,222 shares are issuable upon the
exercise of warrants.
Use of proceeds....................................................We will not receive any proceeds from the
conversion of the 6% senior secured convertible
notes, the conversion of the 8% senior secured
convertible notes or the sale of the common
stock. We will, however, receive proceeds from
the exercise of our common stock purchase
warrants if such warrants are exercised for
cash.
Risk Factors.......................................................The purchase of our common stock involves a
high degree of risk. You should carefully
review and consider the "Risk Factors"
beginning on page 2 of this prospectus.
OTC Bulletin Board Trading Symbol................................. CEIW.OB
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. Each of the following risks could materially adversely
affect our business, financial condition and results of operations, which could
cause the price of our shares to decline significantly and you may lose all or a
part of your investment. 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 had nominal production
and development operations. Since inception of our current business in September
2003 through December 31, 2005 we have had only $5,388,510 in revenue.
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's operations.
OUR FINANCIAL STATUS CREATES SUBSTANTIAL DOUBT WHETHER WE WILL CONTINUE AS A
GOING CONCERN FOR MORE THAN 12 MONTHS FROM THE DATE OF THIS PROSPECTUS. IF WE DO
NOT CONTINUE AS A GOING CONCERN, INVESTORS WILL LOSE THEIR ENTIRE INVESTMENT.
We have suffered recurring losses from operations and we have limited
capital resources. We reported net losses totaling $3,642,082, $6,413,900 and
$1,401,722 for the nine months ended September 30, 2005 and for the fiscal years
ended December 31, 2004 and 2003, respectively. Because of these factors, the
accompanying financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates
realization of assets and the liquidation of liabilities in the normal course of
business. There are no assurances that we will be able to achieve a level of
revenues adequate to generate sufficient cash flow from operations or obtain
additional financing through private placements, public offerings and/or bank
financing necessary to support our working capital requirements. To the extent
that funds generated from any private placements, public offerings and/or bank
financing are insufficient, we will have to raise additional working capital. No
assurance can be given that additional financing will be available, or if
available, will be on acceptable terms. If adequate working capital is not
available we will be forced to discontinue operations, which would cause
investors to lose the entire amount of their investment.
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
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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.
o During the year ended December 31, 2004, a bank account was maintained
by an individual who is not an officer, employee or director. The
transactions for this account were not properly reflected on our books
and records. We have since revised our banking practices to ensure
that the books and records will be properly maintained to reflect all
transactions in a timely fashion. All bank accounts are now properly
maintained by an officer, employee or director of the company.
o During the year ended December 31, 2004, equipment purchases were
authorized by an individual who is not an officer, employee or
director, without prior approval by an officer or the board of
directors. We have since revised our authorization procedures to
require prior approval of purchases by an authorized officer up to
$5,000, and by the board of directors above that amount. Such
purchases will be supported by documentation from the vendor.
o Since inception, we have had transactions with related parties and/or
common shareholders, including the issuance of common stock for the
assignment of coal leases. We assigned a market value to the common
stock issued based on the potential value of the reserves covered by
the leases without regard to the historical cost basis to the related
parties or shareholders. Our auditors believe that the historical cost
basis as determined under GAAP is the appropriate valuation method for
all such transactions unless the fair value of the stock issued or
assets acquired is objectively measurable and the transferor's stock
ownership following the transaction is not so significant that the
transferor retains a substantial indirect interest in the assets as a
result of stock ownership in the company. We have accepted the
conclusions of our auditor and intend to use the appropriate valuation
method on any similar transactions in the future.
o Since inception, we have issued common stock for services rendered to
us. The valuation of this stock has been inconsistent and not
necessarily related to the stock's market price. We will henceforth
value such issuances based on the listed closing price of the stock on
the date we agree to issue such stock without any discount or
adjustment.
o We have received cash advances from individuals based on future
promises to repay the cash advances based on coal mined from our
Warfield lease. We recorded these advances as loans (notes payable)
instead of the sale of mineral interests. Henceforth, we will review
any such transactions in detail to ascertain the appropriate
accounting treatment.
Despite the material weaknesses identified, our principal executive and
financial officers believe that there are no material inaccuracies or omissions
of material facts necessary to make the statements included in this report not
misleading in light of the circumstances under which they are made. To overcome
the material weaknesses, our principal executive and financial officers directed
our internal accounting staff to provide additional substantive accounting
information and data to our auditors in conjunction with their audit of the
consolidated financial statements for the year ended December 31, 2004, and in
connection with their review of the consolidated financial statements for the
current quarter.
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. WE WERE IN DEFAULT OF INTEREST PAYMENTS ON OUR OUTSTANDING
6% SENIOR SECURED CONVERTIBLE NOTES FROM JULY 1, 2005 THROUGH JANUARY 13, 2006.
WHILE THE NOTE HOLDERS WAIVED THE PRIOR DEFAULTS, IF WE DEFAULT AGAIN ON ANY OF
OUR OUTSTANDING SENIOR SECURED CONVERTIBLE NOTES, THE NOTE HOLDERS WILL BE ABLE
TO TAKE IMMEDIATE POSSESSION OF ALL OF OUR ASSETS.
3
As of September 30, 2005, we had current liabilities totaling $6,012,447
and long-term liabilities totaling $10,830,803. To date in 2005, we have issued
8% senior secured convertible notes totaling $6,239,930.00, increasing our debt
obligations. We also have significant lease and royalty obligations. On July 1,
2005, we failed to pay interest as required pursuant the terms of certain 6%
senior secured convertible notes executed on February 24, 2005 for an aggregate
total face amount of $7,000,000, and thereby caused a default under the terms of
such notes. As a result of the event of default, the holders of the notes could
have declared the entire outstanding principal amount immediately due and
payable along with any interest accrued thereon. On September 23, 2005, we
entered into a Consent and Waiver Agreement with the 6% note holders, pursuant
to which they consented to a bridge note financing resulting in $170,000 in
total net proceeds and waived the application of default provision under the 6%
Notes for a period of ten business days. The waiver was extended to November 18,
2005. On January 13, 2006, the 6% note holders waived the prior defaults in
connection with a private placement of 8% senior secured convertible notes. If
we default again, the note holders will have the right to take immediate
possession of all of our assets. Based on past experience with the current
lenders, our management believes additional waivers will be granted by the
lenders, if necessary.
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.
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 minimal production at the mine
since February 2005. We plan to restart production when the coal washing
facility is completed which we estimate will be mid to late February 2006. 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, and
greatly reduce the company's ability to continue as a going concern.
A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUE AND
IF WE ARE UNABLE TO MAINTAIN OUR CURRENT CUSTOMER BASE OR ATTRACT A NEW CUSTOMER
BASE WE WILL BE REQUIRED TO CURTAIL OR CEASE OPERATIONS.
For the year ended December 31, 2004, approximately 97% of our sales were
to three customers: Progress Fuels accounted for 24% of total coal sales,
Eastern Consolidated Mining, Inc. accounted for 36% of coal sales and New River
Energy accounted for 37% of coal sales. In addition, we have a long-term
contract for coal sales to one other large customer, American Electric Power,
for the period beginning in June 2005 for the next three years. We have two
contracts with American Electric Power, one of which is a 12-month contract for
50,000 tons per month, with a 24-month option. If American Electric Power
exercises its option on this contract, the two contracts combined will account
for approximately 80% of our production capacity over the next three years and
account for approximately 15% of our current recoverable reserves. If American
4
Electric Power does not exercise its option on this contract, American Electric
Power will account for approximately 80% of our production capacity for the
first 12 months and 33 percent of our production and approximately 9% of our
current recoverable reserves. 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, we will be required to
curtail or cease operations.
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.
During January 2006 16 men died in four coal mining accidents in West Virginia.
As a result, West Virginia's Governor ordered a halt in coal mining until safety
checks could be conducted. If a similar significant accident were to occur at
our mines or other mines in Kentucky, such an accident would cause a minimum of
30 days of delayed production. A prolonged disruption of production at our mines
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.
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
5
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
customers of ours 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, and require that we find alternative customers. If we could not find
alternative customers, our revenues will be significantly impaired and we could
be forced to reduce operations.
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
adversely affect our business by decreasing demand for coal.
Other proposed initiatives, such as the Bush administration's announced
Clear Skies Initiative, may also have an adverse 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 and lowering our revenues.
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: employee health and safety; permitting and
licensing requirements regarding environmental and safety matters; air quality
standards; water quality standards; plant and wildlife and wetland protection;
blasting operations; the management and disposal of hazardous and non-hazardous
materials generated by mining operations; the storage of petroleum products and
other hazardous substances; reclamation and restoration of properties after
mining operations are completed; discharge of materials into the environment,
including air emissions and wastewater discharge; surface subsidence from
underground mining; and the effects of mining operations on groundwater quality
and availability.
6
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.
For a more detailed discussion of governmental regulation of our business,
please refer to pages 25-29 of this prospectus.
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.
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 which will reduce our revenues.
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 reduce our profit margins and accordingly have
a negative effect on our profitability.
7
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. If we do not accurately assess the
geological characteristics of any reserves that we acquire, we may not be able
to mine such properties at competitive costs, which would decrease our margins.
Exhaustion of reserves at existing mines would have a similar 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 reduce our revenues. 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 by reducing our margins and causing us to lose customers to such
competitors.
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
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 may vary materially from estimates, which
could significantly increase our costs and reduce revenues.
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 would cause us to lose revenue related to 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 lost 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.
8
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 WHICH MAKES IT DIFFICULT FOR
INVESTORS TO ENGAGE IN TRANSACTIONS IN OUR SECURITIES.
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. If public
trading of our common stock does not increase, a liquid markets will not develop
for our common stock. The potential effects of this include difficulties for the
holders of our common stock to sell our common stock at prices they find
attractive. If liquidity in the market for our common stock does not increase,
investors in our business may never realize a profit on their investment.
OUR STOCK PRICE IS VOLATILE WHICH MAY MAKE IT DIFFICULT FOR INVESTORS TO SELL
OUR SECURITIES FOR A PROFIT.
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;
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.
9
OUR COMMON STOCK IS DEEMED A "PENNY STOCK" UNDER THE RULES OF THE SEC, WHICH
MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME.
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 11,313,904 shares of
common stock to be registered under this registration statement will be freely
tradable upon effectiveness of this registration statement.
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. 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.
10
RECENT DEVELOPMENTS
Liquidity and Capital Resources
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6% Senior Secured Convertible Notes
On July 1, 2005, we failed to pay interest as required pursuant the terms
of certain 6% senior secured convertible notes executed on February 24, 2005 for
an aggregate total face amount of $7,000,000, and thereby caused a default under
the terms of the 6% senior secured convertible notes. The holders of the 6%
senior secured convertible notes are Gryphon Master Fund, L.P. and 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.
Subsequently, and in order to secure additional financing for continuing
operations, on September 23, 2005, we executed a promissory note (the "Bridge
Note") payable to Cordillera Fund L.P. for an aggregate principal amount of up
to $1,500,000. On November 24, 2005 the existing Bridge Note holders and us
agreed to increase the amount of debt by $300,000 to a total of $1,800,000. The
Bridge Note was subsequently cancelled on January 13, 2006 and exchanged for an
investment in our 8% senior secured convertible notes and warrants. See below
for a description of the material terms of this transaction.
In connection with the Bridge Note, we entered into a Consent and Waiver
with the holders of the 6% senior secured convertible notes, whereby they
consented to the Bridge Note transactions and waived, until resolution of the
Bridge Note transactions, the application of any of the provisions of the 6%
senior secured convertible notes and related transaction documents. We also
entered into a Subordination Agreement in connection with the Bridge Note,
whereby Cordillera Fund L.P. agreed to subordinate the Bridge Note to the prior
payment in full in cash of the 6% senior secured convertible notes. In addition,
the holders of the 6% senior secured convertible notes entered into a Bridge
Forbearance with us whereby they agreed to forebear from exercising any of their
rights or remedies under the 6% senior secured convertible notes and the related
securities purchase agreement, security agreement and any other related
transaction documents for a period of ten business days.
On October 6, 2005, the holders of the 6% senior secured convertible notes
signed an extension to the Bridge Forbearance until the earliest to occur of the
following: (i) November 18, 2005, (ii) the expiration and termination of the
Bridge Note, or (iii) the completion by us of a new financing. As described
below, on January 13, 2006, the 6% note holders signed another forbearance
agreement pursuant to which, among other things, they agreed to waive our prior
defaults on the 6% senior secured convertible notes
January 13, 2006 Private Placement
On January 13, 2006, we sold approximately $5.9 million principal amount of
8% senior secured convertible notes due June 30, 2008 to 18 accredited
investors. In connection with the sale of the 8% senior secured convertible
notes, we issued investors warrants to purchase an aggregate of approximately
3.3 million shares of common stock, calculated as 50% of each investor's
subscription amount divided by $0.90. Of the $5.9 million principal amount of 8%
senior secured convertible notes, we received gross proceeds of $3.4 million.
The remaining approximate $2.5 million principal amount of 8% senior secured
convertible notes was paid by investors as follows: (a) $1.8 million was paid by
the cancellation of promissory notes sold by us on September 23, 2005; (b)
$102,000 represents a management fee owed to the lead investor, Gryphon Master
Fund, L.P.; and (c) the remaining $598,000 represents interest accrued on our 6%
senior secured convertible notes sold February 24, 2005 and pursuant to certain
Additional Investment Rights sold February 24, 2005.
The 8% senior secured convertible notes have a final maturity date of June
30, 2008, accrue interest at the rate of 8% per annum, are secured by all of our
properties and assets and the properties and assets of each of our subsidiaries,
and are guaranteed by each of our subsidiaries. The 8% senior secured
convertible notes rank pari passu with our outstanding 6% senior secured
convertible notes. Interest may be paid either in cash or with shares of common
11
stock in our sole discretion. Holders of the 8% senior secured convertible notes
have the right to convert the outstanding principal amount into shares of our
common stock from time to time based on a conversion price of $0.90, subject to
adjustment. Beginning July 1, 2006, on the first day of each month we are
required to redeem 1/24th of the outstanding principal of the 8% senior secured
convertible notes (the "Monthly Redemption Amount"). If the transaction is
registered on an effective registration statement and certain other conditions
are satisfied, we may pay the Monthly Redemption Amount with shares of common
stock based on a conversion price equal to the lesser of (a) the then conversion
price and (b) 80% of the daily volume weighted average price of the common stock
for the 10 consecutive trading days prior to the applicable monthly redemption
date. In the event our annualized EBITDA for the two fiscal quarters ending
December 31, 2006 (the "Annualized EBITDA") is less than $17 million, the
conversion price of the 8% senior secured convertible notes will be reset to
equal the greater of (a) $0.30 or (b) a price determined by the following
formula: [3 * X/Y], where X equals the Annualized EBITDA and Y equals the number
of shares of common stock outstanding on a fully diluted basis on December 31,
2006. In addition, if we issue or commit to issue or distribute new securities
at a price per share less than the current market price or the current
conversion price, then the conversion price will be adjusted to reflect such
lower price. The conversion price is also subject to adjustment for stock
dividends, stock splits, stock combinations and similar dilutive transactions.
The warrants issued in connection with the 8% senior secured convertible
notes have an exercise price of $0.90 per share and are exercisable until
January 14, 2011. Holders may exercise the warrants on a cashless basis after
the first anniversary of the initial issuance date and then only in the event
that a registration statement covering the resale of the warrant shares is not
then effective. In the event our annualized EBITDA for the two fiscal quarters
ending December 31, 2006 (the "Annualized EBITDA") is less than $17 million, the
exercise price of the warrants will be reset to equal the greater of (a) $0.30
or (b) a price determined by the following formula: [3 * X/Y], where X equals
the Annualized EBITDA and Y equals the number of shares of common stock
outstanding on a fully diluted basis on December 31, 2006. In addition, if we
issue or commit to issue or distribute new securities at a price per share less
than the current market price or the current exercise price, then the exercise
price will be adjusted to reflect such lower price. The exercise price is also
subject to adjustment for stock dividends, stock splits, stock combinations and
similar dilutive transactions.
The investors have agreed to restrict their ability to convert the 8%
senior secured convertible notes and exercise the warrants 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 4.99% of our then issued and
outstanding shares of common stock.
We agreed to file a registration statement with the SEC registering the
resale of the shares of common stock issuable upon conversion of the 8% senior
secured convertible notes and related warrants on or before February 12, 2006
and cause such registration statement to be declared effective no later than May
31, 2006.
Forbearance Agreement
On January 13, 2006, we entered into a forbearance agreement with the
holders of our 6% senior secured convertible notes. In connection with the
January 13, 2006 private placement described above, holders of the 6% senior
secured convertible notes waived certain events of default (the "Existing
Defaults") by us including: (a) our failure to pay accrued but unpaid interest
on the 6% senior secured convertible notes when due; (2) our failure to comply
with certain negative and financial covenants of the securities purchase
agreement dated February 22, 2005; (3) our failure to comply with certain
registration requirements of the registration rights agreement dated February
24, 2005; and (4) our failure to comply with certain other provisions of the 6%
senior secured convertible notes, the February 22, 2005 securities purchase
agreement and the February 24, 2005 registration rights agreement to the extent
that completion of the January 13, 2006 private placement may cause any
processing delay of our prior registration statement (SEC File No. 333-127261)
with the SEC.
