**SECURITES AND EXCHANGE COMMISSION**

**WashingtonD.C.  20549**

 

----

 

**FORM 10-K/A**

 

**Amendment No. 1**

 

**Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

 

**For the FiscalYear Ended December 31, 2002**

 

**Commission FileNumber 1-15639**

 

----

 
| **CARBON  ENERGY CORPORATION**                                              |
|-----------------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its Charter)                     |
|                                                                        |   |   |
| **Colorado**                                                                |   | **84-1515097** |
| (State of Incorporation)                                                    |   | (I.R.S.  Employer  Identification No.) |
|                                                                        |   |   |
| **1700 Broadway,  Suite 1150  Denver, Colorado**                            |   | **80290** |
| (Address of principal executive offices)                                    |   | (Zip Code) |
|                                                                        |   |   |
| Registrants telephone number, including area code:  **(303) 863-1555** |
|                                                                        |   |   |
| Securities registered pursuant to Section 12(b) of the Act:                 |

 

| **Title of each class**      |   | **Name of Exchange on which registered** |
|------------------------------|--------|------------------------------------------|
|                         |   |                                     |
| Common Stock, (no par value) |   | American Stock Exchange                  |

 

Securities registered pursuant to Section 12(g) of the Act: **None**

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.  Yes ý  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes o  No ý

 

Theaggregate market value of the 1,107,714 shares of voting stock held bynon-affiliates of the registrant, based upon the closing sale price of thecommon stock on June 30, 2002 of $9.69 per share as reported on the AmericanStock Exchange, was $10,733,749.  Sharesof common stock held by each officer and director and by each person who owns5% or more of the outstanding common stock have been excluded in that suchpersons may be deemed affiliates.  Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

 

Asof March 19, 2003, the registrant had 6,150,323 shares of common stockoutstanding.

 

 

----

 

**PART III**

 

**ITEM 10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The executive officers and directors are listed belowwith a description of their experience and certain other information.  Each director was elected to serve until thenext annual meeting of stockholders or until their successors are duly electedand qualified.  Two of the Company’sdirectors, Mr. Lawrence and Mr. Leidel, were persons selected as nominees byYorktown Energy Partners III, L.P. (Yorktown) in accordance with the exchangeagreement described in Item 13 below. Mr. McDonald was selected as a director pursuant to requirements of theexchange agreement and his employment agreement.  Each of Carbon’s two executive officers serves at the pleasure ofthe Board of Directors and in accordance with their employment agreements.

 

**Directors and Officers**

 

The following setsforth certain information about the executive officers and directors of theCompany:

 
| **Name**                 |   | **Age** |   | **Position**                                     |
|--------------------------|--------|---------|--------|--------------------------------------------------|
|                     |   |    |   |                                             |
| Patrick R.  McDonald     |   | 46      |   | President, Chief  Executive Officer and Director |
| Kevin D.  Struzeski      |   | 44      |   | Treasurer and  Chief Financial Officer           |
| Cortlandt S.  Dietler    |   | 81      |   | Director                                         |
| David H. Kennedy         |   | 53      |   | Director                                         |
| Bryan H.  Lawrence       |   | 60      |   | Director                                         |
| Peter A. Leidel          |   | 46      |   | Director                                         |
| Harry A.  Trueblood, Jr. |   | 77      |   | Director                                         |

 

**Patrick R. McDonald**became Carbon’s President, Chief Executive Officer and a director in September1999.  He has been Chairman and ChiefExecutive Officer of CEC since July 1998. From 1987 until 1997, Mr. McDonald was Chairman and President ofInterenergy Corporation, Denver, Colorado. Since January 1998, he has been the sole member of McDonald Energy,LLC.  Mr. McDonald is a petroleumgeologist.

 

**Kevin D. Struzeski**became Carbon’sTreasurer and Chief Financial Officer on September 14, 1999.  He has been Treasurer and Chief FinancialOfficer for CEC since November 1998. Mr. Struzeski was employed as Accounting Manager, MediaOne Group from1997 to 1998 and prior to that he was employed as Controller, InterenergyCorporation from 1995 to 1997.

 

**Cortlandt S. Dietler**has served as adirector of Carbon since December 1999. Mr. Dietler has been the Chairman of TransMontaigne Inc., which owns andoperates terminals and pipelines for the transportation of oil, gas and otherpetroleum products, since April 1995. Mr. Dietler was Chief Executive Officer of TransMontaigne from April1995 through September 1999.  He was thefounder, Chairman and Chief Executive Officer of Associated Natural GasCorporation, a natural gas gathering, processing and marketing company, priorto its 1994 merger with PanEnergy Corporation, on whose Board he served as anAdvisory Director, prior to its merger with Duke Energy Corporation.  Mr. Dietler also serves as a director ofHallador Petroleum Company (OTC-HPCO.OB), Cimarex Energy Co. (NYSE-XEC), andForest Oil Corporation (NYSE-FST).

