As filed with the Securities and Exchange Commission on November 26, 1996
Registration No. 333-______
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer in Its Charter)
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<S> <C> <C>
Ontario, Canada 1381 98-0164357
(I.R.S. Employer Identification Number)
(State or Other Jurisdiction of Incorporation (Primary Standard Industrial Classification
or Organization) Code Number)
8350 North Central Expressway 8350 North Central Expressway Peter Lucas
Suite M2030 Suite M2030 8350 North Central Expressway
Dallas, Texas 75206 Dallas, Texas 75206 Suite M2030
(214) 363-1968 Dallas, Texas 75206
(Address of Principal Place of Business or (214) 363-1968
(Address and Telephone Number of Principal Intended Principal Place of Business)
Executive Offices) (Name, Address and Telephone Number of
Agent for Service)
------------------------------
Norman R. Miller, Esq. Copies to: Maurice J. Bates, L.L.C.
Alexandra Christian, Esq. 8214 Westchester, Suite 500
Wolin, Fuller, Ridley & Miller LLP Dallas, Texas 75225
1717 Main Street, Suite 3100 Telephone: (214) 692-3566
Dallas, Texas 75201 Fax: (214) 987-2091
Telephone: (214) 939-4906
Fax: (214) 939-4949
------------------------------
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Approximate Date of Proposed Sale to the Public:
As soon as practicable after this registration statement becomes effective.
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, please check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Dollar Amount Proposed Maximum Proposed Maximum Amount of
Securities to be Registered to be Registered Offering Price per Unit(1) Aggregate Offering Price(1) Registration Fee
- -------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Units for public sale(2) $8,625,000(3) $6.00(3) $8,625,000(3) $2,614(3)
- -------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
8% Cumulative Convertible - - - -
Preferred Stock, no par value(4)
- -------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Redeemable Common Stock
Purchase Warrants(5) $4,687,500(6) $3.00(6) $4,687,500(6) $1,420(6)
- -------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Units subject to Underwriters'
warrants(7) $ 900,000 $7.20 $ 900,000 $ 273
- -------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Common stock, no par value(8) - - - -
- -------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Total $14,212,500 - $14,212,500 $4,307
================================ ================= ============================ ============================ ==================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 1,250,000 Units proposed for sale to the public and 187,500 Units
underlying the Underwriters' over-allotment option.
(3) Includes the 8% Cumulative Convertible Preferred Stock, the Redeemable
Common Stock Purchase Warrants, and the common stock underlying the 8%
Cumulative Convertible Preferred Stock, for which no additional
consideration will be received.
(4) Includes 1,437,500 shares underlying Units proposed for sale to the public
and subject to the Underwriters' over-allotment option and 125,000 shares
underlying Units subject to Underwriters' warrants.
(5) Includes 1,437,500 warrants underlying Units proposed for sale to the
public and subject to the Underwriters' over-allotment option and 125,000
warrants underlying Units subject to Underwriters' warrants.
(6) Pursuant to Rule 457(g), represents additional consideration to be received
upon exercise of, and includes common stock underlying, the Redeemable
Common Stock Purchase Warrants.
<PAGE>
(7) Includes 125,000 Units that the Underwriters have the right to acquire upon
exercise of warrants issued pursuant to Section 4(2) of the Securities Act
of 1933, as amended.
(8) Includes 3,125,000 shares underlying the 8% Cumulative Convertible
Preferred Stock, for which no separate fee is required pursuant to Rule
457(i); and 1,562,500 shares underlying the Redeemable Common Stock
Purchase Warrants, the fee for which is included under Redeemable Common
Stock Purchase Warrants.
- -------------------------------------------------------------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant files
a further amendment specifically stating that this registration statement will
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement becomes effective on such date
as the Securities and Exchange Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
CROSS REFERENCE SHEET
(Between Items of SB-2 and the Prospectus)
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<S> <C> <C>
Item
No. Caption Location in Prospectus
1. Front of Registration Statement and Outside Front Cover of
Prospectus......................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus.......... Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk Factors............................. Prospectus Summary; Risk Factors
4. Use of Proceeds.................................................. Use of Proceeds
5. Determination of Offering Price.................................. Outside Front Cover Page;
Underwriting
6. Dilution......................................................... Dilution
7. Selling Security Holders......................................... Inapplicable
8. Plan of Distribution............................................. Outside Front Cover Page;
Underwriting
9. Legal Proceedings................................................ Business and Properties--Legal
Proceedings
10. Directors, Executive Officers, Promoters and Control Persons..... Management
11. Security Ownership of Certain Beneficial Owners and
Management......................................................... Principal Shareholders
12. Description of Securities........................................ Description of Securities; Shares
Eligible for Future Sale
13. Interest of Named Experts and Counsel............................ Inapplicable
14. Disclosure of SEC Position on Indemnification for Securities Act
Liabilities........................................................ Inapplicable
15. Organization Within Last 5 Years................................. Prospectus Summary; Business and
Properties
16. Description of Business.......................................... Business and Properties
17. Managements's Discussion and Analysis or Plan of Operation....... Management's Discussion and
Analysis or Plan of Operation
18. Description of Property.......................................... Business and Properties
19. Certain Relationships and Related Transactions................... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related Shareholder Matters......... Description of Securities
21. Executive Compensation........................................... Management
22. Financial Statements............................................. Financial Statements
23. Changes in and Disagreements with Accountants on Accounting Inapplicable
and Financial Disclosure...........................................
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
COTTON VALLEY RESOURCES CORPORATION
1,250,000 Units
Consisting of
1,250,000 Shares of 8% Cumulative Convertible Preferred Stock, Without Par
Value, and 1,250,000 Redeemable Common Stock Purchase Warrants
--------------------------------------------
Cotton Valley Resources Corporation ("Cotton Valley") is offering
1,250,000 units ("Unit(s)") by this prospectus at an initial public offering
price estimated to be $6.00 per Unit. Each Unit consists of one share of 8%
Cumulative Convertible Preferred Stock ("Preferred Stock") and one Redeemable
Common Stock Purchase Warrant ("Warrant"). Cotton Valley is applying for listing
of the Units, Preferred Stock, Warrants and underlying common stock
(collectively, the "Securities") on the American Stock Exchange under the
symbols ___, ___, ___ and ___, respectively. The Preferred Stock and the
Warrants will be traded together in Units until the earlier of _________, 1997,
or the third day after Cotton Valley receives written notice that they may be
traded separately from National Securities Corporation, the representative
("Representative") of the underwriters ("Underwriters"). See "Underwriting."
Each share of Preferred Stock is convertible into two shares of common
stock at any time and, if not sooner converted by the holder, will be converted
into two shares of common stock automatically no later than December 31, 2002.
Dividends on the Preferred Stock will be noncumulative and payable annually at
the rate of 8% per annum, at the election of Cotton Valley, either in cash or in
shares of common stock. The Preferred Stock will have a liquidation preference
of $6.00 per share. See "Description of Securities-- Preferred Stock--8%
Cumulative Convertible Preferred Stock."
Each Warrant represents the right to purchase one share of common stock
for $____ (subject to adjustment) at any time after the Preferred Stock and the
Warrants become tradable separately until ____________, 1998. After __________,
1997, Cotton Valley may redeem the Warrants at $.01 per Warrant upon certain
conditions. See "Description of Securities--Other Options and Warrants--
Canadian Financings."
Before this offering, no United States public market has existed for any
of the Securities, and no assurance can be given that an active market will
develop. Cotton Valley's common stock is traded through The Canadian Dealing
Network under the symbol "CVZC."
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION INCLUDED IN
"RISK FACTORS" BEGINNING ON PAGE __ OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") NOR HAS THE
SEC OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Public Underwriting Proceeds to Cotton
Price to Public Discount (1) Valley (2)
- -------------------- ---------------------- ---------------- -----------------
Per Unit $ $ $
- -------------------- ---------------------- ---------------- -----------------
Total (3) $ $ $
==================== ====================== ================ =================
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a 2.5% nonaccountable expense allowance,
(ii) warrants to purchase 125,000 Units at 120% of the public offering
price exercisable between the first and fifth anniversaries of the date of
this prospectus ("Underwriters' Warrants"), and (iii) consulting agreements
for the Representative to act as financial consultant to Cotton Valley for
two years for a fee of $________. In addition, Cotton Valley has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended ("Securities
Act"). See "Underwriting."
(2) Before deducting estimated offering expenses of $425,000, including the
Representative's 2.5% nonaccountable expense allowance.
(3) Cotton Valley has granted the Underwriters an option, exercisable within 45
days after the date of this prospectus, to purchase up to 187,500
additional Units to cover over-allotments, if any. If the Underwriters
exercise this option in full, then the total Price to Public, Underwriting
Discount and Proceeds to Cotton Valley will be $ , $ and $ , respectively.
See "Underwriting."
--------------------------------------------
The Units are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, subject to approval of certain
legal matters by counsel and other conditions. The Underwriters reserve the
right to withdraw, cancel or modify this offering without notice and to reject
any order, in whole or in part. Delivery of certificates representing Units is
expected to be made upon payment at _____________________________, on
____________, 1997.
National Securities Corporation
--------------------------------------------
The date of this prospectus is ______________, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. STABILIZING TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE.
STABILIZING ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Certificates representing Units will be delivered against payment on or
about a date that is longer than the third business day following the date of
this prospectus ("T+3"). Prospective investors should note that the ability to
settle secondary market trades of Units on the American Stock Exchange will be
affected by a settlement period longer than T+3.
The enforcement by investors of civil liabilities under securities laws of
the United States may be affected adversely by the fact that Cotton Valley is
incorporated under the laws of the Province of Ontario, Canada, that some or all
of its officers and directors may be residents of Canada and that some or all of
the Underwriters or the experts named in the registration statement may be
residents of Canada.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this prospectus constitute "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause Cotton Valley's actual results,
performance or achievements or industry results to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. Such factors include, among others, the following:
general, economic and business conditions that will, among other things, impact
demand for oil and gas, industry capacity, Cotton Valley's ability to implement
its business strategy, changes in or the failure to comply with government
regulations (especially safety and environmental laws and regulations) and other
factors set forth in "Risk Factors."
ADDITIONAL INFORMATION
Cotton Valley has filed with the SEC a registration statement on Form SB-2
under the Securities Act with respect to the Securities. This prospectus, which
forms a part of the registration statement, does not contain all of the
information set forth in the registration statement as permitted by applicable
SEC rules and regulations. Statements in this prospectus about any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the registration
statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
this reference.
The registration statement may be inspected without charge and copies may
be obtained at prescribed rates at the SEC's public reference facilities at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, DC 20549, or on
the Internet at http://www.sec.gov. Copies of the registration statement may
also be inspected without charge at the SEC's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, copies of the registration statement
may be obtained by mail, at prescribed rates, from the SEC's Public Reference
Branch at 450 Fifth Street, N.W., Washington, DC 20549.
Cotton Valley files periodic reports, proxy statements and other
information with the SEC. The periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference facility and regional offices referred to above.
Cotton Valley will furnish to its shareholders annual reports containing
audited financial statements reported on by independent public accountants for
each fiscal year and make available quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
Cotton Valley intends to submit an application to list its Securities on
the American Stock Exchange ("AMEX"). If Cotton Valley's application is
accepted, then reports, proxy statements and other information concerning Cotton
Valley will be available for inspection at AMEX's principal office at 86 Trinity
Place, New York, New York 10006-1881.
1
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus. Unless the context indicates otherwise, (i) all information in this
prospectus assumes that the Underwriters' over-allotment option will not be
exercised, and (ii) "Cotton Valley" refers to Cotton Valley Resources
Corporation and all of its subsidiaries.
The Company
Cotton Valley is a development stage oil and gas exploration, development
and production company, with no operating history. It was incorporated in
Ontario, Canada, originally as Cotton Valley Energy Limited, on February 15,
1995. Through its wholly owned subsidiary Cotton Valley Energy Corporation, a
Nevada corporation, Cotton Valley owns (i) approximately 6,000 acres of
primarily non-producing oil and gas leases in the Cheneyboro Field of Navarro
County, Texas, (ii) a 25% working interest in 1,145 acres of oil and gas leases
in the Movico Field of Mobile County, Alabama, and (iii) an option to acquire a
51.8% working interest in the Sword Unit, offshore Santa Barbara, California. At
June 30, 1996, Cotton Valley's proved oil reserves were approximately 4.8
million Bbl, and its proved gas reserves were approximately 13.5 million Mcf.
Cotton Valley intends to reincorporate in Canada's Yukon Territory by the
end of 1996. Under Yukon Territory law, Cotton Valley's board of directors need
not be comprised of a majority of Canadian residents as currently required under
Ontario law.
Cotton Valley's principal executive offices are located at 8350 North
Central Expressway, Suite M2030, Dallas, Texas 75206. Its telephone number is
(214) 363-1968.
Business Strategy
Cotton Valley intends to drill up to 10 wells on its Texas acreage within
24 months after this offering. Five of these wells are expected to be horizontal
wells. Cotton Valley intends to drill two vertical wells on its Alabama property
within 12 months after this offering. No assurance can be given that any wells
will be drilled or completed or produce oil or gas in commercial quantities.
Cotton Valley plans in the future to exercise its option in the Sword Unit, to
retain an 11.8% working interest and to sell the remainder. See "Management's
Discussion and Analysis or Plan of Operation--12-Month Operating Plan", and
"Business and Properties--Cheneyboro Field--Horizontal Drilling", "--Movico
Field" and "--Sword Unit."
Cotton Valley's business strategy is to continue to increase reserves and
commence and increase production and cash flows by concentrating on:
o Acquiring properties, or companies with properties, with
development and exploration opportunities and/or significant cost
reduction potential;
o Developing existing reserves through low-risk development
drilling or recompletion programs capitalizing on reserves left
in existing wells by major oil companies;
o Exploring for new reserves utilizing state-of-the-art technology
to reduce exploration risk;
o Concentrating on focused geographic areas to achieve operating
and technical efficiencies; and
o Maintaining financial flexibility to take advantage of additional
development and acquisition opportunities as they develop.
2
<PAGE>
The Offering
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<S> <C>
Securities offered by Cotton Valley ........... 1,250,000 Units, each Unit consisting of one share of Preferred
Stock and one Warrant. See "Description of Securities."
Description of Preferred Stock ................ Each share of Preferred Stock is convertible into two shares of
common stock at any time, accrues noncumulative dividends
at 8% per annum payable annually in cash or shares of
common stock, at Cotton Valley's election, and has a $6.00
liquidation preference. See "Description of Securities--
Preferred Stock--8% Cumulative Convertible Preferred Stock."
Description of Warrants ....................... Each Warrant entitles the holder to purchase one share of
common stock for $____ per share until ___________, 1998.
The Warrants are not immediately exercisable. Cotton Valley
may redeem the Warrants at $0.01 per Warrant under certain
conditions. See "Description of Securities--Warrants."
Units to be outstanding after this offering ... 1,250,000 (1)
Preferred Stock to be outstanding after this
offering ...................................... 1,250,000 shares (1)
Warrants to be outstanding after this offering 1,250,000 Warrants (1)
Common stock to be outstanding after this
offering ...................................... 9,204,318 shares (2)
Use of Proceeds ............................... For development drilling, to acquire acreage, to reduce debt
and for working capital. See "Use of Proceeds."
AMEX Symbols(3):
Units ...................................... ______
Preferred Stock ............................ ______
Warrants ................................... ______
Common stock ............................... ______
- ---------------------
</TABLE>
(1) Excludes Securities underlying the Underwriters' Warrants. See
"Underwriting."
(2) Excludes 3,750,000 shares issuable upon conversion of the Preferred Stock
or exercise of the Warrants' underlying Units offered by this prospectus,
375,000 shares underlying the Underwriters' Warrants, 930,000 shares
subject to employee stock options and 1,935,220 shares subject to options
and warrants issued in Canadian financings. See
"Underwriting--Underwriters' Warrants" and "Description of
Securities--Other Options and Warrants."
(3) Cotton Valley has applied (or intends to apply) for listing of the
Securities on the AMEX. Such listing, if approved, does not imply that a
meaningful, sustained market for the Securities will develop.
Risk Factors
The Units offered by this prospectus are speculative and involve a high
degree of risk. They should not be purchased by investors who cannot afford to
lose their entire investment. See "Risk Factors."
3
<PAGE>
Summary Financial Data
From February 15, 1995
For the year ended (inception)
Statement of operations data: June 30,1996 to June 30, 1995
------------------ ---------------------
Net loss .......................... $ 428,360 $ 49,917
Net loss per common share ......... $ 0.05 $ 0.01
Weighted average shares outstanding 9,186,000 8,438,000
June 30, 1996
Balance sheet data: Actual As Adjusted (1)
-------- -------------
Total assets ........ $11,979,330 $17,488,281
Long-term obligations 757,758 171,727
Working capital ..... 286,381 6,025,332
Shareholders' equity $ 8,964,883 $15,289,883
----------------------------
(1) Adjusted to reflect the Units offered by this prospectus.
Summary Oil and Gas Reserve Data (1)
Alabama Texas Total
------- ------- ---------
Proved producing
Oil (Bbl) .......... 0 93,327 93,327
Gas (Mcf) .......... 0 279,979 279,979
Proved undeveloped
Oil (Bbl) .......... 481,843 4,200,812 4,682,655
Gas (Mcf) .......... 573,440 12,602,434 13,175,874
- ----------------
(1) Estimated. See "Business and Properties--Oil and Gas Reserves."
4
<PAGE>
RISK FACTORS
INVESTING IN THE UNITS INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
Development Stage Company
Cotton Valley was incorporated in February 1995 and is still in its
development stage. Cotton Valley's operations are subject to all of the risks
inherent in establishing a new business enterprise. Cotton Valley's potential
for success must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business. No assurance can be given that Cotton Valley will be successful. See
"Business and Properties."
History of Losses
Cotton Valley incurred operating losses of $428,360 for the fiscal year
ended June 30, 1996, and $49,917 from inception to June 30, 1995. No assurance
can be given that Cotton Valley will be profitable in the future. See
"Management's Discussion and Analysis or Plan of Operation."
Going Concern Risk
Cotton Valley's financial statements for the fiscal year ended June 30,
1996, and the period from inception to June 30, 1995, were audited by its
independent certified public accountants, whose report includes an explanatory
paragraph stating that the financial statements have been prepared assuming
Cotton Valley will continue as a going concern and that Cotton Valley has
incurred significant operating losses to date and has a working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. See "Independent Auditor's Report" and "Financial Statements."
No Substantial Producing Properties
Almost all of Cotton Valley's proved reserves are classified as proved
undeveloped, meaning no production currently exists. No assurance can be given
that any wells will be drilled or completed or produce oil or gas in
commercially profitable quantities. See "Business and Properties."
Capital Expenditures for Undeveloped Properties
Recovery of Cotton Valley's proved undeveloped reserves will require
significant capital expenditures and successful drilling operations. Management
estimates that aggregate capital expenditures of approximately $13.5 million
will be required to develop these reserves, of which $3.5 million and $5.0
million are expected to be incurred during the remainder of the year ending June
30, 1997, and during the year ending June 30, 1998, respectively. Cotton Valley
intends to finance development with the proceeds from this offering and cash
from operations. No assurance can be given that Cotton Valley's estimates of
capital expenditures will prove accurate, that its financing sources will be
sufficient to fund its planned development activities fully or that development
activities will be either successful or in accordance with Cotton Valley's
schedule. Additionally, any significant decrease in oil and gas prices or any
significant increase in the costs of development could result in a significant
reduction in the number of wells drilled. See "Management's Discussion and
Analysis or Plan of Operation."
Limited Capital; Need for Significant Additional Financing
Cotton Valley anticipates that the net proceeds of this offering will
satisfy its operating cash requirements for at least 12 months after this
offering is consummated. However, no assurance can be given that Cotton Valley
will not require additional financing sooner than currently anticipated.
5
<PAGE>
The net proceeds of this offering will not be sufficient to develop fully
the properties. Development of the properties may require capital resources
substantially greater than the net proceeds of this offering or resources
otherwise currently available to Cotton Valley. Cotton Valley has no current
arrangements with respect to or sources of additional financing. No assurance
can be given that additional financing will be available to Cotton Valley on
acceptable terms or at all. The inability to obtain additional financing would
have a material adverse effect on Cotton Valley, including requiring Cotton
Valley to curtail significantly or farm-out development of the properties. Any
additional financing may involve substantial dilution to the interests of Cotton
Valley's shareholders at that time. See "Management's Discussion and Analysis or
Plan of Operation."
Operating Hazards and Other Uncertainties
The acquisition, development, exploration for and production,
transportation and storage of, crude oil, gas liquids and gas involves a high
degree of risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Cotton Valley's operations are subject
to all of the risks normally incident to drilling oil and gas wells, operating
and developing oil and gas properties, transporting, processing, and storing
gas, including encountering unexpected formations or pressures, premature
reservoir declines, blow-outs, equipment failures and other accidents,
craterings, sour gas releases, uncontrollable flows of oil, gas or well fluids,
adverse weather conditions, pollution, other environmental risks, fires and
spills. Oil production requires high levels of investment and has particular
economic risks, such as retaining well failure, fires, explosions, gaseous
leaks, spills and migration of harmful substances, any of which can cause
personal injury, damage to property, equipment and the environment and severely
interrupt operations. Cotton Valley is also subject to deliverability
uncertainties related to the proximity of its reserves to pipeline and
processing facilities and the inability to secure space on pipelines that
deliver oil and gas to commercial markets. Although Cotton Valley maintains
insurance in accordance with customary industry practice, it is not fully
insured against all of these risks, nor are all such risks insurable. Losses
resulting from the occurrence of these risks could have a material adverse
impact on Cotton Valley. See "Business and Properties."
Competition
The oil and gas business is highly competitive and has few barriers to
entry. Cotton Valley will be competing with other oil and gas companies and
investment partnerships for desirable prospects, contracts with third parties to
develop oil and gas properties and purchase equipment necessary to complete
wells. Many of Cotton Valley's competitors are larger than Cotton Valley and
have substantially greater access to capital and technical resources than does
Cotton Valley and may therefore have a significant competitive advantage. Many
of Cotton Valley's competitors are capable of making a greater investment in a
given area than is Cotton Valley, although large and small companies alike are
subject to the economics of cost effectiveness. See "Business and
Properties--Competition."
Volatility of Oil and Gas Prices
Oil and gas prices fluctuated from $33.00 per Bbl of oil in January 1991
to $13.52 per Bbl in December 1993 and $1.10 per Mcf of gas in February 1992 to
$3.72 per Mcf in February 1996. At the end of October 1996, prices were $23.35
per Bbl and $2.73 per Mcf. Prices for oil and gas probably will continue to
fluctuate, depending upon a number of conditions over which Cotton Valley has no
control. These conditions include, but are not limited to, actions taken by the
Organization of Petroleum Exporting Countries, turmoil in the Middle East, the
price of alternative fuels, weather and general economic conditions. A major
decline in oil or gas prices could have a material adverse effect on Cotton
Valley's operations, financial condition, proved reserves and the costs of
developing its oil and gas reserves.
In addition, Cotton Valley assesses the carrying value of its assets
annually in accordance with generally accepted accounting principles under the
full cost method. If oil and gas prices decline, the carrying value of Cotton
Valley's assets could be subject to downward revision.
6
<PAGE>
Uncertainty of Reserve Estimates
The reserve estimates included in this prospectus could be materially
different from the quantities and values ultimately realized. Reserve data set
forth in this prospectus are only estimates. In general, estimates of
economically recoverable oil and gas reserves and future net cash flows from
them are based upon a number of variable factors and assumptions, such as
historical production from the properties, the assumed effects of governmental
regulation and future operating costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For those reasons, estimates of the economically
recoverable oil and gas reserves attributable to any particular group of
properties, classification of such reserves based on risk of recovery and
estimates of future net revenues expected from them, prepared by different
engineers or by the same engineers at different times, may vary substantially.
Cotton Valley's actual production, revenues, taxes and development and operating
expenditures with respect to its reserves will vary from such estimates, and
such variances could be material. Numerous uncertainties are inherent in
estimating proved reserves, including many factors beyond Cotton Valley's
control.
Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variation, which may be material, in the
estimated reserves.
Estimated discounted future net cash flows from estimated proved reserves
are based on prices and costs as of the date of the estimate unless prices or
costs are contractually determined at that date. Actual future prices and costs
may be materially higher or lower. Actual future net cash flows also will be
affected by factors such as actual production, supply and demand for oil and
gas, curtailments or increases in consumption by gas purchasers, changes in
governmental regulation or taxation and the impact of inflation on costs. See
"Business and Properties--Oil and Gas Reserves."
Need to Replace Reserves
Cotton Valley's future oil and gas reserves and production, and therefore
its cash flows, are highly dependent upon Cotton Valley's success in exploiting
its current reserve base and acquiring or discovering additional reserves.
Without the addition of reserves through exploration, acquisition or development
activities, Cotton Valley's reserves and production will decline over time as
reserves are exploited. The business of exploring for, developing or acquiring
reserves is capital intensive. To the extent cash flows from operations are
insufficient and external sources of capital become limited or unavailable,
Cotton Valley's ability to make the necessary capital investments to maintain
and expand its oil and gas reserves will be impaired. In addition, no assurance
can be given that Cotton Valley will be able to find and develop or acquire
additional reserves to replace production at acceptable costs.
Environmental Risks
All phases of the oil and gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
international conventions and United States and Canadian federal, provincial,
state and municipal laws and regulations. Environmental legislation provides
for, among other things, restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with Cotton Valley's
past and current operations. The legislation also requires that refineries,
wells and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties. Environmental legislation is evolving in a
manner expected to result in stricter standards and enforcement, larger fines
and liability and potentially increased capital expenditures and operating
costs. Although Cotton Valley believes that it is currently in substantial
compliance with all existing material environmental regulations, no assurance
can be given that future environmental costs will not have a material adverse
effect on Cotton Valley's financial condition or results of operations.
7
<PAGE>
Use of Proceeds
As of the date of this prospectus, management has not specifically
determined the use of a portion of the estimated net proceeds. Management will
decide how to apply this portion of the net proceeds in its discretion without
shareholder input. Accordingly, investors in this offering will be entrusting
this portion of their funds to management without any determination as to its
use. See "Use of Proceeds."
Dependence on Key Personnel
Cotton Valley depends to a large extent on the services of Messrs.
Soltero, Hogue and Burden. The loss of the services of any one of them could
have a material adverse effect on Cotton Valley's operations. Cotton Valley has
not entered into any employment contracts with any of its executive officers,
nor has it obtained key personnel life insurance. Cotton Valley believes that
its success is also dependent on its ability to continue to employ and retain
skilled technical personnel. See "Management."
Absence of Public Market and Possible Volatility of Securities
Prior to this offering, no public market for any of Cotton Valley's
Securities has existed in the United States. No assurance can be given that an
active public market will develop or be sustained after the offering. The
initial public offering price of the Units has been determined by negotiations
between Cotton Valley and the Underwriters. See "Underwriting." The trading
price of the Securities could be subject to wide fluctuations in response to
quarter-to- quarter variations in operating results, announcements of drilling
results by Cotton Valley and other events or factors. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations
which have particularly affected the market price for many companies and which
often have been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the
Securities.
Immediate Substantial Dilution
This offering involves immediate substantial dilution to investors in the
net tangible book value per share of common stock underlying each Unit from the
public offering price. See "Dilution."
Securities Eligible for Future Sale
Upon completion of this offering, 1,250,000 Units, consisting of 1,250,000
shares of Preferred Stock and 1,250,000 Warrants, and 9,204,318 shares of common
stock will be outstanding. The Units will be eligible for sale without
restriction immediately after completion of the offering. The 9,204,318 shares
of common stock are registered on Form 20-F and currently eligible for sale
without restriction. The sale of significant quantities of these shares could
have an adverse effect on the market price of Cotton Valley's Securities.
Furthermore, the 9,204,318 shares of common stock are eligible for sale (subject
to a pooling agreement and control block issues) under Canadian and Ontario
rules. Cotton Valley's common stock trades over the Canadian over-the-counter
system known as The Canadian Dealing Network. See "Securities Eligible for
Future Sale."
Risk of Redemption of Warrants
Cotton Valley may redeem the Warrants for $0.01 per Warrant at any time
after ___________, 19__, on 30 days prior written notice under certain
circumstances. Notice of redemption could force the holders to exercise their
Warrants and pay the exercise price at a time when it might be disadvantageous
or difficult for the holder to do so, sell the Warrants at the current market
price when they might otherwise wish to hold the Warrants, or accept the
redemption price, which is likely to be less than the market price of the
Warrants at the time of redemption. See "Description of Securities--Other
Options and Warrants--Canadian Financings."
8
<PAGE>
Underwriters' Warrants; Risk of Further Dilution
Cotton Valley has agreed to sell to the Underwriters, for nominal
consideration, warrants to purchase 125,000 Units at an exercise price of 120%
of the price at which the Units are initially offered to the public. Cotton
Valley has granted the Underwriters certain registration rights with respect to
the Securities issuable upon exercise of the Underwriters' Warrants. The
Underwriters' Warrants and any profits realized by the Underwriters on the sale
of the Securities underlying the Underwriters' Warrants could be considered
additional underwriting compensation. For the term of the Underwriters'
Warrants, the holders are given, at nominal cost, the opportunity to profit from
the difference, if any, between the exercise price of the Underwriters' Warrants
and the value of or market price, if any, for the Securities, with a resulting
dilution in the interest of existing shareholders. The Underwriters' Warrants
may be exercised at a time when, in all likelihood, Cotton Valley would be able
to obtain any needed capital by a new placement of Securities on terms more
favorable than those provided for or by the Underwriters' Warrants. See
"Underwriting."
Regulation
Cotton Valley's business is subject to federal, state and local regulation
relating to the development, production and transmission of oil and gas, as well
as environmental and safety matters. No assurance can be given that current or
future regulation will not adversely affect Cotton Valley's exploration for, and
production and transmission of, oil and gas or its financial condition and
results of operations. See "Business and Properties--Regulation."
No Dividends
Cotton Valley's board of directors presently intends to retain all of
Cotton Valley's earnings for the expansion of its business. Cotton Valley
therefore does not anticipate the distribution of cash dividends in the
foreseeable future. Any future decision of Cotton Valley's board of directors to
pay cash dividends will depend, among other factors, upon Cotton Valley's
earnings, financial position and cash requirements. See "Dividend Policy."
Availability of Preferred Stock
Cotton Valley's board of directors is authorized, without further
shareholder action, to issue preferred stock in one or more series and may
designate the dividend rate, voting rights and other rights, preferences and
restrictions of each series. No preferred stock currently is outstanding and
Cotton Valley has no plans to issue any preferred stock other than in this
offering. Any future preferred stock issuances could have the effect of, among
other things, restricting common stock dividends, diluting common stock voting
power, impairing common stock liquidation rights and delaying or preventing a
change in control of Cotton Valley without further action by the shareholders.
See "Description of Securities--Preferred Stock."
Exchange Rate Fluctuations
Cotton Valley is exposed to foreign exchange risks since it has granted
stock options, warrants and agent's options denominated in Canadian currency
while the majority of its expenditures will be in United States dollars. Any
significant reduction in the value of the Canadian dollar may decrease the value
of funds in United States dollars Cotton Valley receives upon exercise of
warrants and options.