In connection with the forbearance agreement, we agreed to release and
discharge each of the parties thereto and each of their affiliates from any and
all claims that we have or ever had against such parties through January 13,
2006. Solely for the purpose of completing the January 13, 2006 private
placement, the parties waived the anti-dilution provisions of the 6% senior
secured convertible notes and the related warrants, any existing rights
associated with Additional Investment Rights and the right to liquidated damages
and other remedies under the February 24, 2005 registration rights agreement.
The parties also agreed to forbear from enforcing certain remedies as a result
of the Existing Defaults through December 30, 2005.
12
Pursuant to the terms of the forbearance agreement, the following
substantive amendments were made to the February 22, 2005 securities purchase
agreement, the 6% senior secured convertible notes, the related warrants and the
February 24, 2005 registration rights agreement:
o The minimum EBITDA financial covenants required by the February 22,
2005 securities purchase agreement through March 31, 2006 were
deleted.
o The maximum capital expenditures required by the February 22, 2005
securities purchase agreement were deleted in their entirety.
o The minimum cash level requirements of the February 22, 2005
securities purchase agreement through June 30, 3006 were deleted.
o The minimum cash level requirement of the February 22, 2005 securities
purchase agreement for the period from July 1, 2006 through September
30, 2006 was changed from $2 million to $1 million.
o The definition of "Conversion Price" in the 6% senior secured
convertible notes and "Exercise Price" in the related warrants was
changed from $1.70 to $0.90.
o The interest requirement of the 6% senior secured convertible notes
was changed to require interest payments beginning July 1, 2006.
o A provision was added to the 6% senior secured convertible notes and
the related warrants requiring an adjustment to the conversion price
and exercise price in the event our annualized EBITDA for the two
fiscal quarters ending December 31, 2006 (the "Annualized EBITDA") is
less than $17 million. In such event, the conversion price and
exercise price will be reset to equal the greater of (a) $0.30 or (b)
a price determined by the following formula: [3 * X/Y], where X equals
the Annualized EBITDA and Y equals the number of shares of common
stock outstanding on a fully diluted basis on December 31, 2006.
o A provision was added to the 6% senior secured convertible notes amd
the related warrants requiring an adjustment to the conversion price
and exercise price in the event we issue or commits to issue or
distribute new securities at a price per share less than the current
conversion or exercise price.
o The "Events of Default" provision of the 6% senior secured convertible
notes was amended replacing the event of default for failure to have
an effective registration statement within 270 days of the closing
date with an event of default for failure to have an effective
registration statement within 270 days of the closing date for the
January 13, 2006 private placement.
o An event of default was added to the 6% senior secured convertible
notes for a breach of any of our representations, warranties or
covenants contained in any agreement or document executed in
connection with the January 13, 2006 private placement.
o The required filing date and earliest required effectiveness date of
the February 24, 2005 registration rights agreement was changed to
February 12, 2006 and May 31, 2006, respectively.
Notwithstanding the availability of Rule 144, each investor agreed not to
sell, offer or otherwise transfer any shares of our common stock beneficially
owned by them until the earlier of: (a) May 31, 2006 or (b) the date the
required registration statement is declared effective by the SEC.
The parties also entered into an amended and restated security agreement
reflecting the pari passu nature of the 6% senior secured convertible notes with
the 8% senior secured convertible notes.
In lieu of cash payment of accrued but unpaid interest due pursuant to the
8% senior secured convertible notes, we issued holders 8% senior secured
convertible notes and warrants pursuant to the terms of the January 13, 2006
private placement.
In addition, the Company issued promissory notes to holders of the 6%
senior secured convertible notes in the aggregate principal amount of $2,640,000
which represents liquidated damages which had accrued and is payable pursuant to
the February 24, 2005 registration rights agreement. The promissory notes bear
interest at the rate of 3% per annum, compounded annually. The full amount of
principal and interest is due on June 30, 2008. Our obligations pursuant to the
promissory notes are secured by all of our properties and assets and the
properties and assets of each of our subsidiaries pari passu with the 6% senior
secured convertible notes and 8% senior secured convertible notes.
13
As additional incentive to enter into the forbearance agreement, we issued
certain 6% note holders who acquired their 6% senior secured convertible notes
pursuant to exercise of Additional Investment Rights additional warrants to
purchase an aggregate of 1,723,857 shares of common stock calculated pursuant to
the following formula: X = [(Y/$0.90) * (0.50 - Z)], where: X = the number of
shares of common stock underlying the warrant certificate; Y = the stated
aggregate principal amount of all 6% senior secured convertible notes; and Z =
the number of shares of common stock underlying all warrants issued to such
party in connection with the 6% senior secured convertible notes. The additional
warrants issued have identical terms to the warrants sold by us pursuant to the
January 13, 2006 private placement.
Other Agreements Executed in Connection with the January 13, 2006 Private
Placement
Also in connection with the January 13, 2006 private placement:
(a) we secured a directors and officers liability insurance policy which
provides $10,000,000 of total coverage;
(b) each of our then-current officers and directors entered into an
agreement to vote all shares of common stock owned by them to increase our
authorized shares of common stock from 50 million shares to 100 million shares;
(c) each of our then-current officers and directors entered into an
agreement to vote for Timothy M. Stobaugh, Robert Chmiel, Jesse Shelmire and
Scott Griffith as additional directors and for a fifth additional director
designated by Gryphon Master Fund, L.P. within 60 days of closing;
(d) each of our officers and directors entered into lock-up agreements
agreeing not to offer, sell, contract to sell, pledge or otherwise dispose of
any shares of common stock or other of our equity securities for the period
ending on January 13, 2007;
(e) our subsidiary Eastern Consolidated Energy, Inc. entered into an
agreement with Kentucky Energy Consultants, Inc. whereby Kentucky Energy
Consultants, Inc. agreed to: (i) change its coal sales commission to 2.5% of the
gross sales price received by Eastern Consolidated Energy, Inc. on any purchase
orders and/or contracts on either spot or contract arrangements, and (ii)
forfeit its coal sales commission of 2.5% of gross revenues less trucking costs
until such time that we reach $20 million in aggregate EBITDA production;
(f) our subsidiary Eastern Consolidated Energy, Inc. entered into an
agreement with New River Energy Sales Company, Inc. whereby, among other things,
New River Energy Sales Company, Inc. agreed to reduce its coal sales commission
from 5% to 2.5% of gross coal sales until such time that we reach $20 million in
aggregate EBITDA production;
(g) together with our subsidiary CEI Holdings, Inc., we entered into an
agreement with Saudi American Minerals, Inc. whereby, among other things: (i)
the parties terminated that certain Agreement and Plan of Acquisition and Merger
dated May 30, 2003 and all subsequent amendments to such agreement; and (ii) we
agreed to pay $750,000 cash and issue 3,000,000 shares of common stock to Saudi
American Minerals, Inc. in exchange for the assignment by Saudi American
Minerals, Inc. of a 25% interest in its patented clean coal technology (Patent
No. 6,447,559) including any subsequent improvements thereto; and
(h) we entered into a consulting agreement with RC Financial Group, LLC,
pursuant to which Robert Chmiel was retained as a non-exclusive financial
advisor for a term of 24 months in exchange for the following compensation: (i)
$17,500 each month from January 1, 2006 through June 30, 2006; (ii) $12,500 each
month thereafter; and (iii) issuance of a warrant to purchase 150,000 shares of
common stock with an exercise price of $0.90 per share and an expiration date of
December 31, 2011.
14
Operational Developments
- ------------------------
We have experienced unanticipated delays and considerable additional
expenses in connection with our mine development activities. The agreements
described above were necessary due to a series of events as described below.
The Pond Creek mine development which began in late February 2005, involved
a ventilation development plan and a slope development plan. The ventilation
development plan called for increasing the height of the existing Alma mine
intake and return air entries along with the connecting corridors. The planned
increase was from approximately 40 inches in height to approximately 108 inches
in height. This increase in height was scheduled for 1100 feet in both corridors
and the connecting corridors. Management initially estimated that the overall
plan would require 90 days to complete.
However, in late April 2005, the ventilation development crew, while
developing the ventilation improvement plan, encountered a geological fault
after completing approximately 1000 feet of both the fresh and return air
corridors. The condition threatened the ongoing useful life of the Alma mine.
Management decided in early May 2005 that it was imperative that we mitigate the
negative affects of the geological fault in order to secure the coal reserves
contained in the Alma coal seam. As a result of the ventilation development
changes, management redesigned the actual slope portion of the project to allow
the slopes to be relocated approximately 100 feet away from the geological
fault. The slope construction portion of the project was re-engaged and two of
the three slopes have reached the coal seam. The third slope has advanced
significantly towards the scheduled 610 feet. The corrective action began in
early May and has required approximately $3.5 million to address.
Slope construction is currently progressing on a two shift per day schedule
while Alma seam roof rehabilitation project is progressing on a one shift per
day schedule. To date, Slope #1 is complete, Slope #2 is complete and Slope #3
has progressed 525 feet of the anticipated 610 feet. The current progress rate
for slope advancement is approximately 12 feet per shift and the company is
currently operating two shifts per day. Slope #3, as of February 6, 2006, has
approximately 85 feet to advance before this slope is complete.
In the third week of July 2005, a more detailed review of the existing Alma
seam was conducted by the Mine Safety and Health Administration. As a result of
the review, it was strongly recommended that we re-secure approximately 9,600
feet of roof in a portion of the mine that had been mined by a previous mine
owner/operator. Management immediately directed a full time crew with the
appropriate equipment to address the concerns offered by the regulatory agency.
This project is still ongoing and is expected to be completed in the first
quarter of 2006 at an estimated cost of approximately $2 million.
The wash plant construction project was initiated in mid March 2005. The
initial plan provided for a certain location and equipment type. However, during
the rework of the Pond Creek project, management was able to negotiate to have a
significant amount of Alma coal washed by third parties. Management sought to
have this product washed in order to verify the laboratory reports obtained
earlier. Information obtained during this process indicated that we could
potentially realize greater profits from the washed coal if some adjustments
were made to the initial wash plant plans. In early June 2005, management
determined to change the design, final location, and overall size of the
proposed wash plant to accommodate this new information. As a result of these
changes, the overall budgeted cost of the wash plant was increased by
approximately 12.5% (from $4 million to $4.5 million) and completion has been
delayed. The wash plant erecting contractor is behind schedule. However, the
contractor has indicated that we should be able to begin processing coal through
the wash plant by mid to late February 2006.
The events described above have caused delays and increased development
costs significantly. As a result, management, in January 1006, obtained the
additional financing described above in order to (1) sustain operations and (2)
complete mine development and construction of the coal washing plant.
In addition to the increased costs, the delay in full scale production has
caused us to miss our delivery deadlines for supplying coal pursuant to the two
contracts we signed with American Electric Power. The first contract called for
36 months of delivery of 40,000 tons of coal per month to Kentucky Power Company
beginning as early as March 2005. American Electric Power has verbally agreed to
postpone the initial delivery date until the first quarter of 2006 and extend
15
the monthly delivery obligation to the end of the contract. The second contract
called for delivery of 60,000 tons per month beginning in July 2005 through
December 2005 and 50,000 tons per month from January 2006 through June 2006 to
Ohio Valley Electric Corporation's Kyger Creek Plant in Cheshire, Ohio. On this
second contract, we have arranged for an unrelated third party, New River
Energy, LLC to supply and deliver up to 40,000 tons of coal per month as an
alternative supplier through December 2005. The supply agreement with New River
Energy, LLC is oral. For this alternative supply, we have agreed to pay New
River Energy, LLC up to $2 per ton of delivered coal, payable in stock or cash
at our option. New River Energy, LLC began supplying coal pursuant to this oral
agreement to the Kyger Creek Plant in July 2005 and has shipped approximately
138,000 tons through the end of December 2005.
American Electric Power representatives have given us verbal assurances
that they do not intend to try to invoke contractual penalties for the
production and delivery delays. American Electric Power has represented that it
is willing to wait for us to solve our mining problems and have suggested that
any tonnage shortfalls may be added to the end of the existing contracts.
Weakness in Disclosure Controls and Procedures
- ----------------------------------------------
Our independent auditors 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. The five matters described
below resulted in incorrect reporting in our financial statements.
1. During the year ended December 31, 2004, a bank account was
maintained by an individual who is not an officer, employee or director.
The transactions for this account were not properly reflected on our books
and records. We have since revised our banking practices to ensure that the
books and records will be properly maintained to reflect all transactions
in a timely fashion. All bank accounts are currently maintained by
authorized officers of the corporation.
2. During the year ended December 31, 2004, equipment purchases were
authorized by an individual who is not an officer, employee or director,
without prior approval by an officer or the board of directors. We have
since revised our authorization procedures to require prior approval of
purchases by an authorized officer up to $5,000, and by the board of
directors above that amount. Such purchases will be supported by
documentation from the vendor.
3. Since inception, we have had transactions with related parties
and/or common shareholders, including the issuance of common stock for the
assignment of coal leases. We assigned a market value to the common stock
issued based on the potential value of the reserves covered by the leases
without regard to the historical cost basis to the related parties or
shareholders. Our auditors believe that the historical cost basis as
determined under GAAP is the appropriate valuation method for all such
transactions unless the fair value of the stock issued or assets acquired
is objectively measurable and the transferor's stock ownership following
the transaction is not so significant that the transferor retains a
substantial indirect interest in the assets as a result of stock ownership
in the company. We have accepted the conclusions of our auditor and intend
to use the appropriate valuation method on any similar transactions in the
future.
4. Since inception, we have issued common stock for services rendered
to us. The valuation of this stock has been inconsistent and not
necessarily related to the stock's market price. We will henceforth value
such issuances based on the listed closing price of the stock on the date
we agree to issue such stock without any discount or adjustment.
5. We have received cash advances from individuals based on future
promises to repay the cash advances based on coal mined from our Warfield
lease. We recorded these advances as loans (notes payable) instead of the
sale of mineral interests. Henceforth, we will review any such transactions
in detail to ascertain the appropriate accounting treatment.
Despite the material weaknesses identified, our principal executive and
financial officers believe that there are no material inaccuracies or omissions
of material facts necessary to make the statements included in this prospectus
not misleading in light of the circumstances under which they are made. To
16
overcome the previous material weaknesses, we have hired an interim Chief
Financial Officer with SEC reporting experience. We also utilized the advice and
experience of this individual as a consultant in preparation of the consolidated
financial statements for the year ended December 31, 2004, and in connection
with their review of the consolidated financial statements for the September 30,
2005 quarter.
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.
USE OF PROCEEDS
We will not receive any proceeds from the conversion of the 6% senior
secured convertible notes, the conversion of the 8% senior secured convertible
notes or the sale of the common stock. We will, however, receive proceeds from
the exercise of our common stock purchase warrants if such warrants are
exercised for cash. We currently have a total of 2,058,824 warrants outstanding
with an issue date of February 24, 2005, and 9,774,472 warrants outstanding with
an issue date of January 13, 2006. All warrants have an exercise price of $0.90
each. If all warrants were exercised for cash, we would receive cash proceeds
totaling $10,649,966.40. We would use any such proceeds received to accelerate
the development of coal seams located on the properties currently under lease.
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. Over the next 6-12 months we expect all coal
production to be sold solely through existing long-term contracts. If no other
long-term contracts are executed, we anticipate selling any coal not covered by
the existing contracts in the spot market.
We have committed nearly 100% of our current anticipated overall run-rate
to American Electric Power. We have two contracts with American Electric Power,
one of which is a 12-month contract for approximately 50,000 tons per month,
with a 24-month option. If American Electric Power exercises its option on this
contract, the two contracts combined will account for approximately 95% of our
production capacity over the next three years and account for approximately 15%
of our current recoverable reserves. If American Electric Power does not
exercise its option on this contract, American Electric Power will account for
approximately 70% of our production capacity for the first 12 months and
approximately 9% of our current recoverable reserves.
We are also involved in gas and oil property development through our wholly
owned subsidiary Consolidated Oil and Gas, Inc. We have interests in one
producing gas well drilled in the third quarter of 2004. For the year ended
December 31, 2004, 100% of our revenue was generated from coal sales. As of
September 30, 2005, more than 99% of all revenue was a result of coal sales
revenue, and less than 1% from the sale of oil and gas.
In June 2003, we signed a definitive agreement to acquire Saudi American
Minerals, Inc. with an effective date to coincide with the effective date of a
Form S-4 registration statement which was being prepared to be filed with the
SEC. As of December 30, 2005, we negotiated with Saudi American to terminate the
acquisition agreement and enter into an alternative arrangement to acquire a 25%
17
interest in Saudi American Minerals' technology. Termination of the original
agreement with Saudi American Minerals allows us to share in 25% in all revenue
associated with Saudi American Minerals' clean coal technology (Patent No.