 

**David H. Kennedy** has served as a directorof Carbon since September 1999.  FromMarch 1981 through December 1998, Mr. Kennedy was a managing director of FirstReserve Corp. and was responsible for investing and monitoring part of itsportfolio of energy investments.  SinceJanuary 1999, Mr. Kennedy has acted as a consultant to and investor in theenergy industry.  He serves as adirector of Maverick Tube Corporation (NYSE-MVK).

 

**Bryan H. Lawrence** has served as a directorof Carbon since September 1999.  Mr.Lawrence is a founder and member of Yorktown Partners LLC which was establishedin September 1997.  Yorktown PartnersLLC is the manager of private equity partnerships that invest in the energyindustry.  Mr. Lawrence had beenemployed at Dillon, Read & Co. Inc. since 1966, serving as a ManagingDirector until the merger of Dillon Read with SBC Warburg in September1997.  Mr. Lawrence also serves as aDirector of Crosstex Energy, L.P. (NASDAQ-XTEX), D & K HealthcareResources, Inc.

 

1

----

 

(NASDAQ-DKWD), HalladorPetroleum Company (OTC-HPCO.OB), TransMontaigne Inc. (ASE-TMG), VintagePetroleum, Inc. (NYSE-VPI) and certain non-public companies in the energyindustry in which the Yorktown partnerships hold equity interests.

 

**Peter A. Leidel** has served as a director ofCarbon since September 1999.  Mr. Leidelis a founder and member of Yorktown Partners LLC which was established inSeptember 1997.  Yorktown Partners LLCis the manager of private equity partnerships that invest in the energyindustry.  Previously, he was a partnerof Dillon, Read & Co. Inc.’s venture capital fund and has invested in avariety of private companies with a particular focus on energy investmentssince 1983.  He was previously employedin corporate treasury positions at Mobil Corporation and worked for KPMG PeatMarwick and the U.S. Patent and Trademark Office.  Mr. Leidel is a director of Cornell Companies, Inc. (NYSE-CRN),Willbros Group, Inc. (NYSE-WG) and certain non-public companies in the energyindustry in which the Yorktown partnerships hold equity interests.

 

**Harry A. Trueblood, Jr.** has served as adirector of Carbon since February 2000. Mr. Trueblood is currently owner and managing member of HAT Resources,LLC.  He was formerly President andChief Executive Officer of CEC from 1972 until June 1998.  Mr. Trueblood also was founder and served asChairman, President and CEO of Columbus Energy Corp., the former parent of CEC,from 1982 through December 2000 and also was founder and served as Presidentand CEO of Consolidated Oil & Gas, Inc., the former parent of both CEC andColumbus from 1958 to 1988.

 

**COMPLIANCEWITH SECTION 16 (a) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

Section 16(a) of the Securities Exchange Act of 1934requires executive officers, directors and persons who beneficially own morethan ten percent of the Company’s stock to file initial reports of ownershipand reports of changes of ownership at specified times with the Securities andExchange Commission and the American Stock Exchange.  Copies of such reports are required to be furnished to theCompany.

 

Based solely on a reviewof copies of such reports furnished to the Company, the Company believes thatall Section 16(a) filing requirements of its directors, officers and beneficialowners of more than 10% of the outstanding shares of the Company for the yearending December 31, 2002 have been complied with in a timely manner.

 

2

----

 

**ITEM 11.****                                              EXECUTIVECOMPENSATION**

 

The following table summarizes the compensation paidduring the last three fiscal years by Carbon to each of the two executiveofficers of Carbon.

 

**SUMMARYCOMPENSATION TABLE**

 
|                                   |   | **Annual  Compensation** |   | **Long Term  Compensation** |   |
|----------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
| **Name and Principal Position**        |   | **Fiscal  Year**         |   | **Salary  ($)**             |   | **Bonus(1)  ($)** |   | **Restricted  Stock  Awards(2)  ($)** |   | **Securites  Underlying  Options(3)  (#)** |   | **All Other  Compensation  ($)** |   |
| Patrick R.  McDonald                   |   | 2002                     |   | 244,764                     |   | 301,900 |   | — |   | — |   | 166,662 | (4) |
| President and  Chief Executive Officer |   | 2001                     |   | 229,050                     |   | 138,000 |   | — |   | — |   | 6,300 |   |
|                                   |   | 2000                     |   | 203,642                     |   | 102,733 |   | 58,625 |   | — |   | 14,035 |   |
|                                   |   |                     |   |                        |   |   |   |   |   |   |   |   |   |
| Kevin D.  Struzeski                    |   | 2002                     |   | 115,000                     |   | 53,000 |   | 19,975 |   | 5,000 |   | 28,452 | (5) |
| Chief Financial  Officer and Treasurer |   | 2001                     |   | 110,000                     |   | 25,000 |   | — |   | — |   | 5,250 |   |
|                                   |   | 2000                     |   | 100,321                     |   | 30,000 |   | 14,656 |   | 5,000 |   | 9,774 |   |

 

----

(1)                                  Includes$250,000 and $40,000 paid in January 2003 to Mr. McDonald and Mr. Struzeski,respectively, for bonuses accrued in 2002.