Income Tax Considerations
The purchase of Securities by United States residents may have tax
consequences in both the United States and Canada. Prospective investors should
consult their own tax advisors regarding the particular tax consequences
applicable to them. See "Certain Income Tax Considerations."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to Cotton Valley from the sale of 1,250,000 Units
pursuant to this prospectus at an assumed public offering price of $6.00 per
Unit are estimated to be approximately $6,325,000 after deducting estimated
underwriting discounts and offering expenses ($7,303,750 if the Underwriters'
over-allotment option is exercised in full).
Cotton Valley intends to use approximately $5.0 million of the estimated
net proceeds of this offering for development drilling on its Texas and Alabama
properties. Seven wells are scheduled to be drilled within 12 months after this
offering. No assurance can be given that any wells will be drilled or completed
or produce oil or gas in commercial quantities. Cotton Valley may use a portion
of the $5.0 million to acquire additional acreage in these fields if Cotton
Valley determines this is advisable to facilitate its drilling program. As of
the date of this prospectus, management has no specific plans to acquire
additional acreage. See "Business--Properties--Cheneyboro Field" and "--Movico
Field."
Approximately $816,000 of the estimated net proceeds will be used to repay
debt that Cotton Valley incurred to acquire its Texas and Alabama properties.
The original principal amount of the debt on the Texas properties was
$1,086,050, of which approximately $586,000 was outstanding as of October 31,
1996. This debt bears interest at 12.0% and matures on July 17, 1997. The
remaining $230,000 does not bear interest and is payable upon transfer of title.
See "Management's Discussion and Analysis or Plan of Operation" and note 3 of
Notes to Consolidated Financial Statements.
The remaining $509,000 of the estimated net proceeds will be allocated to
working capital. Management intends to use this portion of the proceeds for
general corporate purposes and to acquire interests in unrelated drilling
prospects if appropriate opportunities arise. As of the date of this prospectus,
management has not specifically determined any of these uses or identified any
unrelated drilling prospects for acquisition. Management will decide how to
apply this portion of the net proceeds in its discretion without shareholder
input. Accordingly, investors in this offering will be entrusting this portion
of their funds to management without any determination as to its use. Management
does not currently intend to use proceeds from this offering to exercise its
option on the Sword Unit.
Cotton Valley intends to invest the net proceeds of this offering in
short-term, investment grade obligations or bank certificates of deposit until
they are used.
CAPITALIZATION
The following table sets forth Cotton Valley's total consolidated
capitalization as of June 30, 1996, and as adjusted to give effect to the sale
of 1,250,000 Units at $6.00 per Unit in this offering and application of the
estimated net proceeds as described in this prospectus. See "Use of Proceeds."
The table should be read in conjunction with the consolidated financial
statements and notes and the other financial information included elsewhere in
this prospectus.
10
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<TABLE>
<S> <C> <C>
June 30, 1996
Actual As Adjusted
---------- -------------
Total debt, including current maturities:
Accounts payable on oil and gas interests(1) $ 230,000 $ -
Notes payable on oil and gas interests(2) $ 586,049 $ -
Advances from related parties(3) $ 171,709 $ 171,709
--------- --------
$ 987,758 $ 171,709
-------- --------
Shareholders' equity:
Preferred stock without par value, unlimited
shares authorized, none outstanding, 1,250,000
as adjusted $ - $ 6,325,000
Common stock without par value, unlimited
shares authorized, 9,191,596 shares outstanding
and shares outstanding, as adjusted(4) $9,443,160 $ 9,443,160
Accumulated deficit (478,277) (478,277)
--------- --------
Total shareholders' equity $8,964,883 $15,289,883
--------- ----------
Total capitalization $9,952,641 $15,461,592
========== ===========
</TABLE>
- -----------------------
(1) See note 3 of Notes to Consolidated Financial Statements.
(2) See note 4 of Notes to Consolidated Financial Statements.
(3) See "Certain Relationships and Related Transactions" and note 6 of Notes to
Financial Statements.
(4) Excludes (i) 930,000 shares subject to employee stock options, (ii)
1,926,886 shares subject to options and warrants issued in Canadian
financings and (iii) 375,000 shares of common stock underlying the
Underwriters' Warrants. See "Description of Securities--Other Options and
Warrants," "Underwriting--Underwriters' Warrants" and note 5 of Notes to
Financial Statements.
DILUTION
As of June 30, 1996, Cotton Valley's net tangible book value was
$8,964,883 or $0.98 per share of common stock. Net tangible book value is the
aggregate amount of Cotton Valley's tangible assets less its total liabilities.
Net tangible book value per share represents Cotton Valley's total tangible
assets less its total liabilities, divided by the number of shares of common
stock outstanding. After giving effect to the sale of 1,250,000 Units
(consisting of 1,250,000 shares of Preferred Stock and 1,250,000 Warrants) at an
offering price per Unit of $6.00, or $6.00 per share of Preferred Stock (no
value assigned to Warrants, which are not immediately exercisable), application
of the estimated net sale proceeds (after deducting underwriting discounts and
other offering expenses) and assuming conversion of the Preferred Stock into
2,500,000 shares of common stock, Cotton Valley's net tangible book value as of
the date of this prospectus would increase from $8,964,883 to $15,289,883, and
the net tangible book value per share would increase from $0.98 to $1.31. This
represents an immediate increase in net tangible book value of $0.33 per share
to current shareholders, and immediate dilution of $1.69 per share to new
investors or 56%, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share of common stock $3.00
Net tangible book value per share before this offering................ $0.98
Increase per share attributable to new investors...................... $0.33
-----
Adjusted net tangible book value per share after this offering............. $1.31
-----
Dilution per share to new investors........................................ $1.69
Percentage dilution........................................................ 56%
</TABLE>
DIVIDEND POLICY
Cotton Valley has never paid cash dividends on its common stock and does
not plan to pay cash dividends in the foreseeable future. Whether dividends will
be paid in the future will be in the discretion of Cotton Valley's board of
directors and will depend on various factors, including its earnings and
financial condition and such other factors as
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Cotton Valley's board of directors considers relevant. Cotton Valley currently
intends to retain earnings to develop and expand Cotton Valley's business. See
"Management's Discussion and Analysis or Plan of Operation."
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
First Quarter Fiscal 1997 and First Quarter Fiscal 1996
During the quarter ended September 30, 1996, Cotton Valley incurred a net
loss of $205,885. From February 15, 1995 (inception), to September 30, 1996,
Cotton Valley accumulated a deficit of $684,163.
The loss of $205,885 for the first quarter of 1996 compares to a loss of
$25,759 during the first quarter of 1995. The increase is due to greater
business activity during the first quarter of fiscal 1997.
Rehabilitation work on two wells in the Cheneyboro Field in the fourth
quarter of 1996 resulted in oil and gas sales of $19,484 during the first
quarter of 1997.
Fiscal Year 1996 and Fiscal Period 1995
From February 15, 1995 (inception), to June 30, 1996, Cotton Valley
accumulated a deficit of $478,277 after an income tax benefit of $260,000.
During this period, Cotton Valley acquired its properties, merged with Arjon
Enterprises, Inc., issued debentures and notes and sold stock for cash.
Legal, audit and accounting fees were $190,053, which represents 26% of
the net loss before tax through June 30, 1996.
Management fees of $82,840 and salaries of $163,309, for a total of
$246,149, represent 33% of the net loss before tax through June 30, 1996. Cotton
Valley paid management fees of $10,000 per month from incorporation to July 31,
1995, and $20,000 per month from August 1, 1995 to March 31, 1996, for the
full-time services of two of its officers. Effective April 1, 1996, each of
these officers received a salary of $10,000 per month. A third officer earned
$10,000 per month from August 1, 1995. A fourth officer earned $10,000 per month
from May 1, 1996.
Management fees and salaries totaling $194, 951 from inception through
June 30, 1996, were capitalized into oil and gas properties and are thus not
included in the accumulated deficit as of that date. These costs represent the
estimated portion of the compensation directly attributable to acquisition of
the properties in the Cheneyboro Field and related development activities.
Cotton Valley acquired its interest in the Cheneyboro Field from 18
different property owners in March 1995 in exchange for 3,252,533 shares of
common stock, 406,567 Class A Warrants, and $1,086,050, of which approximately
$500,000 has been paid. See "Description of Securities--Other Options and
Warrants--Canadian Financings."
Cotton Valley purchased an option to acquire a 51.8% working interest in
the Sword Unit, offshore Santa Barbara, California, through an interest in an
Option Agreement held by PetroGreen Company to purchase all of Conoco, Inc.'s
interest in the Sword Unit (the "Option Agreement"). All leases and the unit are
held under a current MMS Suspension of Operations Order with no short-term
drilling obligations. The Option Agreement remains effective through the
California Offshore Oil and Gas Energy Resources ("COOGER") regional data
collection study or until 30 days after the Minerals Management Service of the
Department of Interior ("MMS") Directed Suspension of Operations is terminated.
COOGER is a joint venture involving federal, state and local agencies and all of
the Pacific outer continental shelf and California State Tidelands lease owners
organized to study the environmental implications and methods of producing from
the area. In connection with its participation in the COOGER study, MMS has
stated that its Directed Suspension of Operations would not be terminated until
after the COOGER study is completed. Completion of the COOGER study was
scheduled for the fourth quarter of 1997, but it appears to be approximately one
year behind. Cotton Valley is responsible for paying Conoco's share of the cost
of the COOGER study, which portion is expected to be approximately $60,000.
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<PAGE>
Cotton Valley intends to exercise its option, to retain an 11.8% working
interest in the Sword Unit and to sell the remainder of its interest to industry
participants. No assurance can be given, however, that Cotton Valley will be
successful in selling all or any part of the remainder of its interest on terms
and conditions satisfactory to Cotton Valley. Upon purchase of the Conoco
interest in the Sword Unit, the original option owner is entitled to an
overriding royalty interest of 31/3% proportionally reduced as to Conoco's
interest, on all the leasehold interests being acquired. The net revenue
interest remaining to Cotton Valley will be 80% of its working interest. Cotton
Valley cannot exercise its option under the Option Agreement unless it, and its
syndicate of co-owners, are acceptable to the MMS.
12-Month Operating Plan
As of September 30, 1996, Cotton Valley had a working capital deficiency
of $220,958. Management estimates that aggregate capital expenditures of
approximately $13.5 million will be required to develop its reserves, of which
$3.5 million and $5.0 million are expected to be incurred during the remainder
of the year ending June 30, 1997, and during the year ending June 30, 1998,
respectively. Cotton Valley intends to finance development with the proceeds
from this offering and cash from operations.
Cotton Valley intends to drill and complete five horizontal wells with an
average depth of 9,500 feet laterally in the Cheneyboro Field within 12 months
after this offering. The estimated cost of each well is approximately
$1,000,000. Depending upon the results, Cotton Valley plans to drill and
complete ten more horizontal wells in two groups of five. Assuming commercially
profitable production, cash generated from the first five wells should be
sufficient to fund the drilling and completion of subsequent wells.
Cotton Valley intends to drill two vertical wells to a depth of
approximately 17,000 feet in the Movico Field within 12 months after this
offering.
Cotton Valley intends to exercise its option on the offshore California
property, retain an 11.8% working interest and sell the remainder of its
interest to industry participants. Management does not expect to exercise the
option until at least 12 months after this offering. See "Management's
Discussion and Analysis or Plan of Operation--Fiscal Year 1996 and Fiscal Period
1995."
Liquidity and Capital Resources
Cotton Valley currently anticipates that the net proceeds of this offering
will be sufficient to satisfy its operating cash requirements for at least 12
months following the consummation of this offering. No assurance can be given,
however, that Cotton Valley will not require additional financing sooner than
currently anticipated.
The net proceeds of this offering and the anticipated sale of an interest
in the offshore California property will not be sufficient to develop fully the
properties. If the cash flow generated from the first five wells is less than
expected, the development of properties may require capital resources greater
than the net proceeds of this offering or resources otherwise currently
available to Cotton Valley. Cotton Valley has no current arrangements with
respect to, or sources of, additional financing. No assurance can be given that
any additional financing will be available to Cotton Valley on acceptable terms
or at all. The inability to obtain additional financing would have a material
adverse effect on Cotton Valley, including requiring Cotton Valley to curtail
significantly its deployment of the properties. Any additional financing may
involve substantial dilution to the interests of Cotton Valley's then existing
shareholders.
Estimated Reserves
The carrying value of Cotton Valley's oil and gas properties is supported
almost entirely by proved undeveloped reserves. Cotton Valley emphasizes that
reserve estimates of new discoveries or undeveloped properties are more
imprecise than those of producing oil and gas properties. Accordingly, these
estimates are expected to change materially as future information becomes
available.
13
<PAGE>
THE COMPANY
Cotton Valley is a development stage, independent oil and gas exploration,
production and development company. It was incorporated in Ontario, Canada,
originally as Cotton Valley Energy Limited, on February 15, 1995. Cotton Valley
was formed, and its present name adopted, on June 14, 1996, as a result of the
merger of Cotton Valley Energy Limited and Arjon Enterprises, Inc., both Ontario
corporations. Arjon Enterprises, Inc. was a Canadian public company formed more
than 50 years ago to operate a gold mine. At the time of the merger, Arjon
Enterprises, Inc. had not engaged in business for more than 25 years, it had no
material liabilities, and its only asset was a Cotton Valley Energy Limited
debenture in the amount of $146,300. The shareholders of Arjon Enterprises, Inc.
received 686,551 shares of Cotton Valley common stock in the merger,
representing 7.5% of Cotton Valley's then outstanding common stock. Cotton
Valley accounted for the merger as a purchase. See "Certain Relationships and
Related Transactions."
Cotton Valley has three wholly owned subsidiaries, CV Energy, Cotton
Valley Operating Company ("CV Operating"), a Texas corporation, and CV Trading
Company ("CV Trading"), a Nevada corporation, all of which were recently
incorporated. CV Energy holds non-producing oil and gas properties in Texas and
agreements and options to acquire oil and gas properties in Texas, Alabama and
offshore California. Cotton Valley acquired all of the shares of CV Energy on
June 30, 1995, in a one-for-one share and warrant exchange. Because Cotton
Valley had had no substantive activity before this transaction, the acquisition
was accounted for as a recapitalization of Cotton Valley with CV Energy's net
assets. CV Trading was formed to engage in gas trading and transportation
projects. CV Operating was formed to operate oil and gas wells. Neither CV
Operating nor CV Trading has commenced operations at this time.
Cotton Valley intends to reincorporate in Canada's Yukon Territory by the
end of 1996. Under Yukon Territory law, Cotton Valley's board of directors need
not be comprised of a majority of Canadian residents as currently required under
Ontario law.
BUSINESS AND PROPERTIES
Business Strategy
Cotton Valley's business strategy is to continue to increase reserves and
commence and increase production and cash flows by concentrating on:
o Acquiring properties, or companies with properties, with
development and exploration opportunities and/or significant cost
reduction potential, none of which has been identified as of the
date of this prospectus;
o Developing existing reserves through low-risk developmental
drilling or recompletion programs capitalizing on reserves left
behind pipe in existing well bores by major oil companies;
o Exploring for new reserves utilizing state-of-the-art technology,
including horizontal drilling, to reduce exploration risk;
o Concentrating on focused geographic areas to achieve operating
and technical efficiencies; and
o Maintaining financial flexibility to take advantage of
development and acquisition opportunities as they develop.
Properties
Cheneyboro Field
Cotton Valley owns or has options to acquire approximately 6,000 net acres
of producing and non-producing oil and gas leases (with options and rights of
first refusal to acquire additional leases) in the Cheneyboro Field of Navarro
County, Texas. Cotton Valley has entered into an Area of Mutual Interest ("AMI")
Agreement with a number of unaffiliated parties covering approximately 33,000
14
<PAGE>
acres in and around the Cheneyboro Field. Cotton Valley has the right to acquire
up to a 75% working interest in any new lease acquired by any of the other
parties to the AMI Agreement.
The Cheneyboro Field is located 17 miles southeast of Corsicana, Texas, in
Navarro County. This field is productive in the Cotton Valley Limestone
formation (also called the "Cotton Valley Lime") at a vertical depth of
approximately 9,500 feet. Field development continued following the initial
discovery in 1978 into the early 1980s, eventually encompassing an area 12 miles
long and 5 miles wide (approximately 30,000 acres). Between 1978 and 1987, the
Cheneyboro Field produced approximately 3.0 million Bbl of oil from 69 vertical
wells, representing an average of approximately 45,000 Bbl per well. Some of the
vertical wells have produced over 100,000 Bbl, indicating better drainage where
the wells penetrated the fracture system. In 1987, the Tarrant County Water
Authority expropriated approximately 20,000 acres of this field. Producing wells
were plugged and abandoned to permit construction of the Richland/Chambers Creek
Reservoir, a water supply project for Tarrant County and the City of Fort Worth,
Texas.
The Cotton Valley Lime reservoir at Cheneyboro is highly fractured. The
primary objective reservoir rock is an oolitic carbonate grainstone of Jurassic
age that was deposited on a Paleozoic shelf break. Subsequent pullout of the
deeper Louann Salt caused extensive fracturing. The salt withdrawal left the
residual field structure as simple regional dip. Hydrocarbon trapping occurs as
a result of the high degree of fracture density bounded by areas of
non-permeability. Core and log analyses indicate the presence of 2.5 to 4.5% oil
saturated matrix porosity in the field. Vertical wells in this reservoir produce
42(degree) API oil.
Cotton Valley believes that horizontal drilling techniques will lead to
initial rates and recovery efficiencies several times those experienced in the
original vertical well completions. Since the majority of the field is under
water, directional drilling from the shoreline is anticipated. Based on analogy
to horizontal drilling in fractured limestone reservoirs in other areas,
increased productive capacity and ultimate reserves are anticipated relative to
historical, vertical per well averages.
When the field was first developed, several shallower zones tested
hydrocarbons at commercial rates. Due to the expropriation of the field, these
zones were not developed. The Cretaceous Rodessa, Glen Rose, Pettit and Travis
Peak intervals may also prove productive in the field area.
Gas from these wells is expected to be connected to one of several
pipelines in the area.
Horizontal Drilling. Horizontal drilling begins with drilling in the
normal manner (vertically) to a point above the objective formation. From that
point, the hole is directionally deviated until the bit is drilling generally
horizontally in the producing zone. Directional drilling technology has advanced
to the point that the drill-bit can be kept in one geological horizon for many
hundreds of feet away from the vertical well bore. It is no longer necessary to
strike a localized fracture zone accurately with a vertical well. Instead, a
well can be drilled horizontally through an area where fractured zones are known
to exist with a greater chance of encountering the vertical fractures. A single
horizontal well can encounter several localized fracture zones.
Horizontal drilling was first developed over 20 years ago, and has been
used successfully in oil and gas fields as diverse as those located in West
Virginia, the North Sea, Saskatchewan, Argentina, Prudhoe Bay and South Texas,
to extract oil and gas where vertical drilling is impossible or uneconomical.
Horizontal drilling has also increased production of oil and gas from fields
with thin pay zones, low permeability sands, vertical fractured reservoirs,
discontinuous formations and reservoirs with gas and water coning problems. High
angle directional drilling has been performed extensively onshore in California
to reach bottom holes in congested cities or harbors where vertical drilling
would not be feasible. Horizontal drilling has been used extensively offshore to
drill many wells from one platform.
Movico Field
Cotton Valley owns a 25% interest in 1,145 acres of oil and gas leases
(with an AMI covering an additional 6,000 acres of leases) in the Movico Field
of Mobile County, Alabama.
15
<PAGE>
Movico Field was discovered in 1982 when The Superior Oil A.M. Hill Unit
39 #3 was completed at 16,909 feet. This well is productive from two zones in
the Smackover for a total of 4,488 Bbl per day of sweet crude and 3,200 Mcf per
day of gas. During its first 12 months, this well produced over 485,000 Bbl.
Commercial production from October 1983 through December 1992 was 1,584,514 Bbl
of oil and 1,500 Mcf of gas, and the well is still producing. Subsurface and
geophysical data suggest that the fault block that the discovery well occupies
has been largely unexploited and that two to four locations remain to be
drilled. Seismic data indicates that the productive wells are located downdip
and that 200-300 feet of structure can be gained to the discovery well by a
properly located offset well.
Movico Field is located on a salt anticline on the west side of the Mobile
Graben (Jackson-Mobile fault system). The structure at the Smackover level traps
on an upthrown fault closure against Haynesville, evaporates on regional west
dip and is bounded by a large down to the east regional fault that trends in a
north-south direction. This large fault and regional dip are documented by
subsurface, seismic and gravity data. Subsurface mapping demonstrates the fault
to have a displacement of more than 2,400 feet. The seismic data show this fault
on each of the dip lines and each dip line also shows strong west dip. Regional
gravity data also delineate this fault and the eastern boundary of the field.
Regionally, the Smackover is a dolomitic limestone facies and at Movico
Field has porosities and permeabilities that average 16% and 55 md,
respectively. Porosities as high as 25% and over 200 md permeability have been
found in a well located 700 feet downdip of the proposed location. All wells
surrounding the proposed location have reservoir grade porosity ranging from 42
feet to over 70 feet thick.
More production can occur in the Smackover formation where the porosity
intervals found in the offsetting wells increase in quality and thickness updip
on the crest of the structure. Reservoir porosity within the Smackover is
generally best developed and enhanced on the crest of structures that have been
formed by swelling salt pillows. In Smackover fields that surround Movico Field,
namely Hatter's Pond (203,000 Mcf + 49 million Bbl), Chunchula (207,000 Mcf + 52
million Bbl), Chatom (135,000 Mcf + 15 million Bbl) and Jay Field (491,000 Mcf +
380 million Bbl), porosity and permeability reach maximum development at or near
their structural crests and typically decrease on the flanks. At Movico Field,
management expects the best developed reservoir rock to occur 200-300 feet updip
to the offsetting wells based on results in the neighboring fields. Development
of this porosity could create a Smackover net pay section of over 100 feet.
Thick pay sections of over 80 feet occur in Chunchula, Hatter's Pond and Chatom
Fields.
The primary force of hydrocarbon flow at Movico Field is water. The water
drive systems in the Smackover are slow-acting and are usually recognized after
several years of production. Water drive systems usually maintain near original
bottom hole pressures and show an increasing proportion of water and consistent
gas/oil ratios. The Movico Smackover reservoirs act differently due to
variations in porosity and permeability. Migrating fluids follow pathways that
are often indirect and tortuous, slowing down the migration process. Porosity
logs, micrologs and conventional cores from wells within Smackover producing
fields always show differences in Smackover reservoir porosity and quality with
some correlative zones of porosity and other inconsistent zones.
In the case of a newly-discovered Smackover oil reservoir, an initial
period of relatively high production occurs due to original reservoir pressure
and some gas coming out of solution. After several months, the flush production
begins a sloping decline as reservoir pressure around the well decreases. This
decline in pressure is caused because fluids cannot be replaced near the well as
quickly as they are extracted (as a result of the tortuous pathways) by
migrating oil and water that lie at an increasing distance from the well. After
several years, production will decline to a rate equal to the slow encroachment
of the water drive. Reservoir pressure and production will stabilize as the
water drive takes effect. The well will then produce at a fairly constant rate
for 5-15 years. Bottom hole pressures at the well bore (not in the entire
reservoir) will drop to 20%-50% of their original pressure and then level off.
The proportion of water will increase and the gas/oil ratio will remain slightly
above or below its initial ratio. Reservoir pressure at Movico was 8,900 per
square inch initially and currently is calculated at 8,000 per square inch.
Reservoir performance of this kind can only be understood after long
periods of production. The sloping decline in production and bottom hole
pressure can be mistaken for a solution gas or depletion drive in the early
stages of production. Reserve estimates commonly are made early in the life of
the well before decline curves flatten out. As
16
<PAGE>
a result, reserves may be underestimated initially and revised frequently over
time as the wells produce more and last longer than predicted.
Porosity in the Movico Field averages 16% with an average water saturation
of 28% in the Unit 39 #3 well. Better reservoir rock is found at Movico Field
than at Hatter's Pond, and the rock in the Unit 39 #3 is capable of producing
substantially more fluid than a typical well at Hatter's Pond Field. This data
also allows a more accurate estimation of recoverable reserves at Movico based
on volumetrics.
Cotton Valley plans to drill the first well from the surface location used
for the Superior Oil Hill Unit #9 well. This well was plugged after producing
166,209 Bbl of oil from a bottom hole location very near the oil/water contact.
The location will be approximately 4,500 feet north of the Hill Unit 39 #3 well
that has produced more than 1.6 million Bbl of oil and is still producing. By
using the existing location and the nearby pipeline used for the plugged Hill
Unit #9 well, cost is expected to be substantially reduced and the pipeline will
feed the entire well production into the Movico processing plant 3,500 feet to
the north. Proximity to the existing pipeline and the processing plant minimizes
downtime loss and expense for constructing surface production facilities. The
plant can process 15,000 BOPD and 20 MMCFGPD. It currently handles less than 400
BOPD.
Cotton Valley's second drilling target is the Norphlet Formation at 17,000
feet, which lies directly below the Smackover Formation. The highest Norphlet
penetration is in the Superior Unit 16 well (8,500 feet south) that encountered
the sands approximately 200 feet downdip of the crest. A mudlog show of oil was
recorded in this well from the Norphlet sands but production has not been
established from this interval in the field. Several Smackover-Norphlet fields
in Alabama and Mississippi have Norphlet pay located at the highest structural
crest of the field. In addition, Norphlet discoveries have been made years after
the initial Smackover discovery and full development of the field. Womack Hill,
Nancy and Goodwater are fields that have deeper pay in the Norphlet but were
discovered years later as deeper drilling on the crestal structure occurred
within these Smackover Fields. Many Norphlet field wells recover 1 million Bbl
per well. Norphlet production is found at Hatter's Pond Field and Chunchula
Field located south and southwest of Movico Field. Cotton Valley estimates that,
based upon such production, potential reserves for the Norphlet under its
acreage are 3.2 million Bbl of oil and 3,200 Mcf of gas.
Sword Unit
The Sword Unit is located 10 miles off Point Conception, Santa Barbara
County, California, 800 to 1,800 feet underwater, at the juncture of the Santa
Barbara Channel and the offshore Santa Maria Basin. It is on a large anticline
covering approximately 7,800 acres of area and lies immediately south of the
Point Arguello oil field operated by Texaco and Chevron.
Two successful wells have been drilled and tested on the structure. The
discovery well, the P-0322 #1, was drilled to a depth of 9,343 feet and tested
in 1983. The P-0320 #2, which was drilled to determine the size of field, was
drilled to a depth of 8,478 feet and tested in 1985. Both of these wells tested
Monterey zones at high rates. A 3-D seismic survey has been shot, delineating
the structure in great detail. The Upper Miocene fractured Monterey pay is 800
feet thick at the crest and 1,200 feet thick on the flanks and is encountered at
approximately 7,000 feet. Proved recoverable reserves in the Sword Unit are
estimated to be 314 million Bbl of oil and 397,000 Mcf of gas.
The Sword Unit lies almost wholly within the Sword Field, which consists
of all or portions of each of four adjacent federal leases.
The Santa Barbara Channel and the offshore Santa Maria Basin are the
seaward portions of geologically well-known onshore basins with over 90 years of
production history. These offshore areas were first explored in the Santa
Barbara Channel along the nearshore 3-mile strip controlled by the state. New
field discoveries in Pliocene and Miocene age reservoir sands led to exploration
into the federally controlled waters of the outer continental shelf ("OCS").
Eight OCS lease sales conducted between 1966 and 1984 have resulted in the
discovery of an estimated two billion Bbl of oil and three trillion cubic feet
of gas. Of these totals, some 600 million Bbl of oil and 600 billion cubic feet
of gas have been produced and sold. OCS production is approximately 200,000 Bbl
of oil and 200 million cf of gas per day.
17
<PAGE>
Most of the early offshore production was from Pliocene age sandstone
reservoirs. The more recent developments, and those of the future, are from the
highly fractured zones of the Miocene age Monterey Formation. The Monterey is
productive in both the Santa Barbara Channel and the offshore Santa Maria Basin.
It is the principal producing horizon in the Point Arguello and Hondo (Santa
Ynez Unit) fields. Because the Monterey is capable of relatively high productive
rates, the Hondo field, which has been on production since late 1981, has
already surpassed 100 million Bbl.
California's active tectonic history over the last few million years has
formed the large linear anticlinal features which trap the oil and gas. Marine
seismic surveys have been used to locate and define these structures offshore.
Recent seismic surveying utilizing modern 3-D seismic technology, coupled with
exploratory well data, has greatly improved knowledge of the size of planned
reserves in development and in fields for which development is planned.
Currently, 17 platforms are producing from nine fields in the Santa
Barbara Channel and offshore Santa Maria Basin OCS. At least 10 additional
fields may be brought into production during this decade. The number of
platforms needed to develop these fields will be less than required in the past.
Implementation of extended high-angle to horizontal drilling methods will result
not only in the reduction of platforms, but also in the total number of wells
drilled. Use of these new drilling methods and seismic technologies will enhance
environmental protection and improve development economics. At present, four
major Sword area facilities are producing significant volumes of oil and gas
from seven platforms, making this area one of the more significant oil and gas
producing provinces in the United States. The Sword Unit leases and all other
non-producing leases in the area are presently the subject of the COOGER Study.
At its conclusion in 1997, the leases will revert from the present Suspension of
Operations Order to Suspension of Production ("SOP") status. Under an SOP, lease
operators will be required to drill additional delineation wells on the
discovered fields. When this last drilling phase is completed, preparation of
permit applications for the development phase will begin.
The northeast-southwest trend of the Sword structure lies at a right angle
to the general trend of the other structural features in the Arguello-Conception
area. Sword Field is on a large regional feature known as the Amberjack Ridge.
The Monterey formation is draped across this cretaceous feature and is thicker
on its flanks than on its crest. This draping, in conjunction with the extremely
strong tectonic activity of the California area, have resulted in the very
brittle Monterey formation being highly fractured.
Because the Sword anticline is structurally less complicated than many of
the nearby features, it can be mapped with greater confidence. The existing
conventional and 3-D seismic data sets provide an excellent base for definitive
mapping.
Most offshore California Monterey wells average 1,500-2,000 Bbl of oil per
day of sustained production for many years. This is unusual for fractured
reservoirs, which often have high initial rates that decline very rapidly. Some
Monterey wells at the offshore Hondo and South Ellwood fields have produced as
much as nine million Bbl of oil in less than ten years and are still producing
substantial daily volumes.
Title to Properties. Cotton Valley follows industry practice when
acquiring undeveloped properties on minimal title investigation. A title opinion
is obtained before drilling begins on the properties. Title opinions cover
approximately 36% of Cotton Valley's Texas properties. Cotton Valley's
properties are subject to royalty interests, liens incident to operating
agreements, liens for current taxes and other burdens that Cotton Valley
believes do not materially interfere with their use or value.
Oil and Gas Reserves
Cotton Valley's reserves consist primarily of proved undeveloped reserves
located in Texas and Alabama. Reserve estimates were made using
industry-accepted methodology including extrapolation of performance trends,
volumetrics, material balance and statistical analysis of analogs. The
evaluator's professional judgment and experience were used to select the most
appropriate method and to determine the reasonableness of the results. The
estimates were made in accordance with oil and gas reserve definitions
promulgated by the SEC.