6,447,559). We are not obligated to invest any additional time or money in
development or promotional costs of the clean coal technology. We compensated
Saudi American Minerals for terminating the original agreement by extending to
Saudi American Minerals, in its sole discretion, the exclusive right to
terminate and declare null and void the alternative agreement until we make the
required stock and cash payments. We are required to pay Saudi American Minerals
$750,000 cash no later than July 31, 2007 and we must issue Saudi American
Minerals 3 million shares of common stock within 20 days after we increase our
authorized shares of common stock from 50 million to 100 million shares. As per
the terms of the alternative agreement, we expect to complete the acquisition on
or before July 31, 2007. In accordance with the terms of the agreement, if we
achieve an aggregate EBITDA from January 1, 2006 of $20 million before July 31,
2007, then closing could occur sooner.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenues were down in the nine months ended September 30, 2005 compared to
the prior year period because management suspended mining operations in February
and began slope construction and other preparations to mine an additional coal
seam in our Warfield mine. Mining operations resumed on a limited basis in June
2005 to allow management to make several mining and coal quality evaluations and
assessments. Currently, all mining operations have been suspended until such
time as the wash facility is completed and ready to process coal. The
implications and significance of suspending operations in February included
diminished revenues and increased expenses. Slope construction is currently
progressing on a two shift per day schedule while Alma roof rehabilitation is
progressing on a one shift per day schedule. We have substantially completed a
coal washing plant at the Warfield mine in order to further enhance the quality
and sale value of the mined coal. This project is scheduled to be operational in
the first quarter of 2006. The Alma seam is scheduled to engage two production
shifts per day as soon as the Warfield washing facility is complete and ready to
process coal. Management anticipates that production from the Alma and Pond
Creek coal seams should be sufficient to allow us to earn a profit from
operations. We have had difficulty producing coal since inception due to lack of
funding and need for development. Our management, however, does anticipate that
with the proper funding, we will be able to produce coal at a reasonable profit
based on the current cost structure and current sales contracts.
For the nine months ended September 30, 2005, we had revenues of
$1,816,305. Costs and expenses totaled $5,458,387 for a net loss of $3,642,082,
or $.27 per share. For the nine months ended September 30, 2004, we had revenues
of $2,180,868. Costs and expenses for the nine months ended September 30, 2004
totaled $5,020,456 for net loss of $2,839,588, or $.30 per share.
Cost of revenue for the nine months ended September 30, 2005 decreased from
$2,654,192 to $1,959,506. As discussed above, the makeup of the cost of revenue
changed significantly as the cost of revenue during the nine months ended
September 30, 2004 included only costs of coal mined. The cost of revenue in the
nine months ended September 30, 2005 included increases of $403,000 in cost of
purchased coal, $55,000 in cost of coal washing, and $118,526 in trucking
expenses. The above increases were offset by reductions in labor and associated
payroll burden of $1,074,000, commissions of $70,000, coal taxes of $66,000, and
repairs and supplies of $76,000.
18
Operating expenses increased to $2,897,778 for the nine months ended
September 30, 2005 from $1,467,660 in the prior year period. All significant
increases were due to expenses incurred in connection with ours financing
efforts. Consulting fees decreased from $939,474 for the nine months ended
September 30, 2004 to $460,179 in 2005. Legal and accounting fees increased in
the period to $514,721 from $143,281 for the same period in 2004.
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 $4,875,000 the fair
market 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 incurred a net loss of $6,413,900
compared to a net loss for the year ended December 31, 2003 of $1,401,722. We
generated revenues of $2,746,983 for the year ended December 31, 2004 with costs
and expenses of $9,160,883, compared to revenues of $649,606 for the year ended
December 31, 2003 with costs and expenses of 2,051,328. 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 costs and expenses,
including cost of revenue, 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.
Cost of Revenue for 2004 was $3,727,162 compared to $1,035,295 in 2003
primarily due to increases in coal royalties and coal taxes as well as direct
labor, all as a result of increased mining and production. Coal Royalties
increased from $89,346 in 2003 to $464,044 in 2004. Coal taxes increased from
$54,580 in 2003 to $240,319 in 2004. Direct labor associated with increased
activities in 2004 amounted to $1,895,461 as opposed to $434,688 in 2003.
Operating expenses for 2004 increased to $4,205,518 from $659,076 in 2003
in part due to the extended mining operating time in 2004. We did not begin
mining operations until September 2003 but were in continuous operation for the
entire year of 2004. In addition to normal increases due to the more extended
time period of operations, directors' fees and consulting fees in particular
accounted for a substantial part of the increase in operating expenses. Expenses
recorded for shares issued for director fees and consultant services totaled
$3,337,000 in 2004 compared to $395,850 in 2003. Consultant services consisted
primarily of accounting and operations management consulting services, as well
as services performed in connection with acquiring coal leases.
19
Interest expenses in 2004 increased to $878,949 from $246,911 in 2003
because we had to secure additional funds to sustain operations in 2004.
Interest expense will most likely increase in the next 12 months due to
additional funding requirements.
Depreciation and amortization expense increased to $265,394 from $110,046
because we acquired additional equipment. We plan to continue equipment
purchases in the next 12 months and therefore expects that depreciation and
amortization expense will continue to increase.
We moved from a production mode during the first three quarters of fiscal
2004 to a mine development mode during the last quarter of 2004. We decided to
expand our operational capabilities by developing additional coal seams and coal
washing capabilities for future growth.
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. We obtained an additional $300,000 under the terms of our $1.5 million
bridge loan described on page 11 of this prospectus, bringing the total amount
of the Bridge Note to $1.8 million. This allowed us to continue operating
through the middle of January 2006. Subsequently, we were able to secure
additional financing with terms agreeable to the Bridge Note holders which
transferred the bridge note into the additional funding, the material terms of
which are described beginning on page 11 of this prospectus. Our management
believes we now have enough cash to continue operations through the end of March
2006 with no other influx of cash. Once into production, we are scheduled to
generate adequate cash flow from coal sales. As described above, we have
suspended coal production until completion of the wash plant, which we
anticipate completing by the end of February 2006. Once the wash plant is
complete, we plan to implement coal production in two seams of coal located on
the leased property. This coal production will be generated by continuous mining
methods in both the Alma and Pond Creek seams of coal.
We have not established revenues sufficient to cover our operating costs,
and, accordingly, the report of our auditor at December 31, 2004 contains a
statement that there is substantial doubt about its ability to continue as a
going concern. At this filing date, we are still seeking financing. If financing
is secured, we believe we will also have sufficient capital to complete mine
development, complete the wash plant, and upgrade the equipment necessary to
substantially increase the production capability of the Alma seam. If such
funding is received and we successfully complete the planned increase in
production, management believes we will have adequate resources for operations
for the next twelve months. If such funding is not received, we may be forced to
suspend or cease operations
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 $1,085,000. 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
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 $2,871,992 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.
20
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.
Nine Months Ended September 30, 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 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
notes for an aggregate total face amount of $7,000,000 and a term of three
years. The 6% senior secured 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.
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 convertible 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
21
$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. During June 2005, seven investors exercised their additional investment
rights for an aggregate of $6,000,000 in 6% senior secured convertible 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. In July,
placement agent warrants for the purchase of 352,994 shares issued in connection
with the exercise of the additional investment rights were exercised pursuant to
cashless exercise provisions for the issuance of 166,290 shares.
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 convertible 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.
The proceeds received from the financing transaction described above were
budgeted to allow us to:
- access the Pond Creek coal seam at Warfield;
- acquire the equipment necessary to mine the Pond Creek seam;
- prepare to construct a coal washing facility at Warfield;
- begin engineering and permitting of other coal seams at Warfield.
A portion of the proceeds received from the transaction has been 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 was originally scheduled to be near
completion by the end of the third quarter of 2005. The schedule of completion
of this project has been rescheduled to the end of February 2006. The company
has experienced additional time and cost associated with repairs to equipment
used in the construction project due to the additional material the equipment
had to remove due to the geological fault encountered.
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. The wash
plant construction project was initiated in mid March 2005. The initial plan
provided for a certain location and equipment type. However, during the rework
of the Pond Creek project, management was able to negotiate to have a
significant amount of Alma coal washed by third parties. Management sought to
have this product washed in order to verify the laboratory reports obtained
earlier. Information obtained during this process indicated that the Company
could potentially realize greater profits from the washed coal if some
adjustments were made to the initial wash plant plans. In early June 2005,
management determined to change the design, final location, and overall size of
the proposed wash plant to accommodate this new information. As a result of
these changes, the overall budgeted cost of the wash plant was increased by
approximately 12.5% (from $4 million to $4.5 million) and completion has been
delayed. The wash plant erecting contractor is behind schedule but has indicated
that construction is over 80% complete and estimates that the construction will
be completed no later than the end of February 2006.
22
A portion of the proceeds received from the financing transaction was used
to secure the equipment which will be used to mine the Alma and Pond Creek coal
seams. A number of pieces of equipment are on site and in position ready to mine
coal.
At September 30, 2005, the Company had current assets of $140,589
consisting of cash of $63,611, $72,967 in accounts receivable and $4,011 in
prepaid expenses. The Company had current liabilities of $6,012,447, consisting
of $1,004,863 in accounts payable, $1,155,679 in accrued liabilities, $326,402
in royalties payable, $546,429 in notes payable, $1,327,666 in current capital
lease obligations, $702,438 in convertible debentures, $722,717 in a note
payable to a related party, and $226,253 in deferred revenue, for a working
capital deficit of $5,871,858.
At September 30, 2005, the Company had long-term liabilities of $161,582 in
deferred royalties payable, $74,675 for long term notes payable, and $10,594,546
for its senior 6% secured notes payable.
At September 30, 2005, the Company had fixed assets of building and
equipment of $9,642,835 (net of depreciation) and coal leases of $11,977,508
(net of amortization). The Company had other assets of $167,274, consisting of
restricted cash, prepaid royalty and other assets.
For the period ended September 30, 2005, cash flows used by operating
activities totaled $1,909,568. Cash used by investing activities totaled
$10,455,351, primarily for the purchase of mining equipment, plus the
capitalized cost of a coal lease.
Cash provided by financing activities totaled $12,424,138, primarily from
the proceeds of the senior 6% convertible notes, plus proceeds from notes
payable and advances from related parties, offset by payment of notes payable,
payments to related parties, and payment of capital leases.
DESCRIPTION OF BUSINESS
We are a company engaged in coal mining operations, gas and oil property
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
"Consolidated Oil & Gas" with one well drilled and operating.
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 the barbecues, our
management determined that without significant additional funding, we would not
be able to compete in the barbecue business. Accordingly, after several
unsuccessful attempts to obtain additional funding, we determined that it was in
our shareholders' best interest to cease the barbecue business and search for
alternative businesses while we were still solvent. Accordingly, 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. We changed our
corporate name to Consolidated Energy, Inc. in order to better reflect our
current business operations. Our management believed changing domicile to
Wyoming was in our best interest because Wyoming is one of the leading coal
producing states in the United States and was appropriate since our business
focus changed to coal production. In addition, our new chosen corporate name
Consolidated Energy, Inc. was not available in Nevada.
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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
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 February of 2006.
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 could commence as early as the fourth quarter of 2006.
Oil and Gas
We acquired 400 acres which are permitted in Morgan County, Kentucky, to
develop the property. Consolidated Oil & Gas drilled a gas well into the
Devonian Shale gas formation in the fourth quarter 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. Currently, there are approximately 700
to 900 MCF per month being delivered to market via Jefferson Gas Company.
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 Minerals, Inc. with an effective date to coincide with an
effective date of a Form S-4 registration statement. In connection with our
January 13, 2006 private placement, we entered into an agreement with Saudi
American Minerals, Inc. whereby, among other things: (i) the parties terminated
24
the agreement to acquire 100% ownership of Saudi American Minerals, Inc.; and
(ii) we agreed to pay $750,000 cash and issue 3,000,000 shares of common stock
to Saudi American Minerals, Inc. in exchange for the assignment by Saudi
American Minerals, Inc. of a 25% interest in its patented clean coal technology
(Patent No. 6,447,559) including any subsequent improvements thereto. The recent
termination of the original agreement to acquire Saudi American Minerals, Inc.
allows us to focus on our core coal business. The new purchase agreement allows
us to share in 25% of any and all revenues associated with the clean coal
technology. We are not obligated to invest any additional time or money in
development or promotional costs of the clean coal technology. We compensated
Saudi American Minerals for terminating the original agreement by extending to
Saudi American Minerals, in its sole discretion, the exclusive right to
terminate and declare null and void the alternative agreement until we make the
required stock and cash payments. We are required to pay Saudi American Minerals
$750,000 cash no later than July 31, 2007 and we must issue Saudi American
Minerals 3 million shares of common stock within 20 days after we increase our
authorized shares of common stock from 50 million to 100 million shares.
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
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.
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 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.
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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:
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.
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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
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 properties 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.
DEPENDENCE ON MAJOR CUSTOMERS
Our coal production operation has a varied and quite versatile number of
potential customers for the coal mined and made available for sale. Our
management anticipates coal production from three seams of coal by the end of
2006. This coal will be produced from the Alma, Pond Creek and Taylor seams of
coal located on our leased property. Over the next 6-12 months we expect all
coal production to be sold solely through existing long-term (1-5 years)
contracts. One of the existing contracts is for a 36-month term and the other
contract is for a 12-month term. The two contracts will consume most of our
anticipated production for the next 12 months. If no other long-term contracts
are executed, we anticipate selling any coal not covered by the existing
contracts in the spot market.
Eastern has committed approximately one third of its current anticipated
overall run-rate to American Electric Power. Eastern has two contracts with
American Electric Power, one of which is a 12-month contract for 50,000 tons per
month, with a 24-month option. If American Electric Power exercises its option
on this contract, the two contracts combined will account for approximately 80
percent of our production capacity over the next three years and account for
approximately 15 percent of our current recoverable reserves. If American
Electric Power does not exercise its option on this contract, American Electric
Power will account for approximately 80 percent of our production capacity for
the first 12 months and 33 percent of our production and approximately nine
percent of our current recoverable reserves.
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,
27
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
slope in order to reach the Pond Creek reserves. Eastern expects to complete the
planned slope construction sometime in February, 2006.
GOVERNMENTAL REGULATION
The coal mining industry is subject to extensive regulation by federal,
state and local authorities on matters such as: employee health and safety;
permitting and licensing requirements regarding environmental and safety
matters; air quality standards; water quality standards; plant and wildlife and
wetland protection; blasting operations; the management and disposal of
hazardous and non-hazardous materials generated by mining operations; the
storage of petroleum products and other hazardous substances; reclamation and
restoration of properties after mining operations are completed; discharge of
materials into the environment, including air emissions and wastewater
discharge; surface subsidence from underground mining; and the effects of mining
operations on groundwater quality and availability. Complying with these
requirements, including the terms of our permits, has had, and will continue to
have, a significant effect on our costs of operations. We could incur
substantial costs, including clean up costs, fines, civil or criminal sanctions
and third party claims for personal injury or property damage as a result of
violations of or liabilities under these laws and regulations.
In addition, the utility industry, which is the most significant end-user
of coal, is subject to extensive regulation regarding the environmental impact
of its power generation activities, which could affect demand for our coal. The
possibility exists that new legislation or regulations may be adopted which
would have a significant impact on our mining operations or our customers'
ability to use coal and may require us or our customers to change operations
significantly or incur substantial costs.
Need for government approval of our products and services
Numerous governmental permits and approvals are required for mining
operations. In connection with obtaining these permits and approvals, we are, or
may be, required to prepare and present to federal, state or local authorities
data pertaining to the effect or impact that any proposed exploration for or
production of coal may have upon the environment, the public, historical
artifacts and structures, and our employees' health and safety. The requirements
imposed by such authorities may be costly and time-consuming and may delay
commencement or continuation of exploration or production operations. Future
legislation and administrative regulations may emphasize the protection of the
environment and health and safety and, as a consequence, our activities may be
more closely regulated. Such legislation and regulations, as well as future
interpretations of existing laws, may require substantial increases in our
equipment and operating costs and delays, interruptions or a termination of
operations, the extent of which cannot be predicted.
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.
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Mine Health and Safety Laws
Stringent health and safety standards were imposed by federal legislation
when the Federal Coal Mine Safety and Health Act of 1969 was adopted. The
Federal Mine Safety and Health Act of 1977, which significantly expanded the
enforcement of safety and health standards of the Coal Mine Safety and Health
Act of 1969, imposes safety and health standards on all mining operations.
Regulations are comprehensive and affect numerous aspects of mining operations,
including training of mine personnel, mining procedures, blasting, the equipment
used in mining operations and other matters. The Federal Mine Safety and Health
Administration monitors compliance with these federal laws and regulations and
can impose penalties ranging from $60 to $60,000 per violation, as well as
closure of the mine. In addition, as part of the Coal Mine Safety and Health Act
of 1969 and the Federal Mine Safety and Health Act of 1977, the Black Lung
Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977, as
amended in 1981, requires payments of benefits to disabled coal miners with
black lung disease and to certain survivors of miners who die from black lung
disease.