(2)                                  Grantedpursuant to the Company’s 1999 restricted stock plan and valued at the fairmarket value of $7.99 and $5.86 per share on the date of grant for 2002 and2000, respectively.  No shares weregranted under this plan during 2001.  Therestricted stock vests 33.33% each year over a three year period from the dateof the grant.  All restricted stockoutstanding under this plan becomes fully vested upon a change of control asdefined in the plan.  A change ofcontrol would include shareholder approval of Carbon’s proposed merger withEvergreen Resources, Inc.

(3)                                  Grantedpursuant to the Company’s 1999 stock option plan.

(4)                                  Includescontributions of $5,500, $5,250 and $4,800 made by the Company in 2002, 2001and 2000, respectively, to the Company’s 401(k) plan on behalf of Mr. McDonald,$1,050 attributable to the Company’s payment for a term life insurance policyon behalf of Mr. McDonald in 2002, 2001 and 2000, and $108,160 related to astock appreciation amount paid in 2002 to Mr. McDonald by Carbon for thecancellation of an option.  For furtherinformation see Item 13 below.  Thebalance of the amounts for 2002 and 2000 represent amounts paid for untakenleave.

(5)                                  Includescontributions of $5,500, $5,250 and $5,250 made by the Company in 2002, 2001and 2000, respectively, to the Company’s 401(k) plan on behalf of Mr.Struzeski.  The balance of the amountsfor 2002 and 2000 represent amounts paid for untaken leave.

 

**STOCK OPTION GRANTS AND EXERCISES**

 

In 1999, Carbon adopted a stock option plan.  All salaried employees of the Company andits subsidiaries are eligible to receive both incentive stock options andnonqualified stock options.  Directorsand consultants who are not employees of the Company or its subsidiaries areeligible to receive non-qualified stock options, but not incentive stockoptions under the plan.  The optionprice for the incentive stock options granted under the plan are not to be lessthan 100% of the fair market value of the shares subject to the option.  The option price for the nonqualified stockoptions granted under the plan are not to be less than 85% of the fair marketvalue of the shares subject to the options. All outstanding options under thestock option plan become immediately exercisable in full, whether or not thereare vesting requirements, upon the occurrence of a change in control as definedin the plan.  A change of control wouldinclude shareholder approval of Carbon’s proposed merger with EvergreenResources, Inc.  The term of any stockoption cannot exceed ten years.  Theaggregate number of shares of common stock which may be issued under optionsgranted pursuant to the plan may not exceed 700,000 shares.

 

3

----

 

The specific terms ofgrant and exercise are determined by the Compensation Committee of the Board ofDirectors.

 

The following table setsforth information concerning individual grants of stock options made toCarbon’s executive officers for the fiscal year ended December 31, 2002:

 
| **Name**            |   | **Number ofSecurities  Underlying  Options  Granted** |   | **%****of Total  OptionsGranted to  Employees  in Fiscal  Year** |   | **Exercise  Price  ($)** |   | **Expiration  Date** |   | **Potential  Realizable Value  at Assumed Annual Rates  of Stock Price****Appreciation  for  Option Term(1)** |   |
|---------------------|--------|-------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------------------------|--------|----------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|
| **5%  ($)**         |   | **10****%****($)**                                    |
|                |   |                                                  |   |                                                             |   |                     |   |                 |   |                                                                                                          |   |   |   |
| Kevin  D. Struzeski |   | 5,000                                                 |   | 8.3                                                              | %      | 7.99                     |   | 2/29/12              |   | 25,124                                                                                                        |   | 63,670 |   |

 

_________________________

(1)                                  Thecolumns present hypothetical future realizable values of the options,obtainable upon exercise of the option’s exercise price, assuming Carbon’scommon stock appreciates at a 5% and 10% compound annual rate over the term ofthe options.  The 5% and 10% rates ofmarket price appreciation are presented as examples pursuant to rules of theSEC and do not reflect management’s prediction of the future market price of ourcommon stock.  No gain to the optioneesis possible without an increase in the market price of the common stock abovethe option price.  There can be noassurance that the potential realizable values shown in this table will beachieved.  The potential realizablevalues presented are not intended to indicate the value of the options.

 

**YEAR-ENDOPTION VALUE TABLE**

 

The following tablesummarizes information as of December 31, 2002 with respect to exercisable andnon-exercisable options held by the Company’s executive officers.  The table also includes the value of“in-the-money” options, which represents the closing price of a share of commonstock on December 31, 2002 of $10.00, less the exercise price,multiplied by the number of shares subject to the unexercised options.

