As filed with the Securities and Exchange Commission on February 3, 1997
Registration No. 333-16893
- - -------------------------------------------------------------------------------
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<S> <C> <C>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM SB-2/A
AMENDMENT No. 2
Registration Statement
Under
The Securities Act of 1933
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer in Its Charter)
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
------------------------------
</TABLE>
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 Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered(1) Offering Price per Unit(1) Aggregate Offering Price(1) Registration Fee
- - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Units for public sale(2) 1,437,000(3) $6.20(3) $ 8,912,500(3) $1,782.50(3)
- - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Common Stock, no par value(4) 2,875,000 - - -
- - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Redeemable Common Stock
Purchase Warrants(5) 3,125,000(6) $3.75(6) $11,718,750(6) $2,343.75(6)
- - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Units subject to Underwriters'
Warrants(7) 125,000 $7.44 $ 930,000 $ 186.00
- - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Common stock, no par value(8) 6,250,000 - - -
- - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Total - - $21,561,250 $4,312.25
================================ ================= ========================================================= ==================
</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 Common Stock and the Redeemable Common Stock Purchase Warrants
for which no additional consideration will be received.
(4) Represents 2,875,000 shares underlying Units proposed for sale to the
public and subject to the Underwriters' over-allotment option and 250,000
shares underlying Units subject to Underwriters' warrants.
(5) Includes 2,875,000 warrants underlying Units proposed for sale to the
public and subject to the Underwriters' over-allotment option and 250,000
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) Represents 125,000 Units that the Underwriters have the right to acquire
upon exercise of Underwriters' Warrants.
(8) Includes 3,125,000 shares included in the Units for which no separate fee
is required pursuant to Rule 457(I); and 3,125,000 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)
<TABLE>
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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.
Subject to Completion, Dated ______________, 1997 COTTON VALLEY RESOURCES
CORPORATION 1,250,000 Units Consisting of 2,500,000 Shares of Common Stock,
Without Par Value, and 2,500,000 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 $6.20 per Unit. Each Unit consists of two shares of Common
Stock ("Common Stock") and two Redeemable Common Stock Purchase Warrants
("Warrants"). Cotton Valley intends to apply for listing of the Units, Common
Stock, and Warrants (collectively, the "Securities") on the ___________ Stock
Exchange under the symbols ___, ___, ___ and ___, respectively. The Common 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 Warrant represents the right to purchase one share of common stock
for $____ (subject to adjustment) at any time after the Common 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"and on NASD's bulletin board under the symbol
"CTVYF".
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.
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Price to Public Underwriting Discount (1) Proceeds to Cotton Valley (2)
- - -------------------- ----------------------------------------- --------------------------------- -------------------------------
Per Unit $ $ $
- - -------------------- ----------------------------------------- --------------------------------- ------------------------------
Total (3) $ $ $
==================== ========================================= ================================= ==============================
</TABLE>
(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 _____________ 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 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.
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, NW, 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, NW, Washington, DC 20549.
Cotton Valley is currently a foreign private issuer as defined under the
Securities Exchange Act. Upon filing a registration statement on Form SB-2,
Cotton Valley entered the reporting system for small business issuers.
Consequently, Cotton Valley files periodic reports, proxy statements and other
information with the SEC under the small business disclosure system. 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.
Cotton Valley recently acquired an interest in the Alden Field of Oklahoma. 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 during
1997. 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. Since Cotton Valley's principal offices, management and properties
are located in the United States, Cotton Valley believes it is advantageous to
have a majority of US directors. Cotton Valley may in the future continue from
the Yukon Territory to the State of Wyoming. Management believes there are no
significant differences in corporate law concerning material shareholder rights
between the Province of Ontario, Yukon Territory and the State of Wyoming.
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 horizontal wells on its Texas
acreage within 24 months after this offering. 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", "--Sword Unit," and "--Alden
Field."
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
<TABLE>
<S> <C>
Securities offered by Cotton Valley ........... 1,250,000 Units, each Unit consisting of two shares of
Common Stock and two Warrants. See "Description of
Securities."
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)
Warrants to be outstanding after this offering 2,500,000 Warrants (1)
Common stock to be outstanding after this
offering ...................................... 12,904,901 shares (2)
Use of Proceeds ............................... For development drilling, to acquire acreage, to reduce debt
and for working capital. See "Use of Proceeds."
__________ Stock Exchange Symbols(3):
Units ...................................... ______
Warrants ................................... ______
Common stock ............................... ______
- - ---------------------
</TABLE>
(1) Excludes Securities underlying the Underwriters' Warrants and the
Underwriters' over-allotment option. See "Underwriting."
(2) Excludes 2,500,000 shares issuable upon exercise of the Warrants underlying
Units offered by this prospectus, 750,000 shares underlying the
Underwriters' over-allotment option, 250,000 shares underlying the
Underwriters' Warrants, 980,000 shares subject to employee stock options,
1,999,220 shares subject to options and warrants issued in Canadian
financings, and 1,990,000 shares to be issued pursuant to a financial
consulting agreement. See "Principal Shareholders- Liviakis",
"Underwriting--Underwriters' Warrants" and "Description of
Securities--Other Options and Warrants."
(3) Cotton Valley intends to apply for listing of the Securities on the
_________ Stock Exchange. 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
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From February 15, 1995 (Unaudited)
For the year ended (inception) Six months ended
Statement of operations data: June 30,1996 to June 30, 1995 December 31, 1996
----------------- ------------------- ---------------
Net loss $712,360 $49,917 $602,116
Net loss per common share $0.06 - $0.05
Weighted average shares outstanding 11,403,000 10,655,000 13,390,524
</TABLE>
(Unaudited)
(Unaudited) December 31, 1996
Balance sheet data: June 30,1996 December 31, 1996 Adjusted(1)
------------ -------------- ------------
Total assets $11,979,330 $12,115,820 $17,694,771
Long-term obligations 757,758 171,709 171,709
Working capital 286,381 (1,078,321) 5,316,679
Shareholders' equity $9,116,883 $9,332,885 $15,727,885
----------------
(1) Adjusted to reflect the sale of 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."
TO CALIFORNIA RESIDENTS ONLY:
California residents can only purchase the Securities if they have a
minimum gross income of $65,000 during the last tax year and have (based on a
good faith estimate) a minimum gross income of $65,000 during the current tax
year and have a net worth (at fair market value but excluding home equity, home
furnishings and automobile) of $100,000, or have a net worth of $250,000.
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 $712,360 for the fiscal year
ended June 30, 1996, and $49,917 from inception to June 30, 1995. The
accumulated deficit as of June 30, 1996 was $762,277. The Company incurred an
operating loss of $602,116 (unaudited) for the six month period ended December
31, 1996. 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." California Option
The Company has an option to acquire a 51.8% working interest in an oil field
offshore California. In addition to geophysical, environmental, and regulatory
factors, management perceives that an anti-drilling sentiment exists in
California. This may make it difficult for the Company to sell part of its
option as it intends or to obtain financing to participate in the project. The
Company has recorded the option at $438,247, and it is possible that the Company
may have to record an impairment of this value at some time in the future. See
"Description of Property-Sword Unit"
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 December 1996, prices were $23.37
per Bbl and $3.43 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.
6
<PAGE>
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.
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
7
<PAGE>
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.
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."
Limited Public Market and Possible Volatility of Securities
Prior to this offering, Cotton Valley's common shares have traded
"over-the-counter" on NASD's bulletin board. 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.
The Company intends to apply to have its common stock and Warrants listed on the
American Stock Exchange, effective upon the completion of the initial public
offering. The Company has not currently applied to have its securities listed.
The Company does not meet the general listing requirements for the American
Stock Exchange. Furthermore, the Company does not meet the following alternate
numerical criteria for listing on the American Exchange:
-the market value of public float is not $15,000,000 -the price per share
of common stock is less than $3.00, and -the Company does not have a three
year history of operations.
In addition to numerical criteria, the American Stock Exchange considers other
factors, such as the nature and scope of a company's operations, a company's
financial condition and accounting practices, the composition of a company's
assets including its reserves, the experience and reputation of a company and
its management, the nature and effect of governmental policies on a company's
properties, and the extent of competition and economic conditions within a
particular industry.
There is no assurance the Company will meet or receive an exemption from these
requirements.
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."
8
<PAGE>
Securities Eligible for Future Sale
Upon completion of this offering, 1,250,000 Units, consisting of 2,500,000
shares of Common Stock and 2,500,000 Warrants, and 10,404,901 shares of common
stock will be outstanding. The Units will be eligible for sale without
restriction immediately after completion of the offering. 9,204,318 shares of
common stock were registered on Form 20-F are 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 10,404,901 shares of common stock are eligible for sale
(subject to 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-- Warrants".
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. Any future preferred stock issuances
could have the effect of, among other things, restricting common stock
dividends,
9
<PAGE>
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.
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."
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 $6.20 per Unit are
estimated to be approximately $6,395,000 after deducting estimated underwriting
discounts and offering expenses ($7,412,000 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 December 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 $579,000 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, as reflected in the audited financial statements, the
capitalization of Cotton Valley as of December 31, 1996 as reflected in the
unaudited financial statements, the pro forma capitalization of Cotton Valley as
of December 31, 1996 giving effect to the sale of 1,250,000 Units at $6.20 per
Unit in this offering and application of the estimated net proceeds as described
in this
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<PAGE>
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.
<TABLE>
<S> <C> <C> <C>
(Unaudited) (Unaudited)
June 30, 1996 December 31, 1996 December 31, 1996
Actual Actual As Adjusted
------------- ----------------- -----------------
Total debt, including current maturities:
Accounts payable on oil and gas interests(1) ....... $ 230,000 $ 230,000 $ --
Notes payable on oil and gas interests(2) .......... $ 586,049 $ 586,049 $ --
Advances from related parties(3) ................... $ 171,709 $ 171,709 $ 171,709
------------
$ 987,758 $ 987,758 $ 171,709
------------ ------------
Shareholders' equity:
Common stock without par value, unlimited
shares authorized, ............................... 9,191,596
shares outstanding on June 30, 1996,
10,404,901 outstanding on December
31, 1996 and 12,904,901 on December 31, 1996 as
adjusted(4) ................................... $ 9,879,160 $ 10,697,279 $ 17,092,279
Accumulated deficit ................................ (762,277) (1,364,394) (1,364,394)
Total shareholders' equity ............................. $ 9,116,883 $ 9,332,885 $ 15,727,885
------------ ------------ ------------
Total capitalization ............................... $ 10,104,641 $ 10,320,643 $ 16,674,594
============ ============ ============
</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 2,500,000 shares issuable upon exercise of the Warrants underlying
Units offered by this prospectus, 750,000 shares underlying the
Underwriters' over-allotment option, 250,000 shares underlying the
Underwriters' Warrants, 980,000 shares subject to employee stock options,
1,999,220 shares subject to options and warrants issued in Canadian
financings, and 1,990,000 shares to be issued pursuant to a financial
consulting agreement. See "Principal Shareholders--Liviakis",
"Underwriting--Underwriters' Warrants" and "Description of
Securities--Other Options and Warrants."
DILUTION
As of December 31, 1996, Cotton Valley's unaudited net tangible book value
was $9,332,885 or $0.90 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 2,500,000 shares of Common Stock and 2,500,000 Warrants) at an
offering price per Unit of $6.20, or $3.10 per share of Common 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) Cotton Valley's net tangible book value as of December 31,
1996 would increase from $9,332,885 to $15,727,885, and the net tangible book
value per share would increase from $0.90 to $1.22. This represents an immediate
increase in net tangible book value of $0.32 per share to current shareholders,
and immediate dilution of $1.88 per share to new investors or 61%, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share of common stock $3.10
Net tangible book value per share before this offering................ $0.90
Increase per share attributable to new investors...................... $0.32
Adjusted net tangible book value per share after this offering............. $1.22
Dilution per share to new investors........................................ $1.88
Percentage dilution........................................................ 61%
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Shares Purchased Total Consideration
Number Percent Amount Percent Average
per Share
Current Common Stockholders 10,404,901 80.6% $11,627,664 60.0% $1.12
New Investors 2,500,000 19.4% 7,750,000 40.0% $3.10
12,904,901 100.0% $19,377,664 100.0%
========== ===== ============ ======
</TABLE>
DIVIDEND POLICY
Cotton Valley has never paid dividends on its common stock and does not
plan to pay 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 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 Six Months Fiscal 1997 and First Six Months Fiscal 1996
During the six months ended December 31, 1996, Cotton Valley incurred a
net loss of $602,116. From February 15, 1995 (inception), to December 31, 1996,
Cotton Valley accumulated a deficit of $1,364,394.
The loss of $602,116 for the first six months of 1997 compares to a loss
of $426,203 during the first six months of 1996. There was greater business
activity during the first six months of fiscal 1997 and during this period
Cotton Valley issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. for services. The stock was valued at $.73 per share, based
on trading on the Canadian over-the-counter market, for a total expense of
$292,000.
During the first six months of fiscal 1996, Cotton Valley issued 300,000
shares for services which was recorded at $446,950. Other expenses during this
period were $209,253. The loss before income tax benefit of $230,000 was
$656,203.
Rehabilitation work on two wells in the Cheneyboro Field in the fourth
quarter of fiscal 1996 resulted in oil and gas sales of $41,365 during the first
six months of 1997.
Cotton Valley acquired its interest in the Alden Field in December 1996
for $390,000 of which $35,000 was paid and $355,000 is payable upon closing
which is expected to be in February or March 1997.
During the six months ended December 31, 1996, Cotton Valley issued 36,888
shares of common stock to individuals for services which was recorded at
$30,932, issued 73,750 shares of common stock to settle debts which was recorded
at $53,838, issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. (See "Principal Shareholders--Liviakis") which was recorded
at $292,000, issued 302,667 shares of common stock to former Arjon shareholders
on exercise of warrants for $145,524, issued 300,000 shares of common stock in
Canadian private placements for proceeds of $235,425 (before deducting costs of
$14,600), and issued 100,000 shares of common stock to Liviakis Financial
Services, Inc. for cash of $75,000.
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<PAGE>
Fiscal Year 1996 and Fiscal Period 1995
From February 15, 1995 (inception), to June 30, 1996, Cotton Valley
accumulated a deficit of $762,277 after an income tax benefit of $412,000.
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 17% 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 22% 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 also acquired a one-quarter interest in 1,145 acres of oil
and gas leases in the Movico Field of Mobile County, Alabama. It issued 623,424
Common Shares, granted 77,928 Class A Warrants and agreed to pay $230,000 as
consideration.
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 Minerals Management Service of the Department of Interior
("MMS") Suspension of Operations Order ("SOO") 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 SOO 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
SOO would not be terminated until after the COOGER study is completed.
Completion of the COOGER study is scheduled for the fourth quarter of 1997, but
it appears to be behind schedule. On November 5, 1996 the MMS extended its SOO
until December 31, 1998. 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.
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.
Cotton Valley intended to have its shares of Common Stock listed on The
Toronto Stock Exchange and therefore acquired Arjon Enterprises Inc.,which was a
Canadian public company. In the future, Cotton Valley intends to re-apply for
listing on The Toronto Stock Exchange. There is however, no assurance that
Cotton Valley will be successful.
13
<PAGE>
During the year ended June 30, 1996, Cotton Valley issued 1,272,500 shares
of Common Stock in Canadian private placements for cash of $2,089,872 and issued
288,529 shares of Common Stock upon conversion of debentures sold in Canada for
$426,474. Share issuance costs associated with these transactions amounted to
$915,785; the net amount was $1,174,087.
Cotton Valley has not sold any working interests in its properties at this
time.
12-Month Operating Plan
As of December 31, 1996, Cotton Valley had a working capital deficiency of
$1,078,321, calculated by subtracting accounts payable of $732,177 and the
current portion of long-term debt of $586,049 from cash of $239,905. 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 does not intend to significantly increase the number of
employees during the 12 months following the offering.
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 the end of 1998 at the earliest. See "Management's Discussion and
Analysis or Plan of Operation--Fiscal Year 1996 and Fiscal Period 1995."
Liquidity and Capital Resources
As of December 31, 1996, Cotton Valley had a working capital deficiency of
$1,078,321 calculated by subtracting accounts payable of $732,177 and the
current portion of long-term debt of $586,049 from cash of $239,905. Included in
accounts payable is $230,000 representing an unpaid part of the purchase price
of the Movico Filed which is not due until others who hold an interest in the
property decide to commence drilling. The current portion of long-term debt is
described in the following paragraph.
Cotton Valley has promissory notes payable totaling $586,049 for the
unpaid purchase price of the Cheneyboro oil and gas properties. The notes are
collateralized by the properties and are due July 17,1997. Interest is payable
quarterly at 12%. Management believes the notes will be extended if Cotton
Valley is unsuccessful in its initial public offering.
During the first six months of fiscal 1997, Cotton Valley purchased oil
and gas interests in the Alden Field, Caddo County, Oklahoma for $390,000.
Cotton Valley paid $35,000 and $355,000 is due on closing which is expected to
happen during the third quarter of fiscal 1997.
In the first part of 1995, Cotton Valley investigated raising
approximately $4,000,000 by way of equity financing. Advisors to Cotton Valley
suggested this amount was too small for US equity markets and further suggested
that the funds be raised in Canada.
14
<PAGE>
Cotton Valley arranged with Majendie Securities Ltd., a Canadian
investment banker, to raise approximately $4,000,000 in the Canadian market by
way of a private placement of Cotton Valley's securities. An agreement was made
to merge Cotton Valley with Arjon Enterprises Inc., a Canadian public company,
so that after the merger Cotton Valley's securities could trade in Canada,
providing private placement investors with liquidity. Cotton Valley also applied
to have its shares listed on The Toronto Stock Exchange. Cotton Valley intended
to use the $4,000,000 to reduce debt on its properties and to provide funds to
drill wells in the Cheneyboro Field. Future drilling would have been funded from
operations.
The private placement, which occurred during April through June 1996,
raised only $2,089,872. This amount was insufficient to qualify for a Toronto
Stock Exchange listing or to commence exploitation of Cotton Valley's
properties.
Cotton Valley will require additional cash between the date this
Registration Statement is filed and the date net proceeds of its offering are
received. Management is currently taking the following steps:
- - - it has encouraged warrant holders to exercise warrants,
- - - it is actively seeking participation from other oil and gas companies to
fund part of the Cheneyboro Field development,
- - - it is in negotiation with three parties for debt financing, in the nature
of a "bridge loan" to be repaid with net proceeds of its intended U.S.
offering, and
- - - it has entered into an agreement with Liviakis Financial Communications,
Inc. Of Sacramento, California ("Liviakis") which includes a provision
whereby Liviakis has agreed to purchase 500,000 of the Company's shares for
$375,000.
Management believes a combination of the above steps will provide
liquidity until this offering is completed. There is no assurance management
will be successful.
Management expects to pay the outstanding amount of the Alden Field
purchase of $355,000 from proceeds of a loan it is negotiating. There is no
assurance management will be successful. In the event management cannot obtain
financing to complete the purchase and management cannot find acceptable
alternative financing, Cotton Valley may not be able to close on the Alden Field
purchase.
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.
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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, Cotton Valley Energy
Corporation ("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 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 during
1997. 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. Since Cotton Valley's principal offices, management and properties
are located in the United States, Cotton Valley believes it is advantageous to
have a majority of US directors. Cotton Valley may in the future continue from
the Yukon Territory to the State of Wyoming. Management believes there are no
significant differences in corporate law concerning material shareholder rights
between the Province of Ontario, Yukon Territory and the State of Wyoming.
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
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County, Texas. Cotton Valley has entered into an Area of Mutual Interest ("AMI")
Agreement with a number of unaffiliated parties covering approximately 33,000
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 Company has acquired its interest in the Cheneyboro Field through the
issuance of 3,252,533 common shares and 460,567 Class A Warrants (hereinafter
described), and by agreement to pay $1,086,049, of which approximately $500,000
has been paid. The remaining $586,049 is collateralized by the properties, bears
interest at 12% per annum payable quarterly, and is due July 17, 1997.
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
higher initial rates and better recovery efficiencies than 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.
The Company is unaware of any regulatory restrictions on drilling near the
reservoir. The Company will build the normal retaining walls around its drilling
and storage sites to prevent oil spills from spreading. The Company intends
drilling to a depth of approximately 9,500 feet while the deepest point in the
Richland/Chambers Creek Reservoir is approximately 100 feet. Consequently, the
Company does not anticipate any special risks associated with drilling near a
reservoir.
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.
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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.
The Company acquired its interest in the Movico Field through the issuance
of 623,424 common shares and 77,928 Class A Warrants and by agreement to pay
$230,000. The cash is payable at a final closing date dependent upon when
unrelated third parties, who also hold an interest in the Movico Field decide to
commence drilling.
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 1,500,000 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 millidarcies,
respectively. Porosities as high as 25% and over 200 millidarcies 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 drive. 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
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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 pounds
per square inch initially and currently is calculated at 8,000 pounds 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 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 Bbls of oil per day and 20,000 Mcf of gas per day. It
currently handles less than 400 Bbls of oil per day.
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 Company has entered into option agreements to acquire a working
interest in the Sword Unit, Offshore Santa Barbara, California. The Company has
paid $400,00 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 1998 or later, and participate in a $4,000,000 letter of credit to
fund development. The option has been recorded at a cost of $400,000, plus the
Company's share of environmental studies and other costs of $38,247 for a total
of $38,247.
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There is no assurance that the Company will have the financial resources
to acquire any part of the working interest.
The Company plans to sell part of its option to purchase 51.8% of the
Sword Unit working interest and retain 11.8%. The remaining 40% working interest
will be sold to industry participants. No assurance can be given that the
Company will be successful in selling all or part of the 40% for satisfactory
terms or conditions. The Company will also evaluate equity trades and production
sharing agreements to reduce or eliminate direct development cost. Upon purchase
of the Conoco interest in the Sword Unit, the original option owner is entitled
to an overriding royalty interest of 3 1/3% proportionally reduced as to
Conoco's interest, on all leasehold interests being acquired. The net revenue
remaining to the Company will be 80% of its working interest. The Company cannot
exercise its option under the Option Agreement unless it, and its syndicate of
co-owners, are acceptable to the Minerals Management Service.
In addition to factors discussed below, the Company is aware of an
anti-drilling sentiment in California. This may make it difficult for the
Company to sell part of its option or to find the necessary financing to
participate in the project. It is possible that the Company may need to record
an impairment in value of its option at some time.
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 million 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 cubic feet of gas per day.
Most of the early offshore production was from Pliocene age sandstone
reservoirs. The more recent developments 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.
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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 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.
The Company is aware of publicly reported information that Chevron
Corporation recently announced its intention to end all offshore California
crude oil production between 1999 and 2001. The Company notes that Chevron
included information in its September 30, 1996 quarterly report that crude oil
production from the Point Arguello project, offshore California, had continued
to decline rapidly, and that Chevron was reviewing options for the project,
including unitization with an adjoining field and development of an overall
abandonment strategy.
Chevron's announcement may make it more difficult for the Company to find
industry participants willing to purchase part of the Company's option and may
make future financing of the project more difficult.
The Sword Unit lease owners as well as the other non-producing lease
owners in the area are presently under a voluntary suspension of operations
agreement with the Minerals Management Service. This agreement suspends any
leasing, exploratory drilling and/or new platform installation permits through
1998 while the California Offshore Oil and Gas Energy Resources ("COOGER") study
is being completed and evaluated. This study will evaluate the impact of
different levels of offshore oil and gas development on the adjacent onshore
communities. While the suspension of operations agreement is in effect, the
Minerals Management Service has waived rental payments on the affected leases.
When the suspension agreement expires, permitting will begin and normal offshore
exploration drilling and platform installation plans will be started. The COOGER
study will be used in the permitting process and has been designed as a common
"database" for use by the Minerals Management Service, Oil and Gas Operators and
County Governmental agencies. The COOGER study results may make permitting more
difficult, and compliance with COOGER study findings may make production more
expensive. The Company's option expires 30 days after either the termination of
the suspension of operation agreement (recently extended to December 31, 1998)
or the end of the COOGER study, whichever is later.
The regulatory framework within which the Company will develop the Sword
Field consists of: (a) Federal Offshore Lease and Administration, including
approvals of the development plan of the property; (b) a Federally- mandated
environmental impact statement; (c) State of California regulations with respect
of transport of oil and gas through state waters and the air emissions from
offshore and onshore facilities; (d) Santa Barbara County regulations with
respect to the construction and operation of onshore facilities. Permits and
approvals from all three government levels will be required to complete the
development of the field and bring it into operation.
The first three miles off the shore of the coastline are administered by
each state and are known as "State Waters". Within State Waters offshore Santa
Barbara County, the State of California regulates oil and gas leases, drilling,
and the installation of permanent and temporary production facilities. Because
the Sword Field is located outside and beyond the State Waters in the OCS, the
offshore area beyond the three-mile limit, leasing and drilling at Sword are not
regulated by the State of California. However, to the extent that the production
from Sword would be transported to
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a shore side facility from the field through the State Waters, the Company's
pipeline (or other transportation facilities) would be subject to California
State regulations. Construction and operation of the pipeline would require
permits from the State. State regulations also govern the construction and
operations of shore side facilities such as terminals, pumping stations, water
separation facilities, and water disposal, all of which require a comprehensive
permitting process.
Santa Barbara County, through its Board of Supervisors, also has a
significant impact on the method and timing of any offshore field development
through its concurrent regulation of the construction and operation of shore
side facilities.
Leasing, lease administration, development, and production with the OCS
all fall under Federal regulation administered by the Minerals Management
Service of the Department of the Interior ("MMS"). Due to political opposition,
the Federal Government has not issued new OCS leases in the Santa Barbara area
within the past ten years and is unlikely to do so in the near future. This
means that any infrastructure for common use by the different operators of
existing leases in the Santa Barbara OCS will have to rely solely on what is
already in place and what would be built to accommodate a limited number of now
known, but undeveloped, properties and cannot take into account the future
growth of infrastructure from new discoveries and a high level of exploratory
activity. For these reasons, the development of any existing property in the
OCS, including Sword, would be much more expensive and take longer than similar
projects located in a mature and still growing offshore province such as the US
Gulf Coast.
Thus, the value of the proved undeveloped reserves, if acquired by the
Company upon exercise of the option, will be significantly lower than if the
same reserves were located onshore in a less environmentally sensitive area of
the United States that could be developed sooner. Although prices are not
currently regulated, they have been in the past and could be regulated in the
future. Also the rate of production could be affected by Minerals Management
Service regulations, which could also lower the value of the property.