The following table summarizes Cotton Valley's estimated net proved oil
and gas reserves as of June 30, 1996:
18
<PAGE>
Reserves by State
<TABLE>
<S> <C> <C> <C>
Item Texas(1) Alabama(2) Total
---- -------- ---------- -----
Reserves
Proved producing
Oil (Bbl) 93,327 0 93,327
Gas (Mcf) 279,979 0 279,979
Proved undeveloped
Oil (Bbl) 4,200,812 481,843 4,682,655
Gas (Mcf) 12,602,434 573,440 13,175,874
</TABLE>
<TABLE>
<S> <C> <C> <C>
Estimated future net revenues before income taxes
Proved producing $ 1,618,891 $ 0 $ 1,618,891
Proved undeveloped $88,924,623 $9,119,922 $98,044,615
----------- ---------- -----------
Total $90,543,514 $9,119,922 $99,663,506
=========== ========== ===========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Estimated future net revenues before income taxes discounted at 10%
Proved producing $ 1,129,799 $0 $ 1,129,799
Proved non-producing $60,149,064 $5,982,903 $66,131,967
----------- ---------- -----------
Total $61,278,863 $5,982,903 $67,261,766
=========== ========== ===========
</TABLE>
---------------------
(1) Prices based on $21.21 per Bbl of oil and $2.09 per Mcf of gas.
(2) Prices based on $21.46 per Bbl of oil and $2.66 per Mcf of gas.
The reserve data set forth in this prospectus are only estimates. Numerous
uncertainties are inherent in estimating oil and gas reserves and their values,
including many factors beyond the control of the producer. Reserve engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers often
vary. In addition, estimates of reserves are subject to revision by the results
of later drilling, testing and production. Accordingly, reserve estimates often
differ from the quantities of oil and gas ultimately recovered. The
meaningfulness of estimates is highly dependent upon the accuracy of the
assumptions upon which they are based.
In general, oil and gas production declines as reserves are depleted.
Except to the extent that Cotton Valley acquires proven reserves or succeeds in
exploring and developing its own reserves, or both, Cotton Valley's proven
reserves will decline as they are produced. Cotton Valley's future oil and gas
production is, therefore, highly dependent upon its ability to in acquire or
develop additional reserves.
19
<PAGE>
Acreage
The following table provides information regarding Cotton Valley's
undeveloped leasehold acreage as of June 30, 1996. Acreage in which Cotton
Valley's interest is limited to royalty, overriding royalty and similar
interests is excluded.
Developed Acreage Undeveloped Acreage
Gross Net Gross Net
----- --- ----- -----
Cheneyboro Field 820 820 4,660 4,180
Movico Field 0 0 1,145 286
Competition
Competition in the oil and gas industry is intense generally. Cotton
Valley believes that price is the determinative factor in competition for
drilling prospects, equipment and labor. Major and independent oil and gas
companies and syndicates actively bid for desirable oil and gas properties and
equipment and labor required to operate and develop them. Many of Cotton
Valley's competitors have substantially greater financial resources and
exploration and development budgets than those of Cotton Valley. Cotton Valley
expects difficulty in competing for future drilling prospects.
Markets
General. Oil and gas operating revenues are highly dependent upon prices
and demand for oil and production. Numerous factors beyond Cotton Valley's
control can impact the prices of its oil and gas. Decreases in oil and gas
prices would have an adverse effect on Cotton Valley's proved reserves,
revenues, profitability and cash flow.
Cotton Valley has not engaged in any crude oil and gas price swaps or
other hedging transactions to reduce its exposure to price fluctuations. It may,
however, engage in such transactions from time to time as management deems
advisable.
Gas Sales. Cotton Valley has not produced or sold any significant volume
of gas. It has arranged to sell gas produced in the Cheneyboro Field through an
existing gathering system and pipeline. Management believes that gas produced in
the Movico Field can be sold through an existing pipeline.
Oil Sales. Cotton Valley expects to sell its oil production under
short-term arrangements at prices no less than the purchaser's posted prices for
the respective areas less standard deductions. Numerous buyers are expected to
be available for Cotton Valley's oil.
Regulation
Oil and gas exploration, production and related operations are heavily
regulated by federal and state authorities. Failure to comply with applicable
law can result in substantial penalties. The cost of regulatory authorities will
increase Cotton Valley's cost of doing business and affect its profitability.
Regulation of oil and gas activities has changed many times. Consequently,
Cotton Valley is unable to predict the future cost or impact of complying with
such laws. Texas and Alabama require drilling permits and bonds and operating
reports and impose other burdens relating to oil and gas exploration and
production. Both states also require conservation measures, including pooling of
oil and gas properties, establishing maximum production rates from oil and gas
wells, and spacing, plugging and abandoning wells. These laws limit the rate at
which oil and gas can be produced from Cotton Valley's properties.
The transportation and sale of gas in interstate commerce is regulated by
United States law and the Federal Energy Regulatory Commission.
Environmental
Cotton Valley's operations will be subject to extensive federal, state and
local environmental regulation. Permits are required for various operations to
be undertaken by Cotton Valley, and these permits are subject to revocation,
modification and renewal by issuing authorities. Increasingly strict
requirements may be imposed by environmental laws and enforcement policies.
Cotton Valley does not anticipate material capital expenditures to comply with
environmental laws.
Operating Hazards and Uninsured Risks
The acquisition, development, exploration for, and production,
transportation and storage of, crude oil, gas liquids and gas involves a high
degree of risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Cotton Valley's operations are subject
to all of the risks normally incident to drilling gas and
20
<PAGE>
oil wells, operating and developing gas and oil properties, transporting,
processing, and storing gas, including encountering unexpected formations or
pressures, premature reservoir declines, blow-outs, equipment failures and other
accidents, craterings, sour gas releases, uncontrollable flows of oil, gas or
well fluids, adverse weather conditions, pollution, other environmental risks,
fires and spills. Oil production requires high levels of investment and has
particular economic risks, such as retaining well failure, fires, explosions,
gaseous leaks, spills and migration of harmful substances, any of which can
cause personal injury, damage to property, equipment and the environment, and
result in the interruption of operations. Cotton Valley is also subject to
deliverability uncertainties related to the proximity of its reserves to
pipeline and processing facilities and the inability to secure space on
pipelines that deliver oil and gas to commercial markets. Although Cotton Valley
maintains insurance in accordance with customary industry practice, it is not
fully insured against all of these risks, nor are all such risks insurable.
Losses resulting from the occurrence of these risks could have a material
adverse impact on Cotton Valley. See "Business and Properties."
Facilities
Cotton Valley leases approximately 1,900 square feet of office space at
8350 North Central Expressway, Suite M2030, Dallas, Texas 75206, at an annual
base rental of approximately $44,500. Management believes that Cotton Valley's
offices will satisfy its needs for the foreseeable future.
Employees
As of August 31, 1996, Cotton Valley had six employees. Four employees are
officers, one is administrative and one works in the field. Cotton Valley uses
contract services in its oil and gas field operations. Cotton Valley also uses
consultants to evaluate company projects, reserves and other oil and gas assets
for potential acquisitions.
Legal Proceedings
As of the date of this prospectus, Cotton Valley is not a party to any
legal proceedings.
21
<PAGE>
MANAGEMENT
Directors and Executive Officers
Cotton Valley's directors and executive officers are:
Name Age Position
- ---- --- --------
Eugene A. Soltero 53 Chairman of the Board and Chief Executive Officer
James E. Hogue 60 Director, President and Chief Operating Officer
Peter Lucas 42 Senior Vice President and Chief Financial Officer
C. Ron Burden 53 Senior Vice President of Exploration
Wayne T. Egan(1) 32 Director
Michael Kamis 44 Director
Richard J. Lachcik(2) 38 Director
- --------------------
(1) Member, Audit Committee
(2) Member, Compensation Committee
Eugene A. Soltero has served Cotton Valley as a director since February
1995. He was President from February 1995 to July 1996 and has been Chairman and
Chief Executive Officer since January 1996. He has been Chairman and Chief
Executive Officer of CV Trading since May 1995. From March 1994 to February
1995, Mr. Soltero was President and Chief Executive Officer of Cimarron
Resources, Inc., an independent gas production company. From August 1991 to
March 1994, he was Chairman of the Board, President and Chief Executive Officer
of Aztec Energy Corporation, a publicly-held independent oil and gas production
company. In June 1994, Aztec Energy Corporation entered into bankruptcy
proceedings. Mr. Soltero has served as Chief Operating Officer and/or Chief
Executive Officer for private and public oil and gas companies for more than 20
years, including directing the formation and growth of start-up companies. Early
in his career, he was trained at Sinclair Oil Corporation in exploration and
production management, served as Manager of Planning for Texas International
Petroleum Corporation, and Petroleum Economist for DeGolyer and MacNaughton,
petroleum exploration and production consultants. Mr. Soltero is a member of the
Society of Petroleum Engineers, a member and former director of the Independent
Petroleum Association of America and the Texas Independent Producers and Royalty
Owners. He has also served, on two separate terms, as a director of the
Independent Petroleum Refiners Association of America. He is a master's graduate
of the Massachusetts Institute of Technology in business (where he was awarded
the Sinclair Fellowship in Petroleum Economics) with an undergraduate
engineering degree from The Cooper Union. Mr. Soltero is a registered
professional engineer in the State of Texas.
James E. Hogue became President, Chief Operating Officer and a director of
Cotton Valley in July 1996 and he served as Chairman of CV Energy from February
1995 to January 1996 and Chairman of CV Trading from May 1995 to January 1996.
He became President of CV Energy and CV Operating in January 1996. Mr. Hogue
also has been director, President and major shareholder of Third Coast Capital,
Inc., a venture capital company, since 1988. Since 1991, Mr. Hogue has served as
President of Martex Oil and Gas, Inc. In 1983, Mr. Hogue formed Mayco Petroleum,
Inc., for which he served as President until 1988. Early in his career, Mr.
Hogue served as a driller for Leatherwood Company and as a core engineer for
Sargent Diamond Bit, Inc. Subsequently, Mr. Hogue became President and major
shareholder of a diamond bit manufacturing company. In the late 1970s, Mr. Hogue
served for four years as President of Union Crude Oil Company, an exploration
and drilling company, and for two years as Vice President of Independent
Producers Marketing Company, a crude oil supply and transportation company. Mr.
Hogue has participated in drilling or furnishing services for over 3,000 wells
in Texas, Oklahoma, New Mexico, Louisiana and Colorado.
Peter Lucas became Senior Vice President and Chief Financial Officer of
Cotton Valley and all of its subsidiaries in August 1995. From May 1992 to July
1995, Mr. Lucas served as Chief Financial Officer to Canmax, Inc., a publicly
traded company that developed software for oil and gas retailers. Mr. Lucas is a
member of the Canadian Institute of Chartered Accountants. Mr. Lucas received
his tax and accounting training at Coopers & Lybrand, which he left in
22
<PAGE>
1984 to form his own tax practice. Six years later, Mr. Lucas' practice was
merged into Coopers & Lybrand, with whom he was a partner until April 1992. He
holds a bachelor of commerce degree from the University of Alberta.
C. Ronald Burden joined Cotton Valley in April 1996. From July 1994 until
he joined Cotton Valley, Mr. Burden served as Petroleum Geologist for Texakoma
Oil and Gas in Dallas, Texas. He was an independent oil and gas consultant from
September 1993 to July 1994. From November 1990 to September 1993, Mr. Burden
was Exploration Manager for Enron Oil and Gas Corp. at Tyler, Texas. He has
spent the past 25 years developing and managing oil and gas exploration projects
in West Texas, Alaska, offshore Texas, offshore Louisiana, South Texas and
particularly specializing in recent years in the East Texas Basin. Mr. Burden is
a member of the American Association of Petroleum Geologists and the East Texas
Geological Society. He is a graduate of Texas Tech University with a master's
degree in Petroleum Geology.
Wayne T. Egan is a partner with Weir & Foulds in the securities law
section for more than the past five years. He holds an L.L.B. from Queen's
University and a Bachelor of Commerce from the University of Toronto, and is a
member of the Canadian Bar Association. Weir & Foulds serves as Cotton Valley's
corporate counsel. See "Legal Matters."
Michael Kamis has served Cotton Valley as a director since November 1996.
Mr. Kamis has a Bachelor of Science degree in Petroleum Engineering from the
University of Wyoming. He has held increasingly responsible positions throughout
the world with oil and gas producers and service companies. Currently, Mr. Kamis
is president of Apex Energy Consultants, Inc. which provides reserve and
economic evaluations to the petroleum industry and financial institutions.
Richard J. Lachcik has practiced law with the Toronto law firm of Weir &
Foulds since 1988. He currently serves as the partner in charge of the
securities law section. Mr. Lachcik is a graduate of Queen's University with an
L.L.B., holds a B.A. from the University of Toronto, and is a member of the
Ontario Bar. Weir & Foulds serves as Cotton Valley's corporate counsel. See
"Legal Matters."
Audit Committee
Cotton Valley's board of directors has established an Audit Committee to
be comprised entirely of independent directors. The functions of the Audit
Committee are to make recommendations to the board of directors regarding the
engagement of Cotton Valley's independent accountants and to review with
management and the independent accountants Cotton Valley's financial statements,
basic accounting and financial policies and practices, audit scope and
competency of accounting personnel. Members of the Audit Committee are appointed
annually by the board of directors and serve at the discretion of the board of
directors until their successors are appointed or their earlier resignation or
removal.
Compensation Committee
Cotton Valley's board of directors has established a Compensation
Committee to be comprised entirely of independent directors. The functions of
the Compensation Committee are to review and recommend to the board of directors
the compensation, stock options and employment benefits of all officers of
Cotton Valley, to administer Cotton Valley's employee stock option plan, to fix
the terms of other employee benefit arrangements and to make awards under such
arrangements. Members of the Compensation Committee are appointed annually by
the board of directors and serve at the discretion of the board of directors
until their successors are appointed or their earlier resignation or removal.
Director Compensation
Directors who are not Cotton Valley employees receive $500 per meeting of
the board and $500 per committee meeting not held on the same date as a board
meeting. Directors are permitted to accept stock in lieu of cash. Employee
directors receive no extra compensation for service on the board.
23
<PAGE>
Executive Compensation
The following table sets forth the compensation paid or to be paid to
Cotton Valley's executive officers, directly or indirectly, for services
rendered in all capacities for the period from inception to June 30, 1995, and
fiscal 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C>
Annual Compensation(1)
Name and Principal Position Year Salary Other Annual
Compensation
--------------------------- ---- -------- ------------
Eugene A. Soltero, Chairman of the 1996 $115,000 $0
Board and Chief Executive Officer 1995 $25,000 $0
James E. Hogue, President and Chief 1996 $115,000 $0
Operating Officer 1995 $25,000 $0
Peter Lucas, Senior Vice President 1996 $101,500 $0
and Chief Financial Officer 1995 $0 $0
C. Ronald Burden, Senior Vice 1996 $22,000 $0
President of Exploration 1995 $0 $0
</TABLE>
- --------------------------
(1) Certain of Cotton Valley's executive officers receive personal benefits in
addition to salary. The aggregate amounts of these benefits, however, do
not exceed the lesser of $50,000 or 10% of the total annual salary reported
for the executives.
Cotton Valley does not have employment contracts with any of its executive
officers.
The following table sets forth information regarding options granted to
executive officers under Cotton Valley's employee stock option plan in fiscal
1996:
Option Grants in Last Fiscal Year
(Individual Grants)
<TABLE>
<S> <C> <C> <C> <C>
Number of Percent of Total
Securities(1) Underlying Options Granted to Exercise or Expiration
Name Options Granted Employees in Fiscal Year Base Price Date
- ---- ------------------------ ------------------------ ----------- ------------
Eugene A. Soltero 200,000 25.0% $1.83 July 1, 2000
James E. Hogue 200,000 25.0% $1.83 July 1, 2000
Peter Lucas 200,000 25.0% $1.83 July 1, 2000
C. Ronald Burden 200,000 25.0% $1.83 July 1, 2000
</TABLE>
- ----------------------
(1) Shares of common stock
The following table sets forth information regarding the value of
unexercised options held by executive officers as of June 30, 1996. No options
were exercised during fiscal 1996.
24
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<S> <C> <C>
Number of Securities(1) Underlying Value of Unexercised In-the-Money
Unexercised Options at FY-End Options at FY-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Eugene A. Soltero 200,000/0 $0/$0
James E. Hogue 200,000/0 $0/$0
Peter Lucas 200,000/0 $0/$0
C. Ronald Burden 200,000/0 $0/$0
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1995, Cotton Valley issued a total of 1,840,001 shares to
Eugene A. Soltero and James E. Hogue for pre-incorporation services to Cotton
Valley. In December 1995, Cotton Valley issued an additional 80,000 shares of
common stock each to Eugene A. Soltero and James E. Hogue for pre-incorporation
services. In December 1995, Cotton Valley issued 150,000 shares of common stock
each to Peter Lucas and Ron Burden for post-incorporation services to Cotton
Valley.
During the year ended June 30, 1996, Cotton Valley granted to senior
employees options that enable the employees to purchase 800,000 common shares of
Cotton Valley for $1.83 per share until July 1, 2000.
During the years ended June 30, 1996 and 1995, Cotton Valley paid
management fees to two corporations controlled by senior officers of Cotton
Valley, aggregating $160,000 and $50,000, respectively. In addition, Cotton
Valley has received advances from these two companies which total $171,709 at
June 30, 1996. The advances are unsecured and without interest and are payable
after June 30, 1997.
The foregoing transactions were on no less favorable terms than could have
been obtained from unaffiliated third parties. Any future transactions between
Cotton Valley and its affiliates will be approved by a majority of disinterested
directors and will be on terms no less favorable to Cotton Valley than those
which could be obtained from unrelated third parties.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Cotton Valley's common stock as of October 31, 1996, and as
adjusted to reflect the sale of Units in this offering, by (i) each person who
"beneficially" owns more than 5% of all outstanding shares of common stock, (ii)
each Cotton Valley director and executive officer, and (iii) all directors and
executive officers of Cotton Valley as a group. Except as otherwise indicated,
all persons listed below have (i) sole voting power and investment power with
respect to their common stock except to the extent that authority is shared by
spouses under applicable law, and (ii) record and beneficial ownership of their
shares. Percentages in the table "After This Offering" assume conversion of
Preferred Stock but not exercise of Warrants.
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Percentage of
Outstanding Common Stock
Amount and Nature of After This
Name Beneficial Ownership Currently Offering
- ---- ------------- ----------- ---------
Eugene A. Soltero (1) .............. 2,970,199 31.3% 24.8%
James E. Hogue (1) ................. 2,985,199 31.5% 24.9%
Peter Lucas ........................ 350,000 3.7% 2.9%
C. Ronald Burden ................... 390,000 4.1% 3.3%
Wayne T. Egan ...................... 50,000 0.5% 0.4%
Michael Kamis ...................... -- -- --
Richard J. Lachcik ................. 50,000 0.5% 0.4%
All directors and executive officers
as a group (seven persons) ...... 6,795,398 66.2% 53.2%
Royal Trust Corporation ............ 1,500,000 15.5% 12.3%
---------------------------
(1) The address of Messrs. Soltero and Hogue is 8350 North Central Expressway,
Suite M2030, Dallas, Texas 75206.
(2) Includes 200,000 shares of common stock subject to an employee stock option
and the following shares, beneficial ownership of which is disclaimed:
610,000 shares of common stock owned by the Soltero Family Limited
Partnership, 256,000 shares of common stock and 83,333 warrants owned by
Mr. Soltero's wife and 1,740,866 held as attorney under a voting trust
agreement. See "Principal Shareholders--Voting Trust Agreement."
(3) Includes 200,000 shares of common stock subject to an employee stock option
and the following shares, beneficial ownership of which is disclaimed:
640,000 shares of common stock owned by the Hogue Family Limited
Partnership, 241,000 shares of common stock and 83,333 warrants held by Mr.
Hogue's wife and 1,740,866 held as attorney under a voting trust agreement.
See "Principal Shareholders--Voting Trust Agreement."
(4) Includes 200,000 shares of common stock subject to an employee stock option
and 75,000 shares owned by Mr. Lucas' wife the following shares, beneficial
ownership of which is disclaimed.
(5) Includes 200,000 shares of common stock subject to an employee stock
option.
(6) Includes 50,000 shares of common stock subject to an employee stock option.
(7) Includes 1,096,666 shares subject to options or warrants and 3,481,732 held
as attorney under a voting trust agreement.
(8) Includes 500,000 shares subject to warrants. The address of Royal Trust
Corporation Inc. is Royal Bank Plaza, 200 Bay Street, Toronto, Ontario,
Canada M5J 2J5.
Cotton Valley is negotiating an agreement with Liviakis Financial
Communications, Inc. of Sacramento, California ("Liviakis") to assist and
consult with Cotton Valley in matters concerning corporate finance and to
provide investor communications and public relations services. In consideration
of Liviakis' services, Cotton Valley may sell a total of 500,000 shares of its
common stock to Liviakis and an officer of Liviakis for $.75 per share and issue
1,490,000 shares of its common stock to Liviakis. Cotton Valley may also grant
Liviakis and an officer of Liviakis an option to purchase 500,000 shares of its
common stock from January 2, 1998, until November 8, 2001.
Voting Trust Agreement
Unaffiliated parties that transferred their interests in the Texas and
Alabama properties to Cotton Valley in exchange for securities provided a Power
of Attorney to Eugene A. Soltero and James E. Hogue to vote 3,481,732 shares of
common stock held by such property contributors in the attorneys' discretion
between January 1, 1996, and January 1, 2001. Each property contributor may
transfer to unrelated third parties its common stock of Cotton Valley, subject
to the Voting Trust Agreement, at any time. The Power of Attorney provided by
each of the property contributors to Messrs. Soltero and Hogue expires with
respect to the common stock transferred by any property contributor.
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<PAGE>
DESCRIPTION OF SECURITIES
General
Cotton Valley is authorized to issue an unlimited number of shares of
common stock, without par value, and an unlimited number of shares of preferred
stock, without par value, issuable in series. As of the date of this prospectus,
Cotton Valley's issued and outstanding capital securities consist of 9,204,318
shares of common stock and 2,856,886 options and warrants to acquire common
stock. After giving effect to this offering, the issued and outstanding capital
stock of Cotton Valley will consist of 9,204,318 shares of common stock,
1,250,000 Units, 1,250,000 shares of Preferred Stock and 1,250,000 Warrants
underlying the Units, 930,000 employee stock options and 1,926,886 options and
warrants issued in Canadian financings. In addition, the Underwriters will be
issued warrants to purchase 125,000 Units at a price equal to 120% of the
initial public offering price per Unit. See "Description of Securities--Other
Options and Warrants," "Underwriting" and note 5 of Notes to Financial
Statements.
No United States market currently exists for any of the Securities. Cotton
Valley intends to apply for listing of the Securities on the AMEX.
Units
Each Unit consists of one share of Preferred Stock and one Warrant. The
Preferred Stock and the Warrants may not be traded separately until ___________,
unless separated earlier upon three days' prior written notice to Cotton Valley
from the Representative.
Common Stock
Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of shareholders. They are entitled to receive dividends when
and as declared by the board of directors out of legally available funds and to
share ratably in the assets of Cotton Valley legally available for distribution
upon liquidation, dissolution or winding up.
Holders of common stock do not have subscription, redemption or conversion
rights, nor do they have any preemptive rights. The common stock underlying the
Units offered by this prospectus will be, when issued and paid for, fully paid
and nonassessable.
Holders of common stock do not have cumulative voting rights, which means
that the holders of more than half of all voting rights with respect to common
stock and Preferred Stock can elect all of Cotton Valley's directors. The board
of directors is empowered to fill any vacancies on the board of directors
created by resignations, subject to quorum requirements.
All shareholder action is taken by vote of a majority of voting shares of
the capital stock of Cotton Valley present at a meeting of shareholders at which
a quorum (a majority of the issued and outstanding shares of the voting capital
stock) is present in person or by proxy. Directors are elected by a plurality
vote.
For certain fundamental changes, the corporate legislation under which
Cotton Valley was formed may require each class of outstanding stock to vote
separately.
Cotton Valley's common stock began trading through The Canadian Dealing
Network on June 24, 1996, under the symbol "CVZC." From June 24, 1996, through
September 30, 1996, the following table sets forth the high and low bid
information for Cotton Valley's common stock in Canadian Dollars as reported on
The Canadian Dealing Network. The information in the table reflects inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
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<PAGE>
1996 High Low
---- ----- -----
June 24-30 $2.80 $2.50
July 1-September 30 $2.60 $1.20
As of October 31, 1996, CV had 1,130 record holders of its common stock,
207 of whom have United States addresses.
Preferred Stock
Cotton Valley's articles of amalgamation authorize its board of directors
to issue an unlimited number of preferred shares in one or more series and to
fix the rights, priorities, preferences, qualifications, limitations and
restrictions, including the dividend rates, conversion rates, voting rights,
terms of redemption, liquidation preferences and the number of shares
constituting any terms of the designation of such series, without any further
vote or action by the shareholders. Issuing preferred shares could decrease the
amount of earnings and assets available for distribution to holders of common
stock or adversely affect the rights and powers, including voting rights, of the
holders of the common stock.
Cotton Valley has no present plans to issue any preferred stock other than
the Preferred Stock underlying the Units offered by this prospectus. Pursuant to
Policy 5.2 issued by the Ontario Securities Commission, Cotton Valley may not
issue any preferred stock without the advance written consent of the Ontario
Securities Commission. Cotton Valley does not anticipate any difficulty in
obtaining this consent.
8% Cumulative Convertible Preferred Stock
The board of directors has authorized the issuance of up to 2,000,000
shares of 8% Cumulative Convertible Preferred Stock. Holders of the Preferred
Stock are entitled to two votes per share on all matters submitted to a vote of
Cotton Valley shareholders. In addition, such holders are entitled to receive
cumulative dividends at the rate of 8% per annum, payable at the election of
Cotton Valley in cash or in shares of common stock. The dividends will be paid
annually, within 60 days after the close of each fiscal year ending June 30. If
the dividend is paid in shares of common stock, the price of such common stock
will be the average closing price for publicly traded shares during the 20
trading days ended on the last day of the fiscal year.
Holders of the Preferred Stock will have first equity preference as a
class, limited in amount to $6.00 per share of Preferred Stock, in the assets of
Cotton Valley legally available for distribution in the event of the
liquidation, dissolution or winding up.
Each outstanding share of Preferred Stock may be converted at any time by
the holder into two shares of common stock. Each share of Preferred Stock will
convert into two shares of common stock automatically upon the first to occur of
the following:
(1) The closing price for shares of common stock in any United
States public market meets or exceeds $___ per share for 20
consecutive trading days; or
(2) Cotton Valley's auditors release audited financial statements
according to United States generally accepted accounting
principles that show Cotton Valley has had net income for the
previous 12-month (or shorter) period exceeding $2,000,000; or
(3) Cotton Valley's auditors release audited financial statements
according to Canadian generally accepted accounting principles
that show Cotton Valley has had net income for the previous
12-month (or shorter) period exceeding Cdn $2,600,000; or
(4) December 31, 2002.
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<PAGE>
Holders of the Preferred Stock do not have subscription, redemption or
conversion rights other than as set out above, nor do they have any preemptive
rights. If Cotton Valley elects to sell additional shares of its common or
preferred stock following this offering, investors in this offering would have
no right to purchase additional shares of such stock. Consequently, their
percentage equity interest in Cotton Valley could be diluted. The shares of
Preferred Stock underlying the Units offered by this prospectus will be, when
issued and paid for, fully paid and nonassessable.
Holders of the Preferred Stock do not have cumulative voting rights, which
means that the holders of more than half of the voting rights of common stock
and Preferred Stock can elect all of Cotton Valley's directors, if they choose
to do so. In such event, the holders of the remaining shares would not be able
to elect any directors. The board of directors is empowered to fill any
vacancies on the board of directors created by the resignation of directors,
subject to applicable legislation.
Warrants
Each Warrant entitles the holder to purchase one share of common stock for
$____ per share until ___________, 1998. The Warrants are not immediately
exercisable and are not transferable separately from the Preferred Stock until
________________. Cotton Valley may redeem the Warrants at $0.01 per Warrant at
any time after ________________, upon 30 days written notice to the holders.
Other Options and Warrants
Employee Stock Options. Cotton Valley is authorized to issue shares of
common stock under its employee stock option plan to employees, officers,
directors, consultants and other service providers, provided that insiders must
not in aggregate hold options exceeding 10% of the outstanding shares. As of the
date of this prospectus, options have been granted to acquire a total of 930,000
shares for $1.83 per share. These options expire in 1999 and 2000.
Canadian Financings. In connection with financing activities completed in
Canada and the acquisition of Arjon, Cotton Valley granted options and warrants
as reflected in the table below. At October 31, 1996, 1,926,886 options or
warrants were outstanding. Each option or warrant entitles the holder to
purchase one share of common stock at the prices set forth in the table.
Number Exercise Price Cdn $ Exercise Price US $ Expiration Date
- ------ -------------------- ------------------- ---------------
1,340,724 $2.75 $2.00 December 31,1997
125,000 $2.25 $1.64 April 30, 1998
98,421 $2.25 $1.64 December 31,1997
37,741 $2.02 $1.48 August 31, 1998
325,000 $0.66 $0.48 December 31,1998
Transfer Agent and Registrar
The transfer agent and registrar for Cotton Valley's common stock is
Equity Transfer Services Inc., Toronto, Ontario, Canada. Cotton Valley intends
to appoint Continental Stock Transfer and Trust Company of Jersey City, New
Jersey, as United States transfer agent.
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 9,204,318 shares of common stock will be
outstanding. All shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act, except
shares purchased by an affiliate (in general, a person who is in a control
relationship with Cotton Valley) which will be subject to the limitations of
Rule 144 promulgated under the Securities Act. The 9,204,318 shares of common
stock are
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<PAGE>
registered on Form 20-F and currently eligible for sale without restriction,
other than shares held by affiliates. Subject to the limitations of Rule 144,
restricted securities will be freely transferable upon expiration of the
applicable two-year holding period and other provisions. In addition, Cotton
Valley has granted 1,926,886 warrants to purchase common stock. See
"Capitalization," "Management" and "Principal Shareholders."
Under Rule 144 as currently in effect, a person (or persons whose shares
are aggregated with those of others) whose restricted shares have been fully
paid for and meet the rule's two-year holding provisions, including persons who
may be deemed affiliates of Cotton Valley, may sell restricted securities in
brokers' transactions or directly to market makers, provided the number of
shares sold in any three-month period is not more than the greater of 1% of the
total shares of common stock then outstanding (approximately 90,000 shares of
common stock immediately after this offering) or the average weekly trading
volume for the four calendar week period immediately prior to each such sale.