 

**2002 YEAR-END OPTION VALUES**

 
|                 |   | **Number of  Securities  Underlying Unexercised  Options at Year-End** |   | **In-the-Money  Value of Unexercised  Options at Year End  ($)** |   |
|----------------------|--------|------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|
| **Name**             |   | **Exercisable**                                                        |   | **Unexercisable**                                                |   | **Exercisable** |   | **Unexercisable** |   |
|                 |   |                                                                   |   |                                                             |   |   |   |   |   |
| Patrick  R. McDonald |   | 148,000                                                                |   | —                                                           |   | 666,000 |   | — |   |
|                 |   |                                                                   |   |                                                             |   |   |   |   |   |
| Kevin  D. Struzeski  |   | 48,333                                                                 |   | 6,667                                                            |   | 233,790 |   | 16,947 |   |

 

**EMPLOYMENTAGREEMENTS**

 

In October, 2002, PatrickR. McDonald and Carbon entered into a three-year employment agreement, whichprovides for Mr. McDonald to be the President and Chief Executive Officer ofCarbon at a base salary of not less than $242,000 per year, to be adjusted oneach July 1 for cost of living increases in the U.S. consumer price index andto be reviewed annually by the Board of Directors or the Compensation Committee.  Carbon is to provide Mr. McDonald medical,dental and disability benefits and is to maintain for his benefit a lifeinsurance policy in the

 

4

----

 

amount of $2million.  Carbon is also to pay forcertain membership fees and dues of certain organizations to which Mr. McDonaldhas historically belonged.  If a paymentto Mr. McDonald is subject to an excise tax under the Internal Revenue Code,Carbon will pay to Mr. McDonald an additional amount to cover the excise tax onan after-tax basis.  According to theemployment agreement, Carbon is also to nominate and endorse Mr. McDonald as adirector on Carbon’s Board of Directors so long as he is an officer of Carbon.  Prior to this employment agreement, Mr. McDonaldhad a three-year employment agreement which expired in October 2002.

 

If Mr. McDonald’semployment is terminated by Carbon for any reason other than “cause” (asdefined in the agreement) or upon the death or disability of Mr. McDonald or ifMr. McDonald terminates his employment because of a material breach of theemployment agreement by Carbon or because of a change in the position of Mr.McDonald with Carbon, then Mr. McDonald is to be paid a lump sum payment equalto 300% of his average annual compensation (which includes base salary andincentive compensation).  Also, in thatevent, his options and restricted stock become 100% vested.

 

Either Carbon or Mr.McDonald may terminate the agreement if there is a change in control of Carbonas defined in the employment agreement. In the event of a change in control not supported by a majority of theBoard of Directors, Mr. McDonald is to be paid 400% of his average annualcompensation upon termination of the employment agreement.  In the event of a change in controlsupported by the Board of Directors, Mr. McDonald is to be paid 300% of hisaverage annual compensation upon termination of the employment agreement byCarbon or 300% of his compensation upon termination of his employment by him.  In addition, upon a change in control, anyoutstanding stock options, stock appreciation rights and incentive awards(including restricted stock) granted to Mr. McDonald become 100% vested,without any restrictions.

 

In October, 1999, the Company entered into a two-yearemployment agreement with Mr. Struzeski. The initial two year term ended in October, 2001, after which theagreement continues from year to year. The agreement provides for Mr. Struzeski to be the Chief FinancialOfficer of Carbon at a base salary of $100,000 per year to be reviewed annuallyby the Board of Directors or the Compensation Committee, together with allbenefits offered by Carbon to Carbon’s employees generally.  If Mr. Struzeski’s employment is terminatedby Carbon for any reason other than “cause” or upon the death or disability ofMr. Struzeski or if Mr. Struzeski terminates his employment because of a changein the position of Mr. Struzeski with Carbon, Carbon is to pay Mr. Struzeski anamount equal to his compensation (pro rated on a monthly basis) multiplied bythe remaining months of his employment agreement.  Also, in that event, his options and restricted stock become 100%vested.  The employment agreement withMr. Struzeski provides that either Carbon or Mr. Struzeski may terminate thecontract if there is a change in control of Carbon.  In the event of a change in control not supported by a majorityof the Board of Directors, Mr. Struzeski is to be paid 300% of his averageannual compensation (which includes base salary and incentive compensation)upon termination of the employment agreement. In the event of a change in control supported by the Board of Directors,Mr. Struzeski is to be paid 200% of his compensation upon termination of his employmentagreement by the Company or 100% of his compensation upon termination of hisemployment by him.  In the event of achange in control, any outstanding stock options, stock appreciation rights andincentive awards (including restricted stock) granted to Mr. Struzeski willbecome 100% vested, without restrictions.

 

**COMPENSATIONCOMMITTEE REPORT ON EXECUTIVE COMPENSATION**

 

The Compensation Committee of the Board of Directorsis comprised of non-employee directors of the Company.  The Committee establishes and reviews thecompensation policies of the Company and administers the Company’s Stock Optionand Restricted Stock Plans.  TheCommittee also establishes salary and bonus levels for officers.

 

The Committee believes that it is in the best interestof the Company and its shareholders for the cash compensation of its executiveofficers to be competitive with the compensation of executives of oil and gascompanies of comparable size and geographical location and complexity ofoperations.