Cotton Valley currently does not have the capital, manpower, or technical
resources to exploit the Sword leases successfully, assuming exercise of the
option. In order to effectively develop the Sword leases at the 51.8% working
interest level, the Company would require significant recapitalization and
reorganization or would have to seek a merger with, or become a subsidiary of, a
much larger oil and gas company having significantly larger resources. The
Company's current strategy for development of Sword is to retain only that
portion of the 51.8% it feels it will be able to financially and technically
support over the next five years (currently estimated at 11.8%) and seek joint
venture partners to participate in and operate the remainder. Due to the factors
discussed above relating to regulation and environmental compliance, the Santa
Barbara OCS is an area that many large independent oil and gas producers have
avoided, and the task of locating appropriate joint venture partners will be
difficult. If unsuccessful in financing the project or finding partners by the
time the option expires at the end of 1998, the Company may be forced to drop
its option and take a write-off of up to $500,000.
Alden Field
On December 10, 1996, Cotton Valley entered into agreements to purchase
all of the interests held by the Homestake Company and certain other parties in
the NE Alden Field, Caddo County, Oklahoma for an aggregate purchase price of
$390,000. The properties, consisting of approximately 550 net acres of oil and
gas leases, seven producing oil and gas wells, three injection wells and four
shut in wells, contain proved developed and undeveloped net reserves of
approximately 300,000 Bbl of oil and 2,000 Mcf of gas, and significant probable
reserves which have not been quantified. Working interest in the wells ranges
from 50% to 100% and the net revenue interest is at least 75% of the working
interest.
Located approximately 65 miles southwest of Oklahoma City, Oklahoma, the
field was discovered in 1956 and initially tested for 771 barrels of oil and 608
Mcf of gas per day from the Bromide formation at a depth of approximately 8,900
feet. Since the discovery, the Bromide has been developed and is now a unitized
water flood consisting of four producing wells and three water injection wells.
The remaining wells have been completed in other zones above and below the
Bromide. Gas from the field is transported through a one- mile gathering system,
an 82% interest in which
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is included in the purchase price. The gathering system is connected to a
pipeline, access to which is available to Cotton Valley.
Gross production for August 1996 from this property was 1,834 barrels of
oil and 13.7 million cubic feet of gas. Net production to the interest being
acquired was 1,408 barrels of oil and 7.01 million cubic feet of gas.
In addition to the current production, there are also potential zones
either behind existing wells, or reachable by deepening existing well bores.
During 1997, Cotton Valley expects to complete a number of workovers of the
existing wells to improve production from existing zones and to open new zones
for additional production and reserves. Closing of the acquisition is scheduled
to take place in stages during February and March 1997, subject to completion of
title documentation. Cotton Valley intends to complete the purchase with funds
derived from working capital on hand, proceeds from the exercise of existing
options or warrants, and/or project financing from commercial sources.
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. Cotton Valley may
incur additional expenses in obtaining titles or doing remedial work on the
titles, but in the opinion of management these expenses would not be material.
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. The Cheneyboro Field was evaluated by K&A Energy
Consultants, Inc. and the Movico Field was evaluated by Wendell & Associates.
Reserves by State
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
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
===========
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
=========== ========== ===========
---------------------
(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.
23
<PAGE>
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 acquire or
develop additional reserves.
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
In December 1996, Cotton Valley acquired proved developed and proved
undeveloped reserves in Alden Field in Caddo County, Oklahoma. These reserves
are not included in the above table.
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.
24
<PAGE>
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 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 December 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.
25
<PAGE>
Legal Proceedings
As of the date of this prospectus, Cotton Valley is not a party to any
legal proceedings.
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. Ronald Burden 54 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.
26
<PAGE>
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 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 and
continuously since 1985, Mr. Kamis serves as president of Apex Energy
Consultants, Inc., of Calgary, Alberta, which provides reserve and economic
evaluations to the petroleum industry and financial institutions. In this
capacity, Mr. Kamis has managed reservoir and production studies in Canada,
Southeast Asia, Europe, North Africa, Central America, Australia, and the U.S.
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.
27
<PAGE>
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.
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
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
- - --------------------------
(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
Name Securities(1) Underlying Options Granted to Exercise or Expiration
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.
28
<PAGE>
<TABLE>
<S> <C> <C>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
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 C. Ronald 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 December 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" do not assume exercise of
Warrants.
29
<PAGE>
Amount and Nature of Percentage of Outst-
Name Beneficial Ownership anding Common Stock
Currently After
This
Offering
Eugene A. Soltero (1) .............. 2,955,199(4) 27.8% 22.5%
James E. Hogue (1) ................. 2,985,199(5) 27.9% 22.6%
Peter Lucas (1) .................... 350,000(6) 3.3% 2.7%
C. Ronald Burden (1) ............... 390,000(7) 3.7% 3.0%
Wayne T. Egan (2) .................. 50,000(8) 0.5% 0.4%
Michael Kamis (3) .................. 50,000(8) 0.5% 0.4%
Richard J. Lachcik (2) ............. 50,000(8) 0.5% 0.4%
All directors and executive officers
as a group (seven persons) ...... 6,830,398(9) 69.1% 48.8%
Royal Trust Corporation (10) ....... 1,600,000(10) 14.7% 11.9%
Liviakis Financial Communications, . 1,666,666(11) 14.4% 11.8%
Inc.(11)
---------------------------
(1) The address of Messrs. Soltero, Hogue, Lucas and Burden is 8350 North
Central Expressway, Suite M2030, Dallas, Texas 75206.
(2) The address of Messrs. Egan and Lachcik is Suite 1600, 2 First Canadian
Place, Toronto, Ontario, Canada M5X 1J5
(3) The address of Mr. Kamis is Suite 700, 816-8 Avenue SW, Calgary, Alberta,
Canada T2P 3P2.
(4) Includes 200,000 shares of common stock subject to an employee stock option
and the following shares, beneficial ownership of which is disclaimed:
710,000 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 1,640,866 held as attorney under a voting trust
agreement. See "Principal Shareholders--Voting Trust Agreement."
(5) Includes 200,000 shares of common stock subject to an employee stock option
and the following shares, beneficial ownership of which is disclaimed:
740,000 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 1,640,866 held as attorney under a voting trust agreement.
See "Principal Shareholders--Voting Trust Agreement."
(6) Includes 200,000 shares of common stock subject to an employee stock option
and 75,000 shares owned by Mr. Lucas' wife, beneficial ownership of which
is disclaimed.
(7) Includes 200,000 shares of common stock subject to an employee stock
option.
(8) Includes 50,000 shares of common stock subject to an employee stock option.
(9) Includes 1,116,666 shares subject to options or warrants and 3,281,732 held
as attorney under a voting trust agreement.
(10) 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.
(11) Includes 900,000 shares to be issued for services, 200,000 shares subject
to a warrant, and the following shares, beneficial ownership of which is
disclaimed: 25,000 shares and 66,666 warrants owned by an officer of
Liviakis. The address of Liviakis Financial Communications, Inc. is 2420
'K' Street, Sacramento, CA 95816.
Liviakis
Cotton Valley entered into an agreement effective November 7, 1996 and
ending January 2, 1998 with Liviakis Financial Communications, Inc. of
Sacramento, California ("Liviakis"). Liviakis will advise and assist in the
development and implementation of materials to inform the financial community
about Cotton Valley, introduce Cotton Valley to the financial community, assist
in dissemination of news releases and investor relations materials, assist in
presentations to stockholders, brokers, dealers and others, respond to public
inquiries, conduct meetings, review corporate strategy and identify acquisition
candidates. In consideration of Liviakis' services, Cotton Valley will 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, of
which 400,000 shares have been issued, to Liviakis. Cotton Valley also
30
<PAGE>
granted Liviakis and an officer of Liviakis warrants to purchase 500,000 shares
of its common stock from January 2, 1998, until November 8, 2001, at $.80 per
share. Liviakis will receive no cash compensation or reimbursement. Based on the
value of Cotton Valley's stock on The Canadian Dealing Network at the time the
contract was negotiated, Cotton Valley will record an expense of $1,087,700
during the year ended June 30, 1997.
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 3,281,732 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 the common stock 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.
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 10,404,901
shares of common stock and 4,969,220 options and warrants to acquire common
stock (including 1,990,000 shares of common stock to be issued to Liviakis
Financial Communications, Inc. for services). After giving effect to this
offering, the issued and outstanding capital stock of Cotton Valley will consist
of 10,404,901 shares of common stock, 1,250,000 Units, 2,500,000 shares of
Common Stock and 2,500,000 Warrants underlying the Units, 980,000 employee stock
options and 1,999,220 options and warrants issued in Canadian financings. Cotton
Valley has also agreed to issue 1,990,000 shares of common stock in connection
with a financial consulting contract. 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 "Principal Shareholders",
"Description of Securities--Other Options and Warrants," "Underwriting" and note
5 of Notes to Financial Statements.
Cotton Valley's common shares trade "over-the-counter" on NASD's bulletin
board under the symbol CTVYF. Cotton Valley intends to apply for listing of the
Securities on the_________ Stock Exchange.
Units
Each Unit consists of two shares of Common Stock and two Warrants. The
Common 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
31
<PAGE>
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
December 31, 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.
1996 High Low
June 24-30 $2.80 $2.50
July 1-September 30 $2.60 $1.20
October 1-December 31 $1.90 $1.00
As of December 31, 1996, Cotton Valley had 1,114 record holders of its
common stock, 214 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. 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.
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 Common Stock until
________________.
The Warrants do not confer upon the holder any voting, dividend or other
rights of a stockholder of Cotton Valley.
The Warrants are subject to redemption by Cotton Valley after _______ from
the date hereof, upon 30 days written notice, at a price of $0.01 per Warrant
provided that the closing sale or bid price per share of Cotton Valley common
stock equals or exceeds $______ per share for 20 of 30 consecutive trading days
ending within 15 days of the date notice of redemption is given.
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Cotton Valley must have a currently effective registration statement on
file with the Securities and Exchange Commission in order for a Warrant holder
to be able to exercise his Warrants. Cotton Valley will endeavor to maintain
such current effective registration. Necessarily there can be no assurance that
Cotton Valley will, at all times during the life of the Warrants, be able to
maintain such registration, and in the event it is unable to do so, the Warrants
will not then be exercisable. Additionally, the exercise of the warrants is
subject to the requirement that the Common Stock issuable upon exercise be
registered or qualified for sale under applicable state securities laws in the
states where Warrant holders reside. There can be no assurance that Cotton
Valley will be able to comply with applicable state laws where all Warrant
holders reside.
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 980,000
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 December 31, 1996, 1,999,220 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
30,668 $0.66 $0.48 December 31, 1998
366,666 $1.00 $0.73 December 31, 1999
Liviakis
In connection with a financial consulting agreement, the Company granted
warrants to Liviakis Financial Communications, Inc. of Sacramento, California to
purchase 500,000 shares of common stock for $.80 per share from January 2, 1998
until November 7, 2001.
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, 12,904,901 shares of common stock,
including the 2,500,000 shares of common stock underlying the Units, will be
outstanding. All shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act. However,
shares purchased by an affiliate (in general, a person who is in a control
relationship with Cotton Valley) will be subject to the limitations of Rule 144
promulgated under the Securities Act. 9,204,318 shares of common stock are
registered on Form 20-F and currently eligible for sale without restriction.
This does not include shares held by affiliates. Subject to the limitations of
Rule 144, restricted
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securities will be freely transferable upon expiration of the applicable
two-year holding period and other provisions. In addition, Cotton Valley has
granted 3,479,220 warrants or options 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 100,000 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.
Prior to this offering, no public market has existed for any of the
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, 980,000 shares are subject to outstanding options under the
employee stock option plan.
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. The Income Tax Act (Canada) requires 25% tax withholding from
any dividends paid or deemed to be paid to non-Canadian shareholders. However,
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
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(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.
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.
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GLOSSARY
In this prospectus, the following terms have the meanings indicated:
API - The density (weight per volume) of crude oil on a scale adopted by the
American Petroleum Institute. On the API scale, the higher the density the
lighter the oil.
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.
Injection Well - A well used to inject a gas or liquid into a reservoir with a
view to enhance or replace the natural reservoir drive to increase or maintain
production from nearby productive wells.
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 Reserves - 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
39
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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.
(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.
Water Flood - A method of injecting water into a reservoir to enhance or replace
the natural reservoir drive.
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.
40
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INDEPENDENT AUDITOR'S REPORT
Board of Directors
Cotton Valley Resources Corporation
(Formerly Cotton Valley Energy Limited)
Dallas, Texas
We have audited the consolidated balance sheets 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 SHEETS
(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 ........................................ $11,979,330
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITY - Accounts payable ................................$ 516,689
LONG-TERM DEBT ...................................................... 586,049
ADVANCES FROM RELATED PARTIES ....................................... 171,709
DEFERRED INCOME TAXES ............................................... 1,588,000
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized-unlimited, issued - none --
Common stock, no par value, authorized-unlimited, issued -
9,191,596 shares .................................................... 9,879,160
Deficit accumulated in development stage ......................... (762,277)
Total Stockholders' Equity .............................. 9,116,883
Total Liabilities and Stockholders' Equity ..............$11,979,330
===========
See accompanying notes to these financial statements
F-1
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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 965,776 74,917 1,040,693
Interest ................. 138,970 -- 138,970
------------ ------------ ------------
Total Expenses .... 1,104,746 74,917 1,179,663
------------ ------------ ------------
LOSS BEFORE INCOME TAXES .... (1,099,360) (74,917) (1,174,277)
INCOME TAX BENEFIT .......... 387,000 25,000 412,000
------------ ------------ ------------
NET LOSS .................... $ (712,360) $ (49,917) $ (762,277)
============ ============ ============
NET LOSS PER SHARE .......... $ (.06) $ --
============ ============
WEIGHTED AVERAGE SHARES ..... 11,403,000 10,655,000
============ ============
See accompanying notes to these financial statements
F-2
<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)
(Note 5) ....................... 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 ($1.49 per share) ........ 340,000 506,409 -- -- -- 506,409
Issued December 29, 1995 to officers
for services ($1.49 per share) . 300,000 446,950 -- -- -- 446,950
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 ................ -- (915,785) -- -- -- (915,785)
Net loss ............................ -- -- -- -- (712,360) (712,360)
---------- ----------- ----------- ----------- ----------- -----------
BALANCES, June 30, 1996 ............. 9,191,596 $ 9,879,160 -- $- $ (762,277) $ 9,116,883
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these financial statements
F-3
<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 .................................................... $ (712,360) $ (49,917) $ (762,277)
Adjustments to reconcile net loss to net cash used by
operating activities:
Deferred income tax benefit ........................... (387,000) (25,000) (412,000)
Amortization of debt discount ......................... 88,000 -- 88,000
Depreciation .......................................... 1,683 -- 1,683
Common stock issued for services ...................... 446,950 2,181 449,131
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 586,049 500,000 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 ........... 506,409 -- 506,409
</TABLE>
See accompanying notes to these financial statements
F-4
<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 and a new capital structure was established.
Transactions in the accompanying financial statements are reflected as
if the resulting capital structure was in existence since inception.
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 transaction as an issuance of
stock for the net monetary assets of Arjon accompanied by a
recapitalization. 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-5
<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.
Revenue Recognition
Revenue from oil and gas production is recognized in the month the oil
or gas is sold.
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 prior to the initial filing of a
registration statement are assumed to be outstanding for each year
presented for purposes of the loss per share calculation.
F-6
<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
$5,935,281, based on the estimated fair value of the properties. The
Company determined fair value by reference to an independent
engineering firm's reserve report. 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-7
<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 $1,137,635, based
on the estimated fair value of the properties. The Company determined
fair value by reference to an independent engineering firm's reserve
report. 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.
The economic value of the option is dependent upon, among other things,
the Company's ability to raise money to develop the property, the
Company's ability to sell a portion of its interest to industry
participants in the property, and the completion of environmental
studies. In addition, the Company is aware of an anti-drilling
sentiment in California , which may increase the difficulty of the
Company achieving these objectives.
4. LONG-TERM DEBT
The Company has promissory notes payable totaling $586,049 at June 30,
1996 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 March 1995, the Company entered into an agreement to acquire 1310
net acres of oil and gas leases in Leon County, Texas. The Company
issued 621,600 common shares (of which 310,800 were cancelable by the
Company if it did not complete the transaction) and agreed to pay
$100,000 cash upon the transfer of title to the leases. Due to concerns
that developed during due diligence procedures regarding
transferability of title, the Company did not complete the purchase,
canceled 310,800 common shares and did not pay the $100,000.
F-8
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
In connection with the acquisition of oil and gas properties, including
the abandoned property referred to above, 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.
In December 1995, the Company issued a total of 300,000 shares of
common stock to two officers in exchange for services performed from
June 1995 through December 1995. The shares were recorded at $446,950,
which represented the esimated value of the shares.
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 liabilities ............... (2,065,000) (2,000,000)
----------- -----------
Deferred tax asset (net operating loss carryforwards) ... 477,000 25,000
----------- -----------
Net deferred tax liability ................... $(1,588,000) $(1,975,000)
=========== ===========
</TABLE>
F-9
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
At June 30, 1996, the Company has available net operating loss
carryforwards of approximately $1,366,000 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.
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 $ 1,110,054 $ 7,802,914
Development costs 227,754 -
----------- -----------
Total $ 1,337,808 $ 7,802,914
=========== ===========
F-10
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
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 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 4,294,000 12,882,000
---------- ----------
Balance at June 30, 1995 ........ 4,294,000 12,882,000
---------- ----------
Balance at June 30, 1996 ........ 4,294,000(1) 12,882,000(1)
========== ==========
Proved developed reserves at June 30:
1995 -- --
========== ==========
1996 93,000 280,000
========== ==========
(1) Excludes proved reserve quantities of 482,000 barrels of oil
and 573,000 mcf of natural gas 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
F-11
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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. Standardized measure of discounted future
net cash flows relating to proved reserves:
<TABLE>
<S> <C> <C>
AT JUNE 30,
1996 1995
------------- -------------
Future cash inflows ............................ $ 118,003,000 $ 98,023,000
Future production costs ........................ (15,013,000) (13,249,000)
Future development costs ....................... (12,446,000) (12,361,000)
------------- -------------
Future net cash flows, before income tax ....... 90,544,000 72,413,000
Future income tax expenses ..................... (30,785,000) (24,723,000)
------------- -------------
Future net cash flows .......................... 57,759,000 47,690,000
10% discount to reflect timing of net cash flows (19,315,000) (17,890,000)
------------- -------------
Standardized measure of discounted future net
cash flows .................................. $ 40,444,000(1) $ 29,800,000(1)
============= =============
</TABLE>
(1) Excludes approximately $4,000,000 of standardized measure of
discounted future net cash flows 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
------------ -----------
<TABLE>
<S> <C> <C>
Standardized measure, beginning of period ........ $ 29,800,000 $ --
Net change in sales price, net of production costs 11,762,000 --
Accretion of discount ............................ 2,980,000 --
Purchases of reserves in-place ................... -- 45,249,000
Net changes in income taxes ...................... (4,098,000) (15,449,000)
------------ ------------
Standardized measure, end of period .............. $ 40,444,000 $ 29,800,000
============ ============
</TABLE>
F-12
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED CONDENSED BALANCE SHEET
(Expressed in U.S. Dollars)
December 31, 1996
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSET - Cash ................................................... $ 239,905
PROVED OIL AND GAS PROPERTIES (full cost method) ....................... 11,798,858
OFFICE EQUIPMENT, net of accumulated depreciation of $7,256 ............ 33,226
OTHER ASSETS ........................................................... 43,831
Total Assets .................................................. $ 12,115,820
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 732,177
Current portion of long-term debt ............................. 586,049
Total Current Liabilities ..................................... 1,318,226
ADVANCES FROM RELATED PARTIES .......................................... 171,709
DEFERRED INCOME TAXES .................................................. 1,293,000
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized-unlimited, issued - none
Common Stock, no par value, authorized- unlimited, issued - 10,404,901 10,697,279
Deficit accumulated in development stage ............................. (1,364,394)
------------
Total Stockholders' Equity .................................... 9,332,885
Total Liabilities and Stockholders' Equity .................... $ 12,115,820
============
</TABLE>
See accompanying note to these financial statements
F-13
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
Period from
Period from Period from February 15,
July 1, 1996 July 1, 1995 1995 to
to December 31. to December 31, December 31,
1996 1996 1996
--------------- --------------- -------------
REVENUE- Oil and gas sales . $ 41,865 $- $ 41,365
EXPENSES:
General and Administrative 903,319 634,572 1,938,626
Interest ................. 35,162 21,631 174,133
------------ ------------ ------------
Total Expenses .... 938,481 656,203 2,112,759
------------ ------------ ------------
LOSS BEFORE INCOME TAXES ... (897,116) (656,203) (2,071,394)
INCOME TAX BENEFIT ......... 295,000 230,000 707,000
------------ ------------ ------------
NET LOSS ................... $ (602,116) $ (426,203) $ (1,364,394)
============ ============ ============
NET LOSS PER SHARE ......... $ (0.05) $ (0.04)
============ ============
WEIGHTED AVERAGE SHARES .... 13,390,524 9,923,236
============ ============
See accompanying note to these financial statements
F-14
<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, 1996 To July 1, 1995 To February 15, 1995 To
December 31, 1996 December 31, 1995 June 30, 1996
------------------ ---------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITES:
Net loss ................................ $ (602,116) $ (426,203) $(1,364,394)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Deferred income tax benefit .......... (295,000) (230,000) (707,000)
Amortization of debt discount ........ -- -- 88,000
Depreciation ......................... 5,572 -- 7,256
Common stock issued for services ..... 322,932 446,950 772,063
Change in accounts payable ........... (85,674) -- 201,016
Other ................................ (3,263) -- 2,580
----------- -----------
Net cash used by operating activities (657,549) (209,253) (1,000,479)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from related parties ........... -- 112,500 171,709
Sale of common stock .................... 455,949 -- 2,555,821
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 .......................... (14,600) -- (423,976)
Issuance of note payable ................ -- -- 250,000
Repayment of note payable ............... -- -- (250,000)
----------- -----------
Net cash provided by financing activities 441,349 685,274 2,876,328
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of oil and gas properties ... (303,134) (477,021) (1,554,893)
Purchase of other assets ................ (43,831) -- (81,051)
----------- ----------- -----------
Net cash used by investing activities ... (346,965) (477,021) (1,635,944)
----------- -----------
INCREASE (DECREASE) IN CASH ...................... (563,165) (1,000) 239,905
CASH - beginning of period ....................... 803,070 1,000 --
CASH - end of period ............................. $ 239,905 $nil $ 239,905
===========
SUPPLEMENTAL INFORMATION
Cash paid for interest .................. $ 17,581 $- $ 54,591
Debt incurred in acquisition
of oil and gas properties ............... -- -- 1,086,049
Conversion of debentures to
common stock ............................ -- -- 426,474
Retirement of debenture upon
merger with Arjon ....................... 146,300 -- 146,300
Oil and gas property acquired
with payable ............................ 355,000 -- 585,000
Oil and gas properties acquired
with common stock ....................... -- -- 7,072,914
Issuance of common stock for stock
offering costs .......................... -- -- 506,409
</TABLE>
See accompanying note to these statements financial
F-15
<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 herein for the fiscal year ended June 30, 1996.
(2) Common Stock
During the six months ended December 31, 1996, the Company issued
36,888 shares of common stock to individuals for services which was
recorded at $30,932, issued 73,750 shares of common stock to settle
debts which was recorded at $53,838, issued 400,000 shares of common
stock to Liviakis Financial Communications, Inc. which was recorded at
$292,000, issued 302,667 shares of common stock to former Arjon
shareholders on exercise of warrants for $145,524, issued 300,000
shares of common stock in Canadian private placements for proceeds of
$235,425 (before deducting costs of $14,600), and issued 100,000 shares
of common stock to Liviakis Financial Communications, Inc. for cash of
$75,000.
(3) Liviakis Financial Communications, Inc.
During the period, the Company entered into an agreement with Liviakis
Financial Communications, Inc. of Sacramento, California ("Liviakis")
to assist and consult with the Company in matters concerning corporate
finance and to provide investor communications and public relations
services. In consideration of Liviakis' services, the Company will 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 for services. The Company also granted
Liviakis and an officer of Liviakis warrants to purchase 500,000 shares
of its common stock from January 2, 1998, until November 8, 2001, at
$.80 per share.
F-16
<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
2,500,000 Shares of Common Stock
and
2,500,000 Redeemable Warrants to Purchase
Common Stock
P R O S P E C T U S
<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 ......................................
NATIONAL SECURITIES CORPORATION
---------------------------
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.
<PAGE>
, 1997
-----------------------------------------------------
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 $ 4,312
American Stock Exchange Listing Fee 20,000*
Accounting Fees and Expenses 60,000*
Legal Fees and Expenses 80,000*
Printing and Engraving 25,000*
Fees of Transfer Agent and Registrar 20,000*
Listing, Blue Sky Fees and Expenses 40,000*
Underwriter's Nonaccountable Expense Allowance 193,750*
Miscellaneous 136,938*
Total $580,000*
=========
- - ---------------------
*Estimated
Item 26. Recent Sales of Unregistered Securities.
II-1
<PAGE>
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 occurred 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
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 150,000 223,475
To C. Ronald Burden, for post-incorporation services 150,000 223,475
To Robert Harris, for services 100,000 148,944
To other individuals, for services 240,000 357,465
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) 288,529 426,474
To former Arjon shareholders on merger 686,551 146,300
07/96 To individuals, for services 4,388 7,207
To former Arjon shareholders on exercise of warrants 8,344 4,015
11/96 To former Arjon shareholders on exercise of warrants 166,667 80,000
12/96 To individuals for services 32,500 23,725
To settle debts 73,750 53,838
To Liviakis Financial Communications, Inc. for services 400,000 292,000
Private Placements 400,000 310,425
To former Arjon shareholders on exercise of warrants 127,656 61,509
Share issuance costs(3) (930,385)
----------- ---------
TOTAL ISSUED AND OUTSTANDING 10,404,901 $10,697,279
========== ===========
</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 common shares and units in Canada, the sale of
debentures in Canada and the merger with Arjon.
II-2
<PAGE>
b) Reserved Shares
In addition to the shares of common stock issued by Cotton Valley, Cotton
Valley has reserved for issuance 4,969,220 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;
II-3
<PAGE>
(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)980,000 stock options issued to directors and employees.
These options are exercisable at Cdn $2.50 ($1.83) and
expire August 6, 1999 (130,000), November 7, 1999 (50,000)
and July 1, 2000 (800,000).
(iv) 30,668 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 Series B Warrant is exercisable at Cdn
$2.25 ($1.64) until December 31, 1997.