After restricted securities have been fully paid for and held for three years,
restricted securities may be sold by persons who are not affiliates of Cotton
Valley without regard to volume limitations. Restricted securities held by
affiliates must continue, even after the three-year holding period, to be sold
in brokers' transactions or directly to market makers, subject to the volume
limitations described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from Cotton Valley by its
employees, directors, officers, consultants or advisors before the date Cotton
Valley becomes subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended, pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons, including the
employee stock option plan. Securities issued in reliance on Rule 701 are
restricted securities and, beginning 90 days after the date of this prospectus,
may be sold by persons other than affiliates, subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its two-year minimum holding period requirements. Such securities will be
subject, however, to any lock-up agreements related to such securities.
Prior to this offering, no public market has existed for any Securities in
the United States. No predictions can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. The sale, or availability for sale,
of substantial amounts of common stock in the public market could adversely
affect prevailing market prices.
Cotton Valley intends to file a registration statement under the
Securities Act covering shares of common stock available for issuance under the
employee stock option plan. See "Description of Securities--Other Options and
Warrants--Employee Stock Options." Such registration statement relating to the
employee stock option plan is expected to be filed soon after the date of this
prospectus and will automatically become effective upon filing. As of the date
of this prospectus, 930,000 shares are subject to outstanding options under the
employee stock option plan.
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<PAGE>
CERTAIN INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations for United States Residents
The following is a summary of certain of the Canadian federal income tax
considerations which will generally be applicable to holders of common stock
("U.S. residents") who are residents of the United States for the purposes of
the Canada-United States Income Tax Convention (1980) ("the Convention") and are
not residents of Canada for the purposes of the Income Tax Act (Canada) ("the
Canadian Tax Act"), who deal at arm's length with Cotton Valley for the purposes
of the Canadian Tax Act and who do not use or hold and are not deemed to use or
hold such common stock in, or in the course of, carrying on a business in
Canada. This summary is based upon the current provisions of the Canadian Tax
Act and the regulations thereunder, proposed amendments thereto publicly
announced by the Minister of Finance, Canada, prior to the date hereof, and the
provisions of the Convention as in effect on the date hereof.
This summary is of general nature only and is not intended to be legal or
tax advice to any particular U.S. resident. Accordingly, U.S. residents should
consult with their own tax advisors for advice with respect to their own
particular circumstances.
A U.S. resident will not be subject to tax in Canada on any capital gain
realized on a disposition of the Securities unless the value of the Securities
constitutes "taxable Canadian property" of the U.S. resident and the value of
the Securities is derived principally from real property situated in Canada. The
value of these Securities is not derived principally from real property situated
in Canada.
Dividends paid or credited or deemed to be paid or credited to a U.S.
resident in respect of the common stock will generally be subject to Canadian
withholding tax. Currently, under the Convention, the rate of Canadian
withholding tax which would apply on dividends paid by Cotton Valley to a
resident of the United States is (i) 6% with respect to dividends paid in 1996
and 5% thereafter if the beneficial owner of the dividends is a company which
owns at least 10% of the voting stock of Cotton Valley, and (ii) 15% in all
other cases.
United States Federal Income Tax Considerations
The following is a general description of the material United States
federal income tax consequences applicable to U.S. holders of the Securities.
The following discussion deals only with Securities held as a capital asset by
U.S. holders. It does not deal with special situations, such as those of foreign
persons, dealers in securities, financial institutions, life insurance
companies, holders whose "functional currency" is not the United States dollar,
or certain "straddle" or hedging transactions. A "U.S. holder" is (i) a citizen
(not resident in Canada pursuant to the convention) or resident of the United
States, (ii) a corporation created or organized under the laws of the United
States or any state thereof (including the District of Columbia) or (iii) a
person otherwise subject to United States federal income tax on its worldwide
income. Prospective purchasers are urged to consult their tax advisors regarding
the particular tax consequences arising under any state or local law.
The gross amount of a distribution with respect to common stock will
include the amount of any Canadian federal income tax withheld and will be
includible in gross income as a taxable dividend to the extent of Cotton
Valley's current and accumulated earnings and profits (calculated under United
States tax principles), as a return of capital to the extent in excess of such
earnings and profits and not in excess of the holder's tax basis in the common
stock, and as capital gain to the extent of any balance. Dividends will not be
eligible for the dividends-received deduction. Holders generally will be
entitled, subject to certain limitations, to a credit against their United
States federal income tax for Canadian federal income taxes withheld from such
dividends. Holders may claim a deduction for such taxes if they do not elect to
claim such foreign tax credit.
If a dividend distribution is paid in Canadian dollars, the amount
includible in income will be the United States dollar value, on the date of
receipt, of the Canadian dollar amount distributed. Any subsequent gain or loss
in respect of such Canadian dollars arising from exchange rate fluctuations will
be ordinary income or loss.
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The sale of common stock will generally result in the recognition of gain
or loss in an amount equal to the difference between the amount realized on the
sale and the holder's adjusted basis in such common stock. Gain or loss upon the
sale of the common stock will be long-term or short-term capital gain or loss,
depending on whether the common stock has been held for more than one year.
Special rules are applicable to United States persons holding stock in a
"passive foreign investment company" (PFIC), any foreign corporation of which at
least 75% of its gross income for the taxable year is passive income (the
"Income Test") or at least 50% by value of the assets it holds during the
taxable year produce or are held for the production of passive income (the
"Asset Test"). For that purpose, "passive income" includes the excess of gains
over losses from certain commodities transactions, including certain
transactions involving oil and gas. Gains from commodities transactions,
however, are generally excluded from the definition of passive income if
"substantially all" of a merchant's, producer's or handler's business is as an
active merchant, producer or handler of such commodities.
Cotton Valley believes it is not currently and will not become a PFIC.
However, the application of the PFIC provisions of the Internal Revenue Code of
1986, as amended (the "Code"), to oil and gas producers is somewhat unclear.
Therefore, no assurance can be made regarding the PFIC status of Cotton Valley.
If Cotton Valley were a PFIC, a U.S. holder of common stock would be
subject to a special tax regime with respect to certain dividends and with
respect to gain on a disposition of such shares (including a gift or pledge of
shares). Such income would be allocated ratably over the holder's holding period
for the shares, would be taxed, in the year of dividend or disposition, at
ordinary income tax rates (using the highest tax rate in effect for each period
to which the income is allocated), and would be subject to an interest charge
reflecting the deferral of tax from the year to which the income was allocated
to the year of dividend or disposition.
Purchasers of Units are urged to consult their tax advisors regarding the
potential application of the matters described above.
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UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, Cotton Valley has agreed to sell to the Underwriters
named below (the "Underwriters"), and each of the Underwriters, for whom
National Securities Corporation is acting as Representative, have agreed to
purchase the number of Units set forth opposite their respective names in the
following table.
Underwriters Number of Units
- ------------ ---------------
National Securities Corporation.....................
--------
Total....................................... 1,250,000
=========
The Representative has advised Cotton Valley that the Underwriters propose
to offer the Units to the public at the initial public offering price per Unit
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession of not more than $___ per Unit, none of which will be
reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representative. No such reduction shall change the amount of proceeds to be
received by Cotton Valley as set forth on the cover page of this prospectus.
Cotton Valley has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this prospectus, to purchase up to
187,500 additional Units to cover over-allotments, if any, at the same price per
Unit as Cotton Valley will receive for the 1,250,000 Units that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, the Underwriters will have a firm commitment to purchase approximately
the same percentage of such additional Units that the number of Units to be
purchased by it shown in the above table represents as a percentage of the
1,250,000 Units offered hereby. If purchased, such additional Units will be sold
by the Underwriters on the same terms as those on which the 1,250,000 Units are
being sold.
The holders of _____ shares of common stock have agreed with the
Representative that, for at least two years after the date of this prospectus,
subject to certain limited exceptions, they will not directly or indirectly
sell, offer to sell, contract to sell, pledge, make gifts of, grant an option
for the sale of or otherwise dispose of any shares of common stock, or other
securities convertible into, exercisable for or exchangeable for shares of
common stock, owned directly by such holders or with respect to which they have
the power of disposition, without the prior written consent of the
Representative. All of such shares will be eligible for immediate public sale
following expiration of the lock-up periods, subject to the provisions of Rule
144. See "Shares Eligible for Future Sale."
The Underwriters have the right to offer the Securities offered hereby
only through licensed securities dealers in the United States who are members of
the National Association of Securities Dealers, Inc.("NASD") and may allow such
dealers such portion of its ___ percent (__%) commission as each Underwriter may
determine.
The Underwriters will not confirm sales to any discretionary accounts.
Cotton Valley has agreed to pay the Representative a nonaccountable
expense allowance of 2.5% of the gross amount of the Units sold (_______ upon
the sale of the Units offered, _____ if the over-allotment option is exercised
in full) at the closing of the offering. The Underwriters' expenses in excess
thereof will be paid by the Representative. to the extent that the expenses of
the underwriting are less than that amount, such excess shall be deemed to be
additional compensation to the Underwriters. In the event the offering is
terminated before its successful completion, Cotton Valley may be obligated to
pay the Representative a maximum of $______ on an accountable basis for expenses
incurred by the Representative in connection with the offering.
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<PAGE>
Underwriters' Warrants
Upon the closing of this offering, Cotton Valley has agreed to sell to the
Underwriters, for nominal consideration, 125,000 warrants (the "Underwriters'
Warrants"). The Underwriters' Warrants are exercisable at 120% of the public
offering price per Unit for a four-year period commencing one year from the date
of this offering. The Underwriters' Warrants may not be sold, transferred,
assigned or hypothecated for a period of one year from the date of this offering
except to the officers of the Underwriters and their successors and dealers
participating in the offering and/or their partners or officers. The
Underwriters' Warrants will contain antidilution provisions providing for
appropriate adjustment of the number of shares subject to the Warrants under
certain circumstances. The holders of the Underwriters' Warrants have no voting,
dividend or other rights as shareholders of Cotton Valley with respect to shares
underlying the Underwriters' Warrants until the Underwriters' Warrants have been
exercised.
For the term of the Underwriters' Warrants, the holders thereof will be
given the opportunity to profit from a rise in the market value of Cotton
Valley's shares, with a resulting dilution in the interest of other
shareholders. The holders of the Underwriters' Warrants can be expected to
exercise the Underwriters' Warrants at a time when Cotton Valley would, in all
likelihood, be able to obtain needed capital by an offering of its unissued
shares on terms more favorable to Cotton Valley than those provided by the
Underwriters' Warrants. Such facts may adversely affect the terms on which
Cotton Valley can obtain additional financing. Any profit realized by the
Underwriters on the sale of the Underwriters' Warrants or shares issuable upon
exercise of the Underwriters' Warrants may be deemed additional underwriting
compensation.
Indemnification
The Underwriting Agreement provides for indemnification between Cotton
Valley and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among Cotton Valley and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act and the Securities Exchange Act
of 1934.
Determination of Offering Price
The initial public offering price was determined by negotiation between
Cotton Valley and the Representative. The factors considered in determining the
public offering price include Cotton Valley's business potential and earnings
prospects, the oil and gas industry and the general condition of the securities
markets at the time of the offering. The offering price does not bear any
relationship to Cotton Valley's assets, revenue, book value, net worth or other
recognized objective criteria of value. The number of shares of common stock
into which Preferred Stock may be converted, and the exercise price of the
Warrants, was determined by negotiation between Cotton Valley and the
Representative.
American Stock Exchange
Cotton Valley intends to apply to list the Securities on the American
Stock Exchange. No assurance can be given that the Securities will be listed,
that a market for the Securities will develop or, if it does develop, that it
will be maintained.
LIMITATIONS ON DIRECTOR LIABILITY
Under the securities law of the Province of Ontario, a right of action is
given for damages for a "misrepresentation" contained in a prospectus at the
time of purchase against every director of the issuer at the time the prospectus
or its later amendment was filed. A misrepresentation is defined to mean an
untrue statement of material fact or an omission to state a material fact that
is required to be stated or that is necessary to make a statement not misleading
in the light of the circumstances in which it was made. Every person who
purchases the security offered by the prospectus during the period of
distribution is deemed to have relied upon the misrepresentation if it was a
misrepresentation at the time of purchase.
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The general defense available for directors to such an action is proof by
the director that the purchaser purchased the securities with knowledge of the
misrepresentation. In addition, specific defenses are available to directors
provided a director can demonstrate that the prospectus was filed without the
director's knowledge and consent and reasonable general notice was given on
becoming aware of the filing. In addition, a director may also avoid liability
for a misrepresentation in a prospectus if the director did not believe, as to
the non-expertised portion of the prospectus, that a representation is false or
misleading, and if the director conducted a reasonable investigation so as to
provide reasonable grounds for belief that there had been no misrepresentation
(the due diligence defense).
A director of Cotton Valley is also subject to potential liability under
the Ontario Business Corporations Act ("OBCA"). The OBCA requires every director
of a corporation in exercising the director's power and discharging the
director's duties to act honestly and in good faith with a view to the best
interests of the corporation. In addition, every director of a corporation is
required in exercising his or her powers and discharging his or her duties to
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Failure to meet these duties will result
in a director becoming liable for actions taken on behalf of the corporation. A
director may be indemnified by a corporation against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by the director in respect of any civil, criminal or
administrative action or proceeding to which the director is made a party by
reason of being or having been a director of the corporation, if the director
acted honestly and in good faith with a view to the best interests of the
corporation.
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for Cotton Valley by Weir & Foulds, 2 First Canadian Place, Toronto,
Ontario, Canada M5X 1J5. Certain legal matters will be passed upon for the
Underwriters by Maurice J. Bates, L.L.C.
EXPERTS
The financial statements of Cotton Valley at June 30, 1996, and for the
period then ended appearing in this prospectus have been audited by Hein +
Associates, LLP, independent certified public accountants, as set forth in their
report appearing elsewhere in this prospectus, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The reserve report of K&A Energy Consultants, Inc. of the proved reserves
and future net revenues attributable to Cotton Valley's properties in the
Cheneyboro Field and the reserve report of Wendell & Associates of the proved
reserves and projected estimated future production and revenue for the Movico
Field included in this Prospectus as Appendix A-1 and Appendix A-2,
respectively, have been so included in reliance upon the authority of such firms
as experts in petroleum engineering.
35
<PAGE>
GLOSSARY
In this prospectus, the following terms have the meanings indicated:
3-D Seismic - The method by which a three-dimensional image of the earth's
subsurface is created through the interpretation of collected seismic data. 3-D
seismic surveys allow for a more detailed understanding of the subsurface than
do conventional seismic surveys and contribute significantly to field appraisal,
development and production.
Bbl - Barrels of oil.
Commercial Quantities/Well - A well that will make a profit over the cost
of operating the well.
Completion - The casing, perforation, stimulation and installation of
permanent equipment for the production of oil and gas. Completion costs are the
costs incurred for the services, equipment and labor required therefor.
Development Well - A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Exploratory Well - A well drilled to find a new reservoir in a field
previously found to be productive of oil and gas in another reservoir, or to
extend a known reservoir. Generally, an exploratory well is any well that is not
a development well, a service well or a stratigraphic test well as defined
below.
Gas Well - A well capable of producing gas as its primary product.
Gross Acres or Gross Wells - The total acres or well, as the case may be,
in which a working interest is owned.
Mcf - One thousand cubic feet of gas.
Net Acres - Calculated by multiplying the number of gross acres in which a
party has an interest by the fractional interest of the party in each such acre.
Net Revenue Interest - The share of revenues from oil an/or gas production
net of all other interest burdening the gross revenues such as landowner's
royalty and overriding royalties, etc.
Oil and Gas Lease - Contractual right to enter onto lands to explore for,
develop and produce oil and gas. An oil and gas lease is real property.
Oil Well - well capable of producing oil as its primary product.
Producer or Productive Well - A well that is producing oil or gas or that
is capable of production.
Proved Resources - The estimated quantities of crude oil and gas,
condensate and gas liquids recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(i) Reservoirs are considered proved if economic produceability is
supported by either actual production or conclusive formation test.
The area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering data.
In the absence of information on fluid contacts, the lowest known
structural occurrence of hydrocarbons controls the lower proved limit
of the reservoir.
36
<PAGE>
(ii) Reserves which can be produced economically through application of
improved recovery techniques such as fluid injection are included in
the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or
program was based.
(iii)Estimates of proved reserves do not include (A) oil that may become
available from known reservoirs but is classified separately as
"indicated additional reserves", (B) crude oil, gas and gas liquids,
the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics or economic
factors, (C) crude oil, gas and gas liquids that may occur in
undrilled prospects or (D) crude oil, gas and gas liquids that may be
recovered from oil shales, coal, gilsonite and other such sources.
Proved Developed Reserves - Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery are included as "proved developed reserves" only
after testing by a pilot project or after the operation of an installed program
has confirmed through production response that increased recovery will be
achieved.
Proved Undeveloped Reserves - Reserves that are expected to be recovered
from new wells on undrilled acreage or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
are limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units are claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Estimates for proved undeveloped reserves are not attributable to any acreage
for which an application of fluid injection or other improved recovery technique
is contemplated, unless such techniques have been proved effective by actual
tests in the area and in the same reservoir.
Undeveloped Acreage - Oil and gas acreage (including, in applicable
instances, rights in one or more horizons which may be penetrated by existing
well bores, but which have not been tested) to which Proved Reserves have not
been assigned by petroleum engineers.
Working Interest - The operating interest in an Oil and Gas Lease which
gives the owner the right to drill, produce and conduct operating activities on
the property and a share of production, subject to all royalties, overriding
royalties and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
37
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Cotton Valley Resources Corporation
(Formerly Cotton Valley Energy Limited)
Dallas, Texas
We have audited the consolidated balance sheet of Cotton Valley Resources
Corporation (formerly Cotton Valley Energy Limited) (a development stage
company) as of June 30, 1996, and the consolidated statements of operations,
stockholders' equity and cash flows for the year ended June 30, 1996, the period
from February 15, 1995 (date of incorporation) to June 30, 1995 and the period
from February 15, 1995 to June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1996, and the results of its operations and cash flows for the year
ended June 30, 1996, the period from February 15, 1995 to June 30, 1995 and the
period from February 15, 1995 to June 30, 1996 in accordance with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage and has had no
significant revenues from operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Dallas, Texas
November 1, 1996
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED BALANCE SHEET
(Expressed in U. S. Dollars)
June 30, 1996
ASSETS
------
CURRENT ASSET - Cash ............................................ $ 803,070
PROVED OIL AND GAS PROPERTIES (full cost method) ............... 11,140,724
OFFICE EQUIPMENT, net of accumulated depreciation of $1,684 ..... 35,536
-----------
Total Assets ........................................ $11,979,330
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<S> <C>
CURRENT LIABILITY - Accounts payable ........................................ $ 516,689
LONG-TERM DEBT ............................................................... 586,049
ADVANCES FROM RELATED PARTIES ................................................ 171,709
DEFERRED INCOME TAXES ........................................................ 1,740,000
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized-unlimited, issued - none ........ --
Common stock, no par value, authorized-unlimited, issued - 9,191,596 shares 9,443,160
Deficit accumulated in development stage .................................. (478,277)
------------
Total Stockholders' Equity ....................................... 8,964,883
Total Liabilities and Stockholders' Equity ....................... $ 11,979,330
============
</TABLE>
See accompanying notes to these financial statements
F-2
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U. S. Dollars)
PERIOD FROM PERIOD FROM
FEBRUARY 15, FEBRUARY 15,
YEAR ENDED 1995 TO 1995 TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------ ------------- -------------
REVENUE - Interest income ... $ 5,386 $ -- $ 5,386
EXPENSES:
General and administrative 529,776 74,917 604,693
Interest ................. 138,970 -- 138,970
----------- ----------- -----------
Total Expenses .... 668,746 74,917 743,663
----------- ----------- -----------
LOSS BEFORE INCOME TAXES .... (663,360) (74,917) (738,277)
INCOME TAX BENEFIT .......... 235,000 25,000 260,000
----------- ----------- -----------
NET LOSS .................... $ (428,360) $ (49,917) $ (478,277)
=========== =========== ===========
NET LOSS PER SHARE .......... $ (0.05) $ (0.01)
=========== ===========
WEIGHTED AVERAGE SHARES ..... 9,186,000 8,438,000
=========== ===========
See accompanying notes to these financial statements
F-3
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1996
(Expressed in U. S. Dollars)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED
COMMON STOCK SPECIAL SHARES IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STAGE TOTAL
------ ------ -------- ------ ------ -------
Issued upon incorporation to officers ($.003 per share) 560,001 $1,401 2,100,000 $ 8 $ -- $ 1,409
Issued March 10, 1995 for the potential acquisition of
subsequently abandoned oil and gas properties
(621,600 shares issued and 310,800 shares canceled
- $.003 per share) ................................. 310,800 777 -- -- -- 777
Issued March 10, 1995 for the acquisition of oil and gas
properties ($1.82 per share) ........................ 3,875,957 7,072,914 -- -- -- 7,072,914
Issued June 1, 1995 for cash ($1.00 per share) ......... 10,000 10,000 -- -- -- 10,000
Net loss ............................................... -- -- -- -- (49,917) (49,917)
----------- ----------- -----------
BALANCES, June 30, 1995 ............................... 4,756,758 7,085,092 2,100,000 8 (49,917) 7,035,183
Issued July - December 1995 in connection with notes
payable ($1.49 per share) .......................... 107,258 160,008 -- -- -- 160,008
Repayment and conversion to equity of notes payable,
net of amortized discount ........................... -- (72,000) -- -- -- (72,000)
Issued December 29, 1995 to officers upon conversion
of special shares ($.04 per share) .................. 1,440,000 5,840 (2,100,000) (8) -- 5,832
Issued December 29, 1995 as advance for stock offering
costs ($.04 per share) .............................. 340,000 12,409 -- -- -- 12,409
Issued December 29, 1995 to officers for services ($.04
per share) .......................................... 300,000 10,950 -- -- -- 10,950
Sale of shares for cash during April - June 1996 ($1.64
per share) .......................................... 1,272,500 2,089,872 -- -- -- 2,089,872
Issued June 14, 1996 upon conversion of debentures
($1.48 per share) ................................... 288,529 426,474 -- -- -- 426,474
Issued June 14, 1996 to former Arjon shareholders
($.21 per share) .................................... 686,551 146,300 -- -- -- 146,300
Share issuance costs ................................... -- (421,785) -- -- -- (421,785)
Net loss ............................................... -- -- -- -- (428,360) (428,360)
----------- ----------- -----------
BALANCES, June 30, 1996 ............................... 9,191,596 $ 9,443,160 -- $ -- $ (478,277) $ 8,964,883
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these financial statements
F-4
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U. S. Dollars)
<TABLE>
<S> <C> <C> <C>
PERIOD FROM PERIOD FROM
FEBRUARY 15, FEBRUARY 15,
YEAR ENDED 1995 TO 1995 TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (428,360) $ (49,917) $ (478,277)
Adjustments to reconcile net loss to net cash used by
operating activities:
Deferred income tax benefit ........................... (235,000) (25,000) (260,000)
Amortization of debt discount ......................... 88,000 -- 88,000
Depreciation .......................................... 1,683 -- 1,683
Common stock issued for services ...................... 10,950 2,181 13,131
Change in accounts payable ............................ 286,689 -- 286,689
Other ................................................. 5,843 -- 5,843
----------- ----------- -----------
Net cash used by operating activities ............ (270,195) (72,736) (342,931)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties ............................... 107,974 63,736 171,710
Sale of common stock ........................................ 2,089,872 10,000 2,099,872
Issuance of convertible debentures .......................... 426,474 -- 426,474
Issuance of note payable subsequently converted into
convertible debentures .................................... 146,300 -- 146,300
Costs related to sale of stock and debentures ............... (409,376) -- (409,376)
Issuance of note payable .................................... 250,000 -- 250,000
Repayment of note payable ................................... (250,000) -- (250,000)
----------- ----------- -----------
Net cash provided by financing activities ........ 2,361,244 73,736 2,434,980
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties ......................... (751,759) -- (751,759)
Payment of liability related to oil and gas property ........ (500,000) -- (500,000)
Acquisition of office equipment ............................. (37,220) -- (37,220)
----------- ----------- -----------
Net cash used by investing activities ............. (1,288,979) -- (1,288,979)
----------- ----------- -----------
INCREASE IN CASH ............................................... 802,070 1,000 803,070
CASH - beginning of period ..................................... 1,000 -- --
----------- -----------
CASH - end of year period ...................................... $ 803,070 $ 1,000 $ 803,070
----------- ----------- -----------
SUPPLEMENTAL INFORMATION
Cash paid for interest ...................................... $ 37,010 $ -- $ 37,010
Liabilities incurred in acquisition of oil and gas properties -- 1,086,049 1,086,049
Conversion of debentures to common stock .................... 426,474 -- 426,474
Retirement of debenture upon merger with Arjon .............. 146,300 -- 146,300
Oil and gas property option acquired with payable ........... -- 230,000 230,000
Oil and gas properties acquired with common stock ........... -- 7,072,914 7,072,914
Issuance of common stock for stock offering costs ........... 12,409 -- 12,409
</TABLE>
See accompanying notes to these financial statements
F-5
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
1. NATURE OF OPERATIONS
The Company was incorporated under the laws of Ontario as Cotton Valley
Energy Limited (CVEL) on February 15, 1995. It acquired all of the
shares of Cotton Valley Energy Corporation (CVEC), a Nevada
corporation, on June 30, 1995 in a one-for-one share and warrant
exchange. CVEC was also incorporated in February 1995. CVEL had no
substantive activity, so the acquisition of CVEC was accounted for as a
recapitalization of CVEL with the net assets of CVEC. These
consolidated financial statements have been prepared as if the Company
had acquired CVEC at the Company's inception.
The Company also owns 100% of the outstanding shares of CV Trading Co.,
a Nevada corporation that was formed to conduct oil and gas trading
activities, and Cotton Valley Operating Company, a Texas corporation
formed to operate oil and gas wells. Neither of the subsidiaries
commenced operations prior to July 1, 1996.
Intercompany accounts and transactions are eliminated in consolidation.
On June 14, 1996, the Company merged with Arjon Enterprises, Inc.
(Arjon), an Ontario corporation and reporting issuer in Ontario. As a
result of that merger the company's name was changed to Cotton Valley
Resources Corporation. Arjon had no business activities and its only
asset consisted of convertible debentures of the Company in the
principal amount of $146,300. The Company accounted for the merger
using the purchase method. Former Arjon shareholders received 686,551
common shares (representing approximately 7.5% of the then outstanding
common shares) of the Company.
The Company is in the development stage and had no revenues from
operations through June 30, 1996. The Company's planned principal
business activity is to acquire, explore, and develop oil and gas
properties. The Company also intends to develop natural gas
transportation and marketing projects.
The recoverability of amounts capitalized for oil and gas properties is
dependent upon the identification of economically recoverable reserves,
together with obtaining the necessary financing to exploit such
reserves and the achievement of profitable operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition,
exploration and development of oil and gas reserves, including directly
related overhead costs, are capitalized into a "full-cost pool."
All capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized on the
unit-of-production method using estimates of proved reserves. Costs
directly associated with the acquisition and evaluation of unproved
properties are excluded from the amortization base until the related
properties are evaluated. Such unproved properties are assessed
periodically and a provision for impairment is made to the full-cost
amortization base when appropriate. Sales of oil and gas properties are
credited to the full-cost pool unless the sale would have a significant
effect on the amortization rate. Abandonments of properties are
accounted for as adjustments to capitalized costs with no loss
recognized.
F-6
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
The net capitalized costs are subject to a "ceiling test," which limits
such costs to the aggregate of the estimated preset value of future net
revenues from proved reserves discounted at ten percent based on
current economic and operating conditions.
Office Equipment
Office equipment is recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from
three to five years.
Foreign Currency Translation
The company's assets and principal activities are in the U.S. and its
functional currency is the U.S. dollar. The effects of exchange rate
changes on transactions denominated in Canadian dollars or other
currencies are charged to operations. Foreign exchange gains or losses
were insignificant for all periods presented.
Income Taxes
The Company applies Statement of Accounting Standards No. 109 (SFAS
109). As required by SFAS 109, income taxes provided are for the tax
effects of transactions reported in the financial statements and
consist of taxes currently due, if any, plus net deferred taxes related
primarily to differences between the basis of assets and liabilities
for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets include
recognition of operating losses that are available to offset future
taxable income and tax credits that are available to offset future
income taxes. Valuation allowances are recognized to limit recognition
of deferred tax assets where appropriate. Such allowances may be
reversed when circumstances provide evidence that the deferred tax
assets will more likely than not be realized.
Deferred Site Restoration
A provision is established for estimated future costs of site
restoration of oil and gas production interests, including the removal
of production facilities at the end of their useful life. Costs are
based on management's estimates of the anticipated method and extent of
site restoration. The annual charge is determined on the same basis as
the depletion and amortization of the underlying asset.
Net Loss Per Share
Per share information is based on the weighted average number of common
stock and common stock equivalent shares outstanding. As required by
the Securities and Exchange Commission rules, all warrants, options,
and shares issued within a year of a public offering are assumed to be
outstanding for each year presented for purposes of the loss per share
calculation. Stock options and warrants were antidilutive for both
periods and therefore did not enter into the calculation of net loss
per share.
F-7
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Cash Flow Statement
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Accounting for
Stock-Based Compensation (SFAS 123), which is effective for periods
beginning after December 15, 1995. SFAS 123 requires that companies
recognize compensation expense for grants of stock, stock options, and
other equity instruments based on fair value. If the grants are to
employees, companies may elect to disclose only the pro forma effect of
such grants on net income and earnings per share in the notes to
financial statements. The Company expects to adopt the provisions of
SFAS 123 in its 1997 fiscal year and to elect the disclosure
alternative for employee grants.
Continuation as a Going Concern
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, the Company is
in the development stage and has had no significant revenues from
operations, which raises substantial doubt about its ability to
continue as a going concern. Management is seeking additional financing
as described in Note 9. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. Actual
results could differ from those estimates. Significant assumptions are
required in the valuation of proved oil and gas reserves, which as
described above may affect the amount at which oil and gas properties
are recorded. It is at least reasonably possible those estimates could
be revised in the near term and those revisions could be material.
3. OIL AND GAS PROPERTIES
Cheneyboro Field
The Company acquired approximately 5,000 acres of oil and gas leases in
the Cheneyboro Field of Navarro County, Texas during fiscal years 1995
and 1996. The Company issued 3,252,533 common shares, granted 406,567
Class A warrants (see Note 5), and paid $500,000 in cash and a
promissory note of $586,049 as consideration. The stock was recorded at
an estimated value of $5,935,281. During the year ended June 30, 1996,
the Company capitalized management fees and salaries of $195,476
directly related to the acquisition and proposed development of the
property, and incurred other development costs of $127,278.
F-8
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Movico Field, Mobile County, Alabama
The Company acquired an option to acquire a one-quarter interest in
1,280 acres of oil and gas leases in the Movico Field of Mobile County,
Alabama in fiscal year 1995. The Company issued 623,424 common shares,
granted 77,928 Class A warrants (see Note 5), and agreed to pay
$230,000 as consideration. The stock was recorded at a value of
$1,137,635. The interest in the leases is to be assigned to the Company
upon payment of the $230,000 which amount is included in accounts
payable in the accompanying balance sheet.