 

Awards of stock options and restricted stock areintended to serve as long-term compensation designed to align the interests ofCarbon’s employees with the growth objectives of Carbon and its shareholders.

 

5

----

 

Stock options are granted only at the market price of theCompany’s stock and will have value only if the price of the Company’s commonstock increases.  Options typically havea term of ten years and vest 33% each year for three years following the grant.

 

Restricted stock grants typically vest 33% each yearfor three years following the grant.

 

The Committee considers various factors to determinethe performance of the Company and its executives, including growth in naturalgas and oil production, growth in reserves of natural gas and oil, cash flow,earnings before interest, taxes and depreciation (EBITDA) and net income.  The Committee has not established anyparticular formula nor identified any one particular factor as being moreimportant than others in determining the performance of the Company and its executives.

 

For 2002, Carbon USA reported increased productionvolumes and net proved oil and natural gas reserves, and a decline in revenue,cash flow, EBITDA and net income. Production rose by 10% to an average of 9.9 MMcfe a day.  Net proved reserves increased by 5% to 38.3Bcfe, replacing over 196% of last years’ production.  Oil and gas revenues for 2002 decreased by 17% to $8.6million.  Cash flow before changes inworking capital during 2002 was $1.9 million, a decrease of 29% from cash flowbefore changes in working capital reported in 2001.  EBITDA declined to $2.8 million, a decrease of 7% from thatreported for 2001.  Carbon USA reporteda $14.3 million net loss for the year, compared to a net loss of $1.3 millionreported in 2001.  The decrease in oiland gas revenue, cash flow before changes in working capital and EBITDA weredue to a 26% decrease in the price of gas received in 2002 compared to2001.  In addition, the net loss for2002 included a full cost ceiling impairment of $12.0 million due to low spotgas prices at June 30, 2002.

 

For 2002, Carbon Canada reported increased net provedoil and natural gas reserves and a decline in production volumes, revenue, cashflow, EBITDA and net income. Net proved reserves increased by 30% to 29.1 Bcfe,replacing over 362% of last years’ production. Production declined by 9% to an average of 6.9 MMcfe a day due primarilyto the voluntary curtailment of natural gas and liquids production during thethird quarter of 2002 due to low natural gas prices.  Oil and gas revenues for 2002 decreased by 32% to $7.6million.  Cash flow before changes inworking capital during 2002 was $3.5 million, a decrease of 40% from cash flowbefore changes in working capital reported in 2001.  EBITDA declined to $3.8 million, a decrease of 51% from thatreported for 2001.  Carbon Canadareported a $.2 million net loss for the year, compared to net income of $2.9million reported in 2001. The decrease in oil and gas revenues, cash flow beforechanges in working capital, and EBITDA were due to a 27% decrease in the priceof gas received in 2002 compared to 2001. In addition, the net loss for 2002 included a full cost ceilingimpairment of $1.2 million due to low spot gas prices at June 30, 2002.

 

The common stock of Carbon increased from $8.69 pershare at December 31, 2001 to $10.00 per share at December 31, 2002, anincrease of 15%.

 

The Committee reviewed the Company’s operational andfinancial performance during 2002 to determine the level of compensation of itsChief Executive Officer, Patrick R. McDonald. Mr. McDonald has an employment agreement with the Company which providesfor a base salary to be reviewed annually by the Compensation Committee of theBoard of Directors or the Board of Directors. Mr. McDonald’s base salary at January 1, 2002 was $240,000 and increasedto $242,880, effective July 1, 2002. Based upon the Company’s operational and financial results, theCompensation Committee recommended an increase to Mr. McDonald’s base salary to$250,000 effective January 1, 2003 and recommended that Mr. McDonald receive aperformance bonus of $250,000 to be paid January 15, 2003.

 

The Compensation Committee did not award Mr. McDonaldshares of common stock from the Company’s Restricted Stock Plan or options fromthe Company’s Stock Option Plan.

 
|   | Compensation Committee     |
|--------|----------------------------|
|   |                       |
|   | Peter A. Leidel,  Chairman |
|   | Cortlandt S. Dietler       |
|   | David H. Kennedy           |

 

6

----

 

**DirectorCompensation**

 

Each of our directors whois neither an officer nor an employee will be paid a director’s fee of $1,500per quarter and $1,000 per committee meeting when the committee meeting is heldseparate from any regularly scheduled board meeting.  Directors are also reimbursed for expenses incurred in attendingBoard of Directors and committee meetings, including expenses for travel, foodand lodging.

 

On October 21, 2002, Messrs. Dietler, Kennedy andTrueblood were each granted non-qualified stock options to purchase 5,000shares of Carbon common stock at $9.88 per share.  Shares subject to these options vest one-third on the first,second and third anniversaries of the date of grant and have a ten year term.