(vi) 200,000 warrants issued in connection with private placement
of shares in December 1996. Each warrant is exercisable at
Cdn $1.00 ($.73) until December 31, 1999.
(vii)500,000 warrants issued to Liviakis Financial
Communications, Inc. in connection with a financial
consulting contract. Each warrant is exercisable at Cdn
$1.10 ($.80) from January 2, 1998 until November 7, 2001.
(vii)400,000 shares of common stock to be issued to Liviakis
Financial Communications, Inc. at $.75 per share between
January and March 1997.
(ix) 1,090,000 shares of common stock to be issued to Liviakis
Financial Communications, Inc. for services to be rendered
during 1997.
(x) 166,666 warrants issued to the spouses of Eugene A. Soltero
and James E. Hogue to replace warrants exercised at the
request of Cotton Valley. Each warrant is exercisable at Cdn
$1.00 ($.73) until December 31, 1999.
Item 27. Exhibits
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<S> <C> <C>
Exhibit Number Description Sequentially
Numbered Page
1.1* Underwriting Agreement
1.2* Form of Warrant Agreement
1.3* Selected Dealer Agreement
1.4* Agreement Among Underwriters
1.5* Form of Warrant Agreement
3** Articles of Amalgamation
3** Bylaws
4(a)* Text and Description of Graphics and Images Appearing on Certificate for Common
Stock
4(b)* Text and Description of Graphics and Images Appearing on Certificate for Units
4(c)* Text and Description of Graphics and Images Appearing on Certificate for Warrants
5* Opinion of Weir & Foulds
9** Voting Trust Agreement, as amended
10(a)** Property Option Purchase Agreement (Movico)
10(b)** Letter Agreement with Decker Exploration, Inc. (Movico)
10(c)* Consulting Agreement with Liviakis Financial Communications, Inc.
11* Statement regarding computation of per share loss
21** Subsidiaries
23(a)* Consent of Weir & Foulds
23(b)* Consent of Hein + Associates, LLP
23(c)* Consent of K&A Energy Consultants, Inc.
23(d)* Consent of Wendell & Associates
27 Financial Data Schedule
</TABLE>
II-4
<PAGE>
- - -----------------------
* Filed herewith.
** 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.
(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
II-5
<PAGE>
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
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 _____________, 1997.
<TABLE>
<S> <C>
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
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 _______________, 1997
Executive Officer
- - -----------------------------------------
Eugene A. Soltero
President, Chief Operating Officer and
Director
- - -----------------------------------------
James E. Hogue _______________, 1997
Senior Vice President and Chief
Financial Officer
- - -----------------------------------------
Peter Lucas _______________, 1997
Senior Vice President of Exploration
- - -----------------------------------------
C. Ron Burden _______________, 1997
Director
- - -----------------------------------------
Wayne T. Egan _______________, 1997
Director
- - -----------------------------------------
Michael Kamis _______________, 1997
Director
- - -----------------------------------------
Richard J. Lachcik _______________, 1997
</TABLE>
II-6
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023947
<NAME> COTTON VALLEY RESOURCES
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> JUN-30-1996 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 803,070 239,905
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 803,070 239,905
<PP&E> 11,177,944 11,883,171
<DEPRECIATION> 1,684 7,256
<TOTAL-ASSETS> 11,979,330 12,115,820
<CURRENT-LIABILITIES> 516,689 1,318,226
<BONDS> 0 0
0 0
0 0
<COMMON> 9,879,160 10,697,279
<OTHER-SE> (762,277) (1,364,394)
<TOTAL-LIABILITY-AND-EQUITY> (11,979,330) (12,115,820)
<SALES> 5,386 41,365
<TOTAL-REVENUES> 5,386 41,365
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 965,776 302,788
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 138,970 35,162
<INCOME-PRETAX> 1,099,360 897,116
<INCOME-TAX> 387,000 295,000
<INCOME-CONTINUING> 712,360 602,116
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (712,360) (602,116)
<EPS-PRIMARY> (0.06) (0.05)
<EPS-DILUTED> (0.06) (0.05)
</TABLE>
1,250,000 Units
COTTON VALLEY RESOURCESCORPORATION
Each Unit Consisting of
Two Shares of Common Stock and
Two Redeemable Common Stock Purchase Warrants
, 1997
UNDERWRITING AGREEMENT
NATIONAL SECURITIES CORPORATION
As Representative of the Several Underwriters
c/o National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Dear Sirs:
Cotton Valley Resources Corporation, a corporation organized under the
laws of Ontario, Canada (the "Company"), proposes to issue and sell to you and
the other underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom National Securities Corporation is acting as the
managing underwriter and Representative (the "Representative"), in the
respective amount set forth opposite the Underwriter's name in Schedule I hereto
an aggregate of 1,250,000 Units (individually a "Unit" and collectively the
"Units"), each Unit consisting of two shares of Common Stock, without par value,
of the Company (the "Common Stock") and two Redeemable Common Stock Purchase
Warrants (individually, a "Warrant"), which entitles the holder thereof to
purchase one share of Common Stock at a price of $____ per share, subject to
certain conditions. Such Units, together with (a) the shares of Common Stock and
the Warrants comprising such Units and (b) the shares of Common Stock issuable
upon exercise of such Warrants, are collectively referred to herein as the
"Underwritten Securities." In addition, (i) the Company proposes to grant to the
Underwriters an option (the "Underwriters' Option") to purchase up to an
aggregate of 187,500 additional Units solely to cover over-allotments in the
sale of the Underwritten Securities (such additional Units, together with (a)
the shares of Common Stock and Warrants comprising such additional Units and (b)
the shares of Common Stock issuable upon exercise of such Warrants, are
collectively referred to herein as the "Option Securities") and (ii) the Company
proposes to sell to the Underwriters the Underwriters' Warrants (described in
Section 7 hereof) to purchase 125,000 additional Units, which additional Units
are identical to the Units described above (such Underwriters' Warrants and
additional Units, together with (a) the shares of Common Stock and Warrants
comprising such additional Units and (b) the shares of Common Stock issuable
upon exercise of such Warrants, are collectively referred to herein as the
"Underwriters' Securities"). The Underwritten Securities, the Option Securities
and the Underwriters' Securities are collectively referred to herein as the
"Securities."
The terms which follow, when used in this Agreement, shall have the
meanings indicated. "Effective Date" shall mean each date that the Registration
Statement (as defined below) and any post-effective amendment or amendments
thereto became or become effective. "Execution Time" shall mean the date and
time that this Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus referred to in
Section 1(a) below with respect to the offering of the Securities, and any
preliminary prospectus included in the Registration Statement at the Effective
Date that omits Rule 430A Information (as defined below). Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the most
recent Preliminary Prospectus which predates or coincides with the Execution
Time. "Prospectus" shall mean the final prospectus with respect to the offering
of the Securities that contains the Rule 430A Information (as defined below).
"Registration Statement" shall mean the registration statement referred to in
Section 1(a) below, including exhibits and financial statements, in the form in
which it has or shall become effective and, in the event any post-effective
amendment thereto becomes effective prior to the Closing Date (as hereinafter
defined) or any settlement date pursuant to Section 3(b) hereof, shall also mean
such registration statement as so amended on such date. Such term shall include
Rule 430A Information (as defined below) deemed to be included therein at the
Effective Date as provided by Rule 430A. "Rule 424"and "Rule 430A" refer to such
rules under the Securities Act of 1933, as amended (the "Act"). "Rule 430A
Information" means information with respect to the Securities and the offering
thereof permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
<PAGE>
1. Representations and Warranties of the Company. The Company represents and
warrants to, and agrees with, each Underwriter that:
(a) The Company meets the requirements for the use of Form SB-2
under the Act and has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, including a
related preliminary prospectus ("Preliminary Prospectus"), on Form
SB-2 (Commission File No.333-16893) (the "Registration Statement") for
the registration under the Act of the Securities. The Company may have
filed one or more amendments thereto, including related Preliminary
Prospectuses, each of which has previously been furnished to you. The
Company will next file with the Commission either, prior to
effectiveness of such Registration Statement, a further amendment
thereto (including the form of Prospectus) or, after effectiveness of
such Registration Statement, a Prospectus in accordance with Rules
430A and 424(b)(1) or (4). As filed, such amendment and form of
Prospectus, or such Prospectus, shall include all Rule 430A
Information and, except to the extent the Representative shall agree
in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the
extent not completed at the Execution Time, shall contain only such
specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has
advised you in writing, prior to the Execution Time, will be included
or made therein.
(b) Each Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects with the applicable requirements of
the Act and the rules and regulations thereunder and did not include
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading. If the Effective Date is prior to
or simultaneous with the Execution Time, (i) on the Effective Date,
the Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations thereunder and
did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading and (ii) at the
Execution Time, the Registration Statement conforms, and at the time
of filing of the Prospectus pursuant to Rule 424(b), the Registration
Statement and the Prospectus will conform, in all material respects to
the requirements of the Act and the rules and regulations thereunder,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state a
material fact required to be stated therein or necessary in order to
make the statements therein (and, in the case of the Prospectus, in
the light of the circumstances under which they were made) not
misleading. If the Effective Date is subsequent to the Execution Time,
on the Effective Date, the Registration Statement and the Prospectus
will conform in all material respects to the requirements of the Act
and the rules and regulations thereunder, and neither of such
documents will contain any untrue statement of any material fact or
will omit to state any material fact required to be stated therein or
necessary to make the statements therein (and, in the case of the
Prospectus, in the light of the circumstances under which they were
made) not misleading. The two preceding sentences do not apply to
statements in or omissions from the Registration Statement or the
Prospectus (or any supplements thereto) based upon and in conformity
with information furnished in writing to the Company by or on behalf
of any Underwriter through the Representative specifically for use in
connection with the preparation of the Registration Statement or the
Prospectus (or any supplements thereto).
(c) Except as set forth in the Prospectus, the Company has no
subsidiaries, and as of the Effective Date, will have no subsidiaries.
(d) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the Province of
Ontario, Canada with full corporate power and corporate authority to
own its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction in which it conducts its business or owns property and in
which the failure, individually or in the aggregate, to be so
qualified would have a material adverse effect on the properties,
assets, operations, business or condition (financial or otherwise) of
the Company ("Material Adverse Effect").
<PAGE>
(e) The Company does not own any shares of capital stock or any
other securities of any corporation or any equity interest in any
firm, partnership, association or other entity other than as described
in the Registration Statement.
(f) The Company's pro forma authorized and outstanding capital
stock and short-term and long-term indebtedness is as set forth in the
Prospectus under the caption "Capitalization" as of the dates therein
indicated and giving effect to the statements and assumptions therein
stated. The Company's equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus; all
outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable, and the
certificates therefor are in valid and sufficient form in accordance
with the laws of the Province of Ontario and the Company's Bylaws;
and, on the Closing Date (as defined in Section 3(a) hereof) and any
settlement date pursuant to Section 3(b) hereof, there will be, no
other classes of stock outstanding except the Common Stock; all
outstanding options to purchase shares of Common Stock have been duly
and validly authorized and issued; except as described in the
Prospectus, there are, and, on the Closing Date and any settlement
date pursuant to Section 3(b) hereof, there will be, no options,
warrants or rights to acquire, or debt instruments convertible into or
exchangeable for, or other agreements or understandings to which the
Company is a party, outstanding or in existence, entitling any person
to purchase or otherwise acquire shares of capital stock of the
Company; the issuance and sale of the Securities have been duly and
validly authorized and, when issued, delivered and paid for in
accordance with the terms hereof, the Securities will be fully paid
and nonassessable and free from preemptive rights, and will conform in
all respects to the description thereof contained in the Prospectus;
the Warrants and Underwriters' Warrants will, when issued, constitute
valid and binding obligations of the Company enforceable in accordance
with their terms and the Company has reserved a sufficient number of
shares of Common Stock for issuance upon exercise thereof (including
the Warrants included in the Underwriters' Warrants); the Warrants and
Underwriters' Warrants will, when issued, possess the rights,
privileges and characteristics as represented in the exhibits to the
Registration Statement and as described in the Prospectus; and the
Securities (other than the Underwriters' Warrants) have been approved
for listing on the American Stock Exchange upon notice of issuance
thereof. Each offer and sale of securities of the Company referred to
in Item 26 of Part II of the Registration Statement was effected in
compliance with the Act and the rules and regulations thereunder, and
with all applicable state securities and blue sky ("Blue Sky") laws.
(g) Other than as described in the Prospectus, there is no
pending or, to the best knowledge of the Company, threatened action,
suit or proceeding before any court or governmental agency, authority
or body, domestic or foreign, or any arbitrator involving the Company
of a character required to be disclosed in the Registration Statement
or the Prospectus. There is no contract or other document of a
character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit that is not described or filed
as required.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
agreement of the Company, enforceable against the Company in
accordance with its terms, except as rights of indemnity and
contribution hereunder may be limited by public policy and except as
the enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and general principles of equity.
(i) The Company has full corporate power and authority to enter
into and perform its obligations under this Agreement and to issue,
sell and deliver the Securities in the manner provided in this
Agreement. The Company has taken all necessary corporate action to
authorize the execution and delivery of, and the performance of its
obligations under, this Agreement.
<PAGE>
(j) Neither the execution, delivery and performance of this
Agreement by the Company, the offering, issue and sale of the
Securities, nor the consummation of any other of the transactions
contemplated herein, nor the fulfillment of the terms hereof, will
conflict with or result in a breach or violation of, or constitute a
default (or an event that with notice or lapse of time, or both, would
constitute a default) under, or result in the imposition of a lien on
any properties of the Company or an acceleration of indebtedness
pursuant to, the Articles of Incorporation or bylaws of the Company,
or any of the terms of any indenture or other agreement or instrument
to which the Company is a party or by which the Company or any of its
properties are bound, or any federal, state or local law, rule,
regulation of any court, governmental or regulatory body, stock
exchange or arbitrator having jurisdiction over the Company or any of
its assets. The Company is not (A) in violation of its Articles of
Incorporation or bylaws or (B) in breach of or default under any of
the terms of any indenture or other agreement or instrument to which
it is a party or by which it or its properties are bound, which breach
or default described in this clause (B) would, individually or in the
aggregate, have a Material Adverse Effect.
(k) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to it
any shares of capital stock in consequence of the issue and sale of
the Securities, nor does any person have preemptive rights, or rights
of first refusal or other rights to purchase any of the Securities.
Except as referred to in the Prospectus, no person holds a right to
require or participate in a registration under the Act of Common Stock
or any other equity securities of the Company.
(l) The Company has not (i) taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result
in, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
or the Securities or (ii) effected any sales of shares or securities
that are required to be disclosed in response to Item 26 of Part II of
the Registration Statement (other than transactions disclosed in
response to Item 26 of Part II of the Registration Statement or the
Prospectus).
(m) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body
is required to be obtained or filed by or on behalf of the Company in
connection with the transactions contemplated herein, except such as
may have been obtained or made and registration of the Securities
under the Act, and such as may be required under the Blue Sky laws of
any jurisdiction in connection with the purchase and distribution of
the Securities by the Underwriters.
(n) The accountants who have certified the financial statements
filed or to be filed with the Commission as part of the Registration
Statement are independent accountants as required by the Act.
(o) No stop order preventing or suspending the use of any
Preliminary Prospectus has been issued, and no proceedings for that
purpose are pending or, to the best knowledge of the Company,
threatened or contemplated by the Commission; no stop order suspending
the sale of the Securities in any jurisdiction has been issued and no
proceedings for that purpose have been instituted or, to the best
knowledge of the Company, threatened or are contemplated; and any
request of the Commission for additional information (to be included
in the Registration Statement or the Prospectus or otherwise) has been
complied with.
<PAGE>
(p) The Company has not sustained since June 30, 1996, any
material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree,
and, since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there have not been any
material changes in the capital stock or short-or long-term debt of
the Company, or any material adverse change, or a development known to
the Company that could reasonably be expected to cause or result in a
material adverse change, in the general affairs, management, financial
position, stockholders' equity, results of operations or prospects of
the Company, other than as set forth in the Prospectus. Except as set
forth in the Prospectus, there exists no present condition or state of
facts or circumstances known to the Company (A) affecting its reserves
or (B) involving its business which the Company can now reasonably
foresee would have a Material Adverse Effect on the business of the
Company, or which would prevent the Company from conducting its
business as described in the Prospectus in essentially the same manner
in which it has heretofore been conducted.
(q) The financial statements and the related notes of the Company
included in the Registration Statement and the Prospectus present
fairly the financial position, results of operations, cash flow and
changes in stockholders' equity of the Company at the dates and for
the periods indicated, subject in the case of the financial statements
for interim periods, to normal and recurring year-end adjustments. The
financial statement schedules included in the Registration Statement
present fairly the information required to be stated therein. Such
financial statements and schedules were prepared in conformity with
the Commission's rules and regulations and in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as stated therein. The
financial information of the Company set forth in the Prospectus under
the captions "Capitalization" and "Management's Discussion and
Analysis or Plan of Operations" fairly present, on the basis stated in
the Prospectus, the information included therein.
(r) The Company owns or possesses, or has the right to use
pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights
necessary to carry on its business as described in the Prospectus,
and, except as set forth in the Prospectus, the Company has not
received any notice of either (i) default under any of the foregoing
or (ii) infringement of or conflict with asserted rights of others
with respect to, or challenge to the validity of, any of the foregoing
which, in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could have a Material Adverse Effect, and the
Company knows of no fact or existing circumstance which could
reasonably be anticipated to serve as the basis for any such notice or
any such default, infringement or conflict.
(s) The Company has filed all applications and has obtained all
permits, approvals, licenses, franchises, certificates and
authorizations of all Federal, state, local or foreign governmental
authorities ("Permits") as are necessary to own its respective
property and to conduct its business in the manner now being conducted
and as described in the Prospectus, subject to such qualifications as
may be set forth in the Prospectus, except where the lack of ownership
or possession of such Permits would not, individually or in the
aggregate, have a Material Adverse Effect on the Company; the Company
has fulfilled and performed all of its material obligations with
respect to such Permits and no event has occurred which allows, or
after notice or lapse of time would allow, revocation or termination
thereof or would result in any other material impairment of the rights
of the holder of any such Permit, subject in each case to such
qualification as may be set forth in the Prospectus, except where such
revocations, terminations or other impairments thereof would not,
individually or in the aggregate, have a Material Adverse Effect on
the Company; and, except as described in the Prospectus, none of such
Permits contains any restriction that is materially burdensome to the
Company.
<PAGE>
(t) Subject to such exceptions as are not material (A) the
Company owns all properties and assets described in the Registration
Statement and the Prospectus as being owned by it and (B) the Company
has good title to all properties and assets owned by it, free and
clear of all liens, charges, encumbrances and restrictions, except as
otherwise disclosed in the Prospectus, and except for (i) liens for
taxes not yet due, (ii) mortgages and liens securing debt reflected on
the financial statements included in the Prospectus, (iii)
materialmen's, workmen's, vendor's and other similar liens incurred in
the ordinary course of business that are not delinquent and,
individually or in the aggregate, do not have a material adverse
effect on the value of such properties or assets to the Company, or on
the use of such properties or assets by the Company, in its respective
businesses, and (iv) any other liens that, individually or in the
aggregate, are not likely to result in a Material Adverse Effect. All
leases to which the Company is a party and which are material to the
conduct of the business of the Company are valid and binding and no
material default by the Company has occurred and is continuing
thereunder; and the Company enjoys peaceful and undisturbed possession
under all such material leases to which it is a party as lessee.
(u) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the transactions in and
dispositions of the assets of the Company. The system of internal
accounting controls maintained by the Company is sufficient to provide
reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles
and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(v) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company has not incurred any
liabilities or obligations, direct or contingent, or entered into any
transactions, in each case, which are likely to result in a Material
Adverse Effect, and there has not been any payment of or declaration
to pay any dividends or any other distribution with respect to the
shares of the capital stock of the Company.
(w) The Company has obtained and delivered to the Representative
the written agreements, in substantially the form of Exhibit A
attached hereto, of each of the persons listed in Schedule III
attached hereto, restricting dispositions of shares of capital stock
of the Company in accordance with the provisions of Section 6 hereof
and the terms contained in the Exhibit A form applicable thereto.
(x) The Company is in compliance in all material respects with
all applicable laws, rules and regulations, including, without
limitation, employment and employment practices, immigration, terms
and conditions of employment, health and safety of workers, customs
and wages and hours, and is not engaged in any unfair labor practice.
No property of the Company has been seized by any governmental agency
or authority as a result of any violation by the Company or any
independent contractor of the Company of any provision of law. There
is no pending unfair labor practice complaint or charge filed with any
governmental agency against the Company. There is no labor strike,
material dispute, slow down or work stoppage actually pending or, to
the best knowledge of the Company, threatened against or affecting the
Company; no grievance or arbitration arising out of or under any
collective bargaining agreement is pending against the Company; no
collective bargaining agreement which is binding on the Company
restricts the Company from relocating or closing any of its
operations; and the Company has not experienced any work stoppage or
other labor dispute at any time.
<PAGE>
(y) The Company has accurately, properly and timely (giving
effect to any valid extensions of time) filed all federal, state,
local and foreign tax returns (including all schedules thereto) that
are required to be filed, and has paid all taxes and assessments shown
thereon. All tax deficiencies asserted or assessed against the Company
by the Internal Revenue Service ("IRS") or any other foreign or
domestic taxing authority have been paid or finally settled with no
remaining amounts owed. Neither the IRS nor any other foreign or
domestic taxing authority has examined any tax returns of the Company.
The charges, accruals and reserves shown in the financial statements
included in the Prospectus in respect of taxes for all fiscal periods
to date are adequate, and nothing has occurred subsequent to the date
of such financial statements that makes such charges, accruals or
reserves inadequate. The Company is not aware of any proposal (whether
oral or written) by any taxing authority to adjust any tax return
filed by the Company.
(z) Except as set forth in the Prospectus, there are no
outstanding loans, advances or guaranties of indebtedness by the
Company to or for the benefit of its affiliates, or any of its
officers or directors, or any of the members of the families of any of
them, which are required to be disclosed in the Registration Statement
or the Prospectus.
(aa) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(bb) Except as set forth in the Prospectus, the Company has
insurance of the types and in the amounts that it reasonably believes
is adequate for its business, including, but not limited to, casualty
and general liability insurance covering all real and personal
property owned or leased by the Company, as applicable, against theft,
damage, destruction, acts of vandalism and all other risks customarily
insured against.
(cc) The Company has not at any time (i) made any contributions
to any candidate for political office, or failed to disclose fully any
such contribution, in violation of law; (ii) made any payment to any
state, federal or foreign governmental officer or official, or other
person charged with similar public or quasi-public duties, other than
payments required or allowed by all applicable laws; or (iii)
violated, nor is it in violation of, any provision of the Foreign
Corrupt Practices Act of 1977.
(dd) The preparation and the filing of the Registration Statement
with the Commission have been duly authorized by and on behalf of the
Company, and the Registration Statement has been duly executed
pursuant to such authorization by and on behalf of the Company.
(ee) All documents delivered or to be delivered by the Company or
any of its directors or officers to the Underwriters, the Commission
or any state securities law administrator in connection with the
issuance and sale of the Securities were, on the dates on which they
were delivered, and will be, on the dates on which they are to be
delivered, true, complete and correct in all material respects.
(ff) With such exceptions as are not likely to result in a
Material Adverse Effect, the Company is in compliance with all
Federal, state, foreign and local laws and regulations relating to
pollution or protection of human health or the environment
("Environmental Laws"), and the Company has not received any notice or
other communication alleging a currently pending violation of any
Environmental Laws. With such exceptions as are not likely to result
in a Material Adverse Effect, other than as set forth in the
Prospectus, to the Company's best knowledge, there are no past or
present actions, activities, circumstances, conditions, events or
incidents, including, without limitation, the release, emission,
discharge or disposal of any chemicals, pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products, that may
result in the imposition of liability on the Company or any claim
against the Company or, to the Company's best knowledge, against any
person or entity whose liability for any claim the Company has or may
have assumed either contractually or by operation of law, and the
Company has not received any notice or other communication concerning
any such claim against the Company or such person or entity.
<PAGE>
(gg) Except as described in the Prospectus, the Company does not
maintain, nor does any other person maintain on behalf of the Company,
any retirement, pension (whether deferred or non-deferred, defined
contribution or defined benefit) or money purchase plan or trust.
There are no unfunded liabilities of the Company with respect to any
such plans or trusts that are not accrued or otherwise reserved for on
the Company's financial statements included in the Registration
Statement and the Prospectus.
(hh) Any certificates signed by an officer of the Company and
delivered to the Representative or the Underwriters shall also be
deemed a representation and warranty of the Company to the
Underwriters as to the matters covered thereby.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company agrees
to issue and sell to the Underwriters an aggregate of 1,250,000 Units,
with each Unit consisting of two shares of Common Stock and two
Warrants. Each of the Underwriters agrees, severally and not jointly,
to purchase from the Company the number of Units set forth opposite its
name in Schedule I hereto. The purchase price per Unit to be paid by
the several Underwriters to the Company shall be $____ per Unit. A
value of $.10 shall be attributable to each Warrant which comprises a
part of each Unit.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby
grants an option (the "Underwriters' Option") to the several
Underwriters to purchase, severally and not jointly, up to an aggregate
of 187,500 Units at the purchase price of $____ per Unit for use solely
in covering any over-allotments made by the Representative for the
account of the Underwriters in the sale and distribution of the
Underwritten Securities. The Underwriters' Option may be exercised in
whole or in part at any time on or before the 45th day after the
Effective Date upon written or telegraphic notice by the Representative
to the Company setting forth the number of Units which the several
Underwriters are electing to purchase pursuant to the Underwriters'
Option and the settlement date and instructions as to the names and
denominations in which the Securities to be issued pursuant to the
Underwriters' Option are to be registered. Delivery of certificates for
such Units by the Company, and payment therefor to the Company, shall
be made as provided in Section 3 hereof. The number of Units to be so
purchased by each Underwriter pursuant to the Underwriters' Option
shall be determined by multiplying the number of Units to be sold by
the Company pursuant to the Underwriters' Option, as exercised, by a
fraction, the numerator of which is the number of Units to be purchased
by such Underwriter as set forth opposite its name in Schedule I and
the denominator of which is the total number of Units to be purchased
by all of the Underwriters as set forth on Schedule I (subject to such
adjustments to eliminate any fractional Unit purchases as the
Representative in their discretion may make).