In 2001, Kentucky made significant changes to its mining laws. A new
independent agency, the Kentucky Mine Safety Review Commission, was created to
assess penalties against anyone, including owners or part owners (defined as
anyone owning one percent or more shares of publicly traded stock), whose
intentional violations or order to violate mine safety laws place miners in
imminent danger of serious injury or death. Mine safety training and compliance
with state statutes and regulations related to coal mining is monitored by the
Kentucky Office of Mine Safety and Licensing. The Commission can impose a
penalty of up to $10,000 per violation, as well as suspension or revocation of
the mine license.
It is our responsibility to employees to provide a safe and healthy
environment through training, communication, following and improving safety
standards and investigating all accidents, incidents and losses to avoid
reoccurrence. Most aspects of mine operations are subject to extensive
regulation. This regulation has a significant effect on our operating costs.
However, our competitors are subject to the same level of regulation.
Black Lung Legislation
Under the federal Black Lung Benefits Act (as amended) (the "Black Lung
Act"), each coal mine operator is required to make black lung benefits or
contribution payments to:
o current and former coal miners totally disabled from black lung
disease;
o certain survivors of a miner who dies from black lung disease or
pneumoconiosis; and
o a trust fund for the payment of benefits and medical expenses to any
claimant whose last mine employment was before January 1, 1970, or
where a miner's last coal employment was on or after January 1, 1970
and no responsible coal mine operator has been identified for claims,
or where the responsible coal mine operator has defaulted on the
payment of such benefits.
Federal black lung benefits rates are periodically adjusted according to the
percentage increase of the federal pay rate.
In addition to the Black Lung Act, we also are liable under various state
statutes for black lung claims. To a certain extent, our federal black lung
liabilities are reduced by our state liabilities.
The United States Department of Labor issued a final rule, effective
January 19, 2001, amending the regulations implementing the Black Lung Act. The
amendments give greater weight to the opinion of the claimant's treating
physician, expand the definition of black lung disease and limit the amount of
medical evidence that can be submitted by claimants and respondents. The
amendments also alter administrative procedures for the adjudication of claims,
which, according to the Department of Labor, results in streamlined procedures
that are less formal, less adversarial and easier for participants to
understand. These and other changes to the black lung regulations could
significantly increase our exposure to federal black lung benefits liabilities.
Experience to date related to these changes is not sufficient to determine the
impact of these changes. The National Mining Association challenged the
amendments but the courts, to date, with minor exception, affirmed the rules.
However, the decision left many contested issues open for interpretation.
Consequently, we anticipate increased litigation until the various federal
District Courts have had an opportunity to rule on these issues.
29
In recent years, proposed legislation on black lung reform has been
introduced in, but not enacted by, Congress and the Kentucky legislature. It is
possible that legislation on black lung reform will be reintroduced for
consideration by these legislative bodies. If any of the proposals that have
been introduced is passed, the number of claimants who are awarded benefits
could significantly increase. Any such changes in black lung legislation, if
approved, or in state or federal court rulings, may adversely affect our
business, financial condition and results of operations.
Environmental Laws and Regulations
We are subject to various federal environmental and mining laws, including:
the Surface Mining Control and Reclamation Act of 1977; the Clean Air Act; the
Clean Water Act; the Toxic Substances Control Act; the Comprehensive
Environmental Response, Compensation and Liability Act; the U.S. Army Corps of
Engineers; and the Resource Conservation and Recovery Act. We are also subject
to state laws of similar scope in each state in which we operate. These
environmental laws require reporting, permitting and/or approval of many aspects
of coal operations. Both federal and state inspectors regularly visit mines and
other facilities to ensure compliance. We have ongoing compliance and permitting
programs designed to ensure compliance with such environmental laws.
Surface Mining Control and Reclamation Act (the "SMCRA")
The SMCRA, and its state counterparts, establish operational, reclamation
and closure standards for all aspects of surface mining as well as many aspects
of underground mining. The SMCRA requires that comprehensive environmental
protection and reclamation standards be met during the course of and following
completion of mining activities. Permits for all mining operations must be
obtained from the Federal Office of Surface Mining Reclamation and Enforcement
or, where state regulatory agencies have adopted federally approved state
programs under the SMCRA, the appropriate state regulatory authority. Kentucky
has achieved primary jurisdiction for enforcement of the SMCRA through approved
state programs.
The SMCRA and similar state statutes, among other things, require that
mined property be restored in accordance with specified standards and approved
reclamation plans. The mine operator must submit a bond or otherwise secure the
performance of these reclamation obligations. The earliest a reclamation bond
can be fully released is five years after reclamation has been achieved. All
states impose on mine operators the responsibility for repairing or compensating
for damage occurring on the surface as a result of mine subsidence, a possible
consequence of underground mining. In addition, the Abandoned Mine Reclamation
Fund, which is part of the SMCRA, imposes a tax on all current mining
operations, the proceeds of which are used to restore unreclaimed mines closed
before 1977. The maximum tax is $0.35 per ton on surface-mined coal and $0.15
per ton on underground-mined coal.
Clean Air Act
The federal Clean Air Act and similar state laws and regulations, which
regulate emissions into the air, affect coal mining and processing operations
primarily through permitting and/or emissions control requirements. In addition,
the Environmental Protection Agency (the "EPA") has issued certain, and is
considering further, regulations relating to fugitive dust and particulate
matter emissions that could restrict our ability to develop new mines or require
us to modify our operations. In July 1997, the EPA adopted new, more stringent
National Ambient Air Quality Standards for particulate matter, which may require
some states to change existing implementation plans for particulate matter.
Because coal mining operations and plants burning coal emit particulate matter,
our mining operations and utility customers are likely to be directly affected
when the revisions to the National Ambient Air Quality Standards are implemented
by the states. Regulations under the Clean Air Act may restrict our ability to
develop new mines or could require us to modify our existing operations, and may
have a material adverse effect on our financial condition and results of
operations.
The Clean Air Act also indirectly affects coal mining operations by
extensively regulating the air emissions of coal-fired electric power generating
plants. Coal contains impurities, such as sulfur, mercury and other
constituents, many of which are released into the air when coal is burned. New
30
environmental regulations governing emissions from coal-fired electric
generating plants could reduce demand for coal as a fuel source and affect the
volume of our sales. For example, the federal Clean Air Act places limits on
sulfur dioxide emissions from electric power plants. In order to meet the
federal Clean Air Act limits for sulfur dioxide emissions from electric power
plants, coal users need to install scrubbers, use sulfur dioxide emission
allowances (some of which they may purchase), blend high sulfur coal with low
sulfur coal or switch to low sulfur coal or other fuels. The cost of installing
scrubbers is significant and emission allowances may become more expensive as
their availability declines. Switching to other fuels may require expensive
modification of existing plants.
On March 15, 2005, the EPA adopted a new federal rule to cap and reduce
mercury emissions from both new and existing coal-fired power plants. The
reductions will be implemented in stages, primarily through a market-based
cap-and-trade program. Nevertheless, the new regulations will likely require
some power plants to install new equipment, at substantial cost, or discourage
the use of certain coals containing higher levels of mercury.
Other new and proposed reductions in emissions of sulfur dioxides, nitrogen
oxides, particulate matter or various greenhouse gases may require the
installation of additional costly control technology or the implementation of
other measures, including trading of emission allowances and switching to other
fuels. For example, the EPA recently proposed separate regulations to reduce the
interstate transport of fine particulate matter and ozone through reductions in
sulfur dioxides and nitrogen oxides throughout the eastern United States. The
EPA continues to require reduction of nitrogen oxide emissions in 22 eastern
states and the District of Columbia and will require reduction of particulate
matter emissions over the next several years for areas that do not meet air
quality standards for fine particulates and for certain major sources
contributing to those exceedances. In addition, the EPA has issued draft
regulations, and Congress and several states are now considering legislation, to
further control air emissions of multiple pollutants from electric generating
facilities and other large emitters. These new and proposed reductions will make
it more costly to operate coal-fired plants and could make coal a less
attractive fuel alternative in the planning and building of utility power plants
in the future. To the extent that any new and proposed requirements affect our
customers, this could adversely affect our operations and results.
Along with these regulations addressing ambient air quality, 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 may
restrict 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. These requirements could limit the demand for
coal in some locations.
The United States 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. Some of these lawsuits have settled, requiring
the utilities to pay penalties, install pollution control equipment and/or
undertake other emission reduction measures, and the remaining lawsuits or
future lawsuits could require the utilities involved to take similar steps,
which could adversely impact their demand for coal.
Any reduction in coal's share of the capacity for power generation could
have a material adverse effect on our business, financial condition and results
of operations. The effect such regulations, or other requirements that may be
imposed in the future, could have on the coal industry in general and on us in
particular cannot be predicted with certainty.
We believe we have obtained all necessary permits under the Clean Air Act.
We monitor permits required by operations regularly and take appropriate action
to extend or obtain permits as needed.
Clean Water Act
The federal Clean Water Act and corresponding state laws affect coal mining
operations by imposing restrictions on discharges into regulated effluent
waters. Permits requiring regular monitoring and compliance with effluent
limitations and reporting requirements govern the discharge of pollutants into
regulated waters. We believe we have obtained all permits required under the
Clean Water Act and corresponding state laws and are in substantial compliance
with such permits. However, new requirements under the Clean Water Act and
corresponding state laws may cause us to incur significant additional costs that
could adversely affect our operating results.
31
In addition, the U.S. Army Corps of Engineers imposes stream mitigation
requirements on surface mining operations. These regulations require that
footage of stream loss be replaced through various mitigation processes, if any
ephemeral, intermittent, or perennial streams are in-filled due to mining
operations. These regulations may also cause us to incur significant additional
operating costs.
Comprehensive Environmental Response, Compensation and Liability Act
The Comprehensive Environmental Response, Compensation and Liability Act
(commonly known as Superfund) and similar state laws create liabilities for the
investigation and remediation of releases of hazardous substances into the
environment and for damages to natural resources. Our current and former coal
mining operations incur, and will continue to incur, expenditures associated
with the investigation and remediation of facilities and environmental
conditions, including underground storage tanks, solid and hazardous waste
disposal and other matters under these environmental laws. We also must comply
with reporting requirements under the Emergency Planning and Community
Right-to-Know Act and the Toxic Substances Control Act.
The magnitude of the liability and the cost of complying with environmental
laws with respect to particular sites cannot be predicted with certainty due to
the lack of specific information available, the potential for new or changed
laws and regulations and for the development of new remediation technologies and
the uncertainty regarding the timing of remedial work. As a result, we may incur
material liabilities or costs related to environmental matters in the future and
such environmental liabilities or costs could adversely affect our results and
financial condition. In addition, there can be no assurance that changes in laws
or regulations would not result in additional costs and affect the manner in
which we are required to conduct our operations.
Resource Conservation and Recovery Act
The Resource Conservation and Recovery Act and corresponding state laws and
regulations affect coal mining operations by imposing requirements for the
treatment, storage and disposal of hazardous wastes. Facilities at which
hazardous wastes have been treated, stored or disposed of are subject to
corrective action orders issued by the EPA and other potential obligations,
which could adversely affect our results and financial condition.
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 Jacobs
Risk Management, a risk management consulting company operated as a sole
proprietorship by Joseph G. Jacobs, who is one of our directors. Jacobs Risk
Management provides 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 will impact our business,
but expects that any new regulations will apply across the industry and not
impact Eastern more than any other coal mining operation.
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_00/3
0cfrv3_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.
32
EMPLOYEES
As of January 31, 2006 Consolidated Energy, Inc. had no employees. Eastern
has approximately 36 employees. All employees are full time. We believe our
employee relations are satisfactory.
DESCRIPTION OF PROPERTY
An administrative office is 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. Management has determined that there is no need for this administrative
office. This office will be closed by the end of February 2006.
Our corporate office is currently located at 76 George Road, Betsy Layne,
KY 41605. Starting January 1, 2005 we entered into a verbal lease for $2,000 per
month plus utilities of approximately $300 per month. The space of this office
is adequate for our needs and is located closely with all current operations.
Coal
Martin County - As of December 31, 2004, we were 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. 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 scheduled to be mined by the continuous mining method using one Joy 14 CM-10
AA continuous miner, one Fletcher dual head roof bolter, five 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.
33
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.
Proven & Probable Average Total
Tons in Place BTU Per lb. in place, Sulfur Recovery % Inc. Recoverable
Seam As of Dec. 31, 2004 Type including natural moisture Content Processing Tons
---- ------------------- ---- -------------------------- ------- ---------- ----
Pond Creek 5,400,000 Steam 11,800 to 13,200 less than 1.0 40% 2,160,000
Alma 14,600,000 Steam 11,300 to 12,500 greater than 45% 6,570,000
1.5
Totals 20,000,000 8,730,000
========== =========
Proven & Probable Average Total
Tons in Place BTU Per lb. in place, Sulfur Recovery % Inc. Recoverable
Seam As of Sep. 30, 2005 Type including natural moisture Content Processing Tons
---- ------------------- ---- -------------------------- ------- ---------- ----
Pond Creek 5,400,000 Steam 11,800 to 13,200 less than 1.0 40% 2,160,000
Alma 14,600,000 Steam 11,300 to 12,500 Greater than 45% 6,570,000
1.5
Taylor 5,220,300 Steam 12,200 to 13,600 less than 1.0 35% 1,827,105
Coalburg 13,105,855 Steam 11,800 to 13,200 greater than 48% 6,290,810
1.0
Richardson 941,000 Steam 11,800 to 13,200 less than 1.0 50% 470,500
Broas 3,437,250 Steam 11,800 to 13,200 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 developed by others and reviewed by Company
employees with years of experience within the mining or engineering industry.
The latest independent review was performed by Summit Engineering Inc. in July
2005 and conveyed that the company is in control of approximately 20.2 million
recoverable coal tons.
Morgan County - we acquired a lease, permit and the equipment to begin
surface mining in Morgan County, Kentucky. This acquisition allowed the company
to immediately begin surface mining. Management was able to mine and sell
approximately 38,000 tons of coal from this initial permit. The Morgan County
acquisition provided an option to purchase an additional pending permit that
purportedly 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. The company, upon
extensive review of this pending permit elected not to exercise its option to
acquire this permit.
Eastern is current on all permit obligations. The underground permit for
the Alma and Pond Creek coal seams were issued February 2, 2006 and are
scheduled to expire on November 6, 2009. This permit includes the coal
processing facility and approximately one year of refuse disposal. As a general
rule, we will need to perform maintenance on this permit. The large refuse
disposal permit will require a Nation Wide 21 (404) valley fill permit which
will be obtained from the US Corp of Engineers. This permit is currently in the
process of being developed. The Taylor seam is in the permitting process and is
expected to be issued in 2 to 5 months, depending on the review process.
34
Eastern is currently out-sourcing all of the required Engineering and
permitting services. Eastern's management is providing oversight of this
process.
Gas and Oil
The gas and oil leases 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 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 retained the balance. On any future
wells, if we provide the funding for the drilling and completion, we will own
75% of the working interest. We may offer a portion of any such well's working
interest to others who fund the development or a portion of 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).
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following table sets forth information regarding our executive officers
and directors as of February 7, 2006:
Name Age Positions
- ---- --- ---------
David Guthrie.................. 53 President and Director
Robert Chmiel.................. 45 Interim CFO and Director
Joseph Jacobs.................. 58 Secretary and Director
Edward Jennings................ 68 Director
Carl Baker..................... 63 Director
Barry Tackett.................. 31 Director
Timothy M. Stobaugh............ 35 Director
Jesse Shelmire................. 58 Director
Scott Griffith................. 60 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.
Mr. Chmiel was appointed interim Chief Financial Officer effective January
13, 2006. Since mid 2003, Mr. Chmiel has run his own CFO Consulting firm where
he provides CFO services to both public and private companies, typically in the
start-up or growth mode. In September 2003, Mr. Chmiel became the CFO for
National Coal Corp. (NASDAQ: NCOC), a coal mining company based in Knoxville,
TN. Prior to starting his own consulting firm, Mr. Chmiel served as CFO/COO of
35
Brilliant Digital Entertainment, Inc. beginning in 2000 (AMEX: BDE), a
publicly-traded software firm. Previously, he was the President/COO and
co-founder of Phase2Media, Inc., a privately held Internet advertising sales and
marketing firm, and Chief Financial Officer for BarnesandNoble.com (NASDAQ:
BNBN) prior to the online bookseller's IPO. Mr. Chmiel earned his MBA from the
Wharton School of Business at the University of Pennsylvania in 1987, and his BA
in Economics from The College of the Holy Cross in 1982.
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.
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.
Barry W. Tackett is a Certified Public Accountant and owns his C.P.A. firm
in Stanville, Kentucky from April 2003 to Current. Mr. Tackett served as our
Chief Financial Officer from February 2004 until January 12, 2006. Mr. Tackett
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.