Sword Unit, Offshore Santa Barbara, California
The Company has entered into option agreements to acquire a working
interest in the Sword Unit, Offshore Santa Barbara, California. The
Company has paid $400,000 as of June 30, 1996. To complete the option
and acquire the working interest, the Company must pay $8,000,000 in
cash and $4,000,000 in marketable securities (which may consist of the
Company's common shares) on closing sometime in 1997, and participate
in a $4,000,000 letter of credit to fund development. The option has
been recorded at cost of $400,000, plus the Company's share of
environmental studies of $29,005, for a total of $429,005.
4. LONG-TERM DEBT
The Company has promissory notes payable totaling $586,049 for the
unpaid purchase price of the Cheneyboro oil and gas properties (see
Note 3). The notes are collateralized by the properties and are due
July 17, 1997.
Interest is payable quarterly at 12%.
5. STOCKHOLDERS' EQUITY
The Company has an unlimited number of preferred shares authorized,
which may be issued in series and include such rights and preferences
as authorized by the board of directors. No shares were outstanding as
of June 30, 1996.
Shortly after incorporation, the Company issued 2,100,000 special
shares for total cash consideration of $2.00 to officers, which were
subsequently exchanged for 1,440,000 common shares of the Company. The
special shares were issued in exchange for preferred stock which had
been issued upon incorporation of CVEC and subsequently cancelled.
In connection with the acquisition of oil and gas properties, including
a property abandoned following its acquisition, the Company granted
518,345 Class A warrants. In connection with the issuance of notes
payable and debentures, the Company granted 112,390 Class A warrants.
The Company also issued 636,250 Class A warrants in conjunction with a
private placement of common shares. Each Class A warrant is a right to
purchase one common share for $2.00 until December 31, 1997.
Effective January 31, 1996, each 2.5 outstanding shares of the
Company's common stock were consolidated into one share and the
previously authorized unlimited number of special shares were
cancelled. The financial statements reflect the consolidation of common
shares as if it occurred on inception of the Company.
F-9
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
In December 1995, the Company issued a total of 300,000 shares of
common stock to two officers in exchange for services performed shortly
after incorporation of the Company. The shares were recorded at
$10,950, which represented the esimated value of the services.
During the year ended June 30, 1996, the Company granted to senior
employees options that enable the employees to purchase 800,000 common
shares of the Company for $1.83 per share until July 1, 2000. The
Company has granted to the placement agent of the debenture and private
placement offerings three-year options to purchase up to 10% of the
common shares issued upon conversion of the debentures at a price equal
to the conversion price. As a result, the agent has the right to buy
37,741 common shares at $1.48 per share until August 31, 1998; 73,739
common shares at $2.00 per share until December 31, 1997; and 125,000
common shares at $1.64 per share until April 30, 1998.
In conjunction with the merger with Arjon, a total of 431,755 common
shares are issuable to former Arjon shareholders for Arjon warrants in
existence prior to the merger. These shares are issuable as follows:
333,334 common shares until December 31, 1998 at an exercise price of
$0.48 per share and 98,421 common shares at an exercise price of $1.64
per share until December 31, 1997.
6. RELATED PARTY TRANSACTIONS
During the years ended June 30, 1996 and 1995, the Company paid
management fees to two corporations controlled by senior officers of
the Company, aggregating $160,000 and $50,000, respectively. In
addition, the Company has received advances from these two companies
which total $171,709 at June 30, 1996. The advances are unsecured and
without interest and are payable after June 30, 1997.
7. INCOME TAXES
The Company's deferred tax assets (liabilities) consist of the
following:
<TABLE>
<S> <C> <C>
JUNE 30,
1996 1995
-------- -------
Deferred tax liabilities:
Difference in bases of oil and gas properties acquired $(2,000,000) $(2,000,000)
Costs capitalized for books and deducted for tax ..... (65,000) --
----------- -----------
Total deferred tax liaibliites ............... (2,065,000) (2,000,000)
----------- -----------
Deferred tax asset (net operating loss carryforwards) ... 325,000 25,000
----------- -----------
Net deferred tax liability ................... $(1,740,000) $(1,975,000)
=========== ===========
</TABLE>
At June 30, 1996, the Company has available net operating loss
carryforwards of approximately $930,000 to reduce future taxable
income. These carryforwards expire from 2002 to 2003.
8. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996, the Company had deposits in one financial institution
that were approximately $700,000 in excess of FDIC insurance limits.
F-10
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
The Company's financial instruments at June 30, 1996 are cash, accounts
payable, long-term debt, advances from related parties and stock
warrants and options. Management believes the fair market values of
cash and accounts payable approximate carrying values due to the
short-term nature of these instruments. Management has estimated the
fair values of long-term debt and advances from related parties based
on expected discounted cash flows and believes the fair values are not
materially different than carrying values. Management does not believe
it is practicable to estimate the fair values of options and warrants
due to the relatively limited trading activity that occurs in the
Company's stock.
9. SUBSEQUENT EVENTS
The Company and an underwriter have an engagement letter for a proposed
firm commitment underwritten public offering of approximately $7.5
million of securities of the Company. The underwriter would receive
compensation of 10% of the public offering price plus an approximate 3%
non-accountable expense allowance and a Securities Purchase Warrant,
equal to 10% of the number of securities purchased by the underwriters.
The engagement letter also provided the underwriter with an option to
purchase up to an additional 10% of the aggregate number of securities
offered in connection with the offering. The engagement letter is
subject to a comprehensive review of the Company's business and
prospects by the underwriter.
The Company issued a private placement memorandum on July 1, 1996 for
Units of Working Interest to participate in the drilling of a well on
the Cheneyboro property. In this offering the Company is attempting to
raise approximately $425,000 to $850,000.
10. SUPPLEMENTAL INFORMATION (UNAUDITED)
Costs incurred by the Company with respect to its oil and gas producing
activities were set forth below. No significant costs were incurred in
exploration activities or in the acquisition of unproved properties.
FOR THE PERIODS ENDED
JUNE 30,
1996 1995
------ ------
Proved property acquisition cost $ 524,005 $ 8,388,963
Development costs 227,754 -
------------ ---------
Total $ 751,759 $ 8,388,963
============ ===========
11. OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are reserves that can be expected
to be recovered through existing wells with existing equipment and
operating methods. The following estimated net interests in proved
reserves are based upon subjective engineering
F-11
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
judgments and may be affected by the limitations inherent in such
estimation. The process of estimating reserves is subject to continual
revision as additional information becomes available as a result of
drilling, testing, reservoir studies and production history. There can
be no assurance that such estimates will not be materially revised in
subsequent periods.
The Company emphasizes that reserve estimates of new discoveries or
undeveloped properties are more imprecise than those of producing oil
and gas properties. The Company's reserves are substantially from
undeveloped properties. Accordingly, these estimates are expected to
change materially as future information becomes available. The
Company's reserves were estimated by independent petroleum engineers.
All of the Company's reserves are located onshore in the continental
United States.
The following unaudited table sets forth proved oil and gas reserves at
June 30, 1996 and 1995, together with changes therein:
OIL AND NATURAL
CONDENSATE GAS
(BBLS) (MCF)
-------- --------
Balance at February 15, 1995 - -
Purchase of minerals in place 4,776,000 13,455,000
----------- -----------
Balance at June 30, 1995 4,776,000 13,455,000
----------- -----------
Balance at June 30, 1996 4,776,000 (1) 13,455,000 (1)
========== ============
Proved developed reserves at June 30:
1995 - -
============ ============
1996 93,000 280,000
============ ============
(1) Proved reserve quantities of 482,000 barrels of oil and
573,000 mcf of natural gas are subject to an option agreement.
The property interests had not been assigned to the Company as
of June 30, 1996.
The standardized measure of discounted future net cash flows at June
30, 1996 and 1995 relating to proved oil and gas reserves is set forth
below. The assumptions used to compute the standardized measure are
those prescribed by the Financial Accounting Standards Board and as
such, do not necessarily reflect the Company's expectations of actual
revenues to be derived from those reserves nor their present worth. The
limitations inherent in the reserve quantity estimation process
described above are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation
process.
F-12
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Standardized measure of discounted future net cash flows relating to
proved reserves:
AT JUNE 30,
1996 1995
-----------------------------
Future cash inflows ............................ $ 129,867,000 $ 108,408,000
Future production costs ........................ (16,644,000) (14,761,000)
Future development costs ....................... (13,560,000) (13,475,000)
------------- -------------
Future net cash flows, before income tax ....... 99,663,000 80,172,000
Future income tax expenses ..................... (33,060,000) (27,372,000)
------------- -------------
Future net cash flows .......................... 66,603,000 52,800,000
10% discount to reflect timing of net cash flows (21,653,000) (19,800,000)
------------- -------------
Standardized measure of discounted future net
cash flows (1)............................... $ 44,950,000 $ 33,000,000
============= =============
(1) Approximately $4,000,000 of the standardized measure of
discounted future net cash flows at June 30, 1996 is
attributable to an option agreement. The related property
interests had not been assigned to the Company as of June 30,
1996.
Changes in standardized measure of discounted future net cash flows
relating to proved reserves:
FOR THE PERIOD ENDED
JUNE 30,
1996 1995
------------------------------
Standardized measure, beginning of period ........ $ 33,000,000 $ --
Net change in sales price, net of production costs 12,450,000 --
Accretion of discount ............................ 3,300,000 --
Purchases of reserves in-place ................... -- 50,108,000
Net changes in income taxes ...................... (3,800,000) (17,108,000)
------------ ------------
Standardized measure, end of period .............. $ 44,950,000 $ 33,000,000
============ ============
F-13
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED CONDENSED BALANCE SHEET
(Expressed in U.S. Dollars)
September 30, 1996
(Unaudited)
ASSETS
CURRENT ASSET - Cash .......................................... $ 222,210
PROVED OIL AND GAS PROPERTIES (full cost method) .............. 11,322,923
OFFICE EQUIPMENT, net of accumulated depreciation of $4,470 ... 36,012
OTHER ASSETS .................................................. 35,000
Total Assets ......................................... $ 11,616,145
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITY - Accounts payable .......................... $ 443,168
LONG-TERM DEBT ................................................ 586,049
ADVANCES FROM RELATED PARTIES ................................. 171,709
DEFERRED INCOME TAXES ......................................... 1,645,000
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized-unlimited,
issued - none Common Stock, no par value,
authorized- unlimited, issued - 9,204,318 ................... 9,454,382
Deficit accumulated in development stage .................... (684,163)
------------
Total Stockholders' Equity ........................... 8,770,219
Total Liabilities and Stockholders' Equity ........... $ 11,616,145
============
F-14
<PAGE>
See accompanying note to these financial statements
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
Period From Period From Period From
July 1, July 1, February 15
1996 To 1995 To 1995 To
September 30, September 30, September 30,
1996 1995 1996
---------- ----------- -----------
REVENUE - Oil and gas sales ....... $ 19,484 $ -- $ 19,484
EXPENSES:
General and administrative ...... 302,788 33,379 907,481
Interest ........................ 17,581 6,250 151,166
-------- ----------- -----------
Total Expenses ........... 320,369 39,629 1,058,647
--------- ----------- -----------
LOSS BEFORE INCOME TAXES .......... (300,885) (39,629) (1,039,163)
INCOME TAX BENEFIT ................ 95,000 13,870 355,000
----------- ----------- -----------
NET LOSS .......................... $ (205,885) $ (25,759) $ (684,163)
=========== =========== ===========
NET LOSS PER SHARE ................ $ (0.02) $ (0.01)
=========== ===========
WEIGHTED AVERAGE SHARES ........... 9,186,000 4,757,000
=========== ===========
See accompanying note to these financial statements
F-15
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Period From Period From Period From
July 1, July 1, February 15,
1996 To 1995 To 1995 To
September 30, September 30, June 30, 1996
1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITES:
Net loss ................................ $ (205,885) $ (25,759) $ (684,163)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Deferred income tax benefit .......... (95,000) (13,870) (355,000)
Amortization of debt discount ........ -- -- 88,000
Depreciation ......................... 2,786 -- 4,469
Common stock issued for services ..... 7,207 -- 20,338
Change in accounts payable ........... (73,521) -- 213,168
Other ................................ (3,263) -- 2,580
----------- ----------- -----------
Net cash used by operating activities (367,676) (39,629) (710,608)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from related parties ........... -- 60,000 171,711
Sale of common stock .................... 4,015 -- 2,103,887
Issuance of convertible debentures ...... -- 355,650 426,474
Issuance of note payable subsequently
converted into convertible debentures ... -- 100,000 146,300
Costs related to sale of stock
and debentures .......................... -- -- (409,376)
Issuance of note payable ................ -- -- 250,000
Repayment of note payable ...................... -- -- (250,000)
----------- ----------- -----------
Net cash provided by financing activities 4,015 515,650 2,438,996
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of oil and gas properties ... (182,199) (477,021) (1,433,958)
Purchase of other assets ................ (35,000) -- (72,220)
----------- -----------
Net cash used by investing activities ... (217,199) (477,021) (1,506,178)
----------- -----------
INCREASE (DECREASE) IN CASH ...................... (580,860) (1,000) 222,210
CASH - beginning of period ....................... 803,070 1,000 --
CASH - end of year period ........................ $ 222,210 $ nil $ 222,210
=========== =========== ===========
F-16
<PAGE>
SUPPLEMENTAL INFORMATION
Cash paid for interest .................. $ 37,010 $ -- $ 37,010
Debt incurred in acquisition
of oil and gas properties ............... 586,049 -- 586,049
Conversion of debentures to
common stock ............................ 426,474 -- 426,474
Retirement of debenture upon
merger with Arjon ....................... 146,300 -- 146,300
Oil and gas property option acquired
with payable ............................ -- 230,000 230,000
Oil and gas properties acquired
with common stock ....................... -- 7,072,914 7,072,914
Issuance of common stock for stock
offering costs .......................... 12,409 -- 12,409
</TABLE>
See accompanying note to these financial statements
F-17
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTE TO CONDENSED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
(1) Nature of Business and Basis of Preparation and Presentation
The Company's primary business focus is the acquisition of ownership
interests in, and the production of oil and gas from, existing oil and
gas fields that indicate a potential for increased production through
rehabilitation.
The consolidated condensed financial statements of Cotton Valley
Resources Corporation and subsidiaries (collectively the "Company")
included herein have been prepared by the Company, without audit.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, since the
Company believes that the disclosures included are adequate to make
the information presented not misleading. In the opinion of
management, the consolidated condensed financial statements include
all adjustments consisting of normal recurring adjustments necessary
to present fairly the financial position, results of operations, and
cash flows as of the dates and for the periods presented. These
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Registration Statement on Form SB-2 for the
fiscal year ended June 30, 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which sets forth
accounting and disclosure requirements for stock-based compensation
arrangements. The new statement encourages, but does not require,
companies to measure stock-based compensation cost using a fair-value
method, rather that the intrinsic-value method prescribed by
Accounting Principles Board ("APB") Opinion No. 25. Companies choosing
to continue to measure stock-based compensation using the
intrinsic-value method must disclose on a pro forma basis net income
and net income per share using the fair-value method. Prior to the
effective date of SFAS No. 123 in fiscal 1997, the Company will select
the method under which it will measure stock-based compensation cost.
F-18
<PAGE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by Cotton Valley or the Underwriters.
This prospectus does not constitute an offer to sell or the solicitation of an
offer to buy any of the securities to which it relates in any state to any
person to whom it is unlawful to make such offer or solicitation in such state.
Neither the delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that there has been no change in Cotton
Valley's affairs since the date hereof or that the information contained herein
is correct as of any time subsequent to its date.
---------------------------
1,250,000 Units
COTTON VALLEY RESOURCES
CORPORATION
Consisting of
1,250,000 Shares of 8% Cumulative Convertible
Preferred Stock
and
1,250,000 Redeemable Warrants to Purchase
Common Stock
P R O S P E C T U S
NATIONAL SECURITIES CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary ................................
Risk Factors ......................................
Use of Proceeds ...................................
Capitalization ....................................
Dilution ..........................................
Dividend Policy ...................................
Management's Discussion and Analysis or
Plan of Operation ..............................
Business and Properties ...........................
Management ........................................
Certain Relationships and Related Transactions ....
Principal Shareholders ............................
Description of Securities .........................
Securities Eligible for Future Sale ...............
Certain Income Tax Considerations .................
Underwriting ......................................
Limitations on Director Liability .................
Legal Matters .....................................
Experts ...........................................
Glossary ..........................................
---------------------------
Until , 1997 (25 days after the date of this prospectus), all dealers
effecting transactions in the Units, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as Underwriters
and with respect to their unsold allotments or subscriptions.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Cotton Valley has no contract or arrangement that insures or indemnifies a
controlling person, director or officer of Cotton Valley which affects his or
her liability in that capacity. Cotton Valley's bylaws provide for such
indemnification, subject to applicable law.
If available at reasonable cost, Cotton Valley intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by reason of their
positions as officers and directors.
Item 25. Other Expenses of Issuance and Distribution.
Expenses in connection with the public offering of Securities by Cotton
Valley pursuant to this prospectus are as follows:
Securities and Exchange Commission Filing Fee $ 4,307
American Stock Exchange Listing Fee *
Accounting Fees and Expenses *
Legal Fees and Expenses *
Printing and Engraving *
Fees of Transfer Agent and Registrar *
Listing, Blue Sky Fees and Expenses *
Underwriter's Nonaccountable Expense Allowance *
Miscellaneous *
--------------
Total $ *
==============
- ----------------------
*Estimated
Item 26. Recent Sales of Unregistered Securities.
The following is a summary of transactions by Cotton Valley since February
15, 1995 (date of incorporation) involving securities which were not registered
under the Securities Act. With regard to all of the following transactions,
which ocurred in the United States, Cotton Valley relied on the exemption from
registration under Section 4(2) of the Securities Act afforded on the basis that
such transactions do not involve any public offering. The transactions in Canada
took place in accordance with documents filed with the Ontario Securities
Commission. Management believes that Cotton Valley has complied in all material
respects with applicable Canadian securities regulation with respect to all such
transactions.
a) Shares of Common Stock
<TABLE>
<S> <C> <C> <C>
Date Transaction Number Consideration
---- ----------- ------ -------------
02/95 To Eugene A. Soltero and James E. Hogue for 1,840,001 $ 1,401
pre-incorporation services
03/95 To unaffiliated parties, for Cheneyboro Property 3,252,533 5,935,279
04/95 To various entities, for subsequently abandoned oil and
gas interests 310,800 777
06/95 To two corporations, for Movico Property 623,424 1,137,635
06/95 To an individual for cash 10,000 10,000
12/95 To Dalcun Investments Ltd. and Arjon Enterprises Inc. for
a $250,000 note and a $146,000 note, net 107,258 88,008
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C> <C>
Date Transaction Number Consideration
---- ----------- -------- -------------
12/95 To Eugene A. Soltero in exchange for pre-incorporation 80,000 2,920
services
To James E. Hogue, for pre-incorporation services 80,000 2,920
To Peter Lucas, for post-incorporation services 150,000 5,475
To C. Ron Burden, for post-incorporation services 150,000 5,475
To Robert Harris, for services 100,000 3,650
To other individuals, for services 240,000 8,759
04/96 To Royal Trust, for cash (1) 1,000,000 1,642,291
To Majendie Securities, Ltd., for cash (1) 22,500 36,956
To Cramer & Cie, for cash (1) 150,000 246,375
To Tewson Ltd., for cash 100,000 164,250
06/96 To debenture holders, on conversion of debenture (2) 288,259 426,474
To former Arjon shareholders on merger, 686,551 146,300
less commission and other costs (3) (421,785)
07/96 To individuals, for services 4,388 7,207
To a former Arjon shareholder on exercise of warrant 8,334 4,015
--------- ----------
TOTAL ISSUED AND OUTSTANDING 9,204,318 $9,443,160
========= ==========
</TABLE>
- ---------------------------
(1) Cotton Valley sold in Canada units, consisting of one Common Share and
one-half a Warrant to purchase a Common Share until December 31, 1997, at
Cdn $2.75 ($2.00) per share, for Cdn $2.25 ($1.64) each.
(2) Cotton Valley sold in Canada convertible debentures which were converted to
shares of common stock at the rate Cdn $2.02 ($1.48) per share of common
stock.
(3) Costs relate to the sale of units in Canada, the sale of debentures in
Canada and the merger with Arjon.
b) Reserved Shares
In addition to the shares of common stock issued by Cotton Valley, Cotton
Valley has reserved for issuance 2,856,886 shares of common stock pursuant to:
(i) 1,266,985 Class A Warrants, where each Class A Warrant entitles the
holder to purchase one share in the common stock of Cotton Valley
until December 31, 1997, at the price of Cdn $2.75 ($2.00). These
Class A Warrants were issued:
(a) 636,250 in connection with a sale of Units in Canada;
(b) 112,390 in connection with conversion of debenture; and
(c) 518,345 in connection with the acquisition of oil and gas
interests.
(ii) 236,480 Agent's Options in connection with the sale of debentures and
Units. The terms are:
(a) 37,741 at Cdn $2.02 ($1.48) until August 31, 1998;
(b) 73,739 at Cdn $2.75 ($2.00) until December 31, 1997; and
(c) 125,000 at Cdn $2.25 ($1.64) until April 30, 1998.
(iii)930,000 stock options issued to directors and employees. These options
are exercisable at Cdn $2.50 ($1.83) and expire August 6, 1999
(130,000) and July 1, 2000 (800,000).
II-2
<PAGE>
(iv) 325,000 Warrants granted to former Arjon shareholders. Each Warrant is
exercisable at Cdn $0.66 ($0.48) until December 31, 1998.
(v) 98,421 Series B Warrants granted to former Arjon shareholders. Each
Warrant is exercisable at Cdn $2.25 ($1.64) until December 31, 1997.
Item 27. Exhibits
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<S> <C> <C>
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
1* Underwriting Agreement
3.1** Articles of Amalgamation
3.2 Bylaws
4.1* Text and Description of Graphics and Images Appearing on Certificate for Common
Stock
4.2* Text and Description of Graphics and Images Appearing on Certificate for Units
4.3* Text and Description of Graphics and Images Appearing on Certificate for Preferred
Stock
4.4* Text and Description of Graphics and Images Appearing on Certificate for Warrants
5* Opinion of Weir & Foulds
9 Voting Trust Agreement, as amended
10.1 Property Option Purchase Agreement (Movico)
10.2 Letter Agreement with Decker Exploration, Inc. (Movico)
20.1 Form of Proxy
20.2 Special Meeting Memorandum
20.3 Management Information Circular
21 Subsidiaries
23.1* Consent of Weir & Foulds
23.2 Consent of Hein + Associates, LLP
27 Financial Data Schedule
</TABLE>
- -----------------------
* To be filed by amendment.
** Previously filed and incorporated by reference herein.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i)
include any prospectus required by Section 10(a)(3) of 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; and (iii) include any
additional or changed material information on the plan of
distribution. Notwithstanding the foregoing, any increase or decrease
in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) 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.
(2) For determining liability under the Securities Act, to 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.
II-3
<PAGE>
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that, in the opinion of the
SEC, 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 shares
of common stock 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.
(6) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time the SEC declared it effective.
(7) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-4
<PAGE>
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 of 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 Dallas, State of Texas, on _____________, 1996.
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
<TABLE>
<S> <C>
By: By:
- -------------------------------------------- --------------------------------------------
Eugene A. Soltero Peter Lucas
Chairman of the Board and Chief Executive Senior Vice President and Chief Financial
Officer Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
Chairman of the Board and Chief _______________, 1996
Executive Officer
- -----------------------------------------
Eugene A. Soltero
President, Chief Operating Officer and
Director
- -----------------------------------------
James E. Hogue _______________, 1996
Senior Vice President and Chief
Financial Officer
- -----------------------------------------
Peter Lucas _______________, 1996
Senior Vice President of Exploration
- -----------------------------------------
C. Ron Burden _______________, 1996
Director
- -----------------------------------------
Wayne T. Egan _______________, 1996
Director
- -----------------------------------------
Michael Kamis _______________, 1996
Director
- -----------------------------------------
Richard J. Lachcik _______________, 1996
</TABLE>
II-5
<PAGE>
BY-LAW NO. 1
A by-law relating generally to the
transaction of the business and affairs of
COTTON VALLEY ENERGY LIMITED
(herein called the "Corporation")
CONTENTS
One Interpretation
Two Directors
Three Committees
Four Officers
Five Protection of Directors, Officers and Others
Six Meetings of Shareholders
Seven Securities
Eight Dividends and Rights
Nine Notices
Ten Borrowing Powers of the Directors
Eleven Business of the Corporation
BE IT ENACTED as a by-law of the Corporation as follows:
SECTION I
INTERPRETATION
1.1 Definitions. In this by-law, unless the context otherwise requires:
(a) "Act" means the Business Corporations Act, and includes the
regulations made pursuant thereto, and every other act or statute
incorporated therewith or amending the same, or any act or statute
substituted therefor, and in the case of such substitution the
reference in the by-laws of the Corporation to non-existing acts or
statutes shall be read as referring to the substituted provisions in
the new act or statute;
(b) "board" means the board of directors of the Corporation;
(c) words and expressions defined in the Act shall have the applicable
definitions when used herein; and
<PAGE>
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(d) in all by-laws of the Corporation where the context so requires or
permits, the singular shall include the plural and the plural shall
include the singular. The word "person" shall include firms and
corporations, and the masculine gender shall include the feminine and
neuter genders.
SECTION II
DIRECTORS
2.1 Powers. Subject to any unanimous shareholder agreement, the board shall
manage or supervise the management of the affairs and business of the
Corporation. So long as a quorum of directors remains in office no vacancy or
vacancies in the board shall affect the power of the continuing directors to
act.
2.2 Number and Quorum. The board of directors shall consist of such number of
persons as are from time to time determined by the directors subject to the
limitations established by the Articles. The board of directors shall determine
the quorum, provided in no event shall a quorum be less than 2/5 of the number
of directors or minimum number of directors, as the case may be, subject to the
limitations contained in the Act including the limitation that, if the
Corporation has fewer than three (3) directors, the quorum shall consist of all
directors. However, for a meeting of directors to be validly constituted, a
majority of directors present must be resident Canadians as defined by the Act
(unless the Corporation has only one or two directors, in which case that
director or only one of the two directors need be resident Canadians); provided
if a resident Canadian director who is unable to be present at the meeting
approves the business transacted thereat and such director together with those
resident Canadian directors present at the meeting would have constituted the
required number of resident Canadian directors to be present, such meeting shall
be validly constituted.
2.3 Qualification. No person shall be qualified for election as a director if
he: (i) is less than eighteen years of age; (ii) is of unsound mind and has been
so found by a court in Canada or elsewhere; (iii) is not an individual; or (iv)
has the status of a bankrupt. A director need not be a shareholder. A majority
of the directors shall be resident Canadians provided that if the number of
directors is only one or two, that director or only one of the two directors
need be a resident Canadian.
2.4 Election and Term of Office. Unless the Articles otherwise provide, the
directors shall be elected yearly at the annual meeting of the shareholders and
shall hold office until the annual meeting next following. The whole board shall
be elected at each annual meeting and all the directors then in office shall
retire, but, if qualified, shall be eligible for re-election. The election may
be by a show of hands or by resolution of the shareholders unless a ballot be
demanded by any shareholder. If after nomination there is no contest for
election, the persons nominated may be elected by declaration of the chairman to
that effect. If an election of directors is not held at the
<PAGE>
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proper time, the directors then in office shall continue in office until their
successors are elected or appointed.
2.5 Vacancies. Subject to the Act, a quorum of the board may fill a vacancy in
the board, except a vacancy resulting from an increase in the number of
directors or in the maximum number of directors or from a failure of the
shareholders to elect the number of directors required to be elected at any
meeting of shareholders. In the absence of a quorum of the board, or if the
vacancy has arisen from the failure of the shareholders to elect the number of
directors required by the Articles, or if the vacancy has resulted from an
increase in the number of directors or in the maximum number of directors, the
board shall forthwith call a special meeting of shareholders to fill the
vacancy. If the board fails to call such a meeting or if there are no such
directors, then in office, any shareholder may call such meeting. A director
appointed or elected to fill a vacancy holds office for the unexpired term of
his predecessor.
2.6 Vacation of Office. A director ceases to hold office when: (i) he dies; (ii)
he is removed from office by the shareholders; (iii) he ceases to be qualified
for election as a director; or (iv) his written resignation is received by the
Corporation provided if a time subsequent to its date of receipt by the
Corporation is specified in such written resignation the resignation shall
become effective at the time so specified. No director named in the Articles
shall be permitted to resign his office unless at the time the resignation is to
become effective a successor is elected or appointed.
2.7 Removal of Directors. Subject to the provisions of the Act, the shareholders
may by resolution passed at an annual or special meeting remove any director
before the expiration of his term of office and the vacancy created by such
removal may be filled at the same meeting failing which it may be filled by the
directors pursuant to Section 2.5 of this By-law.
2.8 Canadian Majority. The board shall not transact business at a meeting unless
a majority of the directors are resident Canadians as defined by the Act,
(unless the Corporation has only one or two directors, in which case that
director or only one of the two directors need be resident Canadians), except
where:
(a) a resident Canadian director who is unable to be present approves in
writing or by telephone or other communications facilities the
business to be transacted at the meeting; and
(b) a majority of resident Canadians would have been present had that
director been present at the meeting.
2.9 Place of Meetings. Meetings of the board may be held at any place within or
outside Ontario. The board need not hold any meetings within Canada.
2.10 Calling of Meetings. Meetings of the board may be held at any time without
formal notice being given if all the directors are present, or if a quorum is
present and those directors who are absent signify their consent to the holding
of the meeting in their absence. Any resolution passed,
<PAGE>
- 4 -
or proceeding had, or action taken at such meeting shall be as valid and
effectual as if it had been passed at or had been taken at a meeting duly called
and constituted.
Subject to the Act, no notice of a meeting of the board shall be necessary if
the meeting is the first meeting of the board held immediately following a
meeting of shareholders at which such board was elected or if the meeting of the
board is a meeting which follows immediately upon a meeting of shareholders at
which a director was appointed to fill a vacancy on the board, provided at any
such meeting of the board a quorum of directors is present.
2.11 Notice of Meeting. The Chairman, the President or a Vice-President who is a
director or any two directors may at any time by notice call a meeting of the
board. Such notice shall be given in the manner provided in Section 9.1 to each
director not less than forty-eight (48) hours before the time when the meeting
is to be held. A notice of a meeting of directors need not specify the purpose
of or the business to be transacted at the meeting except where the Act requires
such purpose or business to be specified. A director may in any manner and at
any time waive notice of or otherwise consent to a meeting of the board.
Attendance of a director at such a meeting is a waiver of notice of meeting
except where the attendance is for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called.
2.12 Adjourned Meeting. Notice of an adjourned meeting of the board is not
required if the time and place of the adjourned meeting is announced at the
original meeting or the adjourned meeting preceding the applicable adjourned
meeting, if the original meeting is adjourned on more than one occasion.
2.13 Regular Meetings. The board may appoint a day or days in any month or
months for regular meetings of the board at a place and hour to be named. A copy
of any resolution of the board fixing the place and time of such regular
meetings shall be sent to each director forthwith after being passed, but no
other notice shall be required for any such regular meeting except where the Act
requires the purpose thereof or the business to be transacted thereat to be
specified.