3. Delivery and Payment.
(a) Delivery of the certificates for the Units described in
Sections 2(a) and, if the Underwriters' Option described in Section
2(b) hereof is exercised on or before the third business day prior to
the Closing Date (as defined below), 2(b) hereof shall be made by the
Company through the facilities of the Depository Trust Company ("DTC"),
and payment therefor, shall be made at the office of the Company at
11:00 a.m. Dallas, Texas time, on such date, not earlier than the
fourth full business day following the Effective Date of the
Registration Statement, but not later than twelve business days after
such Effective Date, as you shall designate by at least 48 hours' prior
notice to the Company (such date, time of delivery and payment for such
Securities being herein called the Closing Date. Delivery of the
certificates for such Securities to be purchased on the Closing Date
shall be made as provided in the preceding sentence for the respective
accounts of the several Underwriters against payment by the several
Underwriters through the Representative of the aggregate purchase price
of such Securities being sold by the Company, to or upon the order of
the Company, by certified or official bank check or checks drawn on or
by a New York Clearing House bank and payable in next day funds.
Certificates for such Securities shall be registered in such names and
in such denominations as the Representative may request not less than
three full business days in advance of the Closing Date. The Company
agrees to have the certificates for the Securities to be purchased on
the Closing Date available at the office of the DTC, not later than
9:00 a.m. Dallas, Texas time at least one business day prior to the
Closing Date.
<PAGE>
(b) If the Underwriters' Option is exercised after the third
business day prior to the Closing Date, the Company will deliver (at
the expense of the Company) on the date specified by the Representative
(which shall not be less than three business days after exercise of the
Underwriters' Option), certificates for the Securities described in
Section 2(b) hereof in such names and denominations as the
Representative shall have requested against payment at the office of
the Company of the purchase price therefor, by certified or official
bank check or checks drawn on or by a New York Clearing House bank and
payable in next day funds. If settlement for such Securities occurs
after the Closing Date, the Company will deliver to the Representative
on the settlement date for such Securities, and the obligation of the
Underwriters to purchase such Securities shall be conditioned upon
receipt of, supplemental opinions, certificates and letters confirming
as of such date the opinions, certificates and letters delivered on the
Closing Date pursuant to Section 6 hereof. The Company agrees to have
the certificates for the Securities to be purchased after the Closing
Date available at the office of the DTC, not later than 9:00 a.m.
Dallas, Texas time at least one business day prior to the settlement
date.
4. Offering by Underwriters. It is understood that the several Underwriters
propose to offer the Securities for sale to the public as set forth in the
Prospectus.
5. Agreements of the Company. The Company agrees with the several Underwriters
that:
(a) The Company will use its best efforts to cause the
Registration Statement, and any amendment thereof, if not effective at
the Execution Time, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under Rule
424(b), the Company will file the Prospectus, properly completed,
pursuant to Rule 424(b) within the time period prescribed and will
provide evidence satisfactory to the Representative of such timely
filing. The Company will promptly advise the Representative (i) when
the Registration Statement shall have become effective, (ii) when any
post-effective amendment thereto shall have become effective, (iii) of
any request by the Commission for any amendment or supplement of the
Registration Statement or the Prospectus or for any additional
information with respect thereto, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of the receipt by the Company of any
notification with respect to the institution or threatening of any
proceeding for that purpose, and (v) of the receipt by the Company of
any notification with respect to the suspension of the qualification of
the Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company will use
its best efforts to prevent the issuance of any such stop order or
suspension and, if issued, to obtain as soon as possible the withdrawal
thereof. The Company will not file any amendment to the Registration
Statement or supplement to the Prospectus without the prior consent of
the Representative. The Company will prepare and file with the
Commission, promptly upon your request, any amendment to the
Registration Statement or supplement to the Prospectus that you
reasonably determine to be necessary or advisable in connection with
the distribution of the Securities by you, and will use its best
efforts to cause the same to become effective as promptly as possible.
The Company, at the Company's expense, shall keep the Registration
Statement effective and the information contained therein (including
information contained in the Prospectus) current during the term of the
Warrants in accordance with the Act and the rules and regulations
thereunder. Without limiting the effect of the preceding sentence, in
the event any Underwriter is required to deliver a Prospectus in
connection with sales of any of the Securities at any time nine months
or more after the Effective Date, upon the written request of the
Representative and at the expense of the Company, the Company will
prepare, file with the Commission and deliver to such Underwriter as
many copies as the Representative may request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the Act.
<PAGE>
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it
otherwise shall be necessary to supplement the Prospectus to comply
with the Act or the rules or regulations thereunder, the Company will
promptly notify the Representative and prepare and file with the
Commission, subject to Section 5(a) hereof, a supplement that will
correct such statement or omission or a supplement that will effect
such compliance.
(c) As soon as practicable (but not later than ____1998), the
Company will make generally available to its security holders and to
the Representative an earnings statement or statements (which need not
be audited) of the Company covering a period of at least twelve months
after the Effective Date (but in no event commencing later than 90 days
after such date), which will satisfy the provisions of Section 11(a) of
the Act and Rule 158 promulgated thereunder.
(d) The Company will furnish to each of you and counsel for
the Underwriters, without charge, three signed copies of the
Registration Statement and any amendments thereto (including exhibits
thereto) and to each other Underwriter a conformed copy of the
Registration Statement and any amendments thereto (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of the Prospectus and
each Preliminary Prospectus and any supplements thereto as the
Representative may reasonably request. The Company will furnish or
cause to be furnished to the Representative copies of all reports on
Form SR required by Rule 463 under the Act.
(e) The Company will take all actions necessary for the
registration or qualification of the Securities for sale under the laws
of such jurisdictions within the United States and its territories as
the Representative may designate, will maintain such qualifications in
effect so long as required for the distribution of the Securities and
will pay the fee of the National Association of Securities Dealers,
Inc. (the "NASD") in connection with its review of the offering,
provided that the Company shall not be required to qualify as a foreign
corporation or to consent to service of process under the laws of any
such jurisdiction (except service of process with respect to the
offering and sale of the Securities).
(f) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(g) The Company will (i) cause the Securities (other than the
Underwriters' Warrants) to be listed on the American Stock Exchange,
(ii) comply with all registration, filing and reporting requirements of
the Exchange Act and the American Stock Exchange which may from time to
time be applicable to the Company, and (iii) file a report of sales and
use of proceeds on Form SR as required to be filed pursuant to Rule 463
under the Act from time to time.
(h) The Company will file promptly all documents required to
be filed with the Commission pursuant to Sections 13, 14 or 15(d) of
the Exchange Act subsequent to the Effective Date and during any period
in which the Prospectus is required to be delivered.
<PAGE>
(i) During the five year period commencing on the date hereof,
the Company will furnish to its stockholders, as soon as practicable
after the end of each respective period, annual reports (including
financial statements audited by independent certified public
accountants) and unaudited quarterly reports of earnings and will
furnish to you and, upon request, to the other Underwriters hereunder
(i) concurrent with furnishing such annual and quarterly reports to its
stockholders, copies of such reports; (ii) as soon as they are
available, copies of all reports and financial statements furnished to
or filed with the Commission, the NASD, the American Stock Exchange, or
any other securities exchange; (iii) every press release and every
material news item or article in respect of the Company or its affairs
which was released or prepared by the Company; and (iv) any additional
information of a public nature concerning the Company or its business
that you may reasonably request. During such five year period, if the
Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the
accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any
significant subsidiary that is not so consolidated.
(j) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for the
Securities.
(k) The Company will not, for a period of one year following
the Effective Date, without the prior written consent of the
Representative, issue, sell, contract to sell (including, without
limitation, any short sale), transfer, assign, pledge, encumber,
hypothecate or grant any option to purchase or otherwise dispose of,
any capital stock, or any options, rights or warrants to purchase any
capital stock of the Company, or any securities or indebtedness
convertible into or exchangeable for shares of capital stock of the
Company, except for (i) sales of the Securities as contemplated by this
Agreement, and (ii) sales of Common Stock upon the exercise of Warrants
or outstanding options described in the Prospectus.
(l) The Company has reserved and shall continue to reserve a
sufficient number of shares of Common Stock for issuance upon exercise
of the Underwriters' Warrants and Warrants (including the Warrants
included in the Underwriters' Warrants).
(m) The Company will not take, directly or indirectly, any
action designed to or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Units,
Common Stock or Warrants to facilitate the sale or resale of such
Securities or that otherwise might reasonably be expected to violate
the provisions of Rule 10b-6, Rule 10b-7 or Rule 10b-18 under the
Exchange Act.
6. Conditions to the Obligations of the Underwriters. The obligations of the
Underwriters to purchase the Units described in Sections 2(a) and 2(b)
hereof shall be subject to (i) the accuracy in all material respects of the
representations and warranties on the part of the Company contained herein
as of the Execution Time, the Closing Date (except that each of the
representations and warranties of the Company, the breach or violation of
which is not qualified as to materiality, shall be true in all respects)
and (in the case of any Units delivered after the Closing Date) any
settlement date pursuant to Section 3(b) hereof, (ii) the accuracy of the
statements of the Company made in any certificates delivered pursuant to
the provisions hereof, (iii) the performance in all material respects by
the Company of their respective obligations hereunder (except that each of
the obligations of the Company, the violation of which is not qualified as
to materiality, shall be performed in all respects), and (iv) the following
additional conditions:
(a) The Registration Statement shall have become effective (or,
if a post-effective amendment is required to be filed pursuant to Rule
430A under the Act, such post-effective amendment shall become
effective) not later than 5:00 p.m. Dallas, Texas time, on the
execution date hereof or at such later date and time as you may
approve in writing and, at the Closing Date (and any settlement date
pursuant to Section 3(b) hereof), no stop order suspending the
effectiveness of the Registration Statement or any qualification in
any jurisdiction shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company
or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the
Registration Statement or Prospectus or otherwise) shall have been
complied with to the Representative's reasonable satisfaction.
<PAGE>
(b) The Company shall have furnished to the Representative the
opinion of Wolin, Fuller, Ridley & Miller, counsel for the Company, or
other counsel acceptable to the Underwriters addressed to the
Underwriters and dated the Closing Date (and any settlement date
pursuant to Section 3(b) hereof), to the effect that:
(i) The Registration Statement has become effective under
the Act; any required filing of the Prospectus or any supplements
thereto pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); to the best
knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any qualification
in any jurisdiction has been issued and no proceedings for that
purpose have been instituted or threatened; the Registration
Statement and the Prospectus (and any amendments or supplements
thereto) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations
thereunder (other than the financial statements and related
schedules, as to which such counsel need make no statement).
(ii) Except as set for in the Prospectus, the Company has no
subsidiaries.
(iii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
Province of Ontario, with requisite corporate power and authority
to own its properties and conduct its business as described in
the Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction in which it conducts its business or owns property
and in which the failure, individually or in the aggregate, to be
so qualified would have a Material Adverse Effect. The Company
has all necessary and material authorizations, approvals, orders,
licenses, certificates and permits of and from all government
regulatory officials and bodies, to own its properties and
conduct its business as described in the Prospectus, except where
failure to obtain such authorizations, approvals, orders,
licenses, certificates or permits would not have a Material
Adverse Effect.
(iv) The Company does not own any shares of capital stock or
any other equity securities of any corporation or any equity
interest in any firm, partnership, association or other entity,
other than as described in the Prospectus.
(v) The Company has authorized and outstanding share
capitalization as set forth in the Prospectus; the capital stock
of the Company conforms in all material respects to the
description thereof contained in the Prospectus; all outstanding
shares of Common Stock have been duly and validly authorized and
issued and are fully paid and nonassessable and the certificates
therefor are in valid and sufficient form in accordance with the
laws of the Province of Ontario and the Company's Bylaws; there
are no other classes of stock outstanding except Common Stock as
described in the Prospectus; all outstanding options to purchase
shares of Common Stock have been duly and validly authorized and
issued; except as described in the Prospectus, there are no
options, warrants or rights to acquire, or debt instruments
convertible into or exchangeable for, or other agreements or
understandings to which the Company is a party, outstanding or in
existence, entitling any person to purchase or otherwise acquire
any shares of capital stock of the Company; the issuance and sale
of the Securities have been duly and validly authorized and, when
issued and delivered and paid for in accordance with the terms of
this Agreement, the Securities will be fully paid and
nonassessable and free from preemptive rights, and will conform
in all respects to the description thereof contained in the
Prospectus; the Warrants and Underwriters' Warrants constitute
valid and binding obligations of the Company enforceable in
accordance with their terms (subject to customary bankruptcy and
equitable remedy exceptions) and the Company has reserved a
sufficient number of shares of Common Stock for issuance upon
exercise thereof (including the Warrants included in the
Underwriters' Warrants); the Warrants and Underwriters' Warrants
possess the rights, privileges and characteristics as represented
in the forms filed as exhibits to the Registration Statement and
as described in the Prospectus; and the Securities (other than
the Underwriters' Warrants) have been approved for listing on the
American Stock Exchange upon notice of issuance thereof. Each
offer and sale of securities of the Company referred to in Item
26 of Part II of the Registration Statement was effected in
compliance with the Act and the rules and regulations thereunder,
and with all applicable state securities and blue sky ("Blue
Sky") laws.
<PAGE>
(vi) Other than as described in the Prospectus, there is no
pending or, to the best knowledge of such counsel, threatened
action, suit or proceeding before any court or governmental
agency, authority or body, domestic or foreign, or any arbitrator
involving the Company of a character required to be disclosed in
the Registration Statement or the Prospectus that is not
adequately disclosed in the Prospectus, and, to the best
knowledge of such counsel, there is no contract or other document
of a character required to be described in the Registration
Statement or the Prospectus, or to be filed as an exhibit, which
is not described or filed as required.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and
binding agreement and obligation of the Company enforceable
against it in accordance with its terms (subject to customary
bankruptcy and equitable remedy exceptions, and limitations under
the Act as to the enforceability of indemnification provisions).
(viii) The Company has requisite corporate power and
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities to be
sold by it in the manner provided in this Agreement. The Company
has taken all necessary corporate action to authorize the
execution and delivery of, and the performance of its obligations
under, this Agreement.
(ix) Neither the execution, delivery and performance of this
Agreement by the Company, the offering, issue and sale of the
Securities, nor the consummation of any other of the transactions
contemplated herein, nor the fulfillment of the terms hereof,
will conflict with or result in a breach or violation of, or
constitute a default (or an event that with notice or lapse of
time, or both, would constitute a default) under, or result in
the imposition of a lien on any properties of the Company or an
acceleration of indebtedness pursuant to, the Articles of
Incorporation or bylaws of the Company, or any of the terms of
any indenture or other agreement or instrument to which the
Company is a party or by which the Company or any of its
properties are bound, or any federal, state or local law, rule,
regulation of any court, governmental or regulatory body, stock
exchange or arbitrator having jurisdiction over the Company or
any of its assets. The Company is not (A) in violation of its
Articles of Incorporation or bylaws or (B) in breach of or
default under any of the terms of any indenture or other
agreement or instrument to which it is a party or by which it or
its properties are bound, which breach or default described in
this clause (B) would, individually or in the aggregate, have a
Material Adverse Effect. Neither the offering, issue and sale of
the Securities nor the consummation of any other of the
transactions contemplated herein, nor the fulfillment of the
terms hereof, will conflict with or result in a breach or
violation of, or constitute a default (or an event that with
notice or lapse of time, or both, would constitute a default)
under, or result in the imposition of a lien on any properties of
the Company, or an acceleration of indebtedness pursuant to, the
Articles of Incorporation or bylaws of the Company, or any of the
terms of any indenture or other agreement or instrument to which
the Company is a party or by which any of their respective
properties are bound, or any law, rule, regulation, court decree,
judgment or other order of any court, governmental or regulatory
body, stock exchange or arbitrator having jurisdiction over the
Company or any of its assets. The Company is not (A) in violation
of its Articles of Incorporation or bylaws or (B) in breach of or
default under any of the terms of any indenture or other
agreement or instrument to which it is a party or by which it or
its properties are bound, which breach or default described in
this clause (B) would, individually or in the aggregate, have a
Material Adverse Effect.
(x) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to
it any shares of capital stock in consequence of the issue and
sale of the Securities to be sold by the Company hereunder nor
does any person have preemptive rights, or rights of first
refusal or other rights to purchase any of the Securities. Except
as referred to in the Prospectus, no person holds a right to
require or participate in a registration under the Act of Common
Stock or any other equity securities of the Company.
<PAGE>
(xi) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or
body is required to be obtained or filed by or on behalf of the
Company in connection with the transactions contemplated herein,
except such as may have been obtained or made and registration of
the Securities under the Act, and such as may be required under
the Blue Sky laws of any jurisdiction.
(xii) The Company is not in violation of or default under
any judgment, ruling, decree or order or any statute, rule or
regulation of any court or other United States governmental
agency or body, including any applicable laws respecting
employment, immigration and wages and hours, in each case, where
such violation or default could have a Material Adverse Effect.
The Company is not involved in any labor dispute nor, to the best
knowledge of such counsel, is any labor dispute threatened.
(xiii) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as
amended.
(xiv) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on
behalf of the Company and the Registration Statement has been
duly executed pursuant to such authorization by and on behalf of
the Company.
(xv) The Company owns or possesses, or has the right to use
pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights
necessary to carry on its business as described in the
Prospectus, and, except as set forth in the Prospectus, the
Company has not received any notice of either (i) default under
any of the foregoing, or (ii) infringement of or conflict with
asserted rights of others with respect to, or challenge to the
validity of, any of the foregoing which, in the aggregate, if the
subject of an unfavorable decision, ruling or finding, could have
a Material Adverse Effect.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of
the Company, representatives of the independent public accountants of
the Company and representatives of the Underwriters at which the
contents of the Registration Statement and Prospectus were discussed
and, although such counsel is not passing upon and does not assume
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus
(except as and to the extent stated in the first three clauses of
subparagraph (v) above), on the basis of the foregoing and on such
counsel's participation in the preparation of the Registration
Statement and the Prospectus, nothing has come to the attention of such
counsel that causes such counsel to believe that the Registration
Statement, at the Effective Date and at the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), contained or contains
any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or that the Prospectus, at the date of such
Prospectus or at the Closing Date (or any settlement date pursuant to
Section 3(b) hereof), or any amendment or supplement to the Prospectus,
as of its respective date or as of the Closing Date (or any settlement
date pursuant to Section 3(b) hereof) contained or contains any untrue
statement of a material fact or omitted or omits to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no
comment with respect to the financial statements and schedules and
other financial or statistical data included in the Registration
Statement or Prospectus).
Counsel may rely on the opinion of Weir & Foulds as to matters of
Canadian law.
References to the Prospectus in this Section 7(b) shall
include any amendments or supplements thereto.
<PAGE>
(c) The Representative shall have received from Maurice J.
Bates, L.L.C., counsel for the Underwriters, an opinion dated the
Closing Date (and any settlement date pursuant to Section 3(b) hereof),
with respect to the issuance and sale of the Securities, and with
respect to the Registration Statement, the Prospectus and other related
matters as the Representative may reasonably require, and the Company
shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Representative a
certificate of the Company, signed by its President and Chief Executive
Officer, dated the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), to the effect that each has carefully examined
the Registration Statement, the Prospectus (and any supplements
thereto) and this Agreement, and, after due inquiry, that:
(i) As of the Closing Date (and any settlement date
pursuant to Section 3(b) hereof), the statements made in the
Registration Statement and the Prospectus are true and correct
and the Registration Statement and the Prospectus do not
contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(ii) No order suspending the effectiveness of the
Registration Statement or the qualification or registration of
the Securities under the securities or Blue Sky laws of any
jurisdiction is in effect and no proceeding for such purpose
is pending before or, to the knowledge of such officers,
threatened or contemplated by the Commission or the
authorities of any such jurisdiction; and any request for
additional information with respect to the Registration
Statement or the Prospectus on the part of the staff of the
Commission or any such authorities brought to the attention of
such officers has been complied with to the satisfaction of
the staff of the Commission or such authorities.
(iii) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (x) there has not been any change in the capital
stock or short- or long-term debt of the Company, except as
set forth in or contemplated by the Registration Statement and
the Prospectus, (y) there has not been any material adverse
change in the business, prospects, properties, management,
results of operations or condition (financial or otherwise) of
the Company, whether or not arising from transactions in the
ordinary course of business, in each case, other than as set
forth in or contemplated by the Registration Statement and the
Prospectus, and (z) the Company has not sustained any material
interference with its business or properties from fire,
explosion, flood or other casualty, whether or not covered by
insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree,
which is not set forth in the Registration Statement and the
Prospectus.
(iv) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, there has been no litigation instituted against
the Company or any of its respective officers or directors,
and since such dates there has been no proceeding instituted
or, to the best knowledge of such officers, threatened against
the Company or any of its officers or directors before any
federal, state or county court, commission, regulatory body,
administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding could have a Material Adverse
Effect.
(v) Each of the representations and warranties of the
Company in this Agreement is true and correct in all material
respects on and as of the Execution Time and the Closing Date
(and any settlement date pursuant to Section 3(b) hereof) with
the same effect as if made on and as of the Closing Date (and
any settlement date pursuant to Section 3(b) hereof).
<PAGE>
(vi) Each of the covenants required in this Agreement
to be performed by the Company on or prior to the Closing Date
(and any settlement date pursuant to Section 3(b) hereof) has
been duly, timely and fully performed in all material
respects, and each condition required herein to be complied
with by the Company on or prior to the Closing Date (and any
settlement date pursuant to Section 3(b) hereof) has been
duly, timely and fully complied with in all material respects.
(e) At the Execution Time and on the Closing Date (and any
settlement date pursuant to Section 3(b) hereof).Hein + Associates,
LLP. shall have furnished to the Representative letters, dated as of
such dates, in form and substance satisfactory to the Representative,
confirming that they are independent accountants within the meaning of
the Act and the applicable rules and regulations thereunder and stating
in effect that:
(i) In their opinion, the audited financial
statements of the Company for the fiscal year ended June 30,
1996, and the unaided statements for the six months ended
December 31, 1996 compiled by the Company and the notes to the
financial statements and financial statement schedules for
those periods included in the Registration Statement and the
Prospectus, comply in form in all material respects with the
applicable accounting requirements of the Act and the
applicable rules and regulations thereunder.
(ii) On the basis of a reading of the latest
unaudited financial statements made available by the Company,
carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing
standards), a reading of the minutes of the meetings of the
stockholders, directors and committees of the Company, and
inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the
Company, nothing came to their attention that caused them to
believe that with respect to the period subsequent to June 30,
1996, at a specified date not more than five business days
prior to the date of the letter, (y) there were any changes in
the short- or long-term debt or capital stock of the Company,
or decreases in net current assets, net assets or
stockholders' equity of the Company as compared with the
amounts shown on the June 30, 1996 balance sheet included in
the Registration Statement and the Prospectus, or (z) there
were any decreases in reserves, sales, net income or income
from operations, of the Company, as compared with the
corresponding period in the preceding year, except for changes
or decreases which the Registration Statement discloses have
occurred or may occur and except for changes or decreases, set
forth in such letter, in which case (A) the letter shall be
accompanied by an explanation by the Company as to the
significance thereof unless said explanation is not deemed
necessary by the Representative and (B) such changes or
decreases and the explanation thereof shall be acceptable to
the Representative, in its sole discretion.
(iii) They have performed certain other specified
procedures as a result of which they determined that all
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company ) set forth in the Registration Statement and the
Prospectus and specified by you prior to the Execution Time,
agrees with the accounting records of the Company.
(iv) On the basis of a reading of the unaudited
balance sheet as of December 31, 1996 and the related
unaudited statements of operations for the six months ended
December 31, 1996, and the procedures specified by you prior
to the Execution Time, nothing came to their attention that
caused them to believe that the above described balance sheet
and statements of operations had not been properly compiled on
the bases described in the notes thereto.
References to the Prospectus in this Section 6(e)
shall include any amendments or supplements thereto.
<PAGE>
The Representative shall have also received from Hein
+ Associates a letter to the Company stating that the Company's system
of internal accounting controls taken as a whole are sufficient to meet
the broad objectives of internal accounting control insofar as those
objectives pertain to the prevention or detection of errors or
irregularities in amounts that would be material to the financial
statements of the Company.
(f) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there shall
not have been (i) any changes or decreases from those specified in the
letters referred to in Section 6(e) hereof which have been accepted by
the Representative pursuant thereto or (ii) any change in the
properties, assets, results of operations, business, capitalization,
net worth, prospects, general affairs or condition (financial or
otherwise) of the Company the effect of which is, in the sole judgment
of the Representative, so material and adverse as to make it
impractical or inadvisable to proceed with the public offering or
delivery of the Securities as contemplated by the Registration
Statement and the Prospectus.
(g) On or prior to the Effective Date, the Securities shall
have been approved for listing on the American Stock Exchange.
(h) The Company shall not have sustained any uninsured
substantial loss as a result of fire, flood, accident or other
calamity.
(i) The Company shall have furnished to the Representative a
certificate of the Secretary of the Company certifying as to certain
information and other matters as the Representative may reasonably
request.
(j) The Company shall have furnished to the Representative
such further information, certificates and documents as the
Representative may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in any respect when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above
or elsewhere in this Agreement shall not be in all respects reasonably
satisfactory in form and substance to the Representative and its
counsel, this Agreement and all obligations of the Underwriters
hereunder may be canceled at, or at any time prior to, the Closing Date
(or any settlement date, pursuant to Section 3(b) hereof), by the
Representative. Notice of such cancellation shall be given to the
Company in writing or by telephone, facsimile or telegraph confirmed in
writing.
7. Fees and Expenses and Underwriters' Warrants. The Company agrees to pay or
cause to be paid the following:
(a) The fees, disbursements and expenses of its own counsel and
accountants in connection with the registration of the Securities under the
Act and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus, any
Prospectus, and any drafts thereof, and amendments and supplements thereto,
and the mailing and delivery of copies thereof to the Underwriters and
dealers;
(b) All expenses in connection with the qualification of the
Securities for offering under state securities laws, including the fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky Memorandum;
(c) All filing and other fees in connection with filing with the NASD,
and complying with applicable review requirements thereof;
(d) The cost of preparing and printing certificates for the
Securities;
(e) All expenses, taxes, fees and commissions, including, without
limitation, any and all fixed transfer duties, sellers' and buyers' stamp
taxes or duties on the purchase and sale of the Securities and stock
exchange brokerage and transaction levies with respect to the purchase and,
if applicable, the sale of the Securities (the latter to the extent paid
and not reimbursed) (i) incident to the sale and delivery by the Company of
the Securities to the Underwriters, and (ii) incident to the sale and
delivery of the Securities by the Underwriters to the initial purchasers
thereof;
<PAGE>
(f) The costs and charges of any transfer agent and registrar;
(g) The fees and expenses in connection with the registration of the
Securities under the Securities Exchange Act and the qualification of the
Securities for listing on the American Stock Exchange;
(h) The cost of printing, producing and distributing this Agreement,
the Agreement among Underwriters, the Selected Dealers Agreement, the
related syndication materials and the Preliminary and Final Blue Sky
Memoranda;
(i) All travel expenses (including without limitation airfare and
hotel) of the Company's officers, directors and other representatives in
connection with the road show;
(j) A nonaccountable expense allowance of 2.5% of the gross proceeds
from the offering (including the Units described in Section 2(b) hereof)
payable to the Representative, provided, however, in the event that the
offering is not consummated, the Representative will be reimbursed only for
its actual out of pocket expenses; and
(k) All other costs and expenses incident to the performance of the
Company's obligations hereunder.