 

**PERFORMANCEGRAPH**

 

The following performancegraph compares the cumulative total stockholders’ return for Carbon’s commonstock with the cumulative total return for the S&P 500 Index and the DowJones Secondary Oil Index commencing February 23, 2000 (the initial tradingdate for Carbon shares) and ending December 31, 2002.  The closing sales price of the Company’s commonstock on the last trading day of 2002 was $10.00.

 

The table assumes thatthe value of an investment in Carbon common stock and each index was $100 onFebruary 23, 2000 and that all dividends were reinvested.  The stock price performance shown on thegraph is not necessarily indicative of future price performance.

 

 

----

(1)  Source:  Fact SetResearch Systems, Inc.

(2)  Source: Bloomberg

 

7

----

 

**ITEM12.               SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS**

 

The following table contains information regardingownership of our common stock (the only class of stock outstanding) as of March31, 2003 by each director, each executive officer named in the compensationtable, all of our directors and executive officers as a group, and eachshareholder who, to our knowledge, was the beneficial owner of five percent or moreof the outstanding shares.  Allinformation is based on information provided by such persons to us.  Unless otherwise indicated, their addressesare the same as Carbon’s address and each person identified in the table holdssole voting and investment power with respect to the shares shown opposite suchperson’s name.  Footnotes supplement theinformation contained in the table.

 
| **Name  and Address of Beneficial Owner**                                           |   | **Amount and  Nature of  Beneficial  Ownership(a)** |   | **Percent  Outstanding** |   |
|-------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|--------------------------|--------|
| Patrick R. McDonald and McDonald Energy, LLC                                        |   | 378,833                                             | (b)(c) | 6.0                      | %      |
|                                                                                |   |                                                |   |                     |   |
| Kevin  D. Struzeski                                                                 |   | 69,999                                              | (d)    | 1.1                      | %      |
|                                                                                |   |                                                |   |                     |   |
| Cortlandt  S. Dietler  P.O. Box  5660  Denver, CO 80217                        |   | 31,666                                              |   |                     | *      |
|                                                                                |   |                                                |   |                     |   |
| David  H. Kennedy  23 Lakeside Avenue  Darien, CT 06820                             |   | 31,666                                              |   |                     | *      |
|                                                                                |   |                                                |   |                     |   |
| Bryan  H. Lawrence  410 Park Avenue, Suite 1900  New York, NY 10022                 |   | 4,500,000                                           | (e)    | 73.2                     | %      |
|                                                                                |   |                                                |   |                     |   |
| Peter  A. Leidel  410 Park Avenue, Suite 1900  New York, NY 10022                   |   | 4,500,000                                           | (f)    | 73.2                     | %      |
|                                                                                |   |                                                |   |                     |   |
| Harry A. Trueblood, Jr  1720 S. Bellaire Street  Suite 912  Denver, CO 80222        |   | 262,062                                             | (g)    | 4.3                      | %      |
|                                                                                |   |                                                |   |                     |   |
| All directors and executive officers as a group  (7 persons including the above)    |   | 5,274,226                                           |   | 82.5%                    |   |
|                                                                                |   |                                                |   |                     |   |
| Yorktown Energy Partners III, L.P.  410 Park Avenue, Suite 1900  New York, NY 10022 |   | 4,500,000                                           |   | 73.2%                    |   |

 

----

*            Lessthan 1%

 

(a)     Includesthe number of shares of common stock of the Company subject to stock optionsexercisable within 60 days after March 31, 2003, as follows:  Mr. McDonald, 148,000 shares; Mr. Struzeski,49,999 shares; Mr. Dietler, 21,666 shares; Mr. Kennedy, 21,666 shares and Mr.Trueblood, 1,666 shares; all directors and officers as a group, 242,997 shares.

(b)         Includes50,000 shares of restricted stock granted pursuant to the Company’s 1999restricted stock plan, 39,999 of which have vested, 3,334 of which vest in2003, 3,333 of which vest in 2004 and 3,334 of which vest in 2005.

 

8

----

 

(c)          PatrickR. McDonald is the sole member of McDonald Energy, LLC.  The total includes 117,100 shares owned byCEC Resources Holdings, LLC of which McDonald Energy, LLC has a 58.3% interest.

(d)         Includes20,000 shares of restricted stock, 12,499 of which have vested, 834 of whichvest in 2003, 2,499 of which vest in 2004, 2,501 of which vest in 2005 and1,667 which vest in 2006.

(e)          Theseshares are owned by Yorktown Energy Partners III, L.P.  As a member of Yorktown Partners LLC, themanager of Yorktown Energy Partners III, L.P., Mr. Lawrence may be deemed to bea beneficial owner of these shares.  Mr.Lawrence disclaims beneficial ownership of these shares.

(f)            Theseshares are owned by Yorktown Energy Partners III, L.P.  As a member of Yorktown Partners LLC, themanager of Yorktown Energy Partners III, L.P., Mr. Leidel may be deemed to be abeneficial owner of these shares.  Mr.Leidel disclaims beneficial ownership of these shares.