2.14 Absent Directors. Any director of the Corporation may file with the
Secretary of the Corporation a written waiver of notice of any meetings of the
directors and may at any time withdraw such waiver, and until such waiver is
withdrawn, no notice of meetings of directors need be sent to such director, and
any and all meetings of the directors of the Corporation shall (provided a
quorum is present) be validly constituted notwithstanding that notice shall not
have been given to such director.
2.15 Chairman. Subject to Section 4.8 hereof, the chairman of any meeting of the
board shall be the President and, in his absence, a director who is a
Vice-President present at the meeting. If no such officer is present, the
directors present shall choose one of their number to be chairman.
2.16 Voting at Meetings. Questions arising at any meeting of directors shall be
decided by a majority of votes. In the case of an equality of votes, the
chairman of the meeting, in addition to his original vote, shall have a second
or casting vote.
<PAGE>
- 5 -
2.17 Resolution in Writing. A resolution in writing, signed by all the directors
entitled to vote on that resolution at a meeting of directors or a committee of
directors, is as valid as if it had been passed at a meeting of directors or a
committee of directors.
2.18 Meetings by Telephone. If all the directors present at or participating in
a meeting consent, a meeting of the board or of a committee of the board may be
held by means of such telephone, electronic or other communication facilities as
permit all persons participating in the meeting to communicate with each other
simultaneously and instantaneously, and a director participating in such a
meeting by such means is deemed to be present at the meeting. Any such consent
shall be effective whether given before or after the meeting to which it relates
and may be given with respect to all meetings of the board and of committees of
the board held while a director holds office.
2.19 Interest of Directors and Officers in Contracts. Provided the applicable
director or officer shall have complied with the applicable requirements of the
Act in respect of disclosure of interest and otherwise, no director or officer
shall be disqualified by his office from contracting with the Corporation nor
shall any contract or arrangement entered into by or on behalf of the
Corporation with any director or officer or in which any director or officer is
in any way interested be liable to be voided nor shall any director or officer
so contracting or being so interested be liable to account to the Corporation
for any profit realized by any such contract or arrangement by reason of such
director's or officer's holding that office or of the fiduciary relationship
thereby established.
SECTION III
COMMITTEES
3.1 Managing Director and Committee of Directors. The board may in its
discretion appoint a managing director and such committees of the board as it
deems appropriate, and delegate to such managing director and committees any of
the powers of the board except those which the board is prohibited by the Act
from delegating. A majority of the members of each such committee shall be
resident Canadians. The managing director shall be a resident Canadian.
3.2 Transaction of Business. The powers of a committee of directors may be
exercised by a meeting at which a quorum is present or by resolution in writing
signed by all the members of such committee who would have been entitled to vote
on that resolution at a meeting of the committee. Meetings of such committee may
be held at any place within or outside Ontario.
3.3 Procedure. Unless otherwise determined by the board, each committee shall
have the power to fix its quorum at not less than a majority of its members, to
elect its chairman and to regulate its procedure.
<PAGE>
- 6 -
SECTION IV
OFFICERS
4.1 Appointment. Subject to the Act, this by-law and any other applicable
by-laws of the Corporation and any unanimous shareholder agreement:
(a) the directors may designate the offices of the Corporation, appoint
officers, specify their duties and delegate to them powers to manage
the business and affairs of the Corporation;
(b) a director may be appointed to any office of the Corporation; and
(c) two or more offices of the Corporation may be held by the same person.
4.2 The President. The President shall be the chief executive officer of the
Corporation and, subject to the authority of the board, shall be charged with
the general supervision of the business and affairs of the Corporation. He shall
be ex officio a member of all standing committees and, if no chairman of the
board has been appointed, or if appointed is not present, chairman of all
meetings of shareholders and of all meetings of directors of the Corporation, if
a director. Except when the board of directors has appointed a General Manager,
the President shall also have the powers and be charged with the duties of that
office. He shall perform all duties incident to his office and shall have such
other powers and duties as may from time to time be assigned to him by the board
of directors.
4.3 Vice-President. During the absence or disability of the President his duties
may be performed and his powers may be exercised by the Vice-President, or if
there are more than one, by the Vice-Presidents in order of seniority (as
determined by the board), save that no Vice-President shall preside at a meeting
of the board or at a meeting of shareholders who is not qualified to attend the
meeting as a director or shareholder, as the case may be. If a Vice-President
exercises any such duty or power, the absence or disability of the President
shall be presumed with reference thereto. A Vice-President shall also perform
such duties and exercise such powers as the President may from time to time
delegate to him or the board may prescribe.
4.4 Secretary. The Secretary shall give, or cause to be given, all notices
required to be given to shareholders, directors, auditors and members of
committees provided that the validity of any notice shall not be affected by
reason only of the fact that it is sent by some person other than the Secretary.
He shall attend all meetings of the directors and of the shareholders and shall
enter or cause to be entered in books kept for that purpose minutes of all
proceedings at such meetings. He shall, subject to any specific appointment to
the contrary, be the custodian of the stamp or mechanical device generally used
for affixing the corporate seal of the Corporation, if any, and of all books,
papers, records, documents and other instruments belonging to the Corporation,
and he shall perform such other duties as may from time to time be prescribed by
the board.
<PAGE>
- 7 -
4.5 Treasurer. The Treasurer shall keep or cause to be kept proper books of
account and accounting records with respect to all financial and other
transactions of the Corporation and, under the direction of the board, shall
control the deposit of money, the safekeeping of securities and the disbursement
of the funds of the Corporation. He shall render to the board at the meetings
thereof, or whenever required of him, an account of all his transactions as
Treasurer and of the financial position of the Corporation and he shall perform
such other duties as may from time to time be prescribed by the board.
4.6 Assistant-Secretary and Assistant-Treasurer. The Assistant-Secretary and the
Assistant-Treasurer or, if more than one, the Assistant-Secretaries and the
Assistant-Treasurers, shall respectively perform all the duties of the Secretary
and Treasurer in the absence or disability of the Secretary or Treasurer, as the
case may be. The Assistant-Secretary and the Assistant-Treasurer shall also have
such powers and duties as may from time to time be assigned to them by the
board.
4.7 General Manager. The General Manager, if one be appointed, shall have full
authority, subject to the authority of the board of directors and the
supervision of the President, to manage and direct the business and affairs of
the Corporation and to appoint and remove all officers, employees and agents of
the Corporation not elected or appointed directly by the board, and to settle
the terms of their employment and remuneration. If and so long as the General
Manager is a director, he may, but need not, be known as the Managing Director.
4.8 Chairman of the Board. The directors may from time to time appoint a
Chairman of the Board who shall be a director. If appointed, the board may
assign to him any of the powers and duties that are by any provisions of this
by-law assigned to the President, and he shall, subject to the provisions of the
Act, have such other powers and duties as the board may specify. The Chairman of
the Board shall act as chairman of all directors and shareholders meetings at
which he is present. During the absence or disability of the Chairman of the
Board, his duties shall be performed and his powers exercised by the managing
director, if any, or by the president.
4.9 Power and Duties of Other Officers. The powers and duties of all other
officers shall be such as the terms of their engagement call for or as the board
may specify. Any of the powers and duties of an officer to whom an assistant has
been appointed may be exercised and performed by such assistant, unless the
board otherwise directs.
4.10 Duties may be Delegated. In case of the absence or inability to act of the
President, a Vice-President or any other officer of the Corporation or for any
other reason that the board may deem sufficient, the board may delegate all or
any of the powers of such officer to any other officer or to any director for
the time being.
4.11 Remuneration and Removal. The board may determine the remuneration to be
paid to the directors, officers, agents and employees of the Corporation. Any
officer, agent or employee of the Corporation may receive such remuneration as
may be determined notwithstanding the fact that he is a director or shareholder
of the Corporation. The board may by resolution award special remuneration to
any officer of the Corporation undertaking any special work or service for, or
<PAGE>
- 8 -
undertaking any special mission on behalf of the Corporation other than routine
work ordinarily required of such office. If any director or officer of the
Corporation shall be employed by or shall perform services for the Corporation
otherwise than as a director or officer or shall be a member of a firm or a
shareholder, director or officer of a corporation which is employed by or
performs services for the Corporation, the fact of his being a director or
officer of the Corporation shall not disentitle such director or officer or such
firm or corporation, as the case may be, from receiving proper remuneration for
such services. All officers, in the absence of written agreement to the
contrary, shall be subject to removal by resolution of the board at any time
with or without cause. Until such removal each officer shall hold office until
his successor is elected or appointed or until his earlier resignation.
4.12 Agents and Attorneys. The board shall have power from time to time to
appoint agents or attorneys for the Corporation in or out of Canada with such
powers of management or otherwise (including the power to sub-delegate) as may
be thought fit.
4.13 Fidelity Bonds. The board may require such officers, employees and agents
of the Corporation as the board deems advisable to furnish bonds for the
faithful discharge of their duties, in such form and with such surety as the
board may from time to time prescribe, but no director shall be liable for
failure to require any bond or for the insufficiency of any bond or for any loss
by reason of the failure of the Corporation to receive any indemnity thereby
provided.
SECTION V
PROTECTION OF DIRECTORS, OFFICERS AND OTHERS
5.1 Protection of Directors and Officers. Except as otherwise specifically
provided in the Act, no director or officer of the Corporation shall be liable
for the acts, receipts, neglects or defaults of any other director or officer or
employee, or for joining in any receipt or other act for conformity, or for any
loss, damage or expense happening to the Corporation through the insufficiency
or deficiency of title to any property acquired by order of the board of
directors for or on behalf of the Corporation or for the insufficiency or
deficiency of any security in or upon which any of the monies of the Corporation
shall be invested or for any loss or damage arising from the bankruptcy,
insolvency or tortious act of any person, firm or corporation with whom any
monies, securities or effects of the Corporation shall be deposited, or for any
loss, conversion, misapplication or misappropriation of or damage resulting from
any dealings with any monies, securities or other assets belonging to the
Corporation or for any loss occasioned by any error of judgment or oversight on
his part or for any other loss, damage or misfortune whatever which may happen
in the execution of the duties of his office or in relation thereto unless the
same shall happen by failure to exercise the powers and to discharge the duties
of his office honestly, and in good faith with a view to the best interests of
the Corporation and in connection therewith to exercise that degree of care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
<PAGE>
- 9 -
Subject to the foregoing, the directors may rely upon the
accuracy of any statement or report prepared by the Corporation's auditors or
accountants and shall not be responsible or held liable for any loss or damage
resulting from the payment of any dividends or otherwise acting upon such
statement or report.
The directors of the Corporation are hereby authorized from
time to time to cause the Corporation to give indemnities to any director or
other person who has undertaken or is about to undertake any liability on behalf
of the Corporation and to secure such director or other person against loss by
mortgage and charge upon the whole or any part of the real and personal property
of the Corporation by way of security. Any action from time to time taken by the
directors under this paragraph shall not require approval or confirmation by the
shareholders.
5.2 Indemnity. Subject to the limitations contained in the Act, the Corporation
hereby indemnifies all past, present and future directors and officers of the
Corporation, and all persons who are now or may hereafter be, acting or have
heretofore acted, at the Corporation's request, as a director or officer of a
body corporate of which the Corporation is or was a shareholder or creditor, and
his heirs and legal representatives, against all costs, charges and expenses,
including any amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been a
director or officer of the Corporation or body corporate, if:
(a) he acted honestly and in good faith with a view to the best interests
of the Corporation; and
(b) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
5.3 Insurance. Subject to the limitations contained in the Act, the Corporation
may purchase and maintain such insurance for the benefit of its directors and
officers against any liability incurred by them in their capacity as directors
or officers of the Corporation, or in their capacity as directors or officers of
another body corporate where they act or have acted in that capacity at the
Corporation's request, as the board may from time to time determine.
<PAGE>
- 10 -
SECTION VI
MEETINGS OF SHAREHOLDERS
6.1 Annual Meeting. Subject to the Articles and any unanimous shareholder
agreement, the annual meeting of the shareholders shall be held at any place
within or outside Ontario on such day and at such time as the board, may from
time to time determine, for the purpose of hearing and receiving the reports and
statements required by the Act to be read to and laid before shareholders at an
annual meeting, electing directors, appointing the auditor and fixing or
authorizing the board to fix his remuneration, and for the transaction of such
other business as may properly be brought before the meeting.
6.2 Special Meetings. Subject to the Articles and any unanimous shareholder
agreement, the board shall have the power at any time to call a special meeting
of shareholders to be held at such time on such day and at any place within or
outside Ontario as may be determined by the board. The phrase "special meeting
of the shareholders" wherever it occurs in this by-law shall include a meeting
of any class or classes of shareholders, and the phrase "meeting of
shareholders" wherever it occurs in this by-law shall mean and include an annual
meeting of shareholders and a special meeting of shareholders.
6.3 Notice of Meetings. Notice of the time and place of each meeting of
shareholders shall be given in the manner provided in Section 9.1, and
(a) if the Corporation is at the time of such notice offering any of its
securities to the public, not less than twenty-one (21) days, and
(b) if the Corporation is at the time of such notice not offering any of
its securities to the public, not less than ten (10) days,
and in any event, not more than fifty (50) days before the date on which the
meeting is to be held, to the auditor of the Corporation, to the directors of
the Corporation and to each shareholder of record at the close of business on
the day on which the notice is given who is entered on the securities register
of the Corporation as the holder of one or more shares carrying the right to
vote at the meeting. Notice of a meeting of shareholders called for any purpose
other than consideration of the financial statements and auditor's report,
election of directors and reappointment of the incumbent auditor shall state the
nature of such business in sufficient detail to permit the shareholder to form a
reasoned judgment thereon and shall state the text of any special resolution to
be submitted to the meeting.
6.4 List of Shareholders Entitled to Notice. For every meeting of shareholders,
the Corporation shall prepare a list of shareholders entitled to receive notice
of the meeting, arranged in alphabetical order and showing the number of shares
held by each shareholder. If a record date for the meeting is fixed pursuant to
Section 6.5, the shareholders listed shall be those registered at the close of
business on a day not later than ten (10) days after such record date. If no
record date
<PAGE>
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is fixed, the shareholders listed shall be those registered at the close of
business on the day immediately preceding the day on which notice of the meeting
is given, or where no such notice is given, the day on which the meeting is
held. The list shall be available for examination by any shareholder during
usual business hours at the registered office of the Corporation or at the place
where the securities register is kept and at the place where the meeting is
held.
6.5 Record Date for Notice. The board may fix in advance a record date,
preceding the date of any meeting of shareholders by not more than fifty (50)
days and not less than twenty-one (21) days, for the determination of the
shareholders entitled to notice of the meeting, provided that notice of any such
record date is given not less than seven (7) days before such record date, by
newspaper advertisement in the manner provided in the Act. If no record date is
so fixed, the record date for the determination of the shareholders entitled to
notice of the meeting shall be the close of business on the day immediately
preceding the day on which the notice is given.
6.6 Meetings Without Notice. A meeting of shareholders may be held without
notice at any time and place as permitted by the Act:
(a) if all the shareholders entitled to vote thereat are present in person
or represented by proxy or if those not present or represented by
proxy waive notice of or otherwise consent to such meeting being held;
and
(b) if the auditors and the directors are present or waive notice of or
otherwise consent to such meeting being held.
At such a meeting any business may be transacted which the
Corporation at a meeting of shareholders may transact.
6.7 Persons Entitled to be Present. The only persons entitled to be present at a
meeting of the shareholders shall be those entitled to vote thereat, the
directors and auditors of the Corporation and others who, although not entitled
to vote, are entitled or required under any provision of the Act or the Articles
or by-laws to be present at the meeting. Any other person may be admitted only
on the invitation of the chairman of the meeting or with the consent of the
meeting.
6.8 Quorum. Two persons entitled to vote at a meeting of shareholders present in
person constitute a quorum.
6.9 Right to Vote. Subject to the Act, the articles and Section 6.5 hereof, each
person registered as a shareholder of the Corporation at the date of any meeting
of shareholders shall be entitled to one vote for each share held.
6.10 Representatives. An executor, administrator, committee of a mentally
incompetent person, guardian or trustee and where a body corporate is such
executor, administrator, committee, guardian or trustee, any person duly
appointed by proxy for such body corporate, upon filing with the secretary of
the meeting sufficient proof of his appointment, shall represent the shares of
the
<PAGE>
- 12 -
testator, intestate, mentally incompetent person, ward or cestui que trust in
his or its stead at all meetings of the shareholders of the Corporation and may
vote accordingly as a shareholder in the same manner and to the same extent as
the shareholder of record. If there be more than one executor, administrator,
committee, guardian or trustee, the provisions of clause 6.12 shall apply.
6.11 Proxies. Every shareholder, including a shareholder that is a body
corporate, entitled to vote at a meeting of shareholders may by means of a proxy
appoint a person, who need not be a shareholder, as his nominee to attend and
act at the meeting in the manner, to the extent and with the power conferred by
the proxy.
Subject to the Act, a proxy shall be executed by the
shareholder or his attorney authorized in writing or, if the shareholder is a
body corporate, under its corporate seal, if any, or by an officer or attorney
thereof duly authorized.
A proxy may be in any form which may be prescribed from time
to time by the board of directors or which the chairman of the meeting may
accept as sufficient, provided that such form complies with the provisions of
the Act.
Proxies shall be deposited with the secretary of the meeting
before any vote is cast under the authority thereof or at such earlier time and
in such manner as the board may prescribe in accordance with the provisions of
the Act. A proxy in the form of a facsimile transmission may also be so
deposited.
6.12 Joint Shareholders. Where two or more persons hold the same share or shares
jointly, any one of such persons present at a meeting of shareholders has the
right in the absence of the other or others to vote in respect of such share or
shares, but, if more than one of such persons are present or represented by
proxy and vote, they shall vote together as one on the share or shares jointly
held by them.
6.13 Scrutineer. At each meeting of shareholders one or more scrutineers may be
appointed by a resolution of the meeting or by the chairman with the consent of
the meeting to serve at the meeting. Such scrutineers need not be shareholders
of the Corporation.
6.14 Votes to Govern. Unless otherwise required by the provisions of the Act,
the Articles or by-laws of the Corporation, at all meetings of shareholders
every question shall be decided by the majority of the votes duly cast on the
question.
6.15 Show of Hands. At all meetings of shareholders every question shall be
decided by a show of hands unless a poll thereon is required by the chairman or
be demanded by a shareholder present in person or represented by proxy and
entitled to vote or unless a poll is required under the provisions of the Act.
Upon a show of hands every shareholder present in person or represented by proxy
and entitled to vote shall have one vote. After a show of hands has been taken
upon any question the chairman may require or any shareholder present in person
or represented by proxy and entitled to vote may demand a poll thereon. Whenever
a vote by show of hands has been taken upon
<PAGE>
- 13 -
a question, unless a poll thereon is demanded, a declaration by the chairman of
the meeting that the vote upon the question has been carried or carried by a
particular majority or not carried and an entry to that effect in the minutes of
the proceedings at the meeting shall be prima facie evidence of the fact without
proof of the number or proportion of the votes recorded in favour of or against
any resolution or other proceedings in respect of the said question, and the
result of the vote so taken shall be the decision of the Corporation in annual
or general meeting, as the case may be, upon the question. A demand for a poll
may be withdrawn at any time prior to the taking of the poll.
6.16 Polls. If a poll is required by the chairman of the meeting or under the
provisions of the Act or is demanded by any shareholder present in person or
represented by proxy and entitled to vote and the demand be not withdrawn, a
poll upon the question shall be taken in such manner as the chairman of the
meeting directs. Upon a poll each shareholder who is present in person or
represented by proxy shall, unless the Articles otherwise provide, be entitled
to one vote for each share in respect of which he is entitled to vote at the
meeting and the result of the poll shall be the decision of the Corporation in
annual or general meeting, as the case may be, upon the question.
6.17 Casting Vote. In case of an equality of votes at any meeting of
shareholders either upon a show of hands or upon a poll the chairman of the
meeting shall be entitled to a second or casting vote.
6.18 Chairman. Subject to Section 4.8 hereof, the President or, in his absence,
a Vice-President who is a director shall preside as Chairman at a meeting of
shareholders. If there is no President or such a Vice-President, or if at a
meeting, none of them is present within fifteen minutes after the time appointed
for holding of the meeting, the shareholders present shall choose a person from
their number to be the Chairman.
6.19 Adjournment of Meetings. The Chairman of any meeting of shareholders may,
with the consent of the meeting and subject to such conditions as the meeting
may decide, adjourn the same from time to time and from place to place, and no
notice of such adjournment need be given to the shareholders except as required
by the Act. Any business may be brought before or dealt with at an adjourned
meeting which might have been brought before or dealt with at the original
meeting in accordance with the notice calling such original meeting.
6.20 Resolution in Writing. A resolution in writing signed by all of the
shareholders entitled to vote on that resolution at a meeting of shareholders is
as valid as if it had been passed at a meeting of the shareholders unless a
written statement with respect to the subject matter of the resolution is
submitted by a director or the auditors in accordance with the Act.
6.21 Only One Shareholder. Where the Corporation has only one shareholder or
only one holder of any class or series of shares, the shareholder present in
person or by proxy constitutes a meeting.
<PAGE>
- 14 -
6.22 Procedure. At all meetings of shareholders questions of procedure shall be
settled by reference to such publication relating to the conduct of company
meetings as shall be acceptable to the chairman of the meeting.
SECTION VII
SECURITIES
7.1 Registers. The Corporation shall keep or cause to be kept such registers of
security holders and of transfers as required by the Act.
7.2 Allotment. Subject to the provisions, if any, of the Articles, the board may
from time to time allot or grant options to purchase the whole or any part of
the authorized and unissued shares in the capital of the Corporation to such
person or persons or class of persons as the board determines by resolution
provided that no share shall be issued until it is fully paid as prescribed by
the Act.
7.3 Commissions. The board may from time to time authorize the Corporation to
pay a reasonable commission to any person in consideration of his purchasing or
agreeing to purchase shares of the Corporation, whether from the corporation or
from any other person, or procuring or agreeing to procure purchasers for any
such shares.
7.4 Share Certificates. Every holder of one or more shares of the Corporation
shall be entitled, at his option, to a share certificate, or to a
non-transferable written acknowledgement of his right to obtain a share
certificate, stating the number and class or series of shares held by him as
shown on the securities register. Share certificates and acknowledgements of a
shareholder's right to a share certificate, respectively, shall be in such form
as the board shall from time to time approve. Any share certificate shall be
signed in accordance with Section 11.4 hereof, provided that, unless the board
otherwise determines, certificates representing shares in respect of which a
transfer agent or registrar has been appointed shall not be valid unless
countersigned by or on behalf of such transfer agent or registrar. A share
certificate shall be signed manually by at least one director or officer of the
Corporation or by or on behalf of the transfer agent or registrar if there is
one. Any additional signatures required may be printed or otherwise mechanically
reproduced. A share certificate executed as aforesaid shall be valid
notwithstanding that one of the directors or officers whose facsimile signature
appears thereon no longer holds office at the date of issue of the certificate.
7.5 Replacement of Security Certificates. The board or any person designated by
the board shall direct the issue of a new security certificate in lieu of and
upon cancellation of a security certificate that has been mutilated or in
substitution for a security certificate claimed to have been lost, apparently
destroyed or wrongfully taken on payment of such fee and on such terms as to
indemnity, reimbursement of expenses and evidence of loss and of title as the
board may from time to time prescribe, whether generally or in any particular
case.
<PAGE>
- 15 -
7.6 Transfer Agent and Registrar. The directors may from time to time by
resolution appoint or remove a transfer agent and a registrar (who may, but need
not be the same individual or body corporate) and one or more branch transfer
agents and registrars (who may, but need not be the same individual or body
corporate) for the securities of the Corporation and may provide for the
transfer of securities in one or more places and may provide that securities
will be interchangeably transferable or otherwise.
7.7 Transfer of Securities. Securities in the capital of the Corporation shall
be transferable only on the register of transfers or on one of the branch
registers of transfers (if any) kept by or for the Corporation in respect
thereof by the registered holder of such securities in person or by attorney
duly authorized in writing upon surrender for cancellation of the certificate
representing such securities properly endorsed or accompanied by a properly
executed transfer, subject to the provisions of the Act and subject to the
restrictions on transfer (if any) set forth in the Articles.
7.8 Corporation's Lien on Shares. The Corporation shall have a first and
paramount lien upon all the shares registered in the names of each shareholder
whether solely or jointly with others for his debts, liabilities and engagements
solely or jointly with any other person, to or with the Corporation, whether the
periods for payment, fulfilment or discharge thereof have actually arrived or
not. Any such lien shall extend to all dividends from time to time declared in
respect of such shares. Unless otherwise agreed the registration of a transfer
of shares shall operate as a waiver of the Corporation's lien, if any, on such
shares. However, the Corporation shall not be entitled to enforce such lien
against a transferee of the share who has no actual knowledge of it, unless such
lien is noted conspicuously on such share certificate.
For the purpose of enforcing such lien, the board may sell the
shares subject thereto in such manner as it thinks fit; but no sale shall be
made until notice in writing of the intention to sell has been served on such
shareholder, his executors or administrators, and default has been made by him
or them, in payment, fulfilment or discharge of such debts, liabilities or
engagements for ten days after the date of mailing of such notice.
The net proceeds of any such sale shall be applied in or
towards satisfaction of the debts, liabilities or engagements, and the residue,
if any, paid to such shareholder, his executors or administrators or assigns.
Upon any such sale in purported exercise of the powers
hereinbefore given, the directors may cause the purchaser's name to be entered
in the register in respect of the shares sold and the purchaser shall not be
bound to see to the regularity of the proceedings or to the application of the
purchase money, and after his name has been entered in the register in respect
of such shares, the validity of the sale shall not be impeached by any person
and the remedy of any person aggrieved by the sale shall be in damages only and
against the Corporation exclusively.
7.9 Refusal to Register Transfer. Except in the case of shares listed on a stock
exchange recognized by the Ontario Securities Commission, the board may refuse
to permit the registration
<PAGE>
- 16 -
of a transfer of shares in the capital of the Corporation against which the
Corporation has a lien until all of the debt represented by that lien has been
paid to the Corporation.
7.10 Joint Shareholders. If two or more persons are registered as joint holders
of any share, any one of such persons may give effectual receipts for the
certificate issued in respect thereof, and for any dividend, bonus, return of
capital or other money payable or warrant issuable in respect of such share, but
all the joint holders of a share shall be severally as well as jointly liable
for the payment of all demands payable in respect thereof.
SECTION VIII
DIVIDENDS AND RIGHTS
8.1 Dividends. Subject to the provisions of the Act, the board may from time to
time declare dividends payable to the shareholders according to their respective
rights and interests in the Corporation. Dividends may be paid in money or
property or by issuing fully paid shares of the Corporation.
8.2 Dividend Cheques. A dividend payable in cash shall be paid by cheque drawn
on the Corporation's bankers or one of them to the order of each registered
holder of shares of the class or series in respect of which it has been declared
and mailed by prepaid ordinary mail to such registered holder at his last
recorded address, unless such holder otherwise directs. In the case of joint
holders the cheque shall, unless such joint holders otherwise direct, be made
payable to the order of all of such joint holders and mailed to them at their
recorded address and if more than one address appears on the books of the
Corporation in respect of such joint holding the cheque shall be mailed to such
of those addresses as is selected by the person mailing such cheque. The mailing
of such cheque as aforesaid, unless the same is not paid on due presentation,
shall satisfy and discharge all liability for the dividend to the extent of the
sum represented thereby plus the amount of any tax which the Corporation is
required to and does withhold.
8.3 Non-receipt of Cheques. In the event of non-receipt of any dividend cheque
by the person to whom it is sent as aforesaid, the Corporation on proof of such
non-receipt and upon satisfactory indemnity being given to it, shall issue to
such person a replacement cheque for a like amount.
8.4 Record Date. The board may fix in advance a date preceding by not more than
fifty days the date for the payment of any dividend or the date for the issue of
any warrant or other evidence of right to subscribe for shares in the capital or
securities of the Corporation as a record date for the determination of the
persons entitled to receive payment of such dividend or to exercise the right to
subscribe for such securities, as the case may be, and in every such case only
such persons as shall be security holders of record at the close of business on
the date so fixed shall be entitled to receive payment of such dividend or to
exercise the right to subscribe for securities and to receive the warrant or
other evidence in respect of such right, as the case may be, notwithstanding the
transfer of any securities after any such record date fixed as aforesaid. Where
no record date is
<PAGE>
- 17 -
fixed in advance as aforesaid, the record date for the determination of the
persons entitled to receive payment of such dividend or to exercise the right to
subscribe for such securities of the Corporation shall be at the close of
business on the day on which the resolution relating to such dividend or right
to subscribe is passed by the board.
8.5 Unclaimed Dividends. Any dividend unclaimed after a period of six (6) years
from the date on which the same was declared to be payable shall be forfeited
and shall revert to the Corporation.
SECTION IX
NOTICES
9.1 Method of Giving. Any notice, communication or other document to be given by
the Corporation to a shareholder, director, officer or auditor of the
Corporation shall be sufficiently given if:
(a) delivered personally to the person to whom it is to be given to the
latest address of such person as shown in the records of the
Corporation or its transfer agent; or
(b) if sent by prepaid mail addressed to such address; or
(c) if sent to such address by any means of transmitted or recorded
communication; or
(d) if sent by telecopier, to the latest telecopier number of the person
to whom it is to be given, as shown in the records of the Corporation.
The Secretary or any person authorized by him may change the address or
telecopier number on the books of the Corporation of any shareholder in
accordance with any information believed by him to be reliable. A notice,
communication or document so delivered shall be deemed to have been received by
the addressee when it is delivered personally to the address aforesaid; and a
notice, communication or document so mailed shall be deemed to have been
received by the addressee on the fifth day after mailing; and a notice sent by
any means of transmitted or recorded communication shall be deemed to have been
received by the addressee when delivered to the appropriate communication
company or agency or its representative for dispatch; and a notice sent by
telecopier shall be deemed to have been received at the time of transmission;
provided however that, notwithstanding the foregoing, in the case of any meeting
of directors, verbal notice thereof shall be sufficient notice.
9.2 Computation of Time. In computing the date when notice must be given under
any provision of the Articles or by-laws requiring a specified number of days'
notice of any meeting or other event, the period of days shall be deemed to
commence the day following the date the notice
<PAGE>
- 18 -
was given and shall be deemed to terminate at midnight of the last day of the
period, except that if the last day of the period falls on a Sunday or holiday
the period shall terminate at midnight of the day next following that is not a
Sunday or holiday.
9.3 Omissions and Errors. The accidental omission to give any notice to any
shareholder, director, officer or auditor or the non-receipt of any notice by
any shareholder, director, officer or auditor or any error in any notice not
affecting the substance thereof shall not invalidate any action taken at any
meeting held pursuant to such notice or otherwise founded thereon.
9.4 Notice to Joint Shareholders. All notices with respect to any shares
registered in more than one name may, if more than one address appears on the
books of the Corporation in respect of such joint holding, be given to such
joint shareholders at such address so appearing as is selected by the person
giving such notice, and notice so given shall be sufficient notice to all the
holders of such shares.