In addition to the sums payable to the Representative as
provided elsewhere herein and in addition to the Underwriters' Option,
the Underwriters shall be entitled to receive, as partial compensation
for their services, unit purchase warrants for the purchase of up to an
additional 125,000 Units (the "Underwriters' Warrants"). The
Underwriters' Warrants shall be issued pursuant to the Warrant and
Registration Rights Agreement (the "Underwriters' Warrant Agreement")
in the form of Exhibit B attached hereto and shall be exercisable, in
whole or in part, for a period of four years commencing one year from
the date of the Prospectus, at 120% of the public offering price of the
Units set forth on the cover page of the Prospectus. The Underwriters'
Warrants, including the Warrants issuable upon exercise thereof, shall
be non-transferable for one year from the date of issuance of the
Underwriters' Warrants, except as provided in the Underwriters' Warrant
Agreement. The terms of the Units subject to the Underwriters' Warrants
shall be the same as the Units sold to the public.
Without limiting in any respect the foregoing obligations of
the Company, which obligations shall survive any termination of this
Agreement, if the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the
Underwriters set forth in Section 6 hereof is not satisfied, because of
any termination pursuant to Section 10 hereof, or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply in all material respects with any provision
hereof other than by reason of a default by any of the Underwriters,
the Company agrees to reimburse the Underwriters, upon demand, for all
out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities to the extent the amounts
paid pursuant to Section 7(j) hereof are insufficient therefor.
<PAGE>
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person who controls any Underwriter within the meaning of the Act
or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of a
material fact contained in (i) Section 1 of this Agreement, the
Registration Statement, any Preliminary Prospectus or the Prospectus, or in
any amendment thereof or supplement thereto, or (ii) any application or
other document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Securities under
the securities or Blue Sky laws thereof or filed with the Commission or any
securities association or securities exchange, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter through the Representative
specifically for use in the Registration Statement or Prospectus; provided
further, that with respect to any untrue statement or omission, or any
alleged untrue statement or omission, made in any Preliminary Prospectus,
the indemnity agreement contained in this Section 8 shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling any
such Underwriter) from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Securities concerned to the
extent that such untrue statement or omission, or alleged untrue statement
or omission, has been corrected in the Prospectus and the failure to
deliver the Prospectus was not a result of the Company's failure to comply
with its obligations under Sections 5(b) and 5(d) hereof. The indemnity
agreement contained in this section 8 will be in addition to any liability
which the Company may otherwise have. The Company will not, without the
prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act is a party to such claim, action, suit or proceeding),
unless the settlement or compromise or consent includes an unconditional
release of such Underwriter and each such controlling person from all
liability arising out of such claim, action, suit or proceeding,
satisfactory in form and substance to the Representative.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of the Act or the Exchange Act to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only with reference to
written information relating to such Underwriter furnished to the Company
by or on behalf of such Underwriter through the Representative specifically
for use in the Registration Statement or Prospectus. The Company
acknowledges that the corporate names of the Underwriters and the
information under the heading "Underwriting" in the Prospectus and in any
Preliminary Prospectus constitute the only information furnished in writing
by or on behalf of the several Underwriters. The obligations of each
Underwriter under this subsection (b) shall be in addition to any liability
which the Underwriters may otherwise have.
<PAGE>
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made against
the indemnifying party under this Section 8, notify the indemnifying party
in writing of the commencement thereof and the indemnifying party shall
assume the defense thereof, including the employment of counsel reasonably
satisfactory to the indemnified party and the payment of all expenses; but
the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party, unless such
omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. All such expenses shall be paid by the indemnifying
party as incurred by an indemnified party. Any such indemnified party shall
have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party has agreed to pay such fees and expenses or (ii) the
indemnifying party shall have failed promptly after notice by such
indemnified party to assume the defense of such action or proceeding and
employ counsel reasonably satisfactory to the indemnified party in any such
action, suit or proceeding or (iii) the named parties in any such action or
proceeding (including any impleaded parties) include both such indemnified
party and the indemnifying party, and such indemnified party shall have
been advised by counsel that there is a conflict of interest on the part of
counsel employed by the indemnifying party to represent such indemnified
party or there may be one or more legal defenses available to such
indemnified party which are different from or additional to those available
to the indemnifying party (in which case, if such indemnified party
notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action or
proceeding on behalf of the indemnified party or parties, it being
understood, however, that the indemnifying party shall not, in connection
with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for all such
indemnified parties, which firm shall be designated in writing to the
indemnifying party). Any such fees and expenses payable by the indemnifying
party shall be paid to or on behalf of the indemnified party entitled
thereto as incurred. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent, which shall
not be unreasonably withheld.
<PAGE>
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 8(a) or
8(b) is applicable in accordance with its terms but is for any reason held
by a court to be unavailable from the indemnifying party on grounds of
policy or otherwise, the Company and the Underwriters shall contribute to
the aggregate losses, claims, damages and liabilities (including legal or
other expenses reasonably incurred in connection with investigating or
defending same) to which the Company and one or more of the Underwriters
may be subject (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Units or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above, but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection
with the statements or omissions that resulted in such losses, claims,
damages and liabilities, as well as any other relevant equitable
considerations; provided, however, that (x) in no case shall any
Underwriter (except as may be provided in the Agreement Among Underwriters
relating to the offering of the Securities) be responsible for any amount
in excess of the underwriting discount applicable to the Units to be
purchased by such Underwriter hereunder pursuant to this Section 8 and (y)
no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The relative
benefits received by the Company on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Units (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commission received by the Underwriters by reason of the sale of Units by
the Company, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of material
fact or the omission or alleged omission to state a material fact relates
to information supplied by the Company on the one hand or by the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. For purposes of this Section 8, each person who controls an
Underwriter within the meaning of the Act shall have the same rights to
contribution as such Underwriter, and each person who controls the Company
within the meaning of the Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall
have the same rights to contribution as the Company, subject in each case
to clause (y) of this Section 8(d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit
or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this
Section 8, notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
other obligation it or they may have hereunder or otherwise.
9. Default by an Underwriter. If any one or more Underwriters shall fail to
purchase and pay for any of the Units agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under
this Agreement, the remaining Underwriters shall be obligated severally to
take up and pay for (in the respective proportions which the number of
Units set forth opposite their names in Schedule I hereto bears to the
aggregate number of Units set forth opposite the names of all the remaining
Underwriters) the Units which the defaulting Underwriter or Underwriters
agreed but failed to purchase; provided, however, that if the aggregate
number of Units which the defaulting Underwriter or Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate number of Units set
forth in Schedule I hereto, the remaining Underwriters shall have the right
to purchase all, but shall not be under any obligation to purchase any, of
such Units, and if such nondefaulting Underwriters do not purchase all of
such Units, this Agreement will terminate without liability to any
non-defaulting Underwriter or the Company except as otherwise provided in
Section 7. In the event of a default by any Underwriter as set forth in
this Section 9, the Closing Date shall be postponed for such period, not
exceeding seven days, as the Representative shall determine in order that
the required changes in the Registration Statement and the Prospectus or in
any other documents or arrangements may be effected. Nothing contained in
this Agreement shall relieve any defaulting Underwriter of its liability,
if any, to the Company or any nondefaulting Underwriter for damages
occasioned by its default hereunder.
<PAGE>
10. Termination. This Agreement shall be subject to termination in the absolute
discretion of the Representative, by notice given to the Company prior to
delivery of and payment for the Securities, if prior to such time (a) a
suspension or material limitation in trading in securities generally on the
New York or American Stock Exchange, the Nasdaq National Market, or a fall
in the Dow Jones Industrial Average of either ten percent (10%) or more,
(b) a banking moratorium shall have been declared by federal, New York or
Texas state authorities, or (c) the United States shall have engaged in
hostilities which shall have resulted in the declaration, on or after the
date hereof, of a national emergency or war, or (d) a change in national or
international political, financial or economic conditions or national or
international equity markets shall have occurred, and with respect to
events specified in clause (c) or (d) hereof, if the effect of any such
event is, in the reasonable judgment of the Representative, so material and
adverse to the issuer as to make it impractical or inadvisable to proceed
with the public offering or delivery of the Securities due to the
materially impaired investment quality of the Securities as contemplated by
the Registration Statement and the Prospectus.
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the
Company, its officers, and the Underwriters set forth in, referred to in,
or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter,
the Company, or any of the officers, directors or controlling persons
referred to in Section 8 hereof, and will survive delivery of and payment
for the Securities. The provisions of Sections 7 and 8 hereof shall survive
the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and effective only
on receipt, and will be mailed, delivered, telegraphed or sent by facsimile
transmission and confirmed:
to the Representative at:
National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Attention: Robert A. Shuey, III
Facsimile No. (214) 987-2091
<PAGE>
to the Company at:
8350 North Central Expressway
Suite M2030
Dallas, Texas 75206
Attention: Eugene A. Soltero
Facsimile No. (214) 363-4294
13. Successors. This Agreement will inure to the benefit of and be binding upon
the parties hereto and their respective successors and the officers,
directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. Counterparts. This Agreement may be signed in one or more counterparts,
each of which shall be an original, with the same effect as if the
signatures thereon and hereon were on the same instrument.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas, without reference to
conflict of laws or principles thereunder. All disputes relating to this
Underwriting Agreement shall be tried before a court of Texas located in
Dallas County, Texas to the exclusion of all other courts that might have
jurisdiction.
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several Underwriters.
Very truly yours,
Cotton Valley Resources Corporation
By:
Eugene A. Soltero, Chairman of the Board
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
National Securities Corporation
By:
Name:
Title:
For themselves and the other several Underwriters in Schedule I to the foregoing
Agreement.
<PAGE>
SCHEDULE I
Underwriters
National Securities Corporation
<PAGE>
SCHEDULE II
<PAGE>
SCHEDULE III
<PAGE>
EXHIBIT A
Form of Lock-Up Agreement
, 1997
National SECURITIES CORPORATION
8214 Westchester, Suite 500
Dallas, Texas 75225
Re: Agreement Not to Sell
Gentlemen:
Reference is made to the proposed public offering of 1,250,000 Units by
Cotton Valley Resources Corporation. (the "Company"), to be made pursuant to a
Registration Statement (the "Registration Statement") filed with the Securities
and Exchange Commission and to be underwritten by National Securities
Corporation ("National") as representative (the "Representative") of the several
underwriters (the "Underwriters") to be named in an underwriting agreement.
In consideration of the offer and sale of such Units by the Company and
the Underwriters and of other good and valuable consideration the receipt of
which is hereby acknowledged, the undersigned agrees that, without the express
prior written consent of National acting alone, he will not offer, sell, make
any short sale of, loan, encumber, grant any option for the purchase of, or
otherwise dispose of (the "Resale Restrictions"), any securities of the Company
beneficially owned or otherwise held by the undersigned as of the date of this
letter or hereafter acquired by the undersigned (other than those securities
included in the registration statement, if any) (collectively, the "Shares")
until (the "Lock-up Period"). The foregoing Resale Restrictions are
expressly agreed to preclude the holder of the Shares from engaging in any
hedging or other transaction which may lead to or result in a sale of Shares
during the Lock-up Period even if such Shares would be sold by someone other
than the undersigned. Such prohibited hedging or other transactions would
include without limitation any short sale (whether or not against the box), any
pledge or any purchase, sale or grant of any right (including without limitation
any put or call option) with respect to any of the Shares.
The undersigned agrees and consents to the entry of stop transfer
instructions with the transfer agent for the Company's Common Stock against any
transfer of shares of Common Stock by the undersigned in contravention of the
Resale Restrictions. In addition, the undersigned agrees to be bound by the
Resale Restrictions whether or not the undersigned participates in the public
offering. The undersigned understands that the Underwriters and the Company will
rely upon the representations set forth in this letter in proceeding with the
public offering. The undersigned understands that the agreements of the
undersigned are irrevocable and shall be binding upon the undersigned's heirs,
legal representatives, successors and assigns.
<PAGE>
Notwithstanding the foregoing, the undersigned may transfer any or all
of the Shares either during his lifetime or on death by will or intestacy to his
immediate family or to a trust the beneficiaries of which are exclusively the
undersigned and/or a member or members of his immediate family; provided,
however, that in any such case it shall be a condition to the transfer that the
transferee execute an agreement stating that the transferee is receiving and
holding the Shares except in accordance with this Lock-up Agreement. For
purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor.
Very truly yours,
By:
Signature
Accepted and Agreed to:
NATIONAL SECURITIES CORPORATION
As Representative of the
Several Underwriters
By:
Title:
PLEASE COMPLETE AND RETURN TO:
National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
<PAGE>
EXHIBIT B
Underwriters' Warrant Agreement
COTTON VALLEY RESOURCES CORPORATION
and
---------------
Warrant Agent
WARRANT AGREEMENT
Dated as of , 1997
<PAGE>
WARRANT AGREEMENT - Page 1
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Section Page
ss.1. Appointment of Warrant Agent........................................................................... 2
ss.2. Form of Warrant........................................................................................ 2
ss.3. Countersignature and Registration...................................................................... 2
ss.4. Transfers and Exchanges................................................................................ 2
ss.5. Exercise of Warrants................................................................................... 3
ss.6. Mutilated or Missing Warrants.......................................................................... 3
ss.7. Reservation and Registration of Common Stock........................................................... 4
ss.8. Warrant Price; Adjustments............................................................................. 4
ss.9. No Fractional Interests................................................................................ 8
ss.10. Notice to Warrantholders............................................................................... 9
ss.11. Disposition of Proceeds on Exercise of Warrants........................................................ 10
ss.12. Redemption of Warrants................................................................................. 10
ss.13. Merger or Consolidation or Change of Name of Warrant Agent............................................. 11
ss.14. Duties of Warrant Agent................................................................................ 11
ss.15. Change of Warrant Agent................................................................................ 13
ss.16. Identity of Transfer Agent............................................................................. 13
ss.17. Notices................................................................................................ 13
ss.18. Supplements and Amendments............................................................................. 14
ss.19. Successors............................................................................................. 14
ss.20. Merger or Consolidation of the Company................................................................. 14
ss.21. Texas Contract......................................................................................... 14
ss.22. Benefits of This Agreement............................................................................. 14
ss.23. Counterparts........................................................................................... 14
</TABLE>
<PAGE>
WARRANT AGREEMENT - Page 15
<PAGE>
WARRANT AGREEMENT, dated as of __________, 1997, between Cotton Valley
Resources Corporation, a corporation organized under the laws of the Province of
Ontario, Canada (hereinafter called the "Company"), and
_______________________.,as warrant agent (hereinafter called the "Warrant
Agent");
WHEREAS, the Company proposes to issue 2,500,000 Redeemable Common
Stock Purchase Warrants (hereinafter called the " Warrants"), entitling the
holders thereof to purchase one share of Common Stock, no par value (hereinafter
called the "Common Stock") for each Warrant, in connection with the proposed
issuance by the Company of 1,250,000 Units, each Unit consisting of two shares
of Common Stock and two Warrants, and the Company also proposes to issue up to
187,500 Warrants underlying the Underwriters' over-allotment option and 125,000
Warrants underlying a warrant to purchase Units to be granted to the
Representative of the Underwriters; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
registration, transfer, exchange and exercise of Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
ss.1. Appointment of Warrant Agent.1. Appointment of Warrant Agent. The
Company hereby appoints the Warrant Agent to act as agent for the Company in
accordance with the instructions hereinafter in this Agreement set forth, and
the Warrant Agent hereby accepts such appointment.
ss.2. Form of Warrant.2. Form of Warrant. The text of the Warrant and of
the form of election to purchase shares to be printed on the reverse thereof
shall be substantially as set forth in Exhibit A attached hereto. The Warrant
Price to purchase one share of Common Stock shall be as provided and defined in
ss.8. The Warrants shall be executed on behalf of the Company by the manual or
facsimile signature of the present or any future Chairman of the Board or
President or Vice President of the Company, under its corporate seal, affixed or
in facsimile, attested by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary of the Company.
Warrants shall be dated as of the date of issuance thereof by the
Warrant Agent either upon initial issuance or upon transfer or exchange.
ss.3. Countersignature and Registration.3. Countersignature and
Registration. The Warrant Agent shall maintain books for the transfer and
registration of the Warrants. The Warrants shall be countersigned by the Warrant
Agent (or by any successor to the Warrant Agent then acting as warrant agent
under this Agreement) and shall not be valid for any purpose unless so
countersigned. Warrants may be so countersigned, however, by the Warrant Agent
(or by its successor as warrant agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
ss.4. Transfers and Exchanges.4.Transfers and Exchanges. The Warrant
Agent shall transfer, from time to time after the sale of the Units, any
outstanding Warrants upon the books to be maintained by the Warrant Agent for
that purpose, upon surrender thereof for transfer properly endorsed or
accompanied by appropriate instructions for transfer. Upon any such transfer, a
new Warrant shall be issued to the transferee and the surrendered Warrant shall
be canceled by the Warrant Agent. Warrants so canceled shall be delivered by the
Warrant Agent to the Company from time to time. The Warrants may be exchanged at
the option of the holder thereof, when surrendered at the office of the Warrant
Agent, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of shares of Common Stock. The Warrant Agent is hereby irrevocably authorized to
countersign in accordance with ss.3 of this Agreement the new Warrants required
pursuant to the provisions of this Section, and the Company, whenever required
by the Warrant Agent, will supply the Warrant Agent with Warrants duly executed
on behalf of the Company for such purpose.
<PAGE>
ss.5. Exercise of Warrants.5. Exercise of Warrants. Subject to the
provisions of this Agreement, each registered holder of Warrants shall have the
right, which may be exercised as in such Warrants expressed, to purchase from
the Company (and the Company shall issue and sell to such registered holder of
Warrants) the number of fully paid and nonassessable shares of Common Stock
specified in such Warrants, upon surrender of such Warrants to the Company at
the office of the Warrant Agent, with the form of election to purchase on the
reverse thereof duly filled in and signed, and upon payment to the Warrant Agent
for the account of the Company of the Warrant Price for the number of shares of
Common Stock in respect of which such Warrants are then exercised. Payment of
such Warrant Price may be made in cash, or by certified or official bank check,
payable in United States dollars, to the order of the Warrant Agent. No
adjustment shall be made for any dividends on any shares of Common Stock
issuable upon exercise of a Warrant. Upon such surrender of Warrants, and
payment of the Warrant Price as aforesaid, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
registered holder of such Warrants and in such name or names as such registered
holder may designate, a certificate or certificates for the number of full
shares of Common Stock so purchased upon the exercise of such Warrants. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become a holder of
record of such shares as of the date of the surrender of such Warrants and
payment of the Warrant Price as aforesaid; provided, however, that if, at the
date of surrender of such Warrants and payment of the Warrant Price, the
transfer books for the Common Stock or other class of stock purchasable upon the
exercise of such Warrants shall be closed, the certificates for the shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened and until such date the Company
shall be under no duty to deliver any certificate for such shares; provided
further, however, that the transfer books aforesaid, unless otherwise required
by law, shall not be closed at any one time for a period longer than 20 days.
The rights of purchase represented by the Warrants shall be exercisable, at the
election of the registered holders thereof, either as an entirety or from time
to time for part only of the shares specified therein, and in the event that any
Warrant is exercised in respect of less than all of the shares specified
therein, a new Warrant or Warrants will be issued for the remaining number of
shares specified in the Warrant so surrendered, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrants
pursuant to the provisions of this Section and of ss.3 of this Agreement and the
Company, whenever required by the Warrant Agent, will supply the Warrant Agent
with Warrants duly executed on behalf of the Company for such purpose.
ss.6. Mutilated or Missing Warrants.6. Mutilated or Missing Warrants. In
case any of the Warrants shall be mutilated, lost, stolen or destroyed, the
Company will issue and the Warrant Agent will countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest; but only
upon receipt of evidence satisfactory to the Company and the Warrant Agent of
such loss, theft or destruction of such Warrant and indemnity, if requested,
also satisfactory to them. Applicants for such substitute Warrants shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Company or the Warrant Agent may prescribe.
ss.7. Reservation and Registration of Common Stock.7. Reservation and
Registration of Common Stock.
A. There have been reserved, and the Company shall at all times keep
reserved, out of the authorized and unissued shares of Common Stock, a number of
shares sufficient to provide for the exercise of the rights of purchase
represented by the Warrants, and the Transfer Agent for the Common Stock and
every subsequent Transfer Agent for any shares of the Company's capital stock
issuable upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares as shall be requisite for such purpose. The
Company will keep a copy of this Agreement on file with the Transfer Agent for
the Common Stock and with every subsequent Transfer Agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Warrant Agent is hereby irrevocably authorized
to requisition from time to time such Transfer Agent for stock certificates
required to honor outstanding Warrants. The Company will supply such Transfer
Agents with duly executed stock certificates for such purpose and will itself
provide or otherwise make available any cash which may be issuable as provided
in ss.9 of this Agreement. All Warrants surrendered in the exercise of the
rights thereby evidenced shall be canceled by the Warrant Agent and shall
thereafter be delivered to the Company, and such canceled Warrants shall
constitute sufficient evidence of the number of shares of stock which have been
issued upon the exercise of such Warrants.
<PAGE>
B. The Company represents that it has registered under the Securities
Act of 1933 the shares of Common Stock issuable upon exercise of the Warrants
and will use its best efforts to maintain the effectiveness of such registration
by post-effective amendment during the entire period in which the Warrants are
exercisable, and that it will use its best efforts to qualify such Common Stock
for sale under the securities laws of such states of the United States as may be
necessary to permit the exercise of the Warrants in the states in which the
Units are initially qualified and to maintain such qualifications during the
entire period in which the Warrants are exercisable.
ss.8. Warrant Price; Adjustments.8. Warrant Price; Adjustments.
A. The price at which Common Stock shall be purchasable upon exercise
of Warrants at any time after the Common Stock and Warrants become
separately tradable until __________, 1998 (hereinafter called the "Warrant
Price") shall be $_____ per share of Common Stock or, if adjusted as
provided in this Section, shall be such price as so adjusted.
B. The Warrant Price shall be subject to adjustment from time to time
as follows:
(1) Except as hereinafter provided, in case the Company
shall at any time or from time to time after the date hereof
issue any additional shares of Common Stock for a consideration
per share less than the Warrant Price in effect immediately prior
to the issuance of such additional shares, or without
consideration, then, upon each such issuance, the Warrant Price
in effect immediately prior to the issuance of such additional
shares shall forthwith be reduced to a price (calculated to the
nearest full cent) determined by dividing:
(a) An amount equal to (i) the total number of shares
of Common Stock outstanding immediately prior to such issuance
multiplied by the Warrant Price in effect immediately prior to
such issuance, plus (ii) the consideration, if any, received
by the Company upon such issuance, by
(b) The total number of shares of Common Stock
outstanding immediately after the issuance of such additional
shares.
(2) The Company shall not be required to make any such
adjustment of the Warrant Price in accordance with the foregoing
if the amount of such adjustment shall be less than $.25
(adjustment will be made when cumulative adjustment equals or
exceeds $0.25) but in such case the Company shall maintain a
cumulative record of the Warrant Price as it would have been in
the absence of this provision (the "Constructive Warrant Price"),
and for the purpose of computing a new Warrant Price after the
next subsequent issuance of additional shares (but not for the
purpose of determining whether an adjustment thereof is required
under the terms of this paragraph) the constructive Warrant Price
shall be deemed to be the Warrant Price in effect immediately
prior to such issuance.
(3) For the purpose of this ss.8 the following provisions
shall also be applicable:
(a) In the case of the issuance of additional shares
of Common Stock for cash, the consideration received by the
Company therefor shall be deemed to be the net cash proceeds
received by the Company for such shares before deducting any
commissions or other expenses paid or incurred by the Company
for any underwriting of, or otherwise in connection with, the
issuance of such shares.
(b) In case of the issuance (otherwise than upon
conversion or exchange of shares of Common Stock) of
additional shares of Common Stock for a consideration other
than cash or a consideration a part of which shall be other
than cash, the amount of the consideration other than cash
received by the Company for such shares shall be deemed to be
the value of such consideration as determined in good faith by
the Board of Directors of the Company, as of the date of the
adoption of the resolution of said Board, providing for the
issuance of such shares for consideration other than cash or
for consideration a part of which shall be other than cash,
such fair value to include goodwill and other intangibles to
the extent determined in good faith by the Board.
<PAGE>
(c) In case of the issuance by the Company after the
date hereof of any security (other than the Warrants) that is
convertible into shares of Common Stock or of any warrants,
rights or options to purchase shares of Common Stock (except
the options and warrants referred to in subsection H of this
ss.8), (i) the Company shall be deemed (as provided in
subparagraph (e) below) to have issued the maximum number of
shares of Common Stock deliverable upon the exercise of such
conversion privileges or warrants, rights or options, and (ii)
the consideration therefor shall be deemed to be the
consideration received by the Company for such convertible
securities or for such warrants, rights or options, as the
case may be, before deducting therefrom any expenses or
commissions incurred or paid by the Company for any
underwriting of, or otherwise in connection with, the issuance
of such convertible security or warrants, rights or options,
plus (A) the minimum consideration or adjustment payment to be
received by the Company in connection with such conversion, or
(B) the minimum price at which shares of Common Stock are to
be delivered upon exercise of such warrants, rights or options
or, if no minimum price is specified and such shares are to be
delivered at an option price related to the market value of
the subject shares, an option price bearing the same relation
to the market value of the subject shares at the time such
warrants, rights or options were granted; provided that as to
such options such further adjustment as shall be necessary on
the basis of the actual option price at the time of exercise
shall be made at such time if the actual option price is less
than the aforesaid assumed option price. No further adjustment
of the Warrant Price shall be made as a result of the actual
issuance of the shares of Common Stock referred to in this
subparagraph (c). On the expiration of such warrants, rights
or options, or the termination of such right to convert, the
Warrant Price shall be readjusted to such Warrant Price as
would have pertained had the adjustments made upon the
issuance of such warrants, rights, options or convertible
securities been made upon the basis of the delivery of only
the number of shares of Common Stock actually delivered upon
the exercise of such warrants, rights or options or upon the
conversion of such securities.