Tim Stobaugh was appointed as a director on January 13, 2006. He joined
Gryphon Special Situations Fund as a portfolio manager in May 2004 after
spending over 10 years with the investment banking firm of Stonegate Securities,
Inc. in Dallas, Texas. In his most recent position at Stonegate, Mr. Stobaugh
was responsible for managing the investment banking department's private
placement offerings to institutional investors. Mr. Stobaugh graduated cum laude
from Trinity University with a B.S. in Business Administration (Finance) in
1993, and earned the CFA designation in 1998.
Jesse Shelmire was appointed as a director on January 13, 2006. He joined
Stonegate Securities, Inc. in May of 1999. He is a co-owner and principal of
Stonegate, and currently serves as a Managing Director of Investment Banking.
Prior to joining Stonegate, Mr. Shelmire was Managing Director of Investment
Banking for First London Securities from 1996 to 1999 where he managed public
and private offerings. He began his career at Smith Barney in 1980. Mr. Shelmire
received his Bachelor of Science in Economics in 1979 from Wharton School of
Business at the University of Pennsylvania.
36
Scott Griffith was appointed as a director on January 13, 2006. He joined
Stonegate Securities, Inc. in 1992. Mr. Griffith is a co-owner and principal of
Stonegate Securities, Inc., and serves as a Managing Director of Investment
Banking. Prior to joining Stonegate in 1992, Mr. Griffith was a Vice-President
at Donaldson, Lufkin, & Jenrette from 1980 to 1988 and a Vice-President at Smith
Barney from 1988 to 1992. Mr. Griffith received his Bachelor of Science in
Marketing from Florida State University in 1979.
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 earned by our Chief Executive Officer and the other
named executive officers (the "named executive officers") who served as
executive officers as at the fiscal year ended December 31, 2005, for services
as executive officers for the last three fiscal years
.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
------------------------------ ------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------------ ------------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ SARs LTIP Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) (#) Payouts ($) sation ($)
- --------------------------- --------- ------------- ---------- ------------ -------------- --------------- ------------ -----------
David Guthrie, 2005 $933,333 -0- -0- -0- -0- -0- -0-
President 2004 -0- -0- -0- $1,462,500 -0- -0- -0-
2003 -0- -0- -0- -0- -0- -0- -0-
Joseph G. Jacobs, 2005 $433,978 -0- -0- -0- -0- -0- -0-
Secretary 2004 $25,543 -0- -0- $438,750 -0- -0- -0-
2003 $7,146 -0- -0- -0- -0- -0- -0-
Barry W. Tackett, 2005 $535,214 -0- -0- -0- -0- -0- -0-
Former Chief
Financial 2004 $37,509 -0- -0- $438,750 -0- -0- -0-
Officer 2003 $10,610 -0- -0- -0- -0- -0- -0-
Option Grants in Fiscal Year 2005
We did not grant options in 2005.
Aggregated Option Exercises in 2005 and Year End Option Values
None.
Compensation of Directors
We pay our directors $25,000 per year. Each director, at his or her sole
discretion, can elect to be paid in either cash or common stock. An additional
fee, to be determined, will be awarded to directors for service on committees.
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.
37
Executive Employment/Consulting 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. We
have not finalized a written employment agreement in connection with Mr.
Guthrie's employment due to our limited management resources.
Effective January 13, 2006, Robert Chmiel was appointed as our interim
Chief Financial Officer upon the resignation of Barry Tackett on January 12,
2006. In connection with our January 13, 2006 private placement, we entered into
a consulting agreement with RC Financial Group, LLC, pursuant to which Mr.
Chmiel was retained as a non-exclusive financial advisor for a term of 24
months. In addition, we issued RC Financial Group, LLC 20,000 shares of common
stock in exchange for financial advisory services rendered by Mr. Chmiel during
the four months ended December 31, 2005 assisting us with a number of issues
including, but not limited to, the January 13, 2006 private placement.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIALDISCLOSURE
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 OTC
Bulletin Board under the symbol "CEIW." Prior to that date, our common stock was
quoted on the OTC Bulletin Board under the symbol "BBQA." Set forth below are
the high and low bid prices for our common stock for the last two fiscal years
and subsequent interim periods. Although our common stock is quoted on the OTC
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.
On February 7, 2006, the closing sale price of our common stock on the OTC
Bulletin Board was $2.40 per share. 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
------------- ---- ---
December 2005 $2.66 $1.10
September 2005 $3.05 $2.15
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
38
Number of Shareholders
As of February 1, 2006, there were approximately 82 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 1, 2006, 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, 76
George Road, Betsy Layne, Kentucky 41605.
Percentage of
Name of Beneficial Owner Number of Shares Shares Beneficially Owned (1)
- ------------------------------------------- ------------------------- -----------------------------
Executive Officers and Directors:
David Guthrie 750,000 5.0%
President, Director
Robert Chmiel 20,000 1.3%
CFO, Director
Joseph G. Jacobs 351,000 2.4%
Secretary, Director
Edward H. Jennings 25,000 *
Director
Carl G. Baker 25,000 *
Director
Barry W. Tackett 350,000 2.4%
Director
Timothy M. Stobaugh 0 0%
Director
Jesse Shelmire 576,903 3.9%
Director
Scott Griffith 500,833 3.4%
Director
All Directors and Executive Officers as a 2,598,736 17.5%
Group (9 persons)
39
Other 5% Shareholders:
Diatom Energy, LLC (2) 1,182,502 8.0%
1030 Coral Ridge Dr.
Coral Springs, FL 33071
* less than 1%
(1) Applicable percentage ownership as of February 1, 2006 is based upon
14,823,246 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) 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
Shares Being After the Offering
Shares Beneficially Offered Pursuant to -----------------------------
Name Owned Prior to Offering this Prospectus (1) Number Percent
- ----------------------------------------------- ------------------------ ------------------- ------------ --------------
Gryphon Master Fund, L.P. 9,644,727 9,644,727 (2) 0 *
100 Crescent Court
Suite 490
Dallas, Texas 75201
GSSF Master Fund, LP 3,381,576 3,381,576 (3) 0 *
100 Crescent Court
Suite 475
Dallas, Texas 75201
6,977,900 6,977,900 (4) 0 *
Lonestar Partners, L.P.
c/o Lonestar Capital Management, LLC
One Maritime Plaza, Suite 2555
San Francisco, California 94111
40
WS Opportunity International Fund Ltd. 179,364 179,364 (5) 0 *
300 Crescent Court, Suite 1111
Dallas, Texas 75201
WS Opportunity Fund (QP), L.P. 133,997 133,997 (6) 0 *
300 Crescent Court, Suite 1111
Dallas, Texas 75201
WS Opportunity Fund, L.P. 124,539 124,539 (7) 0 *
300 Crescent Court, Suite 1111
Dallas, Texas 75201
Renaissance US Growth Investment Trust PLC 1,310,000 1,310,000 (8) 0 *
c/o RENN Capital Group, Inc.
8080 N. Central Expressway
Suite 210, LB-59
Dallas, Texas 75206
BFS US Special Opportunities Trust PLC 1,310,000 1,310,000 (9) 0 *
c/o RENN Capital Group, Inc.
8080 N. Central Expressway
Suite 210, LB-59
Dallas, Texas 75206
Scott R. Griffith 576,903 576,903 (10) 0 *
Stonegate Securities, Inc.
5940 Sherry Lane, Suite 410
Dallas, Texas 75225
Jesse B. Shelmire IV 500,833 500,833 (11) 0 *
Stonegate Securities, Inc.
5940 Sherry Lane, Suite 410
Dallas, Texas 75225
Enable Growth Partners, LP 2,865,119 2,865,119 (12) 0 *
One Ferry Building, Suite 255
San Francisco, CA 94111
Enable Opportunity Partners, LP 608,964 608,964 (13) 0 *
One Ferry Building, Suite 255
San Francisco, CA 94111
Gamma Opportunity Capital Partners L.P. 1,164,701 1,164,701 (14) 0 *
275 Seventh Avenue, Suite 2000
New York, NY 10001
Bushido Capital Master Fund L.P. 1,890,191 1,890,191 (15) 0 *
275 Seventh Avenue, Suite 2000
New York, NY 10001
Cordillera Fund, LP 2,211,480 2,211,480 (16) 0 *
8201 Preston Road, Suite 400
Dallas, TX 75225
41
Newgrange Partners, LP 85,854 85,854 (17) 0 *
8201 Preston Road, Suite 400
Dallas, TX 75225
Whalehaven Capital Fund Limited 1,666,667 1,666,667 (18) 0 *
c/o Research Capital
1055 Dunsmuir St., Suite 564
Vancouver, BC V7X 1L4, Canada
ABS SOS-Plus Partners Ltd. 208,333 208,333 (19) 0 *
1967 Longwood - Lake Mary Road
Longwood, FL 32750
Regenmacher Holdings, Ltd. 208,333 208,333 (20) 0 *
1967 Longwood - Lake Mary Road
Longwood, FL 32750
Iroquois Master Fund Ltd. 416,667 416,667 (21) 0 *
641 Lexington Avenue, 26th Floor
New York, NY 10022
RC Financial Group, LLC 170,000 170,000 (22) 0 *
TOTAL SHARES OFFERED 35,636,148 (1)
===============
* less than 1%.
(1) Includes: (a) 1,654,892 presently outstanding shares of common stock;
(b) 15,277,778 shares issuable upon conversion of $13,750,000.00
principal amount of 6% senior secured convertible notes; (c) 2,573,529
shares issuable upon exercise of warrants issued in connection with
the 6% senior secured convertible notes; (d) 6,933,256 shares issuable
upon conversion of $6,239,930.00 principal amount of 8% senior secured
convertible notes; (e) 9,046,694 shares issuable upon exercise of
warrants issued in connection with the 8% senior secured convertible
note financing; and (f) 150,000 shares issuable upon exercise of
warrants issued to RC Financial Group, LLC as consideration for
financial consulting services. However, except for RC Financial Group,
LLC, the selling shareholders have contractually agreed to restrict
their ability to convert their senior secured convertible 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 4.99% 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 beneficially own at
any given time through their ownership of the senior secured
convertible notes and warrants.
(2) Includes: (a) 5,000,000 shares issuable upon conversion of
$4,500,000.00 principal amount of 6% senior secured convertible notes;
(b) 1,047,793 shares issuable upon exercise of warrants issued in
connection with the 6% senior secured convertible notes; (c) 1,172,466
shares issuable upon conversion of $1,055,219.18 principal amount of
8% senior secured convertible notes; and (d) 2,424,468 shares issuable
upon exercise of warrants issued in connection with the 8% senior
secured convertible note financing. E.B. Leon makes the investment
decisions on behalf of Gryphon Master Fund, L.P. and has voting
control over the securities beneficially owned by Gryphon Master Fund,
L.P.
(3) Includes: (a) 1,666,667 shares issuable upon conversion of
$1,500,000.00 principal amount of 6% senior secured convertible notes;
(b) 349,264 shares issuable upon exercise of warrants issued in
42
connection with the 6% senior secured convertible notes; (c) 501,933
shares issuable upon conversion of $451,740.00 principal amount of 8%
senior secured convertible notes; and (d) 863,712 shares issuable upon
exercise of warrants issued in connection with the 8% senior secured
convertible note financing. Tom C. Davis makes the investment
decisions on behalf of GSSF Master Fund, LP and has voting control
over the securities beneficially owned by GSSF Master Fund, LP.
(4) Includes: (a) 4,444,444 shares issuable upon conversion of
$4,000,000.00 principal amount of 6% senior secured convertible notes;
(b) 882,353 shares issuable upon exercise of warrants issued in
connection with the 6% senior secured convertible notes; (c) 207,489
shares issuable upon conversion of $186,740.00 principal amount of 8%
senior secured convertible notes; and (d) 1,443,614 shares issuable
upon exercise of warrants issued in connection with the 8% senior
secured convertible note financing. Jerome L. Simon makes the
investment decisions on behalf of Lonestar Partners, L.P. and has
voting control over the securities beneficially owned by Lonestar
Partners, L.P.
(5) Includes: (a) 113,778 shares issuable upon conversion of $102,400.00
principal amount of 6% senior secured convertible notes; (b) 30,118
shares issuable upon exercise of warrants issued in connection with
the 6% senior secured convertible notes; (c) 5,798 shares issuable
upon conversion of $5,218.00 principal amount of 8% senior secured
convertible notes; and (d) 29,670 shares issuable upon exercise of
warrants issued in connection with the 8% senior secured convertible
note financing. Patrick P. Walker, G. Stacy Smith and Reid S. Walker
make the investment decisions on behalf of WS Opportunity
International Fund Ltd. and have voting control over the securities
beneficially owned by WS Opportunity International Fund Ltd.
(6) Includes: (a) 85,000 shares issuable upon conversion of $76,500.00
principal amount of 6% senior secured convertible notes; (b) 22,500
shares issuable upon exercise of warrants issued in connection with
the 6% senior secured convertible notes; (c) 4,331 shares issuable
upon conversion of $3,898.00 principal amount of 8% senior secured
convertible notes; and (d) 22,166 shares issuable upon exercise of
warrants issued in connection with the 8% senior secured convertible
note financing. Patrick P. Walker, G. Stacy Smith and Reid S. Walker
make the investment decisions on behalf of WS Opportunity Fund (QP),
L.P. and have voting control over the securities beneficially owned by
WS Opportunity Fund (QP), L.P.
(7) Includes: (a) 79,000 shares issuable upon conversion of $71,100.00
principal amount of 6% senior secured convertible notes; (b) 20,912
shares issuable upon exercise of warrants issued in connection with
the 6% senior secured convertible notes; (c) 4,026 shares issuable
upon conversion of $3,623.00 principal amount of 8% senior secured
convertible notes; and (d) 20,601 shares issuable upon exercise of
warrants issued in connection with the 8% senior secured convertible
note financing. Patrick P. Walker, G. Stacy Smith and Reid S. Walker
make the investment decisions on behalf of WS Opportunity Fund, L.P.
and have voting control over the securities beneficially owned by WS
Opportunity Fund, L.P.
(8) Includes: (a) 833,333 shares issuable upon conversion of $750,000.00
principal amount of 6% senior secured convertible notes; (b) 110,294
shares issuable upon exercise of warrants issued in connection with
the 6% senior secured convertible notes; (c) 40,000 shares issuable
upon conversion of $36,000.00 principal amount of 8% senior secured
convertible notes; and (d) 326,373 shares issuable upon exercise of
warrants issued in connection with the 8% senior secured convertible
note financing. G. Russell Cleveland makes the investment decisions on
behalf of Renaissance US Growth Investment Trust PLC and has voting
control over the securities beneficially owned by Renaissance US
Growth Investment Trust PLC.
(9) Includes: (a) 833,333 shares issuable upon conversion of $750,000.00
principal amount of 6% senior secured convertible notes; (b) 110,294
shares issuable upon exercise of warrants issued in connection with
the 6% senior secured convertible notes; (c) 40,000 shares issuable
upon conversion of $36,000.00 principal amount of 8% senior secured
convertible notes; and (d) 326,373 shares issuable upon exercise of
warrants issued in connection with the 8% senior secured convertible
note financing. G. Russell Cleveland makes the investment decisions on
behalf of BFS US Special Opportunities Trust PLC and has voting
control over the securities beneficially owned by BFS US Special
Opportunities Trust PLC.
(10) Includes: (a) 326,070 shares of common stock acquired upon exercise of
placement agent warrants issued in connection with the sale of our 6%
senior secured convertible notes and related warrants; (b) 167,222
43
shares of common stock issuable upon conversion of $150,500 principal
amount of 8% senior secured convertible notes; and (c) 83,611 shares
of common stock issuable upon conversion of placement agent warrants.
Scott R. Griffith is a registered representative of Stonegate
Securities, Inc., a registered broker-dealer, and is an "underwriter"
within the meaning of the Securities Act of 1933 in connection with
the sale of common stock under this prospectus. Mr. Griffith received
his securities as compensation for placement agent services in
connection with the sale of our 6% senior secured convertible notes,
8% senior secured convertible notes and the related common stock
purchase warrants. Mr. Griffith is a member of our Board of Directors.
(11) Includes: (a) 250,000 shares of common stock acquired upon exercise of
placement agent warrants issued in connection with the sale of our 6%
senior secured convertible notes and related warrants; (b) 167,222
shares of common stock issuable upon conversion of $150,500 principal
amount of 8% senior secured convertible notes; and (c) 83,611 shares
of common stock issuable upon conversion of placement agent warrants.
Jesse B. Shelmire IV is a registered representative of Stonegate
Securities, Inc., a registered broker-dealer, and is an "underwriter"
within the meaning of the Securities Act of 1933 in connection with
the sale of common stock under this prospectus. Mr. Shelmire received
his securities as compensation for placement agent services in
connection with the sale of our 6% senior secured convertible notes,
8% senior secured convertible notes and the related common stock
purchase warrants. Mr. Shelmire is a member of our Board of Directors.