(g)         Doesnot include 35,711 shares which are owned by Lucile B. Trueblood, Mr.Trueblood’s wife, which she acquired as her separate property and as to whichMr. Trueblood disclaims any beneficial ownership.  Includes 12,000 shares owned by the Harry A. Trueblood, Jr.Charitable Remainder Unitrust dated June 1, 1998 as to which shares Mr.Trueblood disclaims ownership; however, as the only trustee, he does hold solevoting rights and dispositive powers with respect to such shares.

 

The following table provides as of December 31, 2002,information regarding the Company’s equity compensation plans, which consistsof the 1999 stock option plan and 1999 restricted stock plan.

 
| **Plan Category**                                               |   | **Number of  securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** |   | **Weighted-average  exercise price of   outstanding options, warrants and rights  (b)** |   | **Number of  securities remaining available for future issuance under   equity compensation  plans (excluding  securities reflected in   column (a))  (c)** |   |
|-----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Equity  compensation plans approved by security holders**     |   | 570,168                                                                                                  |   | $5.87                                                                                        |   | 290,568                                                                                                                                                     |   |
| **Equity  compensation plans not approved by security holders** |   | -0-                                                                                                      |   | -0-                                                                                          |   | -0-                                                                                                                                                         |   |
| **Total**                                                       |   | 570,168                                                                                                  |   | $5.87                                                                                        |   | 290,568                                                                                                                                                     |   |

 

The number of shares of common stock remainingavailable for future issuance as shown in the table consists of 75,568 sharesthat may be subject to options granted in the future under the 1999 stockoption plan and 215,000 shares of common stock available under the 1999restricted stock plan.

 

As described in Item 1 of this report, Carbon hasentered into an agreement and plan of reorganization with Evergreen Resources,Inc. under which Carbon will merge with a subsidiary of Evergreen and Carbonshareholders will receive 0.275 shares of Evergreen stock for each outstandingshare of Carbon common stock (and cash in lieu of any fractional shares).  Yorktown Energy Partners III, L.P. and Mr.McDonald, who at March 31, 2003 beneficially owned approximately 73.2% and6.0%, respectively, of Carbon’s outstanding common stock, have executed votingagreements with Evergreen obligating each of them to vote all shares over whichthe party has voting control in favor of the merger.  Carbon expects the merger to close in the second quarter or thirdquarter of 2003.

 

9

----

 

**ITEM 13.****                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

In October 1999, Yorktown purchased an aggregate of4,500,000 shares of our common stock for $24,750,000 in cash.  On October 14, 1999, Carbon, CEC andYorktown signed the Exchange and Financing Agreement that provided for:

•                                          An assignmentof the BFC stock purchase agreement to Carbon;

•                                          The purchaseof common stock of Carbon by Yorktown as described above;

•                                          The exchangeoffer made for CEC shares;

•                                          Persons to benominated as directors of the Company;

•                                          The adoptionof the Company’s 1999 stock option plan and the Company’s 1999 restricted stockplan; and

•                                          The Company’sentering into employment agreements with Mr. McDonald and Mr. Struzeski.

 

In the Exchange Agreement, Carbon, CEC and Yorktownagreed that the Board of Directors of Carbon will consist of fivedirectors.  Carbon, CEC and Yorktownagreed that the five directors initially would be David H. Kennedy, a personwho passed away and was replaced by Cortlandt S. Dietler, Bryan H. Lawrence,Peter A. Leidel and Patrick R. McDonald. After completion of the exchange offer and Harry A. Trueblood, Jr.’s acceptanceof the exchange offer for all CEC common stock beneficially owned by him, thenumber of Carbon directors was increased to six and Mr. Trueblood was electedas the sixth director.  As long asYorktown beneficially owns shares with 50% or more of the outstanding votes inthe election of directors of Carbon, Yorktown has the right to designate fornomination two directors.  If Yorktownbeneficially owns shares with 25% or more but less than 50% of the outstandingvotes in the election of directors of Carbon, then Yorktown has the right to designatefor nomination one director.  Yorktownhas no right to designate directors for nomination under the Exchange Agreementif Yorktown beneficially owns shares with less than 25% of the outstandingvotes in the election of directors of Carbon. So long as Mr. McDonald is an officer of Carbon, he is to be designatedfor nomination as a director of Carbon.