(d) For the purposes hereof, any additional shares of
Common Stock issued as a stock dividend shall be deemed to
have been issued for no consideration.
(e) The number of shares of Common Stock at any time
outstanding shall include the aggregate number of shares
deliverable in respect of the convertible securities, rights
and options referred to in subparagraph (c) of this paragraph;
provided that with respect to shares referred to in clause (i)
of subparagraph (c), to the extent that such warrants,
options, rights or conversion privileges are not exercised,
such shares shall be deemed to be outstanding only until the
expiration dates of the warrants, rights, options or
conversion privileges or the prior cancellation thereof.
C. In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the Warrant Price in
effect immediately prior to such subdivision shall be proportionately reduced
and, in case the outstanding shares of the Common Stock of the Company shall be
combined into a smaller number of shares, the Warrant Price in effect
immediately prior to such combination shall be proportionately increased.
D. Upon each adjustment of the Warrant Price pursuant to the provisions
of this ss.8, the number of shares issuable upon the exercise of each Warrant
shall be adjusted by multiplying the Warrant Price in effect prior to the
adjustment by the number of shares of Common Stock covered by the Warrant and
dividing the product so obtained by the adjusted Warrant Price.
E. Except upon consolidation or reclassification of the shares of
Common Stock of the Company as provided for in subsection (C) hereof and except
for readjustment of the Warrant Price upon expiration of warrants, rights or
options as provided for in subparagraph (c) of paragraph 3 of subsection (B)
hereof, the Warrant Price in effect at any time may not be adjusted upward or
increased in any manner whatsoever.
<PAGE>
F. Irrespective of any adjustment or change in the Warrant Price or the
number of shares of Common Stock actually purchasable under the several
Warrants, the Warrants theretofore and thereafter issued may continue to express
the Warrant Price per share and the number of shares purchasable thereunder as
the Warrant Price per share and the number of shares purchasable were expressed
in the Warrants when initially issued.
G. If any capital reorganization or reclassification of the capital
stock of the Company (other than a distribution of stock in accordance with
ss.10(B)) or consolidation or merger of the Company with another corporation or
the sale of all or substantially all of its assets to another corporation shall
be effected, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the holder of each Warrant then outstanding shall thereafter have the
right to purchase and receive upon the basis and upon the terms and conditions
specified herein and in the Warrants and in lieu of the shares of the Common
Stock of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented by each such Warrant, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such Common stock immediately theretofore purchasable and receivable
upon the exercise of the rights represented by each such Warrant had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provisions shall be made with respect to the
rights and interest of the holder of each Warrant then outstanding to the end
that the provisions thereof (including without limitation provisions for
adjustment of the Warrant Price and of the number of shares purchasable upon the
exercise of each Warrant then outstanding) shall thereafter be applicable as
nearly as may be in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of each Warrant.
H. No adjustment of the Warrant Price shall be made in connection with
the issuance or sale of shares of Common Stock issuable pursuant to currently
outstanding options and warrants granted to officers, directors, employees,
advisory directors, or affiliates of the Company.
I. Whenever the Warrant Price is adjusted as herein provided, the
Company shall (a) forthwith file with the Warrant Agent a certificate signed by
the Chairman of the Board or the President or a Vice President of the Company
and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, showing in detail the facts requiring such adjustment
and the Warrant Price and the number of shares of Common Stock purchasable upon
exercise of the Warrants after such adjustment and (b) cause a notice stating
that such adjustment has been effected and stating the adjusted Warrant Price
and the number of shares of Common Stock purchasable upon exercise of the
Warrants to be published at least once a week for ___ consecutive weeks in a
newspaper of general circulation in Dallas, Texas and in New York, New York. The
Company, at its option, may cause a copy of such notice to be sent by first
class mail, postage prepaid, to each registered holder of Warrants at his
address appearing on the Warrant register. The Warrant Agent shall have no duty
with respect to any such certificate filed with it except to keep the same on
file and available for inspection by holders of Warrants during reasonable
business hours. The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of a Warrant to determine whether any facts exist
which may require any adjustment of the Warrant Price, or with respect to the
nature or extent of any adjustment of the Warrant Price when made, or with
respect to the method employed in making such adjustment.
J. The Company may retain a firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) selected by the Board of
Directors of the Company or the Executive Committee of said Board and approved
by the Warrant Agent, to make any computation required under this ss.8, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this ss.8.
K. In case at any time conditions shall arise by reason of action taken
by the Company which, in the opinion of the Board of Directors of the Company,
are not adequately covered by the other provisions of this Agreement and which
might materially and adversely affect the rights of the holders of the Warrants,
or in case at any time any such conditions are expected to arise by reason of
any action contemplated by the Company, the Board of Directors of the Company
shall appoint a firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial statements
of the Company), who shall give their opinion as to the adjustment, if any (not
inconsistent with the standards established in this ss.8), of the Warrant Price
and the number of shares of Common Stock purchasable pursuant hereto (including,
if necessary, any adjustment as to the property which may be purchasable in lieu
thereof upon exercise of the Warrants) which is, or would be, required to
preserve without dilution the rights of the holders of the Warrants. The Board
of Directors of the Company shall make the adjustment recommended forthwith upon
the receipt of such opinion or the taking of any such action contemplated, as
the case may be; provided, however, that no adjustment of the Warrant Price
shall be made which in the opinion of the accountant or firm of accountants
giving the aforesaid opinion would result in an increase of the Warrant Price to
more than the Warrant Price then in effect except as otherwise provided in
subsection E of this ss.8.
<PAGE>
ss.9. No Fractional Interests.9.No Fractional Interests. The Company
shall not be required to issue fractions of shares of Common Stock on the
exercise of Warrants. If any fraction of a share of Common Stock would, except
for the provisions of this Section, be issuable on the exercise of any Warrant
(or specified portions thereof), the Company shall purchase such fraction for an
amount in cash equal to the current value of such fraction (a) computed, if the
Common Stock shall be listed or admitted to unlisted trading privileges on any
national or regional securities exchange, on the basis of the last reported sale
price of the Common Stock on such exchange on the last business day prior to the
date of exercise upon which such a sale shall have been effected (or, if the
Common Stock shall be listed or admitted to unlisted trading privileges on more
than one such exchange, on the basis of such price on the exchange designated
from time to time for such purpose by the Board of Directors of the Company) or
(b) computed, if the Common Stock shall not be listed or admitted to unlisted
trading privileges, on the basis of the average of the high and low bid prices
of the Common Stock in the _______ Market, on the last business day prior to the
date of exercise.
ss.10. Notice to Warrantholders.10. Notice to Warrantholders.
A. Nothing contained in this Agreement or in any of the Warrants shall
be construed as conferring upon the holders thereof the right to vote or to
consent or to receive notice as stockholders in respect of the meetings of
stockholders for the election of directors of the Company or any other matters,
or any rights whatsoever as stockholders of the Company; provided, however, that
in the event that a meeting of stockholders shall be called to consider and take
action on a proposal for the voluntary dissolution of the Company, other than in
connection with a consolidation, merger or sale of all, or substantially all, of
its property, assets, business and goodwill as an entirety, then and in that
event the Company shall cause a notice thereof to be published at least once a
week for 20 of 30 consecutive weeks in a newspaper of general circulation in
Dallas, Texas and New York, New York, such publication to be completed at least
20 days prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stock holders entitled to vote at
such meeting. The Company shall also cause a copy of such notice to be sent by
first class mail, postage prepaid, at least 20 days prior to said date fixed as
a record date or said date of closing the transfer books, to each registered
holder of Warrants at his address appearing on the Warrant register; but failure
to mail or receive such notice or any defect therein or in the mailing thereof
shall not affect the validity of any action taken in connection with such
voluntary dissolution. If such notice shall have been so given and if such a
voluntary dissolution shall be authorized at such meeting or any adjournment
thereof, then for and after the date on which such voluntary dissolution shall
have been duly authorized by the stockholders, the purchase rights represented
by the Warrants and other rights with respect thereto shall cease and terminate.
B. If the Company shall make any distribution on, or to holders of, its
Common Stock (or other property which may be purchasable in lieu thereof upon
the exercise of Warrants) of any property (other than a cash dividend), the
Company shall cause a notice of its intention to make such distribution to be
published at least once a week for ___ consecutive weeks in a newspaper of
general circulation in Dallas, Texas and New York, New York, such publication to
be completed at least 20 days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to receive such distribution. The Company shall also cause a copy of
such notice to be sent by first class mail, postage prepaid, at least 20 days
prior to said date fixed as a record date or said date of closing the transfer
books, to each registered holder of Warrants at his address appearing on the
Warrant register; but failure to mail or to receive such notice or any defect
therein or in the mailing thereof shall not affect the validity of any action
taken in connection with such distribution.
<PAGE>
ss.11. Disposition of Proceeds on Exercise of Warrants.11. Disposition of
Proceeds on Exercise of Warrants.
A. The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all
monies received by the Warrant Agent for the purchase of shares of the
Company's stock through the exercise of such Warrants.
B. The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours at its
principal office.
ss.12. Redemption of Warrants.12.Redemption of Warrants.
A. At any time on or after __________, 1997, the Company may, at its
option, redeem some or all of the outstanding Warrants at $0.01 per
Warrant, upon thirty (30) days prior written notice, if the closing sale
price of the Common Stock on any national securities exchange or the
closing bid quotation on the American Stock Exchange has equaled or
exceeded $_____ for twenty (20) consecutive trading days within the 30 day
period immediately preceding the date notice of redemption is given (the
"Redemption Price"). In the event of an adjustment in the Warrant Price
pursuant to ss.8, the Redemption Price shall also be automatically
adjusted.
B. The election of the Company to redeem some or all of the Warrants
shall be evidenced by a resolution of the Board of Directors of the
Company.
C. Warrants may be exercised at any time on or before the date fixed
for redemption (the "Redemption Date").
D. Notice of redemption shall be given by first class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date, to each holder of Warrants, at his address appearing in
the Warrant register.
All notices of redemption shall state:
(1) The Redemption Date;
(2) That on the Redemption Date the Redemption Price will become
due and payable upon each Warrant;
(3) The place where such Warrants are to be surrendered for
redemption and payment of the Redemption Price; and
(4) The current Warrant Price of the Warrants, the place or
places where such Warrants may be surrendered for exercise,
and the time at which the right to exercise the Warrants
will terminate in accordance with this Agreement.
E. Notice of redemption of Warrants at the election of the Company
shall be given by the Company or, at the Company's request, by the Warrant
Agent in the name and at the expense of the Company.
F. Prior to any Redemption Date, the Company shall deposit with the
Warrant Agent an amount of money sufficient to pay the Redemption Price of
all the Warrants which are to be redeemed on that date. If any Warrant is
exercised pursuant to ss.5, any money so deposited with the Warrant Agent
for the redemption of such Warrant shall be paid to the Company.
G. Notice of redemption having been given as aforesaid, the Warrants
so to be redeemed shall, on the Redemption Date, become redeemable at the
Redemption Price therein specified and on such date (unless the Company
shall default in the payment of the Redemption Price), such Warrants shall
cease to be exercisable and thereafter represent only the right to receive
the Redemption Price. Upon surrender of such Warrants for redemption in
accordance with said notice, such Warrants shall be redeemed by the Company
for the Redemption Price.
ss.13. Merger or Consolidation or Change of Name of Warrant Agent.13.
Merger or Consolidation or Change of Name of Warrant Agent. Any corporation into
which the Warrant Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Warrant
Agent shall be a party, or any corporation succeeding to the corporate trust
business of the Warrant Agent, shall be the successor to the Warrant Agent
hereunder without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor warrant agent under the provisions of
ss.15 of this Agreement. In case at the time such successor to the Warrant Agent
shall succeed to the agency created by this Agreement and at such time any of
the Warrants shall have been countersigned but not delivered, any such successor
to the Warrant Agent may adopt the countersignature of the Warrant Agent and
deliver such Warrants so countersigned; and in case at the time any of the
Warrants shall not have been countersigned, any successor to the Warrant Agent
may countersign such Warrants either in the name of the predecessor Warrant
Agent or in the name of the successor warrant agent; and in all such cases such
Warrants shall have the full force provided in the Warrant and in this
Agreement.
<PAGE>
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, the Warrant Agent may countersign
such Warrants whether in its prior name or in its changed name; and in all such
cases such Warrants shall have the full force provided in the Warrants and in
this Agreement.
ss.14. Duties of Warrant Agent.14. Duties of Warrant Agent. The Warrant
Agent undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be bound:
A. The statements contained herein and in the Warrants shall be taken
as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants except as herein otherwise provided.
B. The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or
in the Warrants to be complied with by the Company.
C. The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it to perform any duty hereunder either itself or
by or through its attorneys, agents or employees.
D. The Warrant Agent may consult at any time with counsel satisfactory
to it (who may be counsel for the Company) and the Warrant Agent shall
incur no liability or responsibility to the Company or to any holder of any
Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such
counsel, provided the Warrant Agent shall have exercised reasonable care in
the selection and continued employment of such counsel.
E. The Warrant Agent shall incur no liability or responsibility to the
Company or to any holder of any Warrant for any action taken in reliance on
any notice, resolution, waiver, consent, order, certificate, or other
paper, document or instrument believed by it to be genuine and to have been
signed, sent or presented by the proper party or parties.
F. The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution of this Agreement and
to indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs and reasonable counsel fees, for
anything done or omitted by the Warrant Agent in the execution of this
Agreement except as a result of the Warrant Agent's negligence or bad
faith.
G. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more registered holders of
Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any cost and expense which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such
action as the Warrant Agent may consider proper, whether with or without
any such security or indemnity. All rights of action under this Agreement
or under any of the Warrants may be enforced by the Warrant Agent without
the possession of any of the Warrants or the production thereof at any
trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable
benefit of the registered holders of the Warrants, as their respective
rights or interests may appear.
H. The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants
or other securities of the Company or become peculiarly interested in any
transaction in which the Company may be interested, or contract with or
lend money to or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.
<PAGE>
I. The Warrant Agent shall act hereunder solely as agent and not in a
ministerial capacity, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything which it
may do or refrain from doing in connection with this Agreement except for its
own negligence or bad faith.
ss.15. Change of Warrant Agent15.Change of Warrant Agent. The Warrant
Agent may resign and be discharged from its duties under this Agreement by
giving to the Company notice in writing, and to the holders of the Warrants
notice by publication, of such resignation, specifying a date when such
resignation shall take effect, which notice shall be published at least once a
week for ___ consecutive weeks in a newspaper of general circulation in Dallas,
Texas and New York, New York, prior to the date so specified. The Warrant Agent
may be removed by like notice to the Warrant Agent from the Company and by like
publication. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of 30
days after such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Warrant Agent or by
the registered holder of a Warrant (who shall, with such notice, submit his
Warrant for inspection by the Company), then the registered holder of a Warrant
may apply to any court of competent jurisdiction for the appointment of a
successor to the Warrant Agent. Any successor warrant agent, whether appointed
by the Company or by such a court, shall be a bank or trust company having its
principal office, and having capital and surplus as shown by its last published
report to its stockholders, of at least $1,000,000. After appointment, the
successor warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Warrant Agent without
further act or deed; but the former Warrant Agent shall deliver and transfer to
the successor warrant agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Failure to file or publish any notice provided for in this Section,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be.
ss.16. Identity of Transfer Agent.16. Identify of Transfer Agent. Forthwith
upon the appointment of any Transfer Agent for the Common Stock or of any
subsequent Transfer Agent for shares of the Common Stock or other shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants, the Company will file with the Warrant Agent a
statement setting forth the name and address of such Transfer Agent.
ss.17. Notices.17. Notices. Any notice pursuant to this Agreement to be
given or made by the Warrant Agent or the registered holder of any Warrant to or
on the Company shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed (until another address is filed in writing by the
Company with the Warrant Agent) as follows:
Cotton Valley Resources Corporation
8350 North Central Expressway
Suite M2030
Dallas, Texas 75206
Attention: Eugene A. Soltero, Chairman
Any notice pursuant to this Agreement to be given or made by the Company or the
registered holder of any Warrant to or on the Warrant Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company) as follows:
-----------------------
ss.18. Supplements and Amendments.18. Supplements and Amendments. The
Company and the Warrant Agent may from time to supplement or amend this
Agreement without the approval of any holders of Warrants in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the holders of Warrants.
ss.19. Successors.19. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
<PAGE>
ss.20. Merger or Consolidation of the Company.20. Merger or Consolidation
of the Company. The Company shall not effect any consolidation or merger with,
or sale of substantially all its property to, any other corporation unless the
corporation resulting from such merger (if not the Company) or consolidation or
the corporation purchasing such property shall expressly assume, by supplemental
agreement satisfactory in form to the Warrant Agent and executed and delivered
to the Warrant Agent, the due and punctual performance and observance of each
and every covenant and condition of this Agreement to be performed and observed
by the Company.
ss.21. Texas Contract.21. Texas Contract. This Agreement and each Warrant
issued hereunder shall be deemed to be a contract made under the laws of the
State of Texas and for all purposes shall be construed in accordance with the
laws of said State.
ss.22. Benefits of This Agreement.22. Benefits of This Agreement. Nothing
in this Agreement shall be construed to give to any person or corporation other
than the Company, the Warrant Agent and the registered holders of the Warrants
any legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent and the registered holders of the Warrants.
ss.23. Counterparts.23. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes by
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
Cotton Valley Resources Corporation
By:
Eugene A. Soltero. Chairman of the Board
(Warrant Agent)
By:
<PAGE>
EXHIBIT A
[FORM OF WARRANT]
No. For the Purchase of ___ Shares
of Common Stock
, 1997
COTTON VALLEY RESOURCES CORPORATION
REDEEMABLE COMMON STOCK PURCHASE WARRANT
Void After _______________, 1998
THIS CERTIFIES that _________________________________ is entitled to
purchase from COTTON VALLEY RESOURCES CORPORATION., a corporation organized
under the laws of the Province of Ontario, Canada (hereinafter called the
"Company"), upon the surrender of this Warrant to the Company at the principal
office of the Warrant Agent hereinafter mentioned (or of its successor as
Warrant Agent), provided, and only if, this Warrant shall be surrendered at any
time on and after __________, 199__ and before the close of business on
__________, 1998, the number of fully paid and nonassessable shares of Common
Stock, no par value ("Common Stock"), set forth above, evidenced by a
certificate therefor, upon payment of the Warrant Price for the number of shares
in respect of which this Warrant is exercised; provided, however, that under
certain conditions set forth in the Warrant Agreement hereinafter mentioned, the
number of shares of Common Stock which may become purchasable pursuant to this
Warrant may be adjusted, or property other than shares of Common Stock may
become purchasable pursuant to this Warrant. The Warrant Price at which the
Common Stock shall be purchasable upon the exercise of Warrants shall be
$_______ per share, payable upon the exercise of this Warrant, either in cash or
by certified or official bank check, in United States dollars, to the order of
the Warrant Agent. No adjustment shall be made for any dividends on any shares
of stock issuable upon exercise of this Warrant and no fractional shares shall
be issued. The right of purchase represented by this Warrant is exercisable, at
the election of the registered holder hereof, either as an entirety or from time
to time in part only of the shares specified herein and, in the event that this
Warrant is exercised in respect of fewer than all of such shares, a new Warrant
for the remaining number of such shares will be issued on such surrender.
The Warrant is issued under, and the rights represented hereby are
subject to the terms and provisions contained in a Warrant Agreement dated as of
__________, 1997, between the Company and _____________________, as Warrant
Agent, to all the terms and provisions of which the registered holder of this
Warrant, by acceptance hereof, assents. Reference is hereby made to said Warrant
Agreement for a more complete statement of the rights and limitations of rights
of the registered holder hereof, the rights and duties of the Warrant Agent and
the rights and obligations of the Company thereunder. Copies of said Warrant
Agreement are on file at the office of said Warrant Agent. The Company shall not
be required upon the exercise of this Warrant to issue fractions of shares, but
shall make adjustment therefor in cash as provided in said Warrant Agreement.
This Warrant may be redeemed by the Company, at its option, at any time
on or after__________, 1997, on thirty days' prior written notice, at $0.01 per
Warrant, if the closing sale price of the Common Stock on any national
securities exchange or the closing bid quotation of the Common Stock on the
American Stock Exchange has equaled or exceeded $_____ for twenty consecutive
trading days during the thirty day period immediately preceding such notice. The
redemption price is subject to adjustment based on adjustments to the Warrant
Price. This Warrant nay not be exercised after the close of business on the day
preceding the redemption date.
The Warrant is transferable at the office of the Warrant Agent (or its
successor as warrant agent) by the registered holder hereof in person or by
attorney duly authorized in writing, but only in the manner and subject to the
limitations provided in the Warrant Agreement, and upon surrender of this
Warrant. Upon any such transfer, a new Warrant, or new Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of shares of Common Stock will be issued to the
transferee in exchange for this Warrant.
This Warrant and similar Warrants when surrendered at the office of the
Warrant Agent (or its successor as warrant agent) by the registered holder in
person or by attorney duly authorized in writing may be exchanged, in the manner
and subject to the limitations provided in the Warrant Agreement, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of shares of
Common Stock.
<PAGE>
This Warrant may be exercised only if a current prospectus relating to
the Common Stock is then in effect and only if the shares of Common Stock are
qualified for sale under the securities law of the state or states in which the
Warrant holder resides.
If this Warrant shall be surrendered for exercise within any period
during which the transfer books for the Common Stock or other class of stock
purchasable upon the exercise of this Warrant are closed for any purpose, the
Company shall not be required to make delivery of certificates for shares
purchasable upon such exercise until the date of the reopening of said transfer
books.
This Warrant shall not be valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, Cotton Valley Resources Corporation . has caused to
be printed herein the facsimile signature of its duly authorized officer as of
the date written above.
COTTON VALLEY RESOURCES CORPORATION
By:
Eugene A. Soltero, Chairman of the Board
- - -----------------------.
As Warrant Agent
By:
Authorized Signature
<PAGE>
[ FORM OF ]
ELECTION TO PURCHASE
Cotton Valley Resources Corporation
c/o _______________________
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and to purchase thereunder,
shares of the stock provided for therein, and requests that certificates for
such shares shall be issued in the name of
( Please Print )
and be delivered to
at
and, if said number of shares shall not be all of the shares purchasable
thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: ,
Name of Warrant holder:
( Please Print )
Address:
Signature:
Note: The above signature must correspond with the
name as written upon the face of this
Warrant in every particular, without
alteration or enlargement or any change
whatsoever.
<PAGE>
[ FORM OF ]
ASSIGNMENT
For value received
does hereby sell, assign and transfer unto
the within Warrant, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint attorney, to transfer said
Warrant on the books of the within-named Corporation, with full power of
substitution in the premises.
Date: ,
Signature:
Note: The above signature must correspond with the
name as written upon the face of this
Warrant in every particular, without
alteration or enlargement or any change
whatsoever.
<PAGE>
1,250,000 Units
COTTON VALLEY RESOURCES CORPORATION
Each Unit Consisting of
Two Shares of Common Stock and
Two Redeemable Common Stock Purchase Warrants
,1997
SELECTED DEALER AGREEMENT
Dear Sirs:
NATIONAL SECURITIES CORPORATION ("National") and the several
underwriters (collectively, the "Underwriters"), on whose behalf National is
acting as managing underwriters and Representative (the "Representative"), have
severally agreed to purchase from COTTON VALLEY RESOURCES CORPORATION, a
corporation organized under the laws of the Province of Ontario, Canada (the
"Company"), (a) an aggregate of 1,250,000 Units, each Unit consisting of two
shares of Common Stock, without par value, of the Company ("Common Stock"), and
two redeemable common stock purchase warrants (individually, a "Warrant"), each
of which entitles the holder thereof to purchase one share of Common Stock at a
price of $___ (such Units, together with (A) the shares of Common Stock and
Warrants comprising the Units and (B) the shares of Common Stock issuable upon
exercise of such Warrants, are collectively referred to herein as the
"Underwritten Securities"), plus (b) up to 187,500 additional Units pursuant to
an option for the purpose of covering over-allotments (such additional Units,
together with (A) the shares of Common Stock and Warrants comprising such
additional Units and (B) the shares of Common Stock issuable upon exercise of
such Warrants, are collectively referred to herein as the "Option Securities";
the Underwritten Securities and the Option Securities are collectively referred
to herein as the "Securities"; and the Units included in the Securities are
collectively referred to herein as the "Registered Units"), all as set forth in
the Preliminary Prospectus dated ______, 1996, as amended and supplemented from
time to time, and subject to the terms of the Underwriting Agreement referred to
therein. The Registered Units and the terms upon which they are to be offered
for sale by the several Underwriters are more particularly described in the
Preliminary Prospectus, additional copies of which will be supplied in
reasonable quantities upon request to the Underwriters.
1. Offering to Dealers. The Registered Units are to be offered to the
public by the Underwriters at the price per unit set forth on the cover page of
the Preliminary Prospectus (the "Public Offering Price"). The several
Underwriters, acting through the Representative, and subject to the terms and
conditions hereof, are severally offering a portion of the Registered Units to
certain dealers (the "Dealers") as principals, at the Public Offering Price of
$_____ per Unit, less a selling concession of $____ per Unit (the "Selling
Concession"). Dealers must be actually engaged in the investment banking or
securities business and be either (i) a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") who agrees that in making
sales of the Registered Units it will comply with the Rules of Fair Practice,
including Sections 8, 24 and 36 of Article m, and the Interpretation of the
Board of Governors of the NASD with respect to Free-Riding and Withholding, or
(ii) dealers with their principal place of business located outside the United
States, its territories and possessions and not registered as brokers or dealers
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), who
have agreed not to make any sales within the United States, its territories or
its possessions or to persons who are nationals thereof or residents therein,
and who agree that in making sales of the Registered Units outside the United
States, they will comply with the requirements of the Rules of Fair Practice of
the NASD, including Sections 8, 24 and 36 of Article m of such Rules, and
Section 25 of such Article as that Section applies to non-member foreign
dealers, and the Interpretation of the Board of Governors of the NASD with
respect to Free-Riding and Withholding.
Under this Agreements the Representative shall have full authority to
take such action as they may deem advisable in respect to all matters pertaining
to the public offering of the Registered Units.
If you desire to purchase any of the Registered Units, your
confirmation should reach the Representative promptly by mail or facsimile
transmission at the office of the Representative, NATIONAL SECURITIES
CORPORATON, 8214 Westchester, Suite 500, Dallas, TX, 75225, attention: Robert A.
Shuey, III facsimile number (214) 987-2091. The Representative reserve the right
to reject subscriptions in whole or in part, to make allotments and to close the
subscription books at any time without notice. The Registered Units allotted to
you and the method and terms of the offering of the Registered Units will be
confirmed to you.