(12) Includes: (a) 282,353 shares of common stock acquired as payment of
interest on previously outstanding Bridge Notes issued in November
2005; (b) 722,222 shares issuable upon conversion of $650,000.00
principal amount of 6% senior secured convertible notes; (c) 999,622
shares issuable upon conversion of $899,660.00 principal amount of 8%
senior secured convertible notes; and (d) 860,922 shares issuable upon
exercise of warrants issued in connection with the 8% senior secured
convertible note financing. Mitch Leveine makes the investment
decisions on behalf of Enable Growth Partners, LP and has voting
control over the securities beneficially owned by Enable Growth
Partners, LP.
(13) Includes: (a) 70,588 shares of common stock acquired as payment of
interest on previously outstanding Bridge Notes issued in November
2005; (b) 111,111 shares issuable upon conversion of $100,000.00
principal amount of 6% senior secured convertible notes; (c) 247,806
shares issuable upon conversion of $223,025.00 principal amount of 8%
senior secured convertible notes; and (d) 179,459 shares issuable upon
exercise of warrants issued in connection with the 8% senior secured
convertible note financing. Mitch Leveine makes the investment
decisions on behalf of Enable Opportunity Partners, LP and has voting
control over the securities beneficially owned by Enable Opportunity
Partners, LP.
(14) Includes: (a) 147,058 shares of common stock acquired as payment of
interest on previously outstanding Bridge Notes issued in November
2005; (b) 388,889 shares issuable upon conversion of $350,000.00
principal amount of 6% senior secured convertible notes; (c) 289,540
shares issuable upon conversion of $260,586.00 principal amount of 8%
senior secured convertible notes; and (d) 339,214 shares issuable upon
exercise of warrants issued in connection with the 8% senior secured
convertible note financing. Christopher Rossman makes the investment
decisions on behalf of Gamma Opportunity Capital Partners L.P. and has
voting control over the securities beneficially owned by Gamma
Opportunity Capital Partners L.P.
(15) Includes: (a) 205,882 shares of common stock acquired as payment of
interest on previously outstanding Bridge Notes issued in November
2005; (b) 388,889 shares issuable upon conversion of $350,000.00
principal amount of 6% senior secured convertible notes; (c) 733,984
shares issuable upon conversion of $660,586.00 principal amount of 8%
senior secured convertible notes; and (d) 561,436 shares issuable upon
exercise of warrants issued in connection with the 8% senior secured
convertible note financing. Christopher Rossman makes the investment
decisions on behalf of Bushido Capital Master Fund L.P.and has voting
control over the securities beneficially owned by Bushido Capital
Master Fund L.P.
(16) Includes: (a) 352,941 shares of common stock acquired as payment of
interest on previously outstanding Bridge Notes issued in November
2005; (b) 555,556 shares issuable upon conversion of $500,000.00
principal amount of 6% senior secured convertible notes; (c) 683,470
shares issuable upon conversion of $615,123.00 principal amount of 8%
senior secured convertible notes; and (d) 619,513 shares issuable upon
exercise of warrants issued in connection with the 8% senior secured
convertible note financing. Stephen J. Carter and James P. Andrew make
the investment decisions on behalf of Cordillera Fund, LP and have
voting control over the securities beneficially owned by Cordillera
Fund, LP.
44
(17) Includes: (a) 55,556 shares issuable upon conversion of $50,000.00
principal amount of 6% senior secured convertible notes; (b) 1,680
shares issuable upon conversion of $1,512.00 principal amount of 8%
senior secured convertible notes; and (c) 28,618 shares issuable upon
exercise of warrants issued in connection with the 8% senior secured
convertible note financing. Michael H. Scholten makes the investment
decisions on behalf of Newgrange Partners, LP and has voting control
over the securities beneficially owned by Newgrange Partners, LP.
(18) Includes: (a) 1,111,111 shares issuable upon conversion of
$1,000,000.00 principal amount of 8% senior secured convertible notes;
and (b) 555,556 shares issuable upon exercise of warrants issued in
connection with the 8% senior secured convertible note financing. Evan
Schemenauer makes the investment decisions on behalf of Whalehaven
Capital Fund Limited and has voting control over the securities
beneficially owned by Whalehaven Capital Fund Limited.
(19) Includes: (a) 138,889 shares issuable upon conversion of $125,000.00
principal amount of 8% senior secured convertible notes; and (b)
69,444 shares issuable upon exercise of warrants issued in connection
with the 8% senior secured convertible note financing. Jonathan Knight
makes the investment decisions on behalf of ABS SOS-Plus Partners Ltd.
and has voting control over the securities beneficially owned by ABS
SOS-Plus Partners Ltd.
(20) Includes: (a) 138,889 shares issuable upon conversion of $125,000.00
principal amount of 8% senior secured convertible notes; and (b)
69,444 shares issuable upon exercise of warrants issued in connection
with the 8% senior secured convertible note financing. Jonathan Knight
makes the investment decisions on behalf of Regenmacher Holdings, Ltd.
and has voting control over the securities beneficially owned by
Regenmacher Holdings, Ltd.
(21) Includes: (a) 277,778 shares issuable upon conversion of $250,000.00
principal amount of 8% senior secured convertible notes; and (b)
138,889 shares issuable upon exercise of warrants issued in connection
with the 8% senior secured convertible note financing. Josh Silverman
makes the investment decisions on behalf of Iroquois Master Fund Ltd.
and has voting control over the securities beneficially owned by
Iroquois Master Fund Ltd.
(22) Includes: (a) 20,000 presently outstanding shares of common stock; and
(b) 150,000 shares of common stock issuable upon exercise of warrants
issued to RC Financial Group, LLC as consideration for financial
consulting services. Robert Chmiel makes the investment decisions on
behalf of RC Financial Group, LLC and has voting control over the
securities beneficially owned by RC Financial Group, LLC. Mr. Chmiel
is our interim Chief Financial Officer and one of our directors.
6% Senior Secured Convertible 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
notes for an aggregate total face amount of $7,000,000 and a term of three
years. The 6% senior secured convertible notes initially had a conversion price
of $1.70 per share which was subsequently amended to $0.90 per share on January
13, 2006. Holders of the 6% senior secured convertible notes are Gryphon Master
Fund, L.P. and 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 have issued to the 6%
note holders warrants to purchase an aggregate of 2,058,824 shares of common
stock. Such warrants initially had an exercise price of $1.70 per share which
was subsequently amended to $0.90 per share on January 13, 2006. The warrants
are exercisable for a term of five years. The conversion price of the 6% senior
secured convertible notes, and the exercise price of the related warrants, are
subject to certain normal and customary anti-dilution adjustment provisions and
also include a one-time reset provision.
Additionally, during March and June 2005 we received additional investments
totaling $6,750,000 of 6% senior secured convertible notes from the following
investors who exercised 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.
45
The 6% senior secured convertible 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 convertible notes were initially
convertible into shares of common stock at a conversion price of $1.70 per
share, which was subsequently amended on January 13, 2006 to $0.90 per share.
The conversion price of the 6% senior secured convertible 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.
In addition, we issued to the selling shareholders warrants to purchase up
to 2,573,529 shares of our common stock at an initial exercise price of $1.70
per share. The exercise price was amended to $0.90 per share on January 13,
2006. The exercise price of the warrants is subject to the same adjustments and
reset provisions as the 6% senior secured convertible notes.
Pursuant to the terms of the 6% senior secured convertible 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 4.99% of the then
issued and outstanding shares of common stock.
On January 13, 2006, in connection with the sale of 8% senior secured
convertible notes described below, the terms of the 6% senior secured
convertible notes and related warrants were materially amended. A complete
description of the material terms of the amendments is included under
"Forbearance Agreement" beginning on page 13 of this prospectus.
8% Senior Secured Convertible Notes Due June 30, 2008
On January 13, 2006, we sold approximately $5.9 million principal amount of
8% senior secured convertible notes due June 30, 2008 to 18 accredited
investors. In connection with the sale of the 8% senior secured convertible
notes, we issued investors warrants to purchase an aggregate of approximately
3.3 million shares of common stock, calculated as 50% of each investor's
subscription amount divided by $0.90. Of the $5.9 million principal amount of 8%
senior secured convertible notes, we received gross proceeds of $3.4 million.
The remaining approximate $2.5 million principal amount of 8% senior secured
convertible notes was paid by investors as follows: (a) $1.8 million was paid by
the cancellation of promissory notes sold by us on September 23, 2005; (b)
$102,000 represents a management fee owed to the lead investor, Gryphon Master
Fund, L.P.; and (c) the remaining $598,000 represents interest accrued on our 6%
senior secured convertible notes sold February 24, 2005 and pursuant to certain
Additional Investment Rights sold February 24, 2005.
The 8% senior secured convertible notes have a final maturity date of June
30, 2008, accrue interest at the rate of 8% per annum, are secured by all of our
properties and assets and the properties and assets of each of our subsidiaries,
and are guaranteed by each of our subsidiaries. The 8% senior secured
convertible notes rank pari passu with our outstanding 6% senior secured
convertible notes. Interest may be paid either in cash or with shares of common
stock in our sole discretion. Holders of the 8% senior secured convertible notes
have the right to convert the outstanding principal amount into shares of our
common stock from time to time based on a conversion price of $0.90, subject to
adjustment. Beginning July 1, 2006, on the first day of each month we are
required to redeem 1/24th of the outstanding principal of the 8% senior secured
convertible notes (the "Monthly Redemption Amount"). If the transaction is
registered on an effective registration statement and certain other conditions
are satisfied, we may pay the Monthly Redemption Amount with shares of common
stock based on a conversion price equal to the lesser of (a) the then conversion
price and (b) 80% of the daily volume weighted average price of the common stock
for the 10 consecutive trading days prior to the applicable monthly redemption
date. In the event our annualized EBITDA for the two fiscal quarters ending
December 31, 2006 (the "Annualized EBITDA") is less than $17 million, the
conversion price of the 8% senior secured convertible notes will be reset to
46
equal the greater of (a) $0.30 or (b) a price determined by the following
formula: [3 * X/Y], where X equals the Annualized EBITDA and Y equals the number
of shares of common stock outstanding on a fully diluted basis on December 31,
2006. In addition, if we issue or commit to issue or distribute new securities
at a price per share less than the current market price or the current
conversion price, then the conversion price will be adjusted to reflect such
lower price. The conversion price is also subject to adjustment for stock
dividends, stock splits, stock combinations and similar dilutive transactions.
The warrants issued in connection with the 8% senior secured convertible
notes have an exercise price of $0.90 per share and are exercisable until
January 14, 2011. Holders may exercise the warrants on a cashless basis after
the first anniversary of the initial issuance date and then only in the event
that a registration statement covering the resale of the warrant shares is not
then effective. In the event our annualized EBITDA for the two fiscal quarters
ending December 31, 2006 (the "Annualized EBITDA") is less than $17 million, the
exercise price of the warrants will be reset to equal the greater of (a) $0.30
or (b) a price determined by the following formula: [3 * X/Y], where X equals
the Annualized EBITDA and Y equals the number of shares of common stock
outstanding on a fully diluted basis on December 31, 2006. In addition, if we
issue or commit to issue or distribute new securities at a price per share less
than the current market price or the current exercise price, then the exercise
price will be adjusted to reflect such lower price. The exercise price is also
subject to adjustment for stock dividends, stock splits, stock combinations and
similar dilutive transactions.
The investors have agreed to restrict their ability to convert the 8%
senior secured convertible notes and exercise the warrants 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 4.99% of our then issued and
outstanding shares of common stock.
We agreed to file a registration statement with the SEC registering the
resale of the shares of common stock issuable upon conversion of the 8% senior
secured convertible notes and related warrants on or before February 12, 2006
and cause such registration statement to be declared effective no later than May
31, 2006.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the transactions listed below, during the fiscal years ended
December 31, 2005, 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. In January 2006, Mr.
Tackett resigned as CFO and agreed to serve our Controller. We currently have an
oral agreement with Mr. Tackett. Mr. Tackett provides services relating to all
aspects of the Company's accounting needs, including payroll services and
general day to day accounting functions.
Jacobs Risk Management, a risk management consulting company operated as a
sole proprietorship by one of our directors and our Secretary, Joseph G. Jacobs,
provides preventative and ongoing compliance support to help insure that Eastern
remains in compliance with all state and federal mandates. Through Jacobs Risk
Management, Mr. Jacobs was paid a total of $7,146 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. We currently have an oral
agreement with Mr. Jacobs in connection with Jacobs Risk Management's services.
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.
47
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.
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.
On January 13, 2006, Scott Griffith and Jesse Shelmire were appointed to
our Board of Directors. Messrs. Griffith and Shelmire are both registered
representatives of Stonegate Securities, Inc., the placement agent engaged by us
in connection with our January 13, 2006 private placement. We are obligated to
pay Stonegate Securities, Inc. a 7% placement agent fee for services rendered in
connection with the January 13, 2006 private placement. The We also paid
Stonegate Securities, Inc. a placement agent fee of $825,000 in association with
placement of our sale of 6% senior secured convertible notes and related
warrants in February 2005 and the exercise of Additional Investment Rights
during 2005. Also in connection with these placements, we issued Messrs.
Griffith and Shelmire warrants to purchase 1,110,290 shares (555,145 shares
each) of common stock with term of five years and an exercise price of $1.70 per
share. These warrants were exercised on a cashless basis and we thereby issued
an aggregate of 652,144 shares (326,072 shares each) of common stock to Messrs.
Griffith and Shelmire.
RC Financial Group LLC was issued 20,000 shares of common stock during the
year ended December 31, 2005 for financial consulting services. On January 13,
2006 Mr. Robert Chmiel, a principal of RC Financial Group, LLC, was appointed to
our Board of Directors and interim Chief Financial Officer. Mr. Chmiel's
agreement with the company is for an annual salary of $150,000 and warrants to
purchase 150,000 shares of common stock with a term of five years and an
exercise price of $0.90 per share.
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 February 1, 2006, there were 14,823,246 shares 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
non-assessable. 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.
48
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;
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.
49
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.
Scott R. Griffith and Jesse B. Shelmire IV are both registered
representatives of Stonegate Securities, Inc., a registered broker-dealer, and
are "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. The other selling shareholders and any other underwriters, brokers,
dealers or agents that participate in the distribution of the common stock may
also 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.
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.
50
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.
References in this prospectus to Summit Engineering Inc. and its analysis
relating to our coal reserves are made in reliance on Summit Engineering's
authority as an expert in engineering consulting.
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 at 100 F Street, N.E., Washington, D.C. 20549. 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.
51
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.
52
CONSOLIDATED ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
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
September 30, 2004 and 2005 (Unaudited) F-4
Consolidated Statements of Operations for the Years Ended December 31, 2003
and 2004 and the Nine Months Ended September 30,
2004 and 2005 (Unaudited) F-6
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
Years Ended December 31, 2003 and 2004 and the Nine Months Ended
September 30, 2004 and 2005 (Unaudited) F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and
2004 and the Nine Months Ended September 30, 2004 and 2005 (Unaudited) F-8
Notes to Consolidated Financial Statements F-12
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' equity (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 audit.
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' equity (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 audit.