9.5 Persons Becoming Entitled by Death or Operation of Law. Every person who by
operation of law, transfer, death of a security holder or by any other means
whatsoever, becomes entitled to any security, shall be bound by every notice in
respect of such security which prior to his name and address being entered on
the books of the Corporation was duly given to the person from whom he derives
his title to such security.
On the death of any security holder (not being one of several
joint holders of a security) the executors or administrators of such deceased
security holder shall be the only persons recognized by the Corporation as
having any title to such security.
Any person becoming entitled to a security in consequence of
the death, bankruptcy or insolvency of any shareholder (herein referred to as a
person entitled by transmission) shall produce to the Corporation such evidence
as may be reasonably required by the board to prove his title and declare in
writing his election either to be himself registered as a security holder in
respect of the security, or instead of being registered himself, to make such
transfer as the deceased or bankrupt person could have made.
Until any person becoming entitled to any security by
transmission has complied with the terms aforesaid, the Corporation may retain
any dividend or other payment declared or payable upon such security, and shall
not be bound to recognize the title of the person claiming under such
transmission.
9.6 Proof of Service. A certificate of the Secretary or other duly authorized
officer of the Corporation in office at the time of the making of the
certificate, or of any agent of the Corporation as to facts in relation to the
mailing or delivery or sending of any notice to any shareholder, director,
officer or auditor shall be conclusive evidence thereof and shall be binding on
every shareholder, director, officer or auditor of the Corporation, as the case
may be.
<PAGE>
- 19 -
9.7 Waiver of Notice. Any shareholder (or his duly appointed proxy) director,
officer or auditor may waive any notice required to be given under any provision
of the articles or by-laws of the Corporation or of the Act, and such waiver,
whether given before or after the meeting or other event of which notice is
required to be given, shall cure any default in giving such notice. Any
shareholder (or his duly appointed proxy) may waive any irregularity in any
meeting of shareholders.
SECTION X
BORROWING POWERS OF THE DIRECTORS
10.1 Borrowing Power. Without limiting the borrowing powers of the Corporation
as set forth in the Act, but subject to the provisions of the Act, the board may
from time to time, without authorization of the shareholders:
(a) borrow money on the credit of the Corporation;
(b) issue, reissue, sell or pledge debt obligations of the Corporation;
(c) give guarantees on behalf of the Corporation to secure performance of
an obligation of any person; and
(d) mortgage, hypothecate, pledge or otherwise create a security interest
in all or any property of the Corporation owned or subsequently
acquired, to secure any obligation of the Corporation.
10.2 The directors may from time to time authorize any director or directors,
officer or officers, employee of the Corporation or other person or persons,
whether connected with the Corporation or not, to make arrangements with
reference to the monies borrowed or to be borrowed as aforesaid and as to the
terms and conditions of the loan thereof and as to the securities to be given
therefor, with power to vary or modify such arrangements, terms and conditions
and to give such additional debt obligations for any monies borrowed or
remaining due by the Corporation as the directors of the Corporation may
authorize and generally to manage, transact and settle the borrowing of money by
the Corporation.
10.3 The directors may from time to time authorize any director or directors,
officer or officers, employee of the Corporation or other person or persons,
whether connected with the Corporation or not, to sign, execute and give on
behalf of the Corporation all documents, agreements and promises necessary or
desirable for the purposes aforesaid and to draw, make, accept, endorse, execute
and issue cheques, promissory notes, bills of exchange, bills of lading and
other negotiable or transferable instruments and the same and all renewals
thereof or substitutions therefor so signed shall be binding upon the
Corporation.
<PAGE>
- 20 -
10.4 The words "debt obligations" as used in this Section 10 mean bonds,
debentures, notes or other similar obligations or guarantees of such an
obligation, whether secured or unsecured.
SECTION XI
BUSINESS OF THE CORPORATION
11.1 Registered Office. The registered office of the Corporation shall be in the
municipality or geographic township within Ontario specified in its Articles,
and at such place therein as the directors of the Corporation may from time to
time by resolution determine.
11.2 Corporate Seal. The corporate seal of the Corporation, if any, shall be
such seal as the directors of the Corporation may from time to time by
resolution adopt.
11.3 Banking Arrangements. The banking business of the Corporation or any part
thereof shall be transacted with such chartered banks, trust companies or other
financial institutions as the board may by resolution from time to time
determine.
Cheques on the bank accounts, drafts drawn or accepted by the
Corporation, promissory notes given by it, acceptances, bills of exchange,
orders for the payment of money and other instruments of a like nature may be
made, signed, drawn, accepted or endorsed, as the case may be, by such officer
or officers, person or persons as the board of directors may by resolution from
time to time name for that purpose.
Cheques, promissory notes, bills of exchange, orders for the
payment of money and other negotiable paper may be endorsed for deposit to the
credit of the Corporation's bank account by such officer or officers, person or
persons, as the board of directors may by resolution from time to time name for
that purpose, or they may be endorsed for such deposit by means of a stamp
bearing the Corporation's name.
11.4 Execution of Instruments. Any instruments in writing may be signed in the
name of and on behalf of the Corporation by two persons, one of whom holds the
office of Chairman of the Board, President, Vice-President or director and the
other of whom holds one of the said offices or the office of Secretary or
Treasurer and any instrument in writing so signed shall be binding upon the
Corporation without any further authorization or formality. In the event that
the Corporation has only one officer and director, that person alone may sign
any instruments in writing in the name of and on behalf of the Corporation. The
board of directors shall have power from time to time by resolution to appoint
any other officer or officers or any person or persons on behalf of the
Corporation either to sign instruments in writing generally or to sign specific
instruments in writing. The corporate seal, if any, may be affixed to any
instruments in writing on the authority of any of the persons named in this
section.
The term "instruments in writing" as used herein shall,
without limiting the generality thereof, include contracts, documents, deeds,
mortgages, hypothecs, charges, security
<PAGE>
- 21 -
interests, conveyances, transfers and assignments of property (real or personal,
immovable or movable), agreements, tenders, releases, proxies, receipts and
discharges for the payment of money or other obligations, conveyances, transfers
and assignments of shares, stocks, bonds, debentures or other securities and all
paper writings.
11.5 Investments. In particular, without limiting the generality of the
foregoing, execution as provided in Section 11.4 hereof shall be adequate to
sell, assign, transfer, exchange, convert or convey any securities, rights and
warrants.
11.6 Voting Securities in Other Companies. All securities carrying voting rights
in any other body corporate held from time to time by the Corporation may be
voted at all meetings of holders of such securities in such manner and by such
person or persons as the board of the Corporation from time to time determines.
In the absence of action by the board, the proper signing officers of the
Corporation may also from time to time execute and deliver for and on behalf of
the Corporation instruments of proxy and arrange for the issuance of voting
certificates and other evidence of right to vote in such names as they may
determine.
11.7 Solicitors. Either the President or the Secretary shall have power from
time to time to instruct solicitors to institute or defend actions or other
legal proceedings for the Corporation without any specific resolution or
retainer or instructions from the board provided, however, that the board may
give instructions superseding or varying such instructions.
11.8 Custody of Securities. The directors may from time to time by resolution
provide for the deposit and custody of securities of the Corporation.
All share certificates, bonds, debentures, debenture stock
certificates, notes or other obligations or securities belonging to the
Corporation, may be issued or held in the name of a nominee or nominees of the
Corporation (and if issued or held in the name of more than one nominee shall be
held in the names of the nominees jointly with right of survivorship) and may be
endorsed in blank with endorsement guaranteed in order to enable transfers to be
completed and registration to be effected.
11.9 Charging Assets. The board may from time to time charge, hypothecate,
mortgage or pledge any or all of the assets of the Corporation not only by means
of bonds and debentures by way of fixed charge or charges or by way of floating
charge or charges, but also by any other instrument or instruments for the
purposes of securing any past or existing or new or future liability direct or
indirect of the Corporation or for the purpose of securing any bonds, debentures
or other securities or liabilities of the Corporation or of any other body
corporate.
11.10 Invalidity of Any Provisions of this By-Law. The invalidity or
unenforceability of any provision of this by-law shall not affect the validity
or enforceability of the remaining provisions of this by-law.
<PAGE>
- 22 -
11.11 Fiscal Year. The fiscal year of the Corporation shall terminate on such
day in each year as is from time to time established by the board of directors.
The undersigned, being the sole director of the Corporation,
by his signature below resolves pursuant to Section 129(1) of the Business
Corporations Act that the foregoing by-law shall be and it is hereby made a
by-law of the Corporation.
DATED the 15th day of February, 1995.
--------------------------------------
Richard J. Lachcik
---------------------
The undersigned, being the sole shareholder of the Corporation
entitled to vote in respect of the foregoing by-law, by his signature below
resolves pursuant to Section 104(1) (a) and (b) of the Business Corporations Act
that the foregoing by-law shall be and it is hereby confirmed as a by-law of the
Corporation.
DATED the 15th day of February, 1995.
--------------------------------------
Eugene A. Soltero
0161508.01
<PAGE>
AMENDED AND RESTATED
VOTING TRUST AGREEMENT
THIS AGREEMENT made effective as of the 17th day of June, 1996.
A M O N G:
EUGENE A. SOLTERO and JAMES
E. HOGUE, of the State of Texas
(hereinafter called "Proxyholders")
OF THE FIRST PART
- and -
WILTEX EASTERN RESOURCE
COMPANY, a corporation formed
pursuant to the laws of the State of Texas
(hereinafter called "Wiltex")
OF THE SECOND PART
- and -
PINNACLE REEF LIMITED
PARTNERSHIP, a limited partnership
formed pursuant to the laws of the State of
Nevada
(hereinafter called "Pinnacle")
OF THE THIRD PART
- and -
SO. ALABAMA EXPLORATION
LIMITED PARTNERSHIP, a limited
partnership formed pursuant to the laws of
the State of Nevada
(hereinafter called "SO. Alabama")
0101626.01C
<PAGE>
- 2 -
OF THE FOURTH PART
- and -
HIBERNIA MANAGEMENT
COMPANY, a corporation formed
pursuant to the laws of the State of
Nevada
(hereinafter called "Hibernia")
OF THE FIFTH PART
- and -
ALBERTSON FAMILY LIMITED
PARTNERSHIP, a limited partnership
formed pursuant to the laws of the State of
Texas
(hereinafter called "Albertson")
OF THE SIXTH PART
- and -
JAMESON FAMILY LIMITED
PARTNERSHIP, a limited partnership
formed pursuant to the laws of the State of
Texas
(hereinafter called "Jameson")
OF THE SEVENTH PART
- and -
WILKERSTEAD THRUST
COMPANY, a corporation formed
0101626.01C
<PAGE>
- 3 -
pursuant to the laws of the laws of
Gibraltar
(hereinafter called "Wilkerstead")
OF THE EIGHTH PART
- and -
BROWNSTOWE PARTNERS, LTD.,
a corporation formed pursuant to the laws
of the laws of Gibraltar
(hereinafter called "Brownstowe")
OF THE NINTH PART
-and-
HALEY MANAGEMENT COMPANY,
a corporation formed pursuant to the laws
of the state of Texas
(hereinafter called "Haley")
OF THE TENTH PART
WHEREAS the parties hereto other than the Proxyholders
(collectively, the "Property Contributors") are the registered holders of
3,481,732 common shares (the "Property Contributors' Shares") in the capital of
Cotton Valley Energy Limited (Cotton Valley Energy Limited and its successors
are hereinafter referred to as "Cotton Valley");
AND WHEREAS the Property Contributors have been granted Class
A Warrants (the "Property Contributors' Warrants") to purchase an aggregate of
up to 518,345 common shares in the capital of Cotton Valley;
0101626.01C
<PAGE>
- 4 -
AND WHEREAS the Property Contributors pursuant to the terms
and conditions of this Agreement wish to provide to the Proxyholders duly
completed Powers of Attorney to vote according to the terms and conditions of
this Voting Trust Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSES THAT for good and
valuable consideration mutually given and received, the receipt and sufficiency
whereof is hereby acknowledged, the parties hereto hereby agree as follows:
1. Voting Trust: Contemporaneously with the signing of this Agreement, each of
the Property Contributors hereby agree to deposit with the Proxyholders Powers
of Attorney substantially in the form attached hereto as Schedule "A", providing
to the Proxyholders the unrestricted right to vote the shares held by the
Property Contributors (collectively, the "Proxy Shares"). Any shares of Cotton
Valley hereinafter acquired by any of the Property Contributors pursuant to the
exercise of the Property Contributors' Warrants or pursuant to paragraphs 4 or 5
hereof, shall form part of the Proxy Shares. Where the context permits, the term
"Proxy Shares" shall include all additional shares of Cotton Valley here after
acquired by any of the Property Contributors and which are subject to the
Proxyholders' voting power pursuant to the provisions of this paragraph 1.
2. Representations and Warranties of the Property Contributors: Each of the
Property Contributors hereby jointly and severally represent and warrant as
follows and hereby acknowledge and agree that the Proxyholders are relying on
such representations and warranties in connection with the entering into by the
Proxyholders of this Agreement:
(a) each of the Property Contributors has good and sufficient
power, authority and right to enter into and deliver this
Agreement and the execution by any Property Contributor of
this Agreement does not constitute a violation of applicable
law or a violation of any contract or other instrument to
which a Property Contributor is a party;
0101626.01C
<PAGE>
- 5 -
(b) Each of the Property Contributors has the power and authority to
enter into this Agreement on behalf of each respective Property
Contributor;
(c) other than the Property Contributors' Shares and the Property
Contributors' Warrants, as of the date of this Agreement, no
Property Contributor owns any other securities of Cotton
Valley; and
(d) the Property Contributors own the Property Contributors'
Shares free and clear of any and all claims, liens, security
interests and encumbrances whatsoever and no person has any
agreement or option or right capable of becoming an agreement
for the purchase of any of the Property Contributors' Shares.
3. Covenant of the Property Contributors: Each of the Property Contributors
hereby covenants and agrees that during the term of this Agreement no Property
Contributor shall sell, transfer, assign, pledge, mortgage, charge, create a
security interest in, hypothecate, enter into any agreement or option to or
otherwise dispose of, encumber or deal with any of the securities of Cotton
Valley held by any such Property Contributor other than as provided for in
paragraph 6 hereof; and
4. Corporate Reorganization: If at any time during the currency of this
Agreement, as a result of a subdivision, consolidation, redivision,
amalgamation, reclassification or other alteration of the share capital of
Cotton Valley, the Property Contributors' Shares subject to the Power of
Attorney provided to the Proxyholders hereunder shall be amended to provide for
such event, and the Proxyholders shall be entitled to vote such shares in
accordance with the provisions of this Agreement.
5. Acquisition of Additional Securities: For greater certainty, forthwith upon
the receipt by any Property Contributor of any additional securities of Cotton
Valley at any time and
0101626.01C
<PAGE>
- 6 -
from time to time during the term of this Agreement pursuant to the exercise of
the Property Contributors' Warrants or by way of dividend in connection with the
Property Contributors' Shares, or upon a reorganization of Cotton Valley as
contemplated in paragraph 4 hereof, such additional securities shall forthwith
become subject to the provisions of this Agreement, and the Proxyholder shall
vote such securities in accordance herewith.
6. Transfer of Shares by Property Contributors: Notwithstanding any provisions
of this Agreement to the contrary, each Property Contributor may transfer any
shares held by it in the capital of Cotton Valley upon written notice to the
Proxyholders. Upon any transfer in accordance with this Agreement, the Power of
Attorney in respect of such Proxy Shares shall immediately be of no further
force or effect, except if such transfer is by a Property Contributor to a
related party or an affiliate, in which case the Power of Attorney shall
continue in full force and effect.
7. Term of Agreement: The term of this Agreement shall commence on the date
first written above and shall terminate and be of no further force and effect on
January 1, 2001 or such earlier date as determined by the Proxyholders in their
sole discretion.
8. Divisable Interest: Each of the Proxyholders holds a 50% undivided interest
in and to this Agreement. Either Proxyholder may, upon written notice to the
other Proxyholder and the Property Contributors convert his undivided interest
in this Agreement to a separate agreement with the Property Contributors
covering one-half of the Proxy Shares.
9. Enurement: Subject to paragraph 8 hereof, the terms and provisions of this
Agreement shall be binding upon and shall enure to the benefit of the
Proxyholders, the Property Contributors and their respective heirs, executors,
successors, assigns and legal representatives.
10. Further Assurances: The parties hereto covenant and agree to sign such other
papers, cause such meetings to be held, resolutions passed and by-laws enacted,
exercise their
0101626.01C
<PAGE>
- 7 -
vote and influence, do and perform and cause to be done and performed such
further and other acts and things as may be necessary or desirable in order to
give full effect to this Agreement at every part hereof.
11. Notices: Any notice or other communication which may be or is required to be
given or made pursuant to this Agreement may be given in writing by personal
delivery, by registered mail, postage prepaid or by telecopier addressed as
follows:
(a) to the Proxyholders at:
8350 North Central Expressway, Suite M-2030
Dallas, Texas
75206, U.S.A.
Telecopier: (214) 363-4294
(b) to the Property Contributors at:
c/o William H. Avery, Attorney
2707 Hibernia Street
Dallas, Texas 75204, USA
Telecopier: 214-720-0039
or at such other address as may be given by any of them to the other in writing
from time to time. Any notice or other communication given by mail as aforesaid
shall be deemed to have been received on the fourth (4th) day following the date
of mailing such notice or other communication. Any notice or other communication
delivered or sent by telecopier as aforesaid shall be deemed to have been
received on the date on which such notice or document was delivered or sent by
telecopier. If a notice or other communication shall have been mailed and if
regular mail service shall be interrupted by strike or other irregularity before
the deemed receipt of such notice as aforesaid, such notice shall, unless
earlier actually received, be deemed to have been received on the fourth (4th)
day following the resumption of normal mail service.
0101626.01C
<PAGE>
- 8 -
12. Entire Agreement: This Agreement shall constitute the entire Agreement among
the parties hereto, and replaces all prior agreements among any of the parties
hereto, with respect to all of the matters herein contained. This agreement may
be signed in counterpart.
13. No Amendments: This Agreement shall not be amended except by a memorandum in
writing signed by each of the parties hereto.
IN WITNESS WHEREOF the parties hereto have duly executed this
Agreement effective as of the date first above written.
SIGNED, SEALED AND DELIVERED )
) --------------------------------
) James E. Hogue
)
) -------------------------------
) Eugene Soltero
)
WILTEX EASTERN RESOURCE PINNACLE REEF LIMITED
COMPANY PARTNERSHIP, By Hibernia
Management Company, General Partner
Per: Per:
SOUTH ALABAMA EXPLORATION HIBERNIA MANAGEMENT
LIMITED PARTNERSHIP, By Hibernia COMPANY
Management Company, General Partner
Per: Per:
0101626.01C
<PAGE>
- 9 -
BROWNSTOWE PARTNERS LTD ALBERTSON FAMILY LIMITED
PARTNERSHIP BY Rose Walker
Management Company, General Partner
Per: Per:
JAMESON FAMILY LIMITED WILKERSTEAD THRUST COMPANY
PARTNERSHIP By Jameson Capital, Inc.,
General Partner
Per: Per:
HALEY MANAGEMENT COMPANY
Per: ______________________________
0101626.01C
<PAGE>
PROPERTY OPTION PURCHASE AGREEMENT
This agreement entered into as of the date set forth below is between
Cotton Valley Energy Corporation, a Nevada Corporation (hereinafter referred to
as "Purchaser"), with its address at 5232 Forest Lane, Suite 120, Dallas, Texas,
75244 and South Alabama Exploration Limited Partnership (hereinafter referred to
as "Seller"), represented by its general partner, Hibernia Management Company,
located at 2707 Hibernia St., Suite 301, Dallas, Texas 75204
W I T N E S S E T H
WHEREAS, Seller represents that it owns an unrecorded option (the "Option")
to purchase a 25% working interest in 640 acres of Oil, Gas, and Mineral leases
owned by Decker Exploration, Inc. and Leeman Energy Corporation (the "Owners")
within the boundaries of the Movico Field, Mobile County, Alabama, as outlined
in Exhibit A attached hereto (the "Property"), and to participate in the area of
mutual interest with the Owners as outlined on Exhibit B attached hereto; and
WHEREAS, Seller is willing to sell, assign and transfer to Purchaser all of
its rights, title and interest in the Option, and have Purchaser substituted in
its place and stead;
NOW THEREFORE, for and in consideration of the delivery of certain
securities of Purchaser as set forth below and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, Seller hereby
grants, sells, assigns and transfers to Purchaser all its right title and
interest in the Option according to the following terms and conditions:
1. The securities (which shall be delivered to Seller on or before March
15, 1995) shall consist of: (a) 1,558,560 shares of the Common Stock
of Purchaser, $0.001 par value (the "Common Stock"); (b) a warrant to
purchase 389,640 shares of Common Stock at Three Canadian Dollars
(C$3.00) per share on or before March 15, 1996 (the "C$3.00 Warrant");
(c) a warrant to purchase 389,640 shares of Common Stock at Four
Canadian Dollars (C$4.00) per share on or before March 15, 1997 (the
"C$4.00 Warrant"); and (d) a warrant to purchase 389,640 shares of
Common Stock at Five Canadian Dollars (C$5.00) per share on or before
March 15, 1998 (the "C$5.00 Warrant"). Seller shall execute a
securities acquisition agreement with respect to the securities being
acquired in the form of Exhibit C attached hereto. The warrants to be
delivered shall be in the form of Exhibit D attached hereto.
2. On the date Purchaser acquires title to the Property, Purchaser shall
pay Seller $117,500 in immediately available funds.
3. In the event Purchaser acquires less than 25% working interest in the
640 acres (160 net acres) having good and merchantable title, Seller
shall return to Purchaser shares of Common Stock, C$3.00 Warrants,
C$4.00 Warrants and C$5.00 Warrants proportional to the amount of net
acres not so acquired. In the event Purchase does not exercise any
portion of its option hereunder, for any reason, Seller, upon written
demand, shall return 50% of amounts it previously received of Common
Stock, C$3.00 Warrants, C$4.00 Warrants and C$5.00 Warrants. 3. This
agreement shall be governed by the laws of the State of Texas.
4. Should any additional instruments need to be executed, certified, or
delivered by one Party to the other, to any third party and/or filed
with or delivered to any public officer in order to carry our the
purpose and intent of this Agreement, each Party hereto agrees to
promptly execute and deliver
Property Option Agreement........Page 1
<PAGE>
any and all such instruments reasonable necessary to carry out the
purpose and intent of this Agreement.
5. This Agreement may be executed in multiple counterparts, each of
which shall be deemed an original and each of which alone, and
all of which together, shall constitute one and the same
instrument. It is agreed to that a facsimile transmission signed
copy of this Agreement shall be treated and considered an
original for all intended purposes.
6. It is expressly agreed that this Agreement embodies the entire
agreement of the parties with regard to the subject matter
herein, and that there is no other oral or written agreement or
understanding between the parties at the time of execution
hereunder. In addition, this Agreement may be amended or modified
only by written agreement signed by all of the parties hereto.
7. The terms and provisions hereof shall be binding upon and inure
to the benefit of the parties hereto and their successors,
transferees, sub-licensees and assigns.
Executed as of this ____ Day of February, 1995.
COTTON VALLEY ENERGY CORPORATION
By______________________Title:___________
SOUTH ALABAMA EXPLORATION LIMITED PARTNERSHIP
HIBERNIA MANAGEMENT COMPANY, General Partner
By: ______________________Title__________
Property Option Agreement........Page 2
<PAGE>
C O T T O N V A L L E Y E N E R G Y C O R P O R A T I O N
5232 FOREST LANE, SUITE 120, DALLAS, TEXAS 75244
ph: 214-363-1990 FAX: 214-363-1070
- -------------------------------------------------------------------------------
February __, 1995
Decker Exploration, Inc.
921 Main St., Suite 1518
Houston, Texas 77002
Attn: Mr. Mark Decker
Re: Letter Agreement
Movico Prospect
Mobile County, Alabama
Dear Mark:
Pursuant to our conversations and agreement, Cotton Valley Energy Corporation
("CVE") agrees to purchase from Decker Exploration, Inc. and Leeman Energy Corp.
(hereinafter "Sellers"), and Sellers agree to sell to CVE, a 25% working
interest in the Movico Prospect subject to the following terms and conditions:
1. CVE will pay 25% of $450,000 to Sellers for leasehold, geology and
geophysical expenses ("Prospect Costs").
2. CVE will own a 25% working interest in the prospect and pay 25% of the
initial well costs.
3. Sellers will deliver an Assignment of 25% working interest in the Oil
and Gas Leases described in Exhibit A hereto with a minimum weighted
net revenue interest of 77% of 25%. Sellers will retain a reversionary
working interest of 15% of 8/8ths after payout of all prospect costs
and well costs ("Project Payout").
4. CVE will have the right of review and approval of all leases, lease
options and title.
5. The parties will negotiate and attempt in good faith to enter into a
mutually acceptable Participation Agreement and Joint Operating
Agreement within 30 days of Sellers receiving letter agreement
commitments for 100% of the working interest, however, CVE may, for
any reason, determine that the proposed Participation or Joint
Operating Agreements or operator are unacceptable and withdraw from
this letter of intent without any obligation to Sellers. Sellers may
terminate this letter agreement in the event CVE fails to pay
compensation, fails to execute agreement, or perform any of the above
after the remaining 75% working interest has been committed by third
parties.
<PAGE>
Decker Exploration, Inc.
February ___, 1995
Page 2
6. An area of mutual interest (AMI) will be established around the
prospect, as shown in Exhibit B hereto, such that any additional
interest delivered to or acquired by the working interest parties
within the AMI will be subject to the reversionary working interest in
paragraph 3 and to a 3% of 8/8ths overriding royalty interest that
will be assigned to Sellers.
7. Within 90 days of executing a mutually acceptable Participation
Agreement and Joint Operating Agreement (but in no event earlier than
September 1, 1995), the working interest participants will at their
own cost and expense commence the drilling of the initial well at a
mutually acceptable location to test the Smackover and Norphlet
formations.
If you are in agreement with the above terms and conditions, please indicate
your acceptance in the space provided below and return a copy to me at your
earliest convenience.
Yours very truly,
COTTON VALLEY ENERGY CORPORATION
By:________________________________
Title:
AGREED TO AND ACCEPTED as of this ___ Day of February
DECKER EXPLORATION, INC.
By:_________________________________
Title:
LEEMAN ENERGY CORP.
By:_________________________________
Title:
<PAGE>
FORM OF PROXY SOLICITED BY THE MANAGEMENT OF
COTTON VALLEY RESOURCES CORPORATION FOR USE AT
THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 10, 1996
The undersigned shareholder(s) of COTTON VALLEY RESOURCES CORPORATION (the
"Corporation") hereby appoint(s) in respect of all of his shares of the
Corporation Eugene A. Soltero, Chief Executive Officer or failing him, James E.
Hogue, President, or in lieu of the foregoing as nominee of the undersigned,
with power of substitution, to attend, act and vote for the undersigned at the
Annual and Special Meeting of Shareholders of the Corporation to be held on the
10th day of December, 1996, and any adjournment or adjournments thereof:
1. TO VOTE FOR ( ) WITHHOLD FROM VOTING IN ( ) the
election of directors.
2. TO VOTE FOR ( ) WITHHOLD FROM VOTING ON ( ) the
appointment of Coopers & Lybrand, Chartered Accountants as
auditors of the Corporation; and authorizing the directors of the
Corporation to fix their remuneration.
3. TO VOTE FOR ( ) AGAINST ( ) the resolution approving the
proposed financing of between US$7,500,000 and US$20,000,000
through the issuance of a minimum of 1,250,000 units and a
maximum of 3,333,333 units.
4. TO VOTE FOR ( ) AGAINST ( ) the special resolution approving
the continuance of the Corporation from the jurisdiction of the
Province of Ontario into the jurisdiction of the Yukon Territory.
This Proxy revokes and supersedes all proxies of earlier date.
If any amendments or variations to matters identified in the
Notice of Meeting are proposed at the Meeting or if any other matters properly
come before the Meeting, this proxy confers discretionary authority to vote on
such amendments or variations or such other matters according to the best
judgment of the person voting the proxy at the Meeting.
DATED the day of , 1996.
Signature of Shareholder(s)
Print Name
(SEE NOTES ON BACK OF THIS PAGE)
0157477.01
<PAGE>
NOTES:
(1) This form of proxy must be dated and signed by the appointor or his
attorney authorized in writing or, if the appointer if a body
corporate, this form of proxy must be executed by an officer or
attorney thereof duly authorized. If the proxy is not dated, it will be
deemed to bear the date on which it was mailed.
(2) The shares represented by this proxy will be voted or withheld from
voting in accordance with the instructions of the shareholder on any
ballot that may be called for.
(3) A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND AND ACT FOR HIM ON HIS BEHALF AT THE MEETING
OTHER THAN THE PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY. SUCH
RIGHT MAY BE EXERCISED BY STRIKING OUT THE NAMES OF THE PERSONS
DESIGNATED IN THIS FORM OF PROXY AND BY INSERTING IN THE BLANK SPACE
PROVIDED FOR THAT PURPOSE THE NAME OF THE DESIRED PERSON OR BY
COMPLETING ANOTHER FORM OF PROXY AND, IN EITHER CASE, DELIVERING THE
COMPLETED AND EXECUTED PROXY TO THE CORPORATION AT ANY TIME UP TO AND
INCLUDING THE LAST BUSINESS DAY PRECEDING THE TIME OF THE MEETING OR
ANY ADJOURNMENT THEREOF.
(4) IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY, THE PERSONS
NAMED IN THIS FORM OF PROXY WILL VOTE FOR EACH OF THE MATTER
IDENTIFIED IN THIS PROXY.
(5) This proxy ceases to be valid one year from its date.
(6) If your address as shown is incorrect, please give your correct address
when returning this proxy.
0157477.01
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
8350 North Central Expressway
Suite M2030
Dallas, Texas 75206
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN THAT an Annual and Special Meeting of Shareholders of
COTTON VALLEY RESOURCES CORPORATION (the "Corporation") will be held at the
offices of the Corporation at 8350 North Central Expressway, Suite M2030,
Dallas, Texas 75206 on Tuesday, the 10th day of December, 1996 at the hour of
10:00 o'clock in the forenoon (Toronto time), for the following purposes:
(a) To receive the report to shareholders and financial statements for the year
ended June 30, 1996 together with the Report of the Auditors thereon;
(b) To elect five (5) directors for the ensuing year;
(c) To appoint auditors and authorize the directors to fix their remuneration;
(d) To consider and, if deemed advisable, to pass with or without variation, a
resolution to approve a financing of between US$7,500,000 and US$20,000,000
through the issuance of a minimum of 1,250,000 units and a maximum of
3,333,333 units, each unit to consist of 1 Series A Convertible Preferred
Share and 1 Redeemable Common Share Purchase Warrant. A copy of the
resolution concerning the proposed public financing is annexed as Schedule
"A" to the Information Circular;
(e) To consider and, if deemed advisable, to pass with or without variation a
special resolution authorizing the continuance of the Corporation from the
Business Corporations Act (Ontario) (the "OBCA") to the jurisdiction of the
Yukon Territory and authorizing the Corporation to apply to the Registrar
of Corporations of the Yukon Territory under the Business Corporation Act
(Yukon) (the "YBCA"), for Articles of Continuance, continuing the
Corporation as if it had been incorporated under the YBCA (the
"Continuance") in the form annexed as Schedule "B";
(f) To transact such other business as properly may be brought before the
Meeting or any adjournment or adjournments thereof,
all as described in the Management Information Circular accompanying this Notice
Take notice that pursuant to the OBCA shareholders have a right to dissent with
regard to the special resolution to continue the Corporation into the Yukon
Territory. Please see the information entitled "Dissent Rights" with regard to
the process in order to provide notice of dissent to the Corporation. As a
result of providing a notice of dissent according to the OBCA, the Corporation
will be required to purchase all your shares in respect of which the notice of
dissent was given, provided that the procedure contained in the OBCA is fully
completed.