<PAGE>
2. Offering by Dealers. Any Registered Units purchased by you under the
terms of this Agreement may be immediately offered to the public in conformity
with the terms of the offering set forth herein and in the Preliminary
Prospectus, subject to the securities or blue sky laws of the various states or
other jurisdictions.
Neither you nor any other person is, or has been, authorized by the
Company or the Representative to give any information or make any representation
in connection with the sale of the Registered Units other than those contained
in the Preliminary Prospectus.
It is assumed that the Registered Units will be effectively placed for
investment. If during the term of this Agreement, the Representative shall
purchase or contract to purchase any Registered Units purchased by you
hereunder, the Representative may, at their election, either (a) require you to
repurchase such Registered Units at a price equal to the total costs of such
purchase by the Representative, including brokerage commissions, if any, and
transfer taxes on the redelivery, or (b) charge you with and collect from you an
amount equal to the Selling Concession originally allowed you with respect to
the Registered Units so purchased by you.
3. Payment and Delivery. Payment for the Registered Units that you have
agreed to purchase hereunder shall be made by you through the Depository Trust
Company ("DTC"), payable in same-day funds to the order of ________, at such
time and on such date as _______ may designate, against delivery of such
Registered Units to you through the facilities of the DTC. The above payment
shall be made by you at $___ per Unit.
4. Blue Sky Matters. Upon request, you will be informed as to the
states and other jurisdictions in which the Underwriters have been advised that
the Registered Units are qualified for sale under the respective securities or
blue sky laws of such states or jurisdictions. However, neither the
Representative nor any of the other Underwriters shall have any obligation or
responsibility with respect to the right of any Dealer to sell the Registered
Units in any jurisdiction and you shall indemnify and hold harmless the
Representative and the other Underwriters and any person controlling the
Representative and the other Underwriters from and against any and all losses,
claims, damages, expenses or liabilities to which any of them may become subject
as a result of your failure to comply with the laws of any jurisdiction in
connection with the offer and the sale of Registered Units. In compliance with
the General Business law of the State of New York, it may be necessary for you
to file a Further State Notice respecting the Registered Units, in the form
required by said Law, prior to offering any of the Registered Units in such
state.
5. Termination. This Agreement shall terminate when the Representative
shall have determined that the public offering of the Registered Units has been
completed and upon facsimile notice to you of such termination, or, if not
theretofore terminated, it shall terminate 45 days after the initial public
offering of the Registered Units; provided, however, that the Representative
shall have the right to extend this Agreement for a period or periods not to
exceed an additional 45 days in the aggregate upon facsimile notice to you. The
Representative may terminate this Agreement at any time without prior notice to
you. Notwithstanding termination of this Agreement, you shall remain liable for
your portion of any transfer tax or other liability that may be asserted or
assessed against the Representative, any of the other Underwriters or any of the
Dealers based upon the claim that the Dealers or any of them constitute a
partnership, an association, an unincorporated business or other separate
entity.
6. Obligations and Positions of Dealers. Notwithstanding any provision
herein, your confirmation hereof will constitute a binding obligation on your
part to purchase, upon the terms and conditions hereof, the aggregate amount of
the Registered Units reserved for you and accepted by you and to perform and
observe all the terms and conditions hereof. You are not authorized to act as
agent of the Representative or the other Underwriters in offering the Registered
Units to the public or otherwise. Nothing contained herein shall constitute the
Dealers an association or other separate entity, or partners with the
Representative or the other Underwriters, but you will be responsible for your
share of any liability or expense based on any claim to the contrary. Neither
the Representative nor the other Underwriters shall be under any liability to
you for or in respect of the value, validity or form of the Registered Units, or
the delivery of the Registered Units, or the performance by anyone of any
agreement on its part, or the qualification of the Registered Units for sale
under the laws of any jurisdiction, or for or in respect of any other matter
relating to this Agreement, except for lack of good faith and matters expressly
assumed by the Representative and the other Underwriters in this Agreement, and
no obligation on the part of the Representative or the other Underwriters shall
be implied therefrom. The foregoing provisions shall not be deemed a waiver of
any liability imposed under the Securities Act of 1933, as amended (the "Act"),
or the Exchange Act.
<PAGE>
You agree that at any time or times prior to the termination of the
Agreement you will, upon the request of the Representative, report to the
Representative the number of Registered Units purchased by you under this
Agreement that then remain unsold by you and will, upon the request of the
Representative at such time or times, sell to the Underwriters for their
account, such number of unsold Registered Units as the Representative may
designate, at the Public Offering Price, less the Selling Concession or such
part thereof as the Representative may determine.
The Representative shall have full authority to take such actions as
they may deem advisable in respect of all matters pertaining to the offering of
the Registered Units or arising hereunder. No obligation not expressly assumed
by the Representative in this Agreement shall be implied hereby or inferred
herefrom.
7. Compliance with Securities Laws. On becoming a Dealer, and in
offering and selling the Registered Units, you agree to comply with all of the
applicable requirements of the Act and the Exchange Act. You confirm that you
are familiar with Rule 15c2-8 under the Exchange Act relating to the
distribution of preliminary and final prospectuses for securities of an issuer
and confirm that you have complied and will comply therewith with respect to the
offering of the Registered Units.
8. Stabilization and Over-Allotment. Each Underwriter has authorized
the Representative, in the discretion of the Representative, to make purchases
and sales of Registered Units, for long or short account, on such terms and at
such prices as the Representative deem advisable, to cover any short position so
incurred and to over-allot in arranging sales.
Each Underwriter has agreed that, during the term of the Agreement
Among Underwriters, or such shorter period as the Representative may determine,
it will not buy or sell any Securities of the Company except as a broker
pursuant to unsolicited orders and as otherwise provided in said Agreement.
Your attention is directed to Rule 10b-6 of the General Rules and
Regulations under the 1934 Act, which contains certain prohibitions against
trading by a person interested in a distribution until such person has completed
its participation in such distribution.
9. Notices. Any notice from you to the Representative should be mailed
or sent by facsimile transmission to the Representative at the addresses and
facsimile numbers set forth in Section 1 hereof. Any notice from the
Representative to you shall be mailed or sent by facsimile transmission to you
at the address and facsimile number set forth on the confirmation executed by
you in the form attached hereto as Exhibit A. Mailed notices shall be sent by
registered mail, return receipt requested. Notices shall be effective upon
receipt.
<PAGE>
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without giving effect to the
choice of law or conflicts of law or principles thereof.
If you desire to purchase any Registered Units, please confirm your
agreement by signing and returning to the Representative by mail or facsimile
transmission your confirmation in the form attached hereto as Exhibit A even
though you may have previously advised the Representative thereof.
Very truly yours,
NATIONAL SECURITIES CORPORATION
By:
Robert A. Shuey, III
For itself and the other several Underwriters
in Schedule I to the Underwriting Agreement
<PAGE>
EXHIBIT A
Confirmation
NATIONAL SECURITIES CORPORATION 8214 Westchester, Suite 500 Dallas, Texas 75225
Facsimile Number (214) 987-2091 Dear Sirs:
The undersigned hereby confirms its agreement to purchase Units of
COTTON VALLEY RESOURCES CORPORATION, a corporation organized under the laws of
the Province of Ontario, Canada (the "Registered Units"), each Registered Unit
consisting of two shares of Common Stock, without par value, and two Redeemable
Common Stock Purchase Warrants, each of which entitles the holder thereof to
purchase one share of Common Stock at a price of $___. The purchase price shall
be $____per Registered Unit, less a selling concession of $___ per Registered
Unit, subject to the terms and conditions of the foregoing Selected Dealer
Agreement, and the undersigned agrees to take up and pay for such Registered
Units on the terms and conditions set forth in such Agreement. The undersigned
hereby acknowledges receipt of the Preliminary Prospectus relating to the
Securities (as defined in the Selected Dealer Agreement) and confirms that in
agreeing to purchase the Registered Units it has relied on said Preliminary
Prospectus and on no other statement whatsoever, written or oral. The
undersigned represents that it has complied and will comply with the
requirements of Rule 15c2-8 under the Securities Exchange Act of 1934, as
amended, with respect to the offering of the Registered Units.
The undersigned confirms that it is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") and represents
that in making sales of the Registered Units it will comply with the Rules of
Fair Practice (including Sections 8, 24 and 36 of Article m) and the
Interpretation of the Board of Governors of the NASD with respect to Free-Riding
and Withholding; alternatively, the undersigned represents that it is a foreign
dealer that is not eligible for membership in the NASD and agrees not to offer
or sell the Registered Units in the United States, its territories or its
possessions or to persons it has reason to believe are nationals thereof or
residents therein, and further agrees that in making sales of the Registered
Units outside the United States, it will comply with the requirements of the
Rules of Fair Practice (including Sections 8, 24 and 36 of Article m, and
Section 25 of such Article as that Section applies to non-member foreign
dealers) and the Interpretation of the Board of Governors of the NASD with
respect to Free-Riding and Withholding.
By:
Name:
Title:
Address:
Facsimile
Number:
Dated , 1997
<PAGE>
1,250,000 Units
COTTON VALLEY RESOURCES CORPORATION
Each Unit Consisting of
Two Shares of Common Stock and
Two Redeemable Common Stock Purchase Warrants
, 1997
AGREEMENT AMONG UNDERWRITERS
National Securities Corporation
as Representative of the Underwriters
c/o National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Dear Sirs:
1. Underwriting Agreement. We understand that COTTON VALLEY
RESOURCES CORPORATION, a corporation organized under the laws of the Province of
Ontario, Canada (the "Company"), proposes to enter into an underwriting
agreement (the "Underwriting Agreement"), with you as managing underwriters
("Managing Underwriters") and other prospective underwriters, including
ourselves, acting severally and not jointly, providing for (a) the purchase by
the Underwriters (as defined in Section 3 hereof) of 1,250,000 Units, each Unit
consisting of two shares of Common Stock, without par value, of the Company
("Preferred Stock"), and two redeemable common stock purchase warrants
(individually, a "Warrant"), each of which entitles the holder thereof to
purchase one share of Common Stock at a price of $___ (such Units, together with
(A) the shares of Common Stock and Warrants comprising such Units and (B) the
shares of Common Stock issuable upon exercise of such Warrants, are collectively
referred to herein as the "Underwritten Securities") and (b) the grant by the
Company to the Underwriters, as provided in Section 2(b) of the Underwriting
Agreement, of an option to purchase from the Company up to an aggregate of
187,500 additional Units (such additional Units, together with (A) the shares of
Common Stock and Warrants comprising such additional Units and (B) the shares of
Common Stock issuable upon exercise of such Warrants, are collectively referred
to herein as the "Option Securities") solely for the purpose of covering
over-allotments in the sale of the Underwritten Securities in each case, upon
the conditions stated in the Underwriting Agreement, in which we agree, in
accordance with the terms thereof and subject to adjustment pursuant to Section
9 thereof, to purchase the number of Units included within the Underwritten
Securities set forth opposite our names in Schedule I thereof and our pro rata
portion of the number of Units included within the Option Securities, determined
in accordance with Section 2(b) of the Underwriting Agreement, with respect to
which the over-allotment option is exercised. The Underwritten Securities and
the Option Securities are hereinafter referred to as the "Securities" and the
Units included therein are hereinafter referred to as the "Registered Units".
2. Registration Statement and Prospectus. The Securities are more
particularly described in the registration statement relating thereto filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"). Amendments to such registration statement have been or may
be filed, in which, with our consent hereby confirmed, we have been or will be
named as one of the Underwriters of the Securities. Copies of the registration
statement and the related preliminary prospectus have heretofore been delivered
to us, and we confirm that they are correct insofar as they relate to us. You
are authorized to approve on our behalf any amendments or any supplements to the
registration statement, any preliminary prospectus and the prospectus which you
consider necessary or appropriate. The registration statement and related
prospectus, as amended and supplemented from time to time, are hereinafter
respectively referred to as the "Registration Statement" and "Prospectus". We
agree, if you so request, to furnish a copy of any revised preliminary
prospectus to each person to whom we have delivered a copy of any previous
preliminary prospectus. We further represent that we have delivered all
preliminary prospectuses and agree that we will deliver all final prospectuses
required for compliance with the provisions of Rule l5c2-8 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
3. Authority of Managing Underwriters. We authorize you, as Managing
Underwriters, (a) to execute and deliver on our behalf the Underwriting
Agreement in the form annexed hereto as Exhibit A, with such changes therein as
in your discretion may be necessary or advisable, including changes in those who
are to be Underwriters and in the respective number of Registered Units to be
purchased by them (but not any change in the number of Registered Units to be
purchased by us except with our consent or as provided in the Underwriting
Agreement), (b) to take such action as in your discretion may be necessary or
advisable to carry out the Underwriting Agreement, this Agreement and the
transactions for the accounts of the several Underwriters contemplated thereby
and hereby, including, in your discretion, whether to purchase any or all of the
Registered Units included within the Option Securities for the accounts of the
several Underwriters, and (c) to take such action as in your discretion may be
necessary or advisable to carry out the purchase, carrying, sale and
distribution of the Registered Units. The parties on whose behalf you execute
the Underwriting Agreement, including yourself as Managing Underwriters, are
herein called the "Underwriters."
<PAGE>
4. Public Offering. We authorize you to supply the Company with the
information to be included in the Registration Statement and Prospectus with
respect to the terms of the offering, to determine the time of the initial
public offering after the Registration Statement becomes effective, to vary the
public offering price of the Registered Units and the concessions and discounts
to dealers after the initial public offering, and to determine all matters
relating to the advertisement of the Securities and communication with dealers
or others.
We authorize you, with respect to any Registered Units which we so agree
to purchase, to reserve for sale and to sell for our account such number of our
Registered Units as you shall determine, to securities dealers ("Dealers"),
including any of the Underwriters. We authorize you to determine the form and
manner of any communications or agreements with Dealers. If there shall be any
such agreements with Dealers, you are authorized to act as managers thereunder,
and we agree, in such event, to be governed by the terms and conditions of such
agreements to the extent we act as a Dealer. The form of Selected Dealer
Agreement attached hereto as Exhibit B is satisfactory to us. If there shall not
be any written agreements with Dealers, we agree to be governed by the terms and
conditions of such Selected Dealer Agreement to the extent we act as a Dealer.
After the Registration Statement becomes effective, you will advise us
of the number of our Registered Units not so reserved but retained by us for
direct sale. Any of our Registered Units reserved but not sold may, from time to
time, on our request and in your discretion, be released to us, and Registered
Units so released will not thereafter be deemed to be reserved, except that any
time prior to termination of the provisions of the last paragraph of this
Section 4, we will on request advise you of the number of our retained unsold
Registered Units and you may in your discretion add all or any number of such
retained unsold Registered Units to those reserved by you for sale. Sales of
reserved Registered Units to Dealers will be made at $_______ per Unit for the
accounts of the several Underwriters as nearly as practicable in proportion to
their respective underwriting obligations.
You may in your discretion sell to another Underwriter any of the
Registered Units so reserved for our account if you determine that such sales
are advisable for Blue Sky purposes. The transfer tax on any such sales shall be
charged to the accounts of the several Underwriters in proportion to their
respective underwriting obligations.
You, and any of the Underwriters with your consent, may make purchases
and sales of Registered Units from or to any other Underwriter at the public
offering price less a concession equivalent to all or any part of the gross
underwriting spread. You are authorized to purchase Registered Units for our
account from Dealers at the public offering price less a concession not
exceeding the concession to Dealers. We will offer to the public, in conformity
with the terms of the offering set forth in the Prospectus, our Registered Units
not reserved by you.
5. Payment and Delivery. Payment for Registered Units retained by us for
direct sale shall be made by us through the Depository Trust Company ("DTC"),
payable in same-day funds to the order of NATIONAL SECURITIES CORPORATION, at
such time or times as you may designate, against delivery of such Registered
Units to us through the facilities of the DTC. The above payment will be made by
us at $______ per Unit; however you will promptly reimburse us the amount of
$_____ per Unit.
If our funds are not received by you when required, you are authorized,
in your individual capacities or as Managing Underwriters, but shall not be
obligated, to make payment pursuant to the Underwriting Agreement for our
account in accordance with the provisions of Section 6 hereof. Any such payment
by you shall not relieve us from any of our obligations hereunder or under the
Underwriting Agreement.
We authorize you to hold and deliver to Dealers, against payment, our
Registered Units reserved by you for offering to them. Upon receiving payment
for Registered Units so sold for our account, you will remit to us as promptly
as practicable the amount of $_______ per Unit.
As soon as practicable after termination of the provisions referred to
in the first paragraph of Section 10 hereof, you shall deliver to us, against
payment therefor unless such payment has already been made, any of our
Registered Units reserved by you for sale but not sold, except that if the
aggregate of all such reserved and unsold Registered Units of all Underwriters
does not exceed 10% of the total number of Registered Units, you are authorized
in your discretion to sell such Registered Units for the accounts of the several
Underwriters at such price or prices as you may determine.
<PAGE>
6. Authority to Borrow. In connection with the purchase or carrying for
our account of any Registered Units purchased for our account under this
Agreement or the Underwriting Agreement, we authorize you, in your discretion
and individual capacity, to advance your own funds for our account, charging
current interest rates as Managing Underwriters to arrange and make loans on our
behalf and for our account, and to execute and deliver any notes or security as
may be necessary or advisable in your discretion. Any lending bank is hereby
authorized to rely upon your instructions in all matters relating to any such
loan. We shall be paid or credited with the proceeds of any such advance or loan
made for our account and shall be debited with any repayment.
You may deliver to us from time to time, for carrying purposes only, any
of our reserved Registered Units held by you for our account which have not been
sold. We will redeliver to you on demand any Registered Units so delivered to us
for carrying purposes.
7. Stabilization. We ratify and confirm your stabilization transactions,
if any, for the accounts of the several Underwriters prior to the date hereof,
and we authorize you, in your discretion, to buy and sell Registered Units in
the open market or otherwise, on a when-issued basis or otherwise, for either
long or short account, at such prices and on such terms as you may determine,
and to over-allot in arranging for sales. We authorize you in your discretion to
cover any short position incurred for the accounts of the several Underwriters
pursuant to this Section 7 by exercising the over-allotment option referred to
in Section 2(b) of the Underwriting Agreement and by buying Registered Units,
and, in lieu of delivering to the several Underwriters any of the Registered
Units held for their respective accounts pursuant to Section 4 hereof, to sell
such Registered Units for the accounts of each of the Underwriters, in each case
at such prices and on such terms as you may determine. All such purchases, sales
and over-allotments will be for the accounts of the several Underwriters as
nearly as practicable in proportion to their respective underwriting
obligations, and at no time will our net commitment under the foregoing
provisions of this paragraph, either for long or short account, exceed 15 % of
our original underwriting obligations. We will take up at cost on demand any of
the Registered Units so purchased for our account and deliver on demand any of
the Registered Units sold or over-allotted for our account. In the event of
default by one or more Underwriters with respect to their obligations under this
paragraph, each nondefaulting Underwriter shall assume its proportionate share
of the obligations of such defaulting Underwriter without relieving such
defaulting Underwriter of its liability hereunder. The existence of this
provision is no assurance that the price of any of the aforesaid Registered
Units will be stabilized or that stabilizing, if commenced, will not be
discontinued at any time.
We authorize you on our behalf to maintain the records required by Rule
17a-2 of the General Rules and Regulations under the Exchange Act and to file
any reports required in connection with any transaction made by you pursuant to
this Section 7, and we agree to furnish you with any information needed for such
reports. You agree that if stabilization is undertaken you will notify the
several Underwriters promptly upon the initiation and termination of such
stabilization. We agree, if stabilization is undertaken, promptly, and in any
event, within ___ business days following such stabilization, to transmit to
you, the price, date and time at which such stabilizing purchase was effected.
In addition, we agree to promptly notify you of the date and time when
stabilizing was terminated.
We agree to advise you, from time to time upon your request, of the
number of Registered Units retained by or released to us and remaining unsold,
and will, upon your request, release to you for the accounts of one or more of
the several Underwriters such number of Registered Units as you may designate at
such price, not less than the net price to Dealers nor more than the public
offering price, as you may determine.
If, pursuant to the provisions of this Section 7, you purchase or
contract to purchase any Registered Units that were retained by or released to
us for direct sale, we authorize you in your discretion either to require us to
repurchase such Registered Units at a price equal to the total cost of such
purchase, including commissions and transfer tax on redelivery, to sell for our
account such Registered Units and debit or credit our account for the profit or
loss resulting from such sale, or to charge our account with an amount equal to
the concession to Dealers with respect thereto.
Upon the termination of this Agreement, you are authorized in your
discretion, in lieu of delivering to the several Underwriters any Registered
Units then held for their respective accounts pursuant to this Section 7, to
sell such Registered Units for the accounts of each of the Underwriters at such
price or prices as you may determine.
<PAGE>
8. Open Market Transactions. We and you agree not to bid for, purchase,
attempt to induce others to purchase, or sell, directly or indirectly, any of
the Securities, including the Registered Units, for our own account or for the
accounts of customers except as brokers pursuant to unsolicited orders and as
otherwise provided in this Agreement or the Underwriting Agreement.
9. Allocation of Expenses. We authorize you to charge our account with
all transfer taxes on sales made by you for our account (except as otherwise
provided herein) and our proportionate share (based upon our underwriting
obligation) of all other expenses incurred by you in finding and developing this
public offering, and arising under the terms of this Agreement or the
Underwriting Agreement, or in connection with the purchase, carrying, sale or
distribution of the Registered Units. Your determination of the amount and
allocation of such expenses shall be final and conclusive. In the event of the
default of any Underwriter in carrying out its obligations hereunder, the
expenses arising from such default may be proportionately charged by you against
the other Underwriters not so defaulting without, however, relieving such
defaulting Underwriter from its liability therefor.
10. Termination and Settlement. The provisions of the last paragraph of
Section 4 hereof, the first sentence and fourth paragraph of Section 7 hereof,
and Section 8 hereof will terminate at the close of business 45 days after the
date of the initial public offering unless extended by you by notice to us for a
further period not exceeding an additional 45 days. Such provisions may be
terminated at such earlier time as you determine in your discretion, by notice
to us stating that such provisions are terminated.
As promptly as practicable after termination of the provisions referred
to in the first paragraph of this Section 10, our account will be settled and
paid, provided that you reserve from distribution to the several Underwriters
such amounts as you may deem advisable to cover possible additional expenses.
You may at any time make partial distribution of credit balances or call on the
several Underwriters to pay their respective debit balances. Any of our funds in
your hands may be held with your general funds without accountability for
interest and may be commingled with your general funds. Notwithstanding
termination of this Agreement or any settlement, we agree to pay (a) our
proportionate share (based on our underwriting obligation) of all expenses and
liabilities which may be incurred by or for the account of the Underwriters and
(b) any transfer taxes paid after such settlement on account of any sale or
transfer for our account.
If the Underwriting Agreement shall be terminated or canceled, or if it
shall be executed but shall not become effective, our obligations hereunder
shall immediately cease and terminate except for the obligation to pay our
proportionate share of all expenses and except for obligations, if any, incurred
for our account under Section 7 hereof and our obligations under the second
paragraph of this Section 10 and under Section 14 hereof.
11. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement will not release
us from any of our obligations or in any way affect the liability of any
defaulting Underwriter to the other Underwriters for damages resulting from such
default. In case of such default with respect to the purchase of 10 % or less of
the Registered Units included within the Underwritten Securities, we will
purchase additional Registered Units as set forth in Section 9 of the
Underwriting Agreement. If such default exceeds 10% of the Registered Units
included within the Underwritten Securities, you are authorized, but shall not
be obligated, to arrange for the purchase by other persons, who may include
yourself or any nondefaulting Underwriter, of that defaulted portion in excess
of 10%. If such arrangements are made, we will purchase Registered Units not
exceeding our original commitments under Section 9 of the Underwriting
Agreement, and the additional number of Registered Units to be purchased by the
nondefaulting Underwriters and by such other persons, if any, shall be added to
our original commitments and shall together be taken as the basis for
determining the proportionate several obligations and benefits hereunder and
under the Underwriting Agreement, but this shall in no way affect the liability
of any defaulting Underwriter for damages resulting from such default. If there
is any default as to the purchase of any portion of the Registered Units, you
are authorized, but shall not be obligated, to purchase or to arrange for the
purchase by the nondefaulting Underwriters of the defaulted portion.
<PAGE>
12. Position of the Managing Underwriters. Except as in this Agreement
otherwise specifically provided, you shall have full authority to take such
action as you deem necessary or advisable in respect of all matters pertaining
to the Underwriting Agreement and this Agreement in connection with the
purchase, carrying, sale and distribution of the Registered Units, but you shall
be under no liability to us, except for your own lack of good faith, for
obligations expressly assumed by you in this Agreement and for any liabilities
imposed upon you by the Act. No obligations on your part shall be implied or
inferred herefrom. Authority with respect to matters to be determined by you, or
by you and the Company pursuant to the Underwriting Agreement, shall survive the
termination of this Agreement.
Nothing herein contained shall be construed as making us partners with
you or with other Underwriters or shall be construed as making the several
Underwriters an association or other separate entity, and the rights and
liabilities of ourselves and each of the other Underwriters (including you) are
several and not joint.
13. Underwriters' Warrants. We agree that the Underwriters' Warrants (as
defined in the Underwriting Agreement) shall be allocated as follows: (i) 100%
to you as Managing Underwriters and (ii) 0% to us in the ratio that the number
of Registered Units purchased by each of us bears to the number of Registered
Units purchased by all of us.
<PAGE>
14. Indemnification.
(a) Each Underwriter agrees to indemnify and hold harmless each other
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act to the extent
and under the terms set forth in the Underwriting Agreement upon which each
Underwriter agrees to indemnify the Company, and the Company's respective
directors, officers and controlling persons. Such indemnity shall survive the
termination of this Agreement and any investigation made by or on behalf of any
Underwriter or any person so controlling an Underwriter.