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, September 30,
---------------------
2003 2004 2005
---- ---- ----
(Unaudited)
CURRENT ASSETS
Cash $ 6,316 $ 4,392 $ 63,611
Accounts Receivable - - 72,967
Accounts Receivable - Other - 75,000 -
Prepaid Expenses 19,141 400 4,011
---------- --------- -----------
TOTAL CURRENT ASSETS 25,457 79,792 140,589
---------- --------- -----------
BUILDING, EQUIPMENT AND
COAL LEASES
Building, Equipment, Net of Depreciation 1,368,817 1,515,677 9,642,835
Coal Leases, Net of Amortization 107,458 1,182,457 11,977,508
---------- ---------- -----------
TOTAL BUILDING, EQUIPMENT
AND COAL LEASES, NET 1,476,275 2,698,134 21,620,343
---------- ---------- -----------
OTHER ASSETS
Restricted Cash - 49,900 51,200
Prepaid Royalty 44,111 11,666 51,166
Other Assets 44,804 32,500 64,908
---------- ---------- -----------
TOTAL OTHER ASSETS 88,915 94,066 167,274
---------- ---------- -----------
TOTAL ASSETS $1,590,647 $2,871,992 $21,928,206
========== ========== ===========
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' EQUITY (DEFICIT)
December 31, September 30,
------------------
2003 2004 2005
---- ---- ----
(Unaudited)
CURRENT LIABILITIES
Cash Overdrafts $ 56,884 $ 400,623 $ -
Senior 6% Secured Notes Payable - - 10,594,546
Accounts Payable 311,030 426,427 1,004,863
Accrued Liabilities 152,728 2,550,574 1,155,679
Royalties Payable 48,786 369,374 326,402
Notes Payable 514,017 182,737 546,429
Current Portion Capital Lease - - 1,327,666
Convertible Debentures 1,266,400 588,010 702,438
Payable to Related Parties 76,276 560,906 722,717
Note Payable to Related Parties - 659,339 -
Deferred Revenue - - 226,253
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 2,426,121 5,737,990 16,606,993
LONG-TERM LIABILITIES
Deferred Royalties Payable - 168,962 161,582
Long Term Notes Payable - - 74,675
- - -
--------- ---------- -----------
TOTAL LIABILITIES 2,426,121 5,906,952 16,843,250
--------- ---------- -----------
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, 7,358,000, 10,327,428 and
14,808,246 Shares Issued and
Outstanding, Respectively 7,358 10,327 14,808
Additional Paid-In-Capital 558,890 4,770,335 16,527,852
Retained Deficit (1,401,722) (7,815,622) (11,457,704)
----------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (835,474) (3,034,960) 5,084,956
----------- ---------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 1,590,647 $2,871,992 $21,928,206
=========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months
Years Ended December 31, Ended September 30,
------------------------ ---------------------
2003 2004 2004 2005
---- ---- ---- ----
(Unaudited) (Unaudited)
REVENUES
Coal Sales $ 649,606 $ 2,746,983 $ 2,180,868 $ 1,816,305
----------- ----------- ----------- -----------
TOTAL REVENUES 649,606 2,746,983 2,180,868 1,816,305
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost Of Revenue, Excluding
Depreciation of Mine Equipment
And Amortization of coal leases
Of $106,033, $256,880, $203,216
And $403,308 for the years ended
December 31, 2003 and 2004 and
The nine months ended
September 30, 2004 and 2005
respectively 1,035,295 3,727,162 2,654,192 1,959,506
Operating Expenses 659,076 4,205,518 1,467,660 2,897,778
Depreciation and Amortization 110,046 265,394 209,601 418,175
----------- ----------- ----------- -----------
TOTAL COSTS AND
EXPENSES 1,804,417 8,198,074 4,331,453 5,275,459
----------- ----------- ----------- -----------
LOSS FROM
OPERATIONS (1,154,811) (5,451,091) (2,150,585) (3,459,154)
----------- ----------- ----------- -----------
OTHER EXPENSES
Loss on Sale of Assets - 83,861 - 72,833
Interest Expense, Net of $1,736,474
Capitalized Interest in 2005 246,911 878,948 689,003 110,095
----------- ----------- ----------- -----------
TOTAL OTHER
EXPENSES 246,911 962,809 689,003 182,928
----------- ----------- ----------- -----------
LOSS BEFORE
INCOME TAXES (1,401,722) (6,413,900) (2,839,588) (3,642,082)
----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET LOSS $(1,401,722) $(6,413,900) $(2,839,588) $(3,642,082)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (.29) $ (.67) $ (.30) $ (.27)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
Basic and Diluted 4,841,750 9,529,560 9,373,317 13,669,645
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Common Stock Additional
------------ 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 Feature
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 Feature
of Debentures - - 514,075 - 514,075
Shares Issued For Copley Lease 700,000 700 1,084,300 1,085,000 -
Net Loss - - - (6,413,900) (6,413,900)
----------- ------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 2004 10,327,428 10,327 4,770,335 (7,815,622) (3,034,960)
Shares Issued For Settlement
of Accrued Liabilities 750,000 750 2,081,750 - 2,082,500
Shares Issued for Services 95,000 95 244,681 - 244,776
Shares Issued Upon Conversion
of Convertible Debentures and
Accrued Interest 58,678 59 106,619 - 106,678
Shares Issued For Coal Lease 2,500,000 2,500 4,872,500 4,875,000
Shares Issued For Coal Lease 425,000 425 1,068,658 - 1,069,083
Interest Cost Associated With
Beneficial Conversion Feature
of Debentures - - 2,493,897 - 2,493,897
Value of Warrants issued with
senior securities - - 890,064 - 890,064
Cashless Exercise of Warrants 652,140 652 (652) - -
Net Loss - - - (3,642,082) (3,642,082)
----------- ------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 2005
(UNAUDITED) 14,808,246 $14,808 $16,527,852 $(11,457,704) $ 5,084,956
=========== ======= =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
F-7
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Years Ended December 31, Ended September 30,
------------------------ -------------------
2003 2004 2004 2005
---- ---- ---- ----
CASH FLOWS FROM OPERATING (Unaudited) (Unaudited)
ACTIVITIES
Net Loss $ (1,401,722) $(6,413,900) $(2,839,588) $(3,642,082)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities
Depreciation and Amortization 110,046 265,394 209,601 418,175
Stock Issued for Services 395,850 1,254,499 824,000 244,776
Amortization of Debt Discount - - 596,833 23,518
Interest Due to Beneficial Conversion Feature 186,171 485,001 - -
Loss on Sale of Assets - 83,861 - 72,833
Changes in Operating Assets and Liabilities
Prepaid Expenses (19,141) 18,741 (4,591) (3,611)
Accounts Receivable - - (47,174) 2,033
Prepaid Royalties (44,111) 32,446 35,244 (39,500)
Other Assets (44,804) 12,304 7,304 (32,408)
Cash Overdrafts 56,884 343,739 (56,884) (400,623)
Accounts Payable 311,030 85,731 279,266 578,436
Accrued Liabilities 152,728 2,509,370 753,315 694,283
Royalties Payable 48,786 303,602 (15,819) (42,972)
Deferred Royalties Payable - 185,948 - (7,380)
Deferred Revenue - - - 226,254
Purchase of Restricted Cash - (49,900) - (1,300)
------------ ----------- ----------- ----------
NET CASH USED
BY OPERATING ACTIVITIES $ (248,283) $ (883,164) $ (258,493) $(1,909,568)
------------ ----------- ----------- ----------
The accompanying notes are an integral part of these consolidated financial statements
(Continued)
F-8
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Nine Months
Years Ended December 31, Ended September 30,
------------------------ -------------------
2003 2004 2004 2005
---- ---- ---- ----
CASH FLOWS FROM INVESTING (Unaudited) (Unaudited)
ACTIVITIES
Purchase of Equipment $(1,473,863) $(1,075,132) $ (755,936) $ (6,002,315)
Lease Cost Capitalized (109,458) - - (4,471,036)
Proceeds from Sale of Assets - - - 18,000
----------- ----------- ---------- ------------
NET CASH USED BY
INVESTING ACTIVITIES (1,583,321) (1,075,132) (755,936) (10,455,351)
----------- ----------- ---------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds From Notes Payable 514,017 182,737 223,331 907,410
Proceeds From Convertible Debentures 1,266,400 325,000 400,000 12,765,000
Payments on Notes Payable - - - (403,910)
Advances From Related Parties 57,503 1,173,635 427,684 686,720
Payments to Related Parties - - - (1,184,248)
Proceeds From Stock Sales - 275,000 - -
Payment on Capital Leases - - - (346,834)
----------- ----------- ---------- ------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 1,837,920 1,956,372 1,051,015 12,424,138
----------- ----------- ---------- ------------
NET (DECREASE) INCREASE IN CASH 6,316 (1,924) 36,586 59,219
CASH BALANCE, BEGINNING OF YEAR - 6,316 6,316 4,392
----------- ----------- ---------- ------------
CASH BALANCE, END OF YEAR $ 6,316 $ 4,392 $ 42,902 $ 63,611
=========== =========== ========== ============
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
F-9
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Nine Months
Years Ended December 31, Ended September 30,
------------------------ -------------------
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 - 514,017 514,017 (125,770)
Decrease in Notes Payable - (514,017) (514,017) 125,770
Increase in Lease Costs - (1,085,000) (1,085,000) (4,875,000)
Common Stock Issued For Lease - 700 700 2,500
Additional Paid-In-Capital From Stock
Issued for Coal Lease 1,084,300 1,084,300 4,872,500
Accrued Interest Converted to
Debenture - (82,684) - -
Convertible Debenture From
Interest Addition - 82,684 - -
Debentures Converted to Common Stock - (1,057,000) (957,000) (100,000)
Accrued Interest Paid with Common Stock - (28,840) (20,599) (6,678)
Common Stock Issued for Debentures
and Accrued Interest - 1,085,840 1,082 59
Additional Paid-In-Capital From Stock
Issued For Debentures - - 976,517 106,619
Transfer of Retained Deficit to
Paid-In-Capital (285,243) - - -
Retained Deficit Transferred to
Paid-In-Capital 285,243 - - -
Debt Discount Capitalized as Equipment - - - (830,746)
Debt Discount Capitalized at Lease Cost - - - (381,844)
Reduction in Debt Discount - - - 1,212,590
Equipment From Capital Lease - - - (1,674,500)
Increase in Capital Lease - - - 1,674,500
Lease Cost From Stock Issued - - - (1,072,500)
Stock Issued For Lease - - - 2,925
Additional Paid-In-Capital From Lease 1,069,575
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 - - - (3,383,044)
Additional Paid-In-Capital
From Debt Discount - - - 3,383,044
Notes Payable Converted to Debenture - - - (190,910)
Debenture Issued for Notes Payable - - - 190,910
Cashless Conversion of Underwriter Warrants
Par Value of Common Stock - 652
Additional Paid-In-Capital - (652)
- - - -
--------- ----------- --------- -----------
$ - $ - $ - $ -
========= =========== ========= ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-10
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Nine Months
Years Ended December 31, Ended September 30,
------------------------ --------------------
2003 2004 2004 2005
---- ---- ---- ----
(Unaudited) (Unaudited)
SUPPLEMENTAL CASH FLOW
DISCLOSURES
Cash Paid During the Year For
Interest $ - $67,845 $ - $167,384
======= ======= ======= ========
Income Taxes $ - $ - $ - $ -
======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements.
F-11
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 may
potentially be comprised of three reportable segments as that term is defined by
SFAS No. 131 "Disclosures About Enterprise and Related Information." The three
segments are: (1) Coal Segment, (2) Oil and Gas Segment and (3) "Clean Coal"
Technologies Segment. However, only the coal segment meets the quantitative
threshold of being a reportable segment, because, since from the inception of
the Company, it has had no revenue or investment in the "clean coal technology"
segment and only $3,000 in revenue and no investment in the oil and gas segment,
therefore, no separate segment disclosures have been included in the
accompanying notes to the financial statement since all activity has been
reported in the coal segment.
(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)
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.
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-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)
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 one day delayed basis. The Company records its
revenue based on actual quality adjustments received from its custiomers.
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. 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.
Depletion of the cost of coal revenues and amortization of mine development
costs are computed using the units-of-production method utilizing only proven
and probable coal reserve tonnage that is accessible without additional future
development cost in the depletion and amortization base.
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
September 30, 2005, prepaid mining royalties included in other noncurrent assets
totaled $44,111, $11,666 and $51,166, respectively.
(Continued)
F-14
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.
The Company acquired its coal leases and began mining operations in September of
2003. The Company's estimate of its asset retirement obligations is immaterial
to the financial statements from its inception through September 30, 2005; and,
therefore, have not been recorded in the accompanying financial statements.
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.
(Continued)
F-15
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
- --------------------------------------
Under previous guidance, paragraph 5 of ARB No. 43, chapter 4, items such as
idle facility expense, excessive spoilage, double freight, and rehandeling 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, 2006. 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 issued any stock-based compensation awards.
(Continued)
F-16
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-17
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.
On March 31, 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
controlling shareholders. The Company amended its financial statements to record
the 700,000 shares of stock at fair market value of $1,085,000 which represents
the closing quoted market value of its stock on March 31,2004.
On January 3, 2005, the Company issued 2,500,000 shares of its common stock to
Eastern Land Development Company, LLC, an entity owned by Larry Hunt, Jeff
Miller and Jay Lasner for the acquisition of the Coal Burg, Taylor, Richardson
and Broas Seams of coal on the Dempsey Heirs Lease. The 2,500,000 shares of
stock were valued at par value of $2,500 which approximated the cost basis of
the leases in the hands of the former owners. The Company amended its financial
statements to reflect the recording of the 2,500,000 shares at fair market value
of $4,875,000, which represents the closing quoted market value of the stock on
January 3, 2005. No adjustment have been made to the statement of operations,
because no coal bas been mined from the acquired coal seams.
F-18
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 3: RESTATEMENT (CONTINUED)
The following sets forth the balance sheet item affected by these changes:
As As
Reported Restatement Restated
12/31/2004 Adjustment 12/31/2004
------------ ----------- -------------
Coal Leases, Net of Amortization $ 98,157 $ 1,084,300 $ 1,182,457
Additional Paid-in-Capital $ 3,686,035 $ 1,084,300 $ 4,770,335
As As
Reported Restatement Restated
9/30/2005 Adjustment 9/30/2005
------------ ----------- ------------
Coal Leases, Net of Amortization $ 6,020,708 $ 5,956,800 $ 11,995,337
Additional Paid-in-Capital $ 11,977,508 $ 5,956,800 $ 16,527,852
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-19
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.
During the year ended December 31, 2004, 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 fair market value
of $1,085,000 which represents the closing quoted market value of the stock on
March 31, 2004.
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 fair market value of $4,875,000, the closing
quoted market value of the stock on January 3, 2005.
During the nine month period ended September 30, 2005, the Company issued 58,678
shares of its common stock upon conversion of $100,000 debenture and $6,678 of
accrued interest.
(Continued)
F-20
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 5: STOCK TRANSACTIONS (CONTINUED)
During the nine months ended September 30, 2005, the Company issued 95,000
shares of its common stock for services, valued at $244,776 (which approximates
the value quoted in the OTCBB) and has been recorded as an expense.
During the nine months ended September 30, 2005, 652,140 shares of stock were
issued upon the cashless exercise of warrants issued to the underwriters of the
6% senior secured notes.
During the nine months ended September 30, 2005, the Company issued 425,000
shares of stock for the settlement of its option to acquire the 20% working
interest in the Warfield Mine.
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, September 30,
------------
DEFERRED TAX ASSETS 2003 2004 2005
---- ---- ----
(Unaudited)
Net Operating Loss Carryforward $ 476,282 $ 2,657,397 $ 3,893,665
Other 1,700 6,800 17,620
Valuation allowance (477,982) (2,664,197) (3,911,285)
--------- ----------- -----------
$ - $ - $ -
========= =========== ===========
(Continued)
F-21
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)
The income tax benefit differs from the amount computed at federal statutory
rates of approximately 34% as follows:
For the Years Ended Nine Months Ended
December 31, September 30,
------------ -------------
2003 2004 2004 2005
---- ---- ---- ----
(Unaudited) (Unaudited)
Income tax Benefit at Statutory Rate of 34% $ 476,585 $ 2,180,726 $ 965,460 $ 1,238,308
Other 1,397 5,489 3,876 8,780
Change in Valuation Allowance (477,982) (2,186,215) (969,336) (1,247,088)
------------- ----------- --------- -----------
$ - $ - $ - $ -
============= =========== ========= ===========
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.
(Continued)
F-22
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 9: BUILDING, EQUIPMENT AND COAL LEASES
Building, equipment and coal leases are comprised of the following:
December 31, September 30,
------------
2003 2004 2005
---- ---- ----
(Unaudited)
Buildings and Equipment $1,473,863 $1,761,983 $10,295,320
Less Accumulated Depreciation (105,046) (246,306) (652,485)
---------- ---------- -----------
Net Building and Equipment $1,368,817 $1,515,677 $ 9,642,835
========== ========== ===========
Warfield Mine Improvements $ 112,458 $ 112,458 $ 5,902,141
Other Leases 1,085,000 6,093,196
---------- ---------- -----------
112,458 1,197,458 11,995,337
Less Accumulated Depletion
and Amortization (5,000) (15,001) (17,829)
---------- ---------- -----------
Net Coal Leases $ 107,458 $1,182,457 $11,977,508
========== ========== ===========
Depreciation and amortization expense for the years ended December 31, 2003 and
2004 and the nine months ended September 30, 2004 and 2005 was $110,046,
$265,394, $209,601 and $418,175, respectively.
NOTE: 10 ACCRUED LIABILITIES
December 31, September 30,
------------
2003 2004 2005
---- ---- ----
(Unaudited)
Consulting and Director Fees $ - $2,082,500 $ 250,000
Workers Compensation Premium - 111,630 139,283
Payroll Tax Liabilities 33,851 121,166 214,203
Interest 78,587 84,186 470,235
Taxes Payable on Coal Sales 39,864 118,687 76,770
Accrued Expenses 426 32,405 5,188
-------- ---------- ----------
$152,728 $2,550,574 $1,155,679
======== ========== ==========
F-23
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 debentures 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 nine months ended
September 30, 2005, applicable to the beneficial conversion feature. The
liability for convertible debentures on December 31, 2004 and September 30, 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-24
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 fair market value of
$1,085,000, which represents the closing quoted market value of the stock on
March 31, 2004.
On January 6, 2004 the Company received $275,000 from a related party, Eastern
Consolidated Mining, Inc. ("Mining") as a prepayment for future coal sales.
Mining has a coal sales contract between Mining and a customer. The company
invoices mining for coal delivered on a weekly basis. During the year ended
December 31, 2004, $751,450 of coal sales were recorded as a result of this
agreement. At December 31, 2004, payable to a related party includes $110,450
due Mining, which represents the balance due on the advance payment of $275,000.