0155912.01
<PAGE>
- 2 -
Shareholders who are unable to attend the Meeting in person are requested to
sign and return the enclosed form of proxy to the Corporation c/o Equity
Transfer Services Inc., 120 Adelaide Street West, Suite 800, Toronto, Ontario
M5H 3V1.
A copy of the Financial Statements, the Report of the Auditors and a Management
Information Circular accompany this Notice, all of which have been sent to each
director, each shareholder entitled to notice of the meeting and to the auditors
of the Corporation.
DATED at Toronto, Ontario this 5th day of November, 1996.
BY ORDER OF THE BOARD
EUGENE A. SOLTERO
Chief Executive Officer
NOTES:
1. As provided in the Business Corporations Act (Ontario), shareholders
registered on the books of the Corporation at the close of business on November
4, 1996 are entitled to notice of the meeting.
2. Shareholders registered on the books of the Corporation at the close of
business on November 4, 1996 are entitled to vote at the meeting.
3. The directors have fixed the hour of 4:00 p.m. in the afternoon on the last
business day preceding the day of the meeting or any adjournment thereof before
which time the instrument of proxy to be used at the meeting must be deposited
with the Corporation, c/o Equity Transfer Services Inc., 120 Adelaide Street
West, Suite 800, Toronto, Ontario M5H 3V1, provided that a proxy may be
delivered to the Chairman of the meeting on the day of the meeting or any
adjournment thereof prior to the time for voting.
0155912.01
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
8350 North Central Expressway
Suite M2030
Dallas, Texas 75206
MANAGEMENT INFORMATION CIRCULAR
1. SOLICITATION OF PROXIES
This Management Information Circular is furnished in connection with
the solicitation of proxies by the management of COTTON VALLEY
RESOURCES CORPORATION (the "Corporation") for use at the Annual and
Special Meeting of Shareholders of the Corporation (the "Meeting") to
be held at the time and place and for the purposes set forth in the
attached Notice of Annual and Special Meeting of Shareholders. It is
expected that the solicitation will be by mail primarily, but proxies
may also be solicited personally by officers or directors of the
Corporation. The cost of such solicitation will be borne by the
Corporation.
2. APPOINTMENT, REVOCATION AND DEPOSIT OF PROXIES
The persons named in the enclosed form of proxy are directors or
officers of the Corporation.
A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND AND ACT FOR HIM AND ON HIS BEHALF AT THE MEETING
OTHER THAN THE PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY. SUCH
RIGHT MAY BE EXERCISED BY STRIKING OUT THE NAMES OF THE PERSONS
DESIGNATED IN THE ENCLOSED FORM OF PROXY AND BY INSERTING IN THE BLANK
SPACE PROVIDED FOR THAT PURPOSE THE NAME OF THE DESIRED PERSON OR BY
COMPLETING ANOTHER PROPER FORM OF PROXY AND, IN EITHER CASE, DELIVERING
THE COMPLETED AND EXECUTED PROXY TO THE CORPORATION BEFORE THE TIME OF
THE MEETING OR ANY ADJOURNMENT THEREOF.
A shareholder forwarding the enclosed proxy may indicate the manner in
which the appointee is to vote with respect to any specific item by
checking the appropriate space. If the shareholder giving the proxy
wishes to confer a discretionary authority with respect to any item of
business then the space opposite the item is to be left blank. The
shares represented by the proxy submitted by a shareholder will be
voted in accordance with the directions, if any, given in the proxy.
A shareholder who has given a proxy may revoke it at any time in so far
as it has not been exercised. A proxy may be revoked, as to any matter
on which a vote shall not already have been cast pursuant to the
authority conferred by such proxy, by instrument in writing executed by
the shareholder or by his attorney authorized in writing or, if the
shareholder is
0157193.01
<PAGE>
- 2 -
a body corporate, by an officer or attorney thereof duly authorized,
and deposited either at the registered office of the Corporation at any
time up to and including the last business day preceding the day of the
Meeting, or any adjournment thereof, at which the proxy is to be used
or with the Chairman of such Meeting on the day of the Meeting or any
adjournment thereof, and upon either of such deposits the proxy is
revoked. A proxy may also be revoked in any other manner permitted by
law.
3. MANNER OF VOTING AND EXERCISE OF DISCRETION BY PROXIES
The persons named in the enclosed form of proxy will vote the common
shares in respect of which they are appointed in accordance with the
direction of the shareholders appointing them. In the absence of such
direction, such common shares will be voted for the election of
directors, for the appointment of the auditor, for the resolution
approving the proposed financing of between US$7,500,000 and
US$20,000,000 through the issuance of a minimum of 1,250,000 units and
a maximum of 3,333,333 units, and for the special resolution approving
the continuance of the Corporation from Ontario to the Yukon Territory,
all as described in this Circular. The enclosed form of proxy confers
discretionary authority upon the persons named therein with respect to
amendments or variations to matters identified in the Notice of
Meeting, and with respect to other matters which may properly come
before the Meeting. At the time of the printing of the Circular, the
management of the Corporation knows of no such amendments, variations
or other matters to come before the Meeting other than the matters
referred to in the Notice of Annual and Special Meeting of
Shareholders.
4. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The authorized capital of the Corporation consists of an unlimited
number of common shares (the "Common Shares") and an unlimited number
of preference shares. On November 4, 1996, an aggregate of 9,204,318
Common Shares and no preference shares were issued and outstanding.
Each Common Share entitles the holder thereof to one (1) vote at all
meetings of shareholders.
All shareholders of record at the time of the Meeting or any
adjournment thereof are entitled either to attend and vote thereat in
person the shares held by them, or provided a completed and executed
proxy shall have been delivered to the Corporation, to attend and vote
thereat by proxy the shares held by them.
As at November 4, 1996, the only persons or companies who, to the
knowledge of the directors and senior officers of the Corporation,
beneficially own, directly or indirectly, or exercise control or
direction over more than ten percent (10%) of the issued and
outstanding voting shares of the Corporation were as follows:
0157193.01
<PAGE>
- 3 -
NAME NUMBER OF TOTAL OF
COMMON SHARES COMMON SHARES
Royal Trust Corporation ................. 1,000,000 10.86%
Eugene A. Soltero ....................... 946,000(1)(2) 10.28%
James E. Hogue .......................... 961,000(2)(3) 10.44%
Notes:
(1) Includes 80,000 Common Shares held directly, 610,000 Common
Shares owned by the Soltero Family Limited Partnership and
256,000 Common Shares held by Mr. Soltero's wife.
(2) Mr. Soltero and Mr. Hogue also hold a Power of Attorney to
vote 3,481,732 Common Shares held by certain parties that
received Common Shares in exchange for the transfer to the
Corporation of their interests in respect of property in the
Movico Field of Mobile County, Alabama and in respect of
property in the Cheneyboro Field of Navarro County, Texas.
(3) Includes 80,000 Common Shares held directly, 640,000 Common
Shares owned by the Hogue Family Limited Partnership and
241,000 Common Shares held by Mr. Hogue's wife.
PARTICULARS OF MATTERS TO BE ACTED UPON
5. ELECTION OF DIRECTORS
The persons named in the enclosed form of proxy intend to vote for the
election of the nominees whose names are set forth below. The
shareholders are being asked to elect five (5) directors at this
Meeting. The management does not contemplate that any of the nominees
will be unable to serve as a director but if that should occur for any
reason prior to the Meeting, the persons named in the enclosed form of
proxy reserve the right to vote for another nominee in their
discretion. Each director elected will hold office until the close of
business on the day of the first annual meeting of shareholders of the
Corporation following his election unless his office is earlier vacated
in accordance with the Articles of the Corporation.
The following are the names of management's nominees for election as
directors of the Corporation together with their positions held with
the Corporation, municipalities of residence, principal occupations for
the past five years, and the number of shares beneficially owned or
over which control or direction is exercised:
0157193.01
<PAGE>
- 4 -
<TABLE>
<S> <C> <C> <C>
Name, Address Date Elected Shares
and Position Principal Occupation Director Held
Eugene A. Soltero Petroleum Executive December, 1995 946,000(2)(3)
Chairman of the Board and
Chief Executive Officer
Dallas, Texas
James E. Hogue Petroleum Executive July, 1996 961,000(3)(4)
President, Chief Operating
Officer, Director
Dallas, Texas
Richard J. Lachcik Lawyer February, 1995 Nil
Director
Oakville, Ontario
Wayne T. Egan Lawyer June, 1996 Nil
Director
Toronto, Ontario
Michael Kamis Petroleum Executive November, 1996 Nil
Director
Calgary, Alberta
</TABLE>
The shareholders are urged to elect Management's nominees as directors.
Notes:
(1) The audit committee will be composed of all the directors.
(2) Includes 80,000 Common Shares held directly, 610,000 Common
Shares owned by the Soltero Family Limited Partnership and
256,000 Common Shares held by Mr. Soltero's wife.
(3) Mr. Soltero and Mr. Hogue also hold a Power of Attorney to
vote 3,481,732 Common Shares held by certain parties that
received Common Shares in exchange for the transfer to the
Corporation of their interests in respect of property in the
Movico Field of Mobile County, Alabama and in respect of
property in the Cheneyboro Field of Navarro County, Texas.
(4) Includes 80,000 Common Shares held directly, 640,000 Common
Shares owned by the Hogue Family Limited Partnership and
241,000 Common Shares held by Mr. Hogue's wife.
6. STATEMENT OF EXECUTIVE COMPENSATION
A. Summary Compensation Table
The following table discloses compensation paid or awarded to
the Corporation's Chief Executive Officer and each of the
other executive officers for the last two financial years
since its inception.
0157193.01
<PAGE>
- 5 -
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Compensation Long-Term Compensation
Awards Payouts
Restricted
Securities Shares
Other Under or All
Name Annual Options/ Restricted Other
and Compen- SARs Share LTIP Compen-
Principal Year Salary Bonus sation Granted Units Payouts sation
Position (US$) (US$) (US$) (#) (US$) (US$) (US$)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Eugene A. 1996 115,000 - - 200,000 - - -
Soltero 1995 25,000 - - - - -
Chairman of
the Board,
Chief
Executive
Officer
- ---------------- --------------------- ----------------------------- ----------------- -------------- --------------
James E. 1996 115,000 - - 200,000 - - -
Hogue 1995 25,000 - - - - -
President,
Chief
Operating
Officer
- ---------------- --------------------- ----------------------------- ----------------- -------------- --------------
Peter Lucas 1996 101,500 - - 200,000 - - -
Senior Vice 1995 0 - - - - - -
President,
Chief
Financial
Officer
- ---------------- --------------------- ----------------------------- ----------------- -------------- --------------
C. Ronald 1996 22,000 - - 200,000 - - -
Burden 1995 0 - - - - - -
Senior Vice
President of
Exploration
================ ========= =========== ========= =================== ================= ============== ==============
</TABLE>
B. Long-Term Incentive Plan Awards (Period ended June 30, 1996)
The Corporation currently has no long-term incentive plans,
other than stock options granted from time to time by the
Board of Directors under the provisions of the Corporation's
stock option plan.
0157193.01
<PAGE>
- 6 -
C. Option/SAR Grants (Period ended June 30, 1996)
<TABLE>
<S> <C> <C> <C> <C> <C>
% of Total Market Value
Securities Options/ of Securities
Under SARs Underlying
Options/ Granted to Exercise Options/
SARs Employees or SARs on the
Granted in Financial Base Price Date of Grant Expiration
Name (#) Year ($/Security) ($/Security) Date
(a) (b) (c) (d) (e) (f)
- -------------------- ------------------- ------------------- ------------------ -------------------- -------------------
Eugene A. 200,000 25.0% 2.50 2.25 July 1, 2001
Soltero
- -------------------- ------------------- ------------------- ------------------ -------------------- -------------------
James E. 200,000 25.0% 2.50 2.25 July 1, 2001
Hogue
- -------------------- ------------------- ------------------- ------------------ -------------------- -------------------
Peter Lucas 200,000 25.0% 2.50 2.25 July 1, 2001
- -------------------- ------------------- ------------------- ------------------ -------------------- -------------------
C. Ronald 200,000 25.0% 2.50 2.25 July 1, 2001
Burden
==================== =================== =================== ================== ==================== ===================
</TABLE>
D. Aggregated Option/SAR Exercises (Period ended June 30, 1996) and
Financial Year-End Option/SAR Values
<TABLE>
<S> <C> <C> <C> <C>
Value of
Unexercised
Unexercised in-the-Money
Options/SARs Options/SARs
Securities Aggregate at FY-End at FY-End
Acquired on Value (#) ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
Eugene A. Soltero 0 0 200,000 0
- ------------------------- ---------------------- ----------------------- ----------------------- ----------------------
James E. Hogue 0 0 200,000 0
- ------------------------- ---------------------- ----------------------- ----------------------- ----------------------
Peter Lucas 0 0 200,000 0
C. Ronald Burden 0 0 200,000 0
========================= ====================== ======================= ======================= ======================
</TABLE>
E. Compensation of Directors
Directors who are not employees of the Corporation receive
$500 per meeting of the board and $500 per committee meeting
not held on the same date as a board meeting. Directors are
permitted to accept shares in lieu of cash. Employee directors
receive no extra compensation for service on the board.
0157193.01
<PAGE>
- 7 -
No directors were compensated by the Corporation during the
last financial year for services as consultants or experts,
other than $26,035.92 paid in legal fees to Weir & Foulds,
Toronto; Mr. Richard J. Lachcik and Mr. Wayne T. Egan,
directors of the Corporation, are partners in such firm.
F. Indebtedness of Directors and Senior Officers
None of the directors or senior officers of the Corporation or
their respective associates or affiliates is indebted to the
Corporation.
7. PUBLIC FINANCING
The Corporation has entered into an agreement with National Securities
Corp. (the "Underwriter") of Seattle, Washington to complete an
offering on a firm commitment basis of a minimum of 1,250,000 units and
a maximum of 3,333,333 units. Under the terms of the agreement with the
Underwriter, the Corporation proposes to raise between US$7,500,000 and
US$20,000,000 through the issuance of a minimum of 1,250,000 units and
a maximum of 3,333,333 units (the "Units"), each Unit consisting of 1
series A convertible preferred share (the "Preferred Shares") and 1
redeemable Common Share purchase warrant (the "Warrants"). The
Preferred Shares and Warrants may not be traded separately until April
6, 1997, unless separated earlier upon three days' prior written notice
to the Corporation from the Underwriter. Each Preferred Share is
convertible into two Common Shares of the Corporation. Each Warrant is
exercisable after the date on which the Preferred Shares and Warrants
become tradeable separately, until December 31, 1998, at a price of
US$3.00 per share (subject to adjustment) to acquire one Common Share
of the Corporation. After April 6, 1997 the Corporation may call for
the redemption of the Warrants at any time on 30 days' prior written
notice to warrant holders at a redemption price of US$0.01 per Warrant
provided that the closing price or the closing bid quotation of the
Common Shares is at least US$4.50 per share for ten consecutive trading
days.
The share provisions attaching to the Preferred Shares are as follows:
(a) the Preferred Shares may be issued for such consideration as the
directors from time to time may determine;
(b) the holders of Preferred Shares are entitled to receive notice
of, and to 2 votes for each Preferred Share held at all
meetings of the shareholders of the Corporation, and to vote
as a class at any meeting at which, pursuant to the corporate
laws of the jurisdiction to which the Corporation is subject,
the holders of Preferred Shares are entitled to vote as a
class;
(c) the holders of Preferred Shares are entitled to receive
dividends at the rate of 8% per annum, payable in cash or in
Common Shares. The dividends will be paid annually, within
sixty (60) days after the close of each fiscal year ending
June 30. If the
0157193.01
<PAGE>
- 8 -
dividend is paid in Common Shares, the price of such shares
shall be the average closing price for the Common Shares
publicly traded during the twenty (20) trading days ended on
the last day of the fiscal year;
(d) the holders of Preferred Shares shall have first equity
preference as a class, limited in amount to US$6.00 per
Preferred Share in the assets of the Corporation legally
available for distribution in the event of a liquidation,
dissolution or winding up of the Corporation; and
(e) each Preferred Share may be converted by the holder at any
time into Common Shares of the Corporation, on the basis of 2
Common Shares for each Preferred Share held by the holder.
Each Preferred Share shall automatically convert into two
Common Shares of the Corporation immediately upon the
occurrence of the first of the following events:
(i) the closing price for the Common Shares of the
Corporation in any public market meets or exceeds
US$4.00 per share for twenty (20) consecutive trading
days;
(ii) the Corporation's auditors release audited financial
statements according to U.S. Generally Accepted
Accounting Principles ("GAAP") that show the
Corporation has a net income for the previous twelve
(12) month (or shorter) period exceeding US$2,000,000;
(iii)the Corporation's auditors release annual financial
statements according to Canadian GAAP that shows the
Corporation has a net income for the previous twelve
(12) months (or shorter) period exceeding $2,600,000;
or
(iv) December 31, 2002.
PROXIES RECEIVED IN FAVOUR OF MANAGEMENT WILL BE VOTED FOR THE
RESOLUTION APPROVING THE PROPOSED PUBLIC FINANCING, UNLESS A
SHAREHOLDER HAS SPECIFIED IN THE PROXY THAT HIS SHARES ARE TO BE VOTED
AGAINST SUCH RESOLUTION. An affirmative of at least a majority of the
votes cast at the Meeting will be required to approve the proposed
resolution. A copy of the proposed resolution for the public financing
is annexed to this Information Circular as Schedule "A".
8. SPECIAL RESOLUTION - CONTINUATION INTO THE YUKON TERRITORY
The Corporation is seeking shareholder approval for the continuance of
the Corporation into the Yukon Territory. The Corporation is proposing
to continue into the Yukon Territory because under Yukon law it will
not be subject to Canadian residency requirements for a majority of
directors and to pursue potential opportunities to amalgamate or merge
with
0157193.01
<PAGE>
- 9 -
companies in the same industry. As a company with all of its assets and
properties in the United States, it is difficult to maintain the
required Canadian resident directors. The freedom to access directors,
whether Canadian residents or not, is attractive to the Corporation. If
the shareholders of the Corporation approve the continuance into the
Yukon Territory, the Corporation will file Articles of Continuance with
the Registrar under the Business Corporations Act (Yukon) (the "YBCA")
and, upon approval of the Articles of Continuance and issuance by the
Registrar under the YBCA of a Certificate of Continuance, the
Corporation will thereafter be continued as a Yukon corporation.
If the continuance is approved, the Articles of Continuance will be
adopted to replace the existing Articles of the Corporation (the
equivalent of a Certificate of Incorporation and Bylaws) and will
constitute the governing instruments of the continued company under
Yukon law. The existing Articles of the Corporation will be adopted and
continued into the Yukon Territory, except to the extent that they may
conflict with Yukon law.
It is contemplated that if a continuance is approved, it will become
effective on the day of the Meeting or any adjournment thereof.
PROXIES RECEIVED IN FAVOUR OF MANAGEMENT WILL BE VOTED FOR THE
APPROVAL OF THE PROPOSED SPECIAL RESOLUTION TO CONTINUE INTO THE YUKON
TERRITORY, UNLESS A SHAREHOLDER HAS SPECIFIED IN THE PROXY THAT HIS
SHARES ARE TO BE VOTED AGAINST SUCH SPECIAL RESOLUTION. The proposed
continuation requires approval by a special resolution which is
defined as a resolution of the shareholders confirmed by at least
two-thirds (2/3) of the votes cast at a special meeting called for
such purpose. An affirmative vote of at least two-thirds (2/3) of the
votes cast at the Meeting will accordingly be required to approve the
proposed special resolution. A copy of the proposed special resolution
approving the continuation into the Yukon Territory is annexed to this
Information Circular as Schedule "B".
The directors of the Corporation may, notwithstanding requisite
shareholder approval, abandon the application for continuance without
further approval of the shareholders, all as provided under the OBCA.
In making such determination, the directors in their discretion, will
determine whether it is in the best interests of the Corporation to
proceed with the continuance, after considering all relevant factors at
the particular time, whether or not foreseen at this date.
Pursuant to the OBCA, a holder of Common Shares is entitled to dissent
and be paid the fair value of such Common Shares if the shareholder
objects to the special resolution attached hereto as Schedule "B". A
management summary of the shareholders dissent rights is set forth
below under Section 9 - "Dissent Rights".
0157193.01
<PAGE>
- 10 -
9. DISSENT RIGHTS
Pursuant to the OBCA, a holder of Common Shares of the Corporation who
objects to the special resolution in respect of continuing the
Corporation into the Yukon Territory (the "Special Resolution") is
entitled, to dissent and be paid the fair value of his or her Common
Shares. A shareholder may dissent only with respect to all of the
shares of the class held by the shareholder on behalf of any one
beneficial owner and registered in the shareholder's name. Accordingly,
in respect of the Special Resolution, a shareholder is not entitled to
dissent with respect to any shares of one class beneficially owned by
one owner if the shareholder votes any of such shares in favour of the
particular matter.
In order to dissent, a shareholder must send to the Corporation at or
before the Meeting a written objection (an "Objection Notice") to the
Special Resolution. A vote against the Special Resolution or an
abstention does not constitute such a written objection, but the
shareholder need not vote his shares against the Special Resolution in
order to object. Within ten (10) days after the approval of the Special
Resolution, the Corporation must send to each shareholder who has filed
an Objection Notice a notice stating that the Special Resolution has
been adopted (the "Corporation Notice"). A Corporation Notice is not
required to be sent to any shareholder who voted for the Special
Resolution or who has withdrawn his Objection Notice.
Within twenty (20) days after receipt of the Corporation Notice or, if
no Corporation Notice is received by the dissenting shareholder within
twenty (20) days after the shareholder learns that the Special
Resolution has been adopted, the dissenting shareholder is required to
send a written notice to the Corporation containing the shareholder's
name and address, the number and class of shares held by him in respect
of which he dissents and a demand for payment of the fair value of such
shares (the "Demand for Payment"). Within thirty (30) days thereafter,
the dissenting shareholder must send the share certificates
representing such shares to the Corporation. Such share certificates
will be endorsed by the Corporation with a notice that the holder is a
dissenting shareholder and will be returned to the dissenting
shareholder. A dissenting shareholder who fails to forward his Demand
for Payment and share certificates within the time required loses any
right to make a claim for payment of the fair value of his shares.
On sending the Demand for Payment to the Corporation, a dissenting
shareholder ceases to have any right as a shareholder in respect of the
shares in respect of which the shareholder dissents except the right to
be paid the fair value of his shares unless the dissenting shareholder
withdraws the Demand for Payment before the Corporation sends an Offer
to Purchase as described below.
Not later than seven (7) days after the later of the date on which the
action approved by the Special Resolution is effective or the date the
Corporation receives the Demand for Payment, the Corporation will send
to each dissenting shareholder a written offer (the "Offer to
Purchase") to pay for the shares in an amount considered by the
directors of the Corporation to be the fair value thereof, accompanied
by a statement showing how the fair value was determined. Every Offer
to Purchase shall be on the same terms.
0157193.01
<PAGE>
- 11 -
Dissenting shareholders who accept the Offer to Purchase will be paid
within ten (10) days after the Corporation receives notice of such
acceptance. The Offer to Purchase lapses if the Corporation does not
receive an acceptance within thirty (30) days after the date on which
the Offer to Purchase was made.
If the Corporation fails to make the Offer to Purchase, or the
dissenting shareholder fails to accept the Offer to Purchase, the
Corporation may, within fifty (50) days after the action approved by
the Special Resolution is effective or within such further period as a
court may allow, apply to a court to fix a fair value for the shares.
If the Corporation fails to make such an application, the dissenting
shareholder has the right to apply for the same purpose within a
further period of twenty (20) days or within such further period as the
court may allow. All the dissenting shareholders who have sent to the
Corporation the Demand for Payment and have not accepted the Offer to
Purchase, if such an offer was made, will be joined as parties to the
application and will be bound by the decision of the court. The court
may determine whether any person is a dissenting shareholder who should
be joined as a party, and the court will fix a fair value for the
shares of all dissenting shareholders.
A shareholder who complies with each of the steps required to dissent
effectively is entitled, for the particular Special Resolution in
respect of which the shareholder dissents and which Special Resolution
becomes effective, to be paid by the Corporation the fair value of the
shares in respect of which that shareholder dissents determined as of
the close of business on the day before the particular Special
Resolution is adopted.
Notwithstanding the foregoing summary, it is strongly suggested that a
shareholder obtain legal advice if he or she wishes to invoke his or
her right of dissent. Failure to comply strictly with the procedure set
out in the OBCA would result in prejudice to that right of dissent.
10. APPOINTMENT OF AUDITORS
The shareholders of the Corporation are being asked at the meeting to
confirm the appointment of Coopers & Lybrand, Chartered Accountants, as
auditors for the year ending June 30, 1997 and to authorize the
directors to fix the remuneration paid to the auditors. Subject to the
foregoing, unless such authority is withheld, the persons named in the
enclosed Proxy intend to vote for the appointment of Coopers & Lybrand
as auditors for the Corporation to hold office until the next annual
meeting of shareholders and to authorize the directors to fix the
remuneration of the auditors.
11. FINANCIAL STATEMENTS
Attached hereto are the Consolidated Financial Statements of the
Corporation for the year ended June 30, 1996.
0157193.01
<PAGE>
- 12 -
12. GENERAL
Except as otherwise indicated, information contained herein is given as
of November 5, 1996. Management knows of no other matters to come
before the Meeting of Shareholders. However, if any other matters which
are not now known to Management should come properly before the
Meeting, the proxy will be voted on such matters in accordance with the
best knowledge of the person voting it.
13. DIRECTORS APPROVAL
The contents and the sending of this Management Information Circular to
shareholders of the Corporation have been approved by the Board of
Directors of the Corporation.
DATED at Dallas, Texas this 5th day of November, 1996.
BY ORDER OF THE BOARD
EUGENE A. SOLTERO
Chief Executive Officer
0157193.01
<PAGE>
- 13 -
SCHEDULE "A"
RESOLUTION RE PUBLIC FINANCING
WHEREAS the Corporation has entered into an agreement with
National Securities Corp. of Seattle, Washington to complete an offering on a
firm commitment basis of a minimum of 1,250,000 units and a maximum of 3,333,333
units (the "Units"), each Unit comprised of 1 series A convertible preferred
share (the ("Preferred Shares") and 1 redeemable Common Share purchase warrant
(the "Warrants");
AND WHEREAS the Preferred Shares and Warrants may not be
traded separately until April 6, 1997, unless separated earlier upon three days'
prior written notice to the Corporation from National Securities Corp.
AND WHEREAS each Preferred Share is convertible into two
Common Shares of the Corporation and each Warrant is exercisable after the date
on which the Preferred Shares and Warrants become tradeable separately until
December 31, 1998, at a price of U.S.$3.00 per share (subject to adjustment) to
acquire 1 Common Share, provided that at any time after April 6, 1997 the
Corporation may call for the redemption of the Warrants on 30 days' prior
written notice to Warrant holders at a redemption price of U.S.$0.01 per
Warrant, provided that the closing price on the closing bid quotation of the
Common Shares is at least U.S.$4.50 per share for 10 consecutive trading days.
NOW THEREFORE BE IT RESOLVED THAT:
1. The Corporation be and it is hereby authorized to enter into an agreement
with National Securities Corp., providing for the offering of a minimum of
1,250,000 Units and a maximum of 3,333,333 Units in the capital of the
Corporation on a firm commitment basis; and
2. Any director or officer of the Corporation be and is hereby authorized on
behalf of the Corporation to execute all documents and do all this necessary or
advisable in connection with the foregoing.
0157193.01
<PAGE>
- 14 -
SCHEDULE "B"
SPECIAL RESOLUTION RE CONTINUANCE
WHEREAS the Corporation considers it advisable to continue the Corporation into
the Yukon Territory;
NOW THEREFORE BE IT RESOLVED AS A SPECIAL RESOLUTION
THAT:
1. The Corporation is hereby authorized to discontinue under the provisions of
the Business Corporations Act (Ontario);
2. The continuance of the Corporation from the jurisdiction of Ontario under the
Business Corporations Act (Ontario) to the Yukon Territory under the Business
Corporations Act (Yukon) be and the same is hereby authorized and approved; and
3. Any director or officer of the Corporation be and they are hereby authorized
on behalf of the Corporation to apply for a certificate of discontinuance with
the Ministry of Consumer and Commercial Relations in order to continue the
Corporation out of Ontario and into the Yukon Territory, to file Articles of
Continuance with the Registrar of the Yukon substantially in the form of the
present Articles of the Corporation except to the extent they may conflict with
Yukon law, and to execute all documents and do all things necessary or advisable
in connection with the foregoing; provided however that the directors of the
Corporation are hereby authorized to revoke or amend the foregoing special
resolution in whole or in part without further approval of the shareholders of
the Corporation at any time prior to the endorsement by the Director under the
Business Corporations Act (Ontario) approving the application for continuance.
0157193.01
<PAGE>
Exhibit 21
List of Subsidiaries
Cotton Valley Energy Corporation (Nevada)
Cotton Valley Operating Company (Texas)
CV Trading Company (Nevada)
Each subsidiary is wholly owned.
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Registration Statement and Prospectus of Cotton
Valley Resources Corporation of our report dates November 1, 1996, accompanying
the consolidated financial statements of Cotton Valley Resources Corporation
contained in such Registration Statement, and to the use of our name and the
statements with respect to us, as appearing under the heading "Experts" in the
Prospectus.
Hein & Associates LLP
Certified Public Accountants
November 21, 1996
Dallas, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023947
<NAME> COTTON VALLEY RESOURCES CORP.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS.
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 803,070 222,210
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 803,070 222,210
<PP&E> 11,177,944 11,398,405
<DEPRECIATION> 1,684 4,470
<TOTAL-ASSETS> 11,979,330 11,616,145
<CURRENT-LIABILITIES> 516,689 443,168
<BONDS> 0 0
0 0
0 0
<COMMON> 9,443,160 9,454,382
<OTHER-SE> (478,277) (684,163)
<TOTAL-LIABILITY-AND-EQUITY> 11,979,330 11,616,145
<SALES> 5,386 19,484
<TOTAL-REVENUES> 5,386 19,484
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 529,776 302,788
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 138,970 17,581
<INCOME-PRETAX> (663,360) (320,369)
<INCOME-TAX> 235,000 95,000
<INCOME-CONTINUING> (428,360) (205,885)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (428,360) (205,885)
<EPS-PRIMARY> (0.05) (0.02)
<EPS-DILUTED> (0.05) (0.02)
</TABLE>