 

As provided by the Exchange Agreement, a NominatingCommittee of Carbon’s Board was established. The Nominating Committee consists of one Yorktown designated director,Mr. McDonald so long as he is a director of Carbon, and two independentdirectors.  The Nominating Committee isresponsible for determining nominees for the positions of directors of Carbonor persons to be elected by the Board of Directors or shareholders of Carbon tofill any vacancy in the Board of Directors. The Nominating Committee is required to nominate for director eachYorktown director which Yorktown has the right to designate and has designated.  The Nominating Committee is required tonominate Mr. McDonald if he is entitled to be nominated.  The Nominating Committee will then nominatethe remaining directors; at least two of the persons nominated will beindependent directors.  If the size ofthe Board is changed and there are not sufficient positions for the election oftwo independent directors after taking into account the directors designated byYorktown and Mr. McDonald, then the Nominating Committee is not required tonominate two independent directors.  Ifthere is a vacancy in the position relating to a Yorktown director, theremaining Yorktown director has the right to designate any replacement to fillthe vacancy.  The Nominating Committeehas the right to designate any replacement to fill any other vacancy.  The Exchange Agreement requires that anychange in the size or composition of the Board of Directors or the NominatingCommittee be approved by a supermajority vote of the Board consisting of amajority of the entire Board which includes a majority of all Yorktowndirectors and at least one independent director.  The Exchange Agreement requires that Yorktown and Mr. McDonaldtake such actions as shareholders of Carbon as necessary to effectuate theelection of directors nominated pursuant to the foregoing provisions.  The provisions relating to election ofdirectors cease to be effective on October 29, 2009 or, if earlier, whenYorktown beneficially owns shares with less than 25% of the outstanding votesin the election of directors and Mr. McDonald is no longer an officer ofCarbon.

 

On July 22, 1999, Mr. McDonald was granted a 20,000share non-qualified option at a strike price of $4.25.  The expiration date for these options wasJuly 21, 2002.  Due to non-publicinformation prior to and at the expiration date, the sale of the shares subjectto these options may have been prohibited. To facilitate the exercise of the options, the entire Board, exclusiveof Mr. McDonald, authorized the cancellation of the options and a cash paymentequal to the stock appreciation amount of $108,160.  The appreciation amount was the difference per share between theexercise price of the options and the fair market value of the underlying stockon the date of cancellation.  Concurrentwith the cash payment, and with approval of the entire Board exclusive of Mr.McDonald,

 

10

----

 

Carbon purchased 5,267 shares of Carbon common stock from Mr. McDonaldat the market price of $9.65 per share for a total of $50,827.

 

11

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 of theSecurities Exchange Act of 1934, the Registrant has duly caused this amendmentto be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date:  April 30, 2003

 
|   |   |   |   |   |   | CARBON ENERGY  CORPORATION |
|--------|--------|--------|--------|--------|--------|----------------------------|
|   |   |   |   |   |   |                       |   |
|   |   |   |   |   |   | By:                        | /s/  Patrick R. McDonald |
|   |   |   |   |   |   |                       | Patrick R. McDonald,  President and Chief Executive Officer |
|   |   |   |   |   |   |                       |   |
|   |   |   |   |   |   | By:                        | /s/  Kevin D. Struzeski |
|   |   |   |   |   |   |                       | Kevin D. Struzeski,  Treasurer and Chief Financial Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this amendment has been signed below by the followingpersons of the Registrant and in the capacities and on the dates indicated:

 
| **Date**       |   | **Name and  Title**       |   | **Signature** |
|----------------|--------|---------------------------|--------|---------------|
|           |   |                      |   |          |
| April 30, 2003 |   | Cortlandt S. Dietler,     | )      |          |   |
|           |   | Director                  | )      |          |   |
|           |   |                      | )      |          | /s/  Patrick R. McDonald |   |
| April 30, 2003 |   | David H. Kennedy,         | )      |          | Patrick R. McDonald,  for himself and as who |
|           |   | Director                  | )      |          | Attorney-in-Fact for  the named directors |
|           |   |                      | )      |          | together constitute all  of the members of |
| April 30, 2003 |   | Bryan H. Lawrence,        | )      |          | Registrant’s Board of  Directors |
|           |   | Director                  | )      |          |   |
|           |   |                      | )      |          |   |
| April 30, 2003 |   | Peter A. Leidel,          | )      |          |   |
|           |   | Director                  | )      |          |   |
|           |   |                      | )      |          |   |
| April 30, 2003 |   | Patrick R. McDonald,      | )      |          |   |
|           |   | Director                  | )      |          |   |
|           |   |                      | )      |          |   |
| April 30, 2003 |   | Harry A. Trueblood,  Jr., | )      |          |   |
|           |   | Director                  | )      |          |   |

 

12

----

 

**CERTIFICATIONS**

 

I, Patrick R. McDonald,certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Carbon Energy Corporation;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a.                                       designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b.                                      evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c.                                       presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.                                       allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.                                      anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  | April  30, 2003 |                                   | /s/  Patrick R. McDonald |
|--------|-----------------|----------------------------------------|--------------------------|
|   |            | Patrick  R. McDonald                   |
|   |            | President  and Chief Executive Officer |

 

13

----

 

### **CERTIFICATIONS**

 

I, Kevin D. Struzeski,certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Carbon Energy Corporation;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a.                                       designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b.                                      evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c.                                       presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.                                       allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.                                      anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  | April  30, 2003 |                                   | /s/  Kevin D. Struzeski |
|--------|-----------------|----------------------------------------|-------------------------|
|   |            | Kevin  D. Struzeski                    |
|   |            | Treasurer  and Chief Financial Officer |

 

14

----