ECM is considered a related party due to the fact that during the time of the
transactions, the principals of ECM, when taken as a whole, beneficially owned
more than 10% of the common stock of the Company. Coal sales receipts were not
transferred to the Company, the Company invoiced ECM for coal shipped to ECM's
customer. The Company was reducing its $275,000 obligation to ECM on a per ton
basis. When the Company suspended coal shipments to ECM's customer, $110,450 was
the remaining balance due.
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 $24,835 for consulting services during the years ended December 31,
2003 and 2004 and the nine months ending September 30, 2005, respectively.
Accrued balances of $29,666, $162,758 and $187,593 are included in amounts due
related parties as of December 31, 2003 and 2004 and September 30, 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.
(Continued)
F-25
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)
The $287,500 has been credited against Eastern Oil's basis in the oil and gas
lease.
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
On January 3, 2005, the company issued 2,500,000 shares of its common stock to
Eastern Land Development Company, LLC, an entity owned by Larry Hunt, Jeff
Miller and Jay Lasner for the acquisition of the Coal Burg, Taylor, Richardson
and the Broas Seams of coal on the Dempsey Heirs Leases. The 2,500,000 shares of
stock were valued at fair market value of $4,875,000, the closing quoted market
value of the stock on January 3, 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% interest in the Warfield Mine for
$100,000 (the "20% Transaction"). The proceeds were used to develop the Warfield
Mine. At the time of the 20% Transaction, development of the Warfield Mine was
critical to the Company's success and the Company did not have internal capital
available for such to development. In the opinion of management, the 20%
Transaction represented the maximum amount of funds available and was at the
best price. Subsequent to the closing of the 20% Transaction, the Company's
outlook improved which then allowed the Company to close on $13,750,000 of
additional funding in 2005 (the "2005 Funding"). However, a closing condition of
the 2005 Funding required that the Company negotiate and re-purchase the 20%
interest in the Warfield Mine on terms that were acceptable to the seller, the
investors and the Company. On January 18, 2005, the Company issued 200,000
shares of the Company's common stock in exchange for an option to re-acquire the
20% working interest for 1,000,000 and has subsequently completed the
re-purchase
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-26
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.
NOTE 18: SENIOR 6% SECURED NOTES PAYABLE (UNAUDITED)
On February 22, 2005, the Company sold $7,000,000 of the Company's 6% senior
secured convertible notes, due in 2008 ("6% 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 AIR's gives the investors ("Investors") in the 6% Notes the right
to acquire an additional $7,000,000 of the 6% Notes. As of September 30, 2005
the Investors had exercised their rights to acquire an additional $6,750,000 of
the 6% Notes under the terms of the AIRs.
(Continued)
F-27
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 18: SENIOR 6% SECURED NOTES PAYABLE (UNAUDITED) (CONTINUED)
In connection with the sale of the 6% Notes, the Investors have registration
rights ("Rights") for any stock into which the 6% Notes may convert. The Rights
require the payment of Liquidated Damages to the holders of the 6% Notes if the
Company does not have an effective registration statement by July 22, 2005. The
Liquidated Damages are equal to 2% of the amount invested by the Investors for
each 30 day period that a registration statement is not effective.
The following is a summary of the 6% Notes:
Face value of notes $ 13,750,000
Less unamortized debt discount (3,249,622)
------------
6% Senior Secured Notes Payable $ 10,500,378
============
The debt discount is comprised of fees paid to underwriters and the fair value
of the warrants issued to the investors and is being amortized over the life of
the 6% Notes. During the nine months ended September 30, 2005 amortization of
the debt discount was $1,212,590 all of which was capitalized as equipment and
mine development cost.
So long as there is $1,000,000 of the 6% Notes outstanding the Company is
obligated to maintain the following financial covenants:
Maintain an EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) of $1,500,000 for each calendar quarter through December 31, 2006
Shall limit its capital expenditures as follows:
Quarter ended December 31, 2005 $ 1,000,000
Quarter ended March 31, 2006 2,250,000
Quarter ended June 30, 2006 3,500,000
Quarter ended September 30, 2006 4,750,000
Shall not permit its level of cash in the following periods to be less than:
Quarter ended December 31, 2005 $ 750,000
Quarter ended March 31, 2006 1,250,000
Quarter ended June 30, 2006 1,500,000
Quarter ended September 30, 2006 2,000,000
In addition to the above listed financial covenants the Company has limitations
as to its equipment purchases, liabilities it may incur, any mergers,
liquidations or reorganizations, assets it may sell, changes in control of the
Company, transactions with related parties, declare dividends, lend money, sell
or transfer assets and form or acquire subsidiaries.
(Continued)
F-28
CONSOLIDATED ENERGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 2003 AND 2004
NOTE 18: SENIOR 6% SECURED NOTES PAYABLE (UNAUDITED) (CONTINUED)
On July 1, 2005, the Company failed to pay interest as required pursuant the
terms of the 6% notes, and thereby caused a default under the terms of the 6%
notes. As a result of the event of default, the holders of the notes could
declare the entire outstanding principal amount immediately due and payable
along with any interest accrued thereon. On September 23, 2005, the Company
entered into a Consent and Waiver Agreement with the 6% note holders, pursuant
to which they consented to a bridge note financing resulting in $170,000 in
total net proceeds and waived the application of default provision under the 6%
notes for a period of ten business days. The waiver was extended to November 18,
2005. The Company is continuing to negotiate with the note holders for an
additional waiver until December 16, 2005. As a result of the default, the 6%
note holders have the right to take immediate possession of all of the Company's
assets. Because the Company has not received a waiver of the default all of the
6% notes are classified as current liabilities.
F-29
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:
SEC Registration Fee $ 8,924.38
Accounting fees and expenses 10,000.00*
Legal fees and expenses 50,000.00*
Miscellaneous 5,000.00*
-----------
Total $73,924.38*
===========
*Estimated
II-1
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.
In January 2005, the Company issued Stonegate Securities, Inc., warrants
for the purchase of an aggregate of 51,470 shares of its common stock on the
same terms as the warrants issued to Gryphon Master Fund and GSSF Master Fund.
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 25,735
shares. Additionally, in connection with a financing transaction for $2,500,000
in bridge financing, which consisted of a 9% senior secured promissory note, the
Company issued warrants for the purchase of an aggregate of 514,706 shares of
the Company's common stock. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act.
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
convertible 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
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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 March 2005, two investors in the Company's February 2005 private
placement exercised their additional investment rights for an aggregate of
$750,000 in 6% senior secured convertible 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,
the Company issued warrants for the purchase of 44,116 shares of its common
stock at an exercise price of $1.70 to the placement agent. 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.
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 the Company's common stock. 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.
In June 2005, the Company issued 6% senior secured convertible 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
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.
Additionally, investors in the Company's February 2005 private placement
exercised their additional investment rights for an aggregate of $6,000,000 in
6% senior secured convertible notes that may be convertible into 3,529,942
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, the
Company issued warrants for the purchase of 352,994 shares of its common stock
at an exercise price of $1.70 to the placement agent. 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.
Moreover, the Company issued 29,330 shares of its common stock pursuant to
the conversion of an outstanding debenture. The Company also issued to an
aggregate of 40,000 shares of its common stock to two consultants for services
performed during the quarter. 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.
In July 2005, the placement agent exercised all of the remaining warrants
issued to date through a cashless exercise provision in exchange for the
issuance of 166,290 shares of the Company's common stock. This transaction was
considered exempt from registration by reason of Section 4(2) of the Securities
Act and/or Rule 506 promulgated under the Securities Act.
In the second quarter of 2005, the Company approved the issuance of 200,000
shares of its common stock pursuant to a repurchase agreement with the holder of
a 20% working interest in the Warfield Mine. The shares were issued in July
2005. This transactions was considered exempt from registration by reason of
Section 4(2) of the Securities Act and/or Rule 506 promulgated under the
Securities Act.
In the nine months ended September 30, 2005, the Company issued an
aggregate of 58,678 shares of its common stock pursuant to the conversion of
outstanding debentures. The Company also issued to an aggregate of 95,000 shares
of its common stock to consultants for services performed during the period.
These transactions were considered exempt from registration by reason of Section
4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act.
On January 13, 2006, the Company sold approximately $5.9 million principal
amount of 8% senior secured convertible notes due June 30, 2008 to 18 accredited
investors. In connection with the sale of the 8% senior secured convertible
notes, the Company issued investors warrants to purchase an aggregate of
approximately 3.3 million shares of the Company's common stock, calculated as
50% of each investor's subscription amount divided by $0.90. Of the $5.9 million
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principal amount of 8% senior secured convertible notes, the Company received
gross proceeds of $3.4 million. The remaining approximate $2.5 million principal
amount of 8% senior secured convertible notes was paid by investors as follows:
(a) $1.8 million was paid by the cancellation of promissory notes sold by the
Company on September 23, 2005; (b) $102,000 represents a management fee owed to
the lead investor, Gryphon Master Fund, L.P.; and (c) the remaining $598,000
represents interest accrued on the Company's 6% senior secured convertible notes
sold February 24, 2005 and pursuant to certain Additional Investment Rights sold
February 24, 2005. The sale and issuance of securities pursuant to the
Securities Purchase Agreement was exempt from registration requirements pursuant
to Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.
In connection with the sale of 8% senior secured convertible notes and
warrants on January 13, 2006, the Company amended the terms of its 6% senior
secured convertible notes and related warrants changing the conversion and
exercise prices from $1.70 per share to $0.90 per share.
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.
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 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's registration
statement on Form SB-2/A (File No. 333-127261), filed with
the SEC on December 16, 2005).
3.2 Certificate of Merger (incorporated by reference to Exhibit
3.2 to the Company's registration statement on Form SB-2/A
(File No. 333-127261), filed with the SEC on December 16,
2005).
3.3 By-Laws of the Company (incorporated by reference to Exhibit
3.3 to the Company's registration statement on Form SB-2/A
(File No. 333-127261), filed with the SEC on December 16,
2005).
4.1 Form of Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's registration statement on Form
SB-2/A (File No. 333-127261), filed with the SEC on December
16, 2005).
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 6% Senior Secured Convertible 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).
4.4 Form of 8% Senior Secured Convertible Note Due June 30, 2008
(incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K, filed with the SEC on January
17, 2006).
4.5 Form of Warrant Issued January 13, 2006 (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K, filed with the SEC on January 17, 2006).
4.6 Form of Secured Promissory Note Issued January 13, 2006
(incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K, filed with the SEC on January
17, 2006).
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).
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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).
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).
10.21 Promissory Note dated September 23, 2005 issued to
Cordillera Fund L.P. (incorporated by reference to Exhibit
10.5 to the Company's Current Report on Form 8-K, filed with
the SEC on September 29, 2005).
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10.22 Consent and Waiver dated September 23, 2005 (incorporated by
reference to Exhibit 10.6 to the Company's Current Report on
Form 8-K, filed with the SEC on September 29, 2005).
10.23 Bridge Forbearance dated September 23, 2005 (incorporated by
reference to Exhibit 10.7 to the Company's Current Report on
Form 8-K, filed with the SEC on September 29, 2005).
10.24 Subordination Agreement entered into as of September 23,
2005 (incorporated by reference to Exhibit 10.8 to the
Company's Current Report on Form 8-K, filed with the SEC on
September 29, 2005).
10.25 Additional Financing Forbearance Agreement entered into as
of October 6, 2005 (incorporated by reference to Exhibit
10.71 to the Company's Current Report on Form 8-K, filed
with the SEC on October 13, 2005).
10.26 Securities Purchase Agreement dated January 13, 2006 by and
among Consolidated Energy, Inc. and the investors signatory
thereto (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed with the SEC on
January 17, 2006).
10.27 Escrow Agreement dated January 13, 2006 by and between
Stonegate Securities, Inc., Consolidated Energy, Inc. and
Signature Bank (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K, filed with the SEC
on January 17, 2006).
10.28 Registration Rights Agreement dated January 13, 2006 by and
among Consolidated Energy, Inc. and the Purchasers signatory
thereto (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K, filed with the SEC on
January 17, 2006).
10.29 Security Agreement dated January 13, 2006 by and among
Consolidated Energy, Inc., Eastern Consolidated Energy,
Inc., Eastern Consolidated Oil and Gas, Inc., CEI Holdings,
Inc., Morgan Mining, Inc., Warfield Processing, Inc.,
Eastern Coal Energies, Inc. and Gryphon Master Fund, L.P.
(incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K, filed with the SEC on January
17, 2006).
10.30 Guaranty dated January 13, 2006 by Eastern Consolidated
Energy, Inc., Eastern Consolidated Oil and Gas, Inc., CEI
Holdings, Inc., Morgan Mining, Inc., Warfield Processing,
Inc. and Eastern Coal Energies, Inc. (incorporated by
reference to Exhibit 10.5 to the Company's Current Report on
Form 8-K, filed with the SEC on January 17, 2006).
10.31 Lock-Up Agreements of Officers and Directors of Consolidated
Energy, Inc. (incorporated by reference to Exhibit 10.6 to
the Company's Current Report on Form 8-K, filed with the SEC
on January 17, 2006).
10.32 Director Voting Agreement of Officers and Directors of
Consolidated Energy, Inc. (incorporated by reference to
Exhibit 10.7 to the Company's Current Report on Form 8-K,
filed with the SEC on January 17, 2006).
10.33 Charter Amendment Voting Agreement of Officers and Directors
of Consolidated Energy, Inc. (incorporated by reference to
Exhibit 10.8 to the Company's Current Report on Form 8-K,
filed with the SEC on January 17, 2006).
10.34 Forbearance Agreement dated January 13, 2006 by and between
Consolidated Energy, Inc. and the noteholders signatory
thereto (incorporated by reference to Exhibit 10.9 to the
Company's Current Report on Form 8-K, filed with the SEC on
January 17, 2006).
10.35 Amended and Restated Security Agreement dated January 13,
2006 by and among Consolidated Energy, Inc., Eastern
Consolidated Energy, Inc., Eastern Consolidated Oil and Gas,
Inc., CEI Holdings, Inc., Morgan Mining, Inc., Warfield
Processing, Inc., Eastern Coal Energies, Inc. and Gryphon
Master Fund, L.P. (incorporated by reference to Exhibit
10.10 to the Company's Current Report on Form 8-K, filed
with the SEC on January 17, 2006).
10.36 Amendment among Eastern Consolidated Energy, Inc. and
Kentucky Energy Consultants, Inc. (incorporated by reference
to Exhibit 10.11 to the Company's Current Report on Form
8-K, filed with the SEC on January 17, 2006).
10.37 Amendment among Eastern Consolidated Energy, Inc. and New
River Energy Sales Company, Inc. (incorporated by reference
to Exhibit 10.12 to the Company's Current Report on Form
8-K, filed with the SEC on January 17, 2006).
10.38 Agreement among Consolidated Energy, Inc., CEI Holdings,
Inc. and Saudi American Minerals, Inc. (incorporated by
reference to Exhibit 10.13 to the Company's Current Report
on Form 8-K, filed with the SEC on January 17, 2006).
10.39 Consultant Agreement dated January 1, 2006 by and between
Consolidated Energy, inc. and RC Financial Group, LLC
(incorporated by reference to Exhibit 10.14 to the Company's
Current Report on Form 8-K, filed with the SEC on January
17, 2006).
II-6
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.*
23.3 Consent of Summit Engineering Inc.*
24.1 Powers of Attorney (Incorporated by reference to the
signature page to the Company's Form SB-2 (File No.
333-127261), filed with the SEC on August 5, 2005)
* Filed herewith
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of the 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 a prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities
of the undersigned small business issuer pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned small business issuer
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424;
(ii) Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned small business issuer or used or referred to by
the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small
business issuer; and
II-7
(iv) Any other communication that is an offer in the offering made by
the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of 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 and will be governed by the final adjudication
of such issue.
II-8
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 13th day of
February 2006.
CONSOLIDATED ENERGY, INC.
By: /s/ David Guthrie
---------------------
David Guthrie
President, Principal Executive Officer
and Director
By: /s/ Robert Chmiel
---------------------
Robert Chmiel
Interim Chief Financial Officer,
Principal Accounting Officer and Director
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 President, Principal Executive February 13, 2006
- ------------------ Officer and Director
David Guthrie
/s/ Robert Chmiel Interim Chief Financial February 13, 2006
- ------------------ Officer, Principal Accounting
Robert Chmiel Officer and Director
/s/ Joseph Jacobs Director February 13, 2006
- ------------------
Joseph Jacobs
/s/ Edward Jennings Director February 13, 2006
- --------------------
Edward Jennings
/s/ Carl Baker Director February 13, 2006
- ---------------
Carl Baker
/s/ Barry Tackett Director February 13, 2006
- ------------------
Barry Tackett
/s/ Timothy M. Stobaugh Director February 13, 2006
- ------------------------
Timothy M. Stobaugh
/s/ Jesse Shelmire Director February 13, 2006
- -------------------
Jesse Shelmire
/s/ Scott Griffith Director February 13, 2006
- -------------------
Scott Griffith
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