(b) We agree that you shall be under no liability in respect of any
matters connected herewith or actions taken by you pursuant to this Agreement,
except for obligations expressly assumed by you in this Agreement. If at any
time any claim or claims shall be asserted against you, as Managing
Underwriters, or otherwise involving the Underwriters generally, relating to any
preliminary prospectus, the Prospectus, the Registration Statement, the public
offering of the Securities, any state or other securities or Blue Sky law
qualification matters, or any of the transactions contemplated by this
Agreement, we authorize you to make such investigation, to retain such counsel
and to take such other actions as you may deem necessary or desirable under the
circumstances, including settlement of any such claim or claims if such course
of action shall be recommended by counsel retained by you. We agree to pay you,
upon request, our proportionate share (based on our underwriting obligation) of
all expenses incurred by you (including, but not limited to, the disbursements
and fees of counsel retained by you) in investigating and defending against such
claim or claims, and our proportionate share (based on our underwriting
obligation) of any liability incurred by you in respect of such claim or claims,
whether such liability shall be the result of a judgment against you or the
result of any such settlement. In determining amounts payable pursuant to this
Section 14(b), any loss, claim, damage, liability or expense (i) incurred by any
person controlling any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, and (ii) for which such Underwriter actually
receives indemnification pursuant to Section 14(a) above or contribution or
indemnification pursuant to the Underwriting Agreement, shall reduce the amount
payable pursuant to this Section 14(b) by the amount so incurred and received.
If any Underwriter or Underwriters default in their obligations to make any
payments under this Section 14(b), then, without relieving such defaulting
Underwriter of its liability hereunder, each nondefaulting Underwriter shall be
obligated to pay its proportionate share of all defaulted payments.
15. Blue Sky Matters. You will not have any responsibility with respect
to the right of any Underwriter or other person to sell any of the Registered
Units in any jurisdiction, notwithstanding any information that we may furnish
in that connection. We understand that you will file a New York Further State
Notice, if required, and we authorize you to take such other action as may be
necessary or advisable to qualify the Securities for offering and sale in any
jurisdiction.
<PAGE>
16. Notices. Any notice from you to us will be deemed to have been duly
given if mailed or sent by facsimile transmission to us at our address and
facsimile number set forth below. Any notice to you shall be deemed to have been
given if mailed or sent by facsimile transmission to NATIONAL SECURITIES
CORPORATION, 8214 Westchester, Suite 500, Dallas, Texas, 75225, attention:
Robert A. Shuey, III, facsimile number (214) 987-2091. Mailed notices shall be
sent by registered mail, return receipt requested. Notices shall be effective
upon receipt.
17. Miscellaneous.
(a) We authorize you to file with any governmental agency any
reports required to be filed by you in connection with the transactions
contemplated by this Agreement or the Underwriting Agreement, and we will
furnish any information in our possession needed for such reports.
(b) In connection with the transactions contemplated by this
Agreement or the Underwriting Agreement, we will not advertise over our name
until after the first public advertisement made by you and then only at our own
expense and risk. We authorize you to exercise complete discretion with regard
to the first public advertisement.
(c) We hereby confirm (i) that we have examined the
Registration Statement and the Prospectus and are familiar with the proposed
further amendment thereto or final Prospectus, (ii) that the information therein
is correct and is not misleading insofar as it relates to us and (iii) that we
are willing to accept the responsibilities under the Act of an Underwriter named
in such Registration Statement. You are authorized, in your discretion, on our
behalf, to approve of or to object to any further amendments or supplements to
the Registration Statement or the Prospectus.
(d) We confirm that we are actually engaged in the investment
banking or securities business and are either (i) a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD") and our
commitment to purchase Registered Units pursuant to the Underwriting Agreement
will not result in a violation of the financial responsibility requirements of
Rule l5c3-1 under the Exchange Act, or of any similar provisions of any
applicable rules of any securities exchange to which we are subject or of any
restriction imposed upon us by any such exchange or any governmental authority
or (ii) a foreign dealer not eligible for membership in the NASD who hereby
agrees to make no sales within the United States, its territories or its
possessions (except that we may participate in sales to Dealers and others under
Section 4 hereof) or to persons who are citizens thereof or residents therein.
In making sales of Registered Units, if we are such a member, we agree to comply
with all applicable rules of the NASD, including, without limitation, the
Interpretation of the Board of Governors of the NASD with Respect to Free-Riding
and Withholding and Sections 8, 24 and 36 of Article III of the NASD's Rules of
Fair Practice, or, if we are such a foreign dealer, we agree to comply with such
Interpretation and Sections 8, 24 and 36 of such Article as though we were such
a member and Section 25 of such Article as that Section applies to a non-member
foreign dealer.
(e) We confirm that the ratio of our aggregate indebtedness to
our net capital is such that we may, in accordance with and pursuant to Rule
l5c3-1 under the Exchange Act, obligate ourselves to purchase, and purchase, the
number of Registered Units that we agree to purchase under the Underwriting
Agreement.
<PAGE>
(f) This Agreement will be governed by, and construed in
accordance with, the laws of the State of Texas without reference to
California's conflict of laws rules.
(g) This Agreement may be signed in any number of counterparts
which taken together shall constitute one and the same instrument.
Very truly yours,
NAME:
By:
Address:
Facsimile.:
NAME:
By:
Address:
Facsimile No.:
NAME:
By:
Address:
Facsimile No.:
NAME:
By:
Address:
Facsimile No.:
Confirmed as of the date first written:
NATIONAL SECURITIES CORPORATION
By: By:
, President ____________,President
<PAGE>
Warrant and Registration Rights Agreement
____, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the Several Underwriters
c/o National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Gentlemen:
Cotton Valley Resources Corporation., a corporation organized under the
laws of Ontario, Canada(the "Company"), hereby agrees to sell to the several
underwriters (the "Underwriters") named in Schedule I to that certain
Underwriting Agreement (herein so called) of even date herewith by and among you
and the Company, and you hereby agree, as representative of the Underwriters,
that the Underwriters will purchase from the Company at a purchase price of
$100, warrants (the "Underwriter Warrants") to purchase 125,000 of the Company's
units (the "Units"), each Unit consisting of two shares of the Company's Common
Stock and two Redeemable Common Stock Purchase Warrant (the "Warrants") issued
in accordance with the terms of a warrant agreement dated as of __________, 1997
between the Company and ___________as warrant agent. The Underwriter Warrants
will be exercisable by the holders thereof as to all or any lesser number of
Units covered thereby, at the Purchase Price per Unit (as defined below) at any
time and from time to time on and after the first anniversary of the date hereof
and ending at 5:00 p.m. on the fifth anniversary of the date hereof.
1. DEFINITIONS.
As used herein the following terms, unless the context otherwise
requires, shall have for all purposes hereof the following meanings:
(a) The term "Common Stock" refers to the common stock of the Company
pursuant to the Articles of Incorporation of the Company, as
amended.
(b) The term "Other Securities" refers to any stock (other than Units)
and other securities of the Company or any other person (corporate
or otherwise) which the holders of the Underwriter Warrants at any
time shall be entitled to receive, or shall have received, upon
the exercise of the Underwriter Warrants, in lieu of or in
addition to Preferred Stock and Warrants, or which at any time
shall be issuable or shall have been issued in exchange for or in
replacement of Units or Other Securities pursuant to Section 6
below or otherwise.
(c) The term "Purchase Price" refers to the purchase price of the
Underlying Units subject to this Agreement. The Purchase Price
shall equal 120% of the offering price per Unit as set forth in
the Registration Statement. The Purchase Price is subject to
adjustment as provided in Section 6 below.
(d) The term "Registration Statement" refers to the Registration
Statement on Form SB-2 (File No. 333-16,893 filed by the Company
with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the "Act").
(e) The term "Underlying Securities" refers to the Underlying Units,
the Underlying Common Stock and the Underlying Warrants.
(f) The term "Underlying Units" refers to the Units issued or issuable
upon the exercise, in whole or in part, of the Underwriter
Warrants.
(g) The term "Underlying Warrants" refers to the Warrants which are
part of the Underlying Units and are issued or issuable upon the
exercise of the Underwriter Warrants.
<PAGE>
(h) The term "Warrant Stock" refers to shares of Common Stock issued
or issuable upon the exercise of the Underlying Warrants.
The purchase and sale of the Underwriter Warrants shall take place, and the
purchase price therefore shall be paid by delivery of your check payable to the
Company on the Closing Date (as defined in the Underwriting Agreement).
2. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to you as follows:
(a) Corporate Action. The Company has all requisite corporate
power and authority, and has taken all necessary corporate action, to execute
and deliver this Agreement, to issue and deliver the Underwriter Warrants and
certificates evidencing same, and to authorize and reserve for issuance, and
upon payment from time to time of the Purchase Price to issue and deliver, the
Underlying Units, including the Underlying Common Stock, the Underlying Warrants
and the Warrant Stock.
(b) No Violation. Neither the execution nor delivery of this
Agreement, the consummation of the actions herein contemplated nor compliance
with the terms and provisions hereof will conflict with, or result in a breach
of, or constitute a default or an event permitting acceleration under, any of
the terms, provisions or conditions of the Articles of Incorporation or Bylaws
of the Company or any indenture, mortgage, deed of trust, note, bank loan,
credit agreement, franchise, license, lease, permit, judgment, decree, order,
statute, rule or regulation or any other agreement, understanding or instrument
to which the Company is a party or by which it is bound.
3. COMPLIANCE WITH THE ACT.
(a) Transferability of Underwriter Warrants. You agree that
the Underwriter Warrants may not be transferred, sold, assigned or hypothecated,
except to (i) persons who are officers of you or any successor of you; (ii) a
successor to you in a merger or consolidation; (iii) a purchaser of all or
substantially all of your assets; (iv) your shareholders in the event you are
liquidated or dissolved; (v) broker-dealers participating in the Company's
initial public offering, and (vi) persons who are officers or partners of such
participating broker-dealers.
(b) Registration of Underlying Common Stock. The Underlying
Common Stock issuable upon the exercise of the Underwriter Warrants has not been
registered under the Act. You agree not to make any sale or other disposition of
the Underlying Common Stock except pursuant to a new registration statement
which has become effective under the Act, setting forth the terms of such
offering, the underwriting discount and the commissions and any other pertinent
data with respect thereto, unless you have provided the Company with an opinion
of recognized counsel reasonably acceptable to the Company that such
registration is not required under the Act and applicable state securities laws.
(c) Inclusion in Registration of Other Securities. If at any
time after the first anniversary of the effective date hereof but prior to the
fifth anniversary of the effective date hereof, the Company shall propose the
registration on an appropriate form under the Act of any shares of Common Stock
or Other Securities (other than in connection with a merger or acquisition or an
employee benefit plan), the Company shall at least 30 days prior to the filing
of such registration statement give you written notice of such proposed
registration and, upon written notice given to the Company within 10 business
days after your receipt of such notice from the Company, shall include or cause
to be included in any such registration statement all or such portion of the
Underwriter Warrants, the Underlying Securities and the Warrant Stock as you may
request, provided, however, that the Company may at any time withdraw or cease
proceeding with any such registration if it shall at the same time withdraw or
cease proceeding with the registration of such Common Stock or such Other
Securities originally proposed to be registered.
<PAGE>
Notwithstanding any provision of this Agreement to the contrary, if
any holder of any of the Underwriter Warrants exercises his Underwriter Warrants
but shall not have included all the Underlying Securities or Warrant Stock in a
registration statement which complies with Section 10(a)(3) of the Act, which
has been effective for at least 30 calendar days following the exercise of the
Underwriter Warrants, the registration rights set forth in this Subsection 3(c)
shall be extended until such time as (i) the registration statement has been
effective for at least 30 calendar days, or (ii) in the opinion of counsel
satisfactory to you and the Company, registration is not required under the Act
or under applicable state laws for resale of the Underlying Securities or
Warrant Stock in the manner proposed.
(d) Company's Obligations in Registration. In the event you
timely elect to participate in an offering by including your Underwriter
Warrants, the Underlying Securities or the Warrant Stock in a registration
statement pursuant to Subsection 3(c) above, the Company shall:
(i) Notify you as to the filing thereof and of all amendments or
supplements thereto filed prior to the effective date
thereof;
(ii) Comply with all applicable rules and regulations of the
Commission;
(iii)Notify you immediately, and confirm the notice in writing,
(1) when the registration statement becomes effective, (2)
of the issuance by the Commission of any stop order or of
the initiation, or the threatening, of any proceedings for
that purpose, (3) of the receipt by the Company of any
notification with respect to the suspension of qualification
of the Common Stock, the Preferred Stock, the Warrants or
the Units for sale in any jurisdiction or of the initiation,
or the threatening, of any proceedings for that purpose and
(4) of the receipt of any comments, or requests for
additional information, from the Commission or any state
regulatory authority. If the Commission or any state
regulatory authority shall enter such a stop order or order
suspending qualification at any time, the Company will make
every reasonable effort to obtain the lifting of such order
as promptly as practicable.
(iv) During the time when a registration statement is required to
be delivered under the Act during the period required for
the distribution of the Underlying Securities or the Warrant
Stock, comply so far as it is able with all requirements
imposed upon it by the Act, as hereafter amended, and by the
rules and regulations promulgated thereunder, as from time
to time in force, so far as necessary to permit the
continuance of sales of the Underlying Securities and the
Warrant Stock, as applicable. If at any time when a
registration statement relating to the Underlying Securities
or the Warrant Stock is required to be delivered under the
Act any event shall have occurred as a result of which, in
the opinion of counsel for the Company or your counsel, the
registration statement relating to the Underlying Securities
or the Warrant Stock as then amended or supplemented
includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or
necessary to make the statements therein, in the light of
the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend such
registration statement to comply with the Act, the Company
will promptly prepare and file with the Commission an
appropriate amendment or supplement (in form satisfactory to
you).
<PAGE>
(v) Endeavor in good faith, in cooperation with you, at or prior
to the time the registration statement becomes effective, to
qualify the Underlying Securities and/or the Warrant Stock,
as applicable for offering and sale under the securities
laws relating to the offering or sale of the Underlying
Securities and/or the Warrant Stock, as applicable in such
jurisdictions as you may reasonably designate and to
continue the qualifications in effect so long as required
for purposes of the sale of the Underlying Securities and/or
the Warrant Stock, as applicable; provided that no such
qualification shall be required in any jurisdiction where,
as a result thereof, the Company would be subject to service
of general process, or to taxation as a foreign corporation
doing business in such jurisdiction. In each jurisdiction
where such qualification shall be effected, the Company
will, unless you agree that such action is not at the time
necessary or advisable, file and make such statements or
reports at such times as are or may reasonably be required
by the laws of such jurisdiction. For the purposes of this
paragraph, "good faith" is defined as the same standard of
care and degree of effort as the Company will use to qualify
its securities other than the Underlying Securities and the
Warrant Stock.
(vi) Make generally available to its security holders as soon as
practicable, but not later than the first day of the
eighteenth full calendar month following the effective date
of the registration statement, an earnings statement (which
need not be certified by independent public or independent
certified public accountants unless required by the Act or
the rules and regulations promulgated thereunder, but which
shall satisfy the provisions of Section 11(a) of the Act)
covering a period of at least twelve months beginning after
the effective date of the registration statement.
(vii)After the effective date of such registration statement,
prepare, and promptly notify you of the proposed filing of,
and promptly file with the Commission, each and every
amendment or supplement thereto or to any registration
statement forming a part thereof as may be necessary to make
any statements therein not misleading in any material
respect; provided that no such amendment or supplement shall
be filed if you shall object thereto in writing promptly
after being furnished a copy thereof.
(viii) Furnish to you, as soon as available, copies of any such
registration statement, including all preliminary or final
registration statements, or supplement or amendment prepared
pursuant thereto, all in such quantities as you may from
time to time reasonably request;
(ix) Make such representations and warranties to any underwriter
of the Underlying Securities or the Warrant Stock, as
applicable, and use your best efforts to cause Company
counsel to render such usual and customary opinions to such
underwriter, as such underwriter may reasonably request; and
(x) Pay all costs and expenses incident to the performance of
the Company's obligations under Subsection 3 (c) above and
under this Subsection 3 (f), including without limitation
the fees and disbursements of Company auditors and legal
counsel, of legal counsel for you and of legal counsel
responsible for qualifying the Underlying Securities and/or
the Warrant Stock under blue sky laws, all filing fees and
printing expenses, all expenses in connection with the
transfer and delivery of the Underlying Securities and/or
Warrant Stock, and all expenses in connection with the
qualification of the Underlying Securities and/or the
Warrant Stock under blue sky laws provided, however, that
the Company shall not be responsible for indemnity discounts
and commissions.
<PAGE>
(e) Agreements by Warrant Holder. In connection with the filing of a
registration statement pursuant to Subsection 3(c) above, if you participate in
the offering of the Underlying Securities and/or Warrant Stock by including
securities owned by you, you agree:
(i) To furnish the Company all material information requested by the
Company concerning yourself and your holdings of securities of the
Company and the proposed method of sale or other disposition of the
Underlying Securities and/or Warrant Stock and such other information
and undertakings as shall be reasonably required in connection with the
preparation and filing of any such registration statement covering all
or a part of the Underlying Securities and/or Warrant Stock and in
order to ensure full compliance with the Act; and
(ii) To cooperate in good faith with the Company and its underwriters,
if any, in connection with such registration, including placing the
shares of Underlying Securities and/or Warrant Stock to be included in
such registration statement in escrow or custody to facilitate the sale
and distribution thereof.
(f) Indemnification. The Company shall indemnify and hold harmless you
and each of the other Underwriters, each of your and their officers and
directors, and each person, if any, who respectively controls you or any such
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any
loss, liability, claim, damage and expense whatsoever (including but not limited
to any and all expense whatsoever reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever), joint or several, to which any of you or any such Underwriter
or such controlling person becomes subject, under the Act or otherwise, insofar
as such loss, liability, claim, damage and expense (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in (i) a registration statement
covering any Underlying Security or Warrant Stock, in the prospectus contained
therein, or in an amendment or supplement thereto or (ii) in any application or
other document or communication (in this Subsection collectively called
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Underlying Securities and/or Warrant Stock under the
securities laws thereof or filed with the Commission, or arise out of or based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
provided, however, that the Company shall not be obligated to indemnify in any
such case to the extent that any such loss, claim, damage, expense or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon, and in conformity with,
written information respectively furnished by you or any such Underwriter or
such controlling person for use in the registration statement, or any amendment
or supplement thereto, or any application, as the case may be.
If any action is brought against a person in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
person shall promptly notify the Company in writing of the institution of such
action and the Company shall assume the defense of the action, including the
employment of counsel (satisfactory to the indemnified person in its reasonable
judgment) and payment of expenses. The indemnified person shall have the right
to employ its or their own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of such indemnified person unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of the action or the Company shall not have
employed counsel to have charge of the defense of the action or the indemnified
person shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to the
Company (in which case the Company shall not have the right to direct the
defense of the action on behalf of the indemnified person), in any of which
events these fees and expenses shall be borne by the Company. Anything in this
paragraph to the contrary notwithstanding, the Company shall not be liable for
any settlement of any claim or action effected without its consent. The
Company's indemnity agreements contained in this Subsection shall remain in full
force and effect regardless of any investigation made by or on behalf of any
indemnified person, and shall survive any termination of this Agreement. The
Company agrees promptly to notify you of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the registration statement pursuant to Subsection 3(c) above.
<PAGE>
If you choose to include all or a part of the Underlying Securities or
Warrant Stock in a public offering pursuant to Subsection 3(c), then you agree
to indemnify and hold harmless the Company and each of its directors and
officers who have signed any such registration statement, and any underwriter
for the Company (as defined in the Act), and each person, if any, who controls
the Company or such underwriter within the meaning of the Act, to the same
extent as the indemnity by the Company in this Subsection 3(f) but only with
respect to statements or omissions, if any, made in such registration statement,
or any amendment or supplement thereto, or in any application in reliance upon,
and in conformity with, written information furnished by you to the Company for
use in the registration statement, or any amendment or supplement thereto, or
any application, as the case may be. In case any action shall be brought in
respect of which indemnity may be sought against you, you shall have the rights
and duties given to the Company, and the persons so indemnified shall have the
rights and duties given to you by the provisions of the first paragraph of this
Subsection.
The Company further agrees that, if the indemnity provisions of the
foregoing paragraphs are held to be unenforceable, any holder of an Underwriter
Warrant or controlling person of such a holder may recover contribution from the
Company in an amount which, when added to contributions such holder or
controlling person has theretofore received or concurrently receives from
officers and directors of the Company or controlling persons of the Company,
will reimburse such holder or controlling person for all losses, claims, damages
or liabilities and legal or other expenses; provided, however, that if the full
amount of the contribution specified in this Subsection 3(f) is not permitted by
law, then such holder or controlling person shall be entitled to contribution
from the Company and its officers, directors and controlling persons to the full
extent permitted by law.
4. EXERCISE OF UNDERWRITER WARRANTS; PARTIAL EXERCISE.
(a) Exercise in Full. Each Underwriter Warrant may be
exercised in full by the holder thereof by surrender of the related Warrant
Certificate, with the form of subscription at the end thereof duly executed by
such holder, to the Company at its principal office, accompanied by payment, in
cash or by certified or bank cashiers check payable to the order of the Company,
in the respective amount obtained by multiplying the number of Underlying Units
represented by the Warrant Certificate (after giving effect to any adjustment
therein as provided in Section 6 below) by the Purchase Price per Unit.
(b) Partial Exercise. Each Underwriter Warrant may be
exercised in part by surrender of the related Warrant Certificate in the manner
and at the place provided in Subsection 4(a) above, accompanied by payment, in
cash or by certified or bank cashiers check payable to the order of the Company,
in the respective amount obtained by multiplying the number of Underlying Units
designated by the holder in the form of subscription attached to the Warrant
Certificate by the Purchase Price per Unit (after giving effect to any
adjustment therein as provided in Section 6 below). Upon any such partial
exercise, the Company at its expense will forthwith issue and deliver to or upon
the order of the purchasing holder, a new Warrant Certificate or Certificates of
like tenor, in the name of the holder thereof or as such holder (upon payment by
such holder of any applicable transfer taxes) may request calling in the
aggregate for the purchase of the number of Units equal to the number of such
Units called for on the face of the original Warrant Certificate (after giving
effect to any adjustment therein as provided in Section 6 below) minus the
number of such Units (after giving effect to such adjustment) designated by the
holder in the aforementioned form of subscription.
(c) Company to Reaffirm Obligations. The Company will, at the
time of any exercise of any Underwriter Warrant, upon the request of the holder
thereof, acknowledge in writing its continuing obligation to afford to such
holder any rights (including without limitation any right to registration of the
Underlying Securities and Warrant Stock) to which such holder shall continue to
be entitled after such exercise in accordance with the provisions of this
Agreement; provided, however, that if the holder of an Underwriter Warrant shall
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford to such holder any such rights.
<PAGE>
5. DELIVERY OF CERTIFICATES, ETC., ON EXERCISE.
As soon as practicable after the exercise of any Underwriter Warrant in
full or in part, and in any event within twenty days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the purchasing holder
thereof, a certificate or certificates for the number of Units, Underlying
Warrants and fully paid and nonassessable shares of Underlying Preferred Stock
to which such holder shall be entitled upon such exercise, plus in lieu of any
fractional share to which such holder would otherwise be entitled, cash in an
amount determined pursuant to Section 7(g), together with any other stock or
other securities and property (including cash, where applicable) to which such
holder is entitled upon such exercise pursuant to Section 6 below or otherwise.
6. ANTI-DILUTION PROVISIONS.
The Underwriter Warrants are subject to the following terms and conditions
during the term thereof:
(a) Stock Distributions and Splits. In case (i) the
outstanding shares of Common Stock (or Other Securities) shall be subdivided
into a greater number of shares, or (ii) a dividend in Common Stock (or Other
Securities) shall be paid in respect of Common Stock (or Other Securities), the
Purchase Price per Unit in effect immediately prior to such subdivision or at
the record date of such dividend or distribution shall simultaneously with the
effectiveness of such subdivision or immediately after the record date of such
dividend or distribution be proportionately reduced; and if outstanding shares
of Common Stock or (or Other Securities) shall be combined into a smaller number
of shares thereof, the Purchase Price per Unit in effect immediately prior to
such combination shall simultaneously with the effectiveness of such combination
be proportionately increased. Any dividend paid or distributed on the Common
Stock (or Other Securities) in stock or any other securities convertible into
shares of Common Stock (or Other Securities) shall be treated as a dividend paid
in Common Stock (or Other Securities) to the extent that shares of Common Stock
(or Other Securities) are issuable upon the conversion thereof.
(b) Adjustments. Whenever the Purchase Price per Unit is
adjusted as provided in Subsection 6(a) above, the number of Underlying Units
purchasable upon exercise of the Underwriter Warrants immediately prior to such
Purchase Price adjustment shall be adjusted, effective simultaneously with such
Purchase Price adjustment, to equal the product obtained (calculated to the
nearest full share) by multiplying such number of Underlying Units by a
fraction, the numerator of which is the Purchase Price per Unit in effect
immediately prior to such Purchase Price adjustment and the denominator of which
is the Purchase Price per Unit in effect upon such Purchase Price adjustment,
which adjusted number of Underlying Units shall thereupon be the number of
Underlying Units purchasable upon exercise of the Underwriter Warrants until
further adjusted as provided herein.
(c) Reorganizations. If any consolidation or merger of the
Company with another corporation, or the sale of all or substantially all of its
assets to another corporation, shall be effected in such a way that holders of
Common Stock or Underlying Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock or
Underlying Common Stock, then, as a condition of such consolidation, merger or
sale, lawful and adequate provisions shall be made whereby the holders of
Underwriter Warrants shall thereafter have the right to purchase and receive
upon the basis and upon the terms and conditions specified in this Agreement and
in lieu of the shares of Common Stock or Underlying Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
Underwriter Warrants, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
shares of Common Stock or Underlying Common Stock equal to the number of shares
<PAGE>
of such stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented by the Underwriter Warrants had such
consolidation, merger or sale not taken place, and in any such case, appropriate
provision shall be made with respect to the rights and interests of the holders
of Underwriter Warrants to the end that the provisions hereof (including without
limitation provisions for adjustments of the Purchase Price and of the number of
Units purchasable and receivable upon the exercise of the Underwriter Warrants)
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon the exercise thereof
(including an immediate adjustment, by reason of such consolidation or merger,
of the Purchase Price to the value for the Common Stock or Underlying Common
Stock reflected by the terms of such consolidation or merger if the value so
reflected is less than the Purchase Price in effect immediately prior to such
consolidation or merger). In the event of a merger or consolidation of the
Company with or into another corporation as a result of which a number of shares
of common stock of the surviving corporation greater or lesser than the number
of shares of Common Stock of the Company outstanding immediately prior to such
merger or consolidation are issuable to holders of Common Stock or Underlying
Common Stock of the Company, then the Purchase Price in effect immediately prior
to such merger or consolidation shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Common
Stock or Underlying Common Stock of the Company. The Company will not effect any
such consolidation, merger or sale, unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument executed and mailed or delivered to the registered holder
hereof at the last address of such holder appearing on the books of the Company,
the obligation to deliver to such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to purchase. If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock of the Company, the Company shall not effect any consolidation, merger or
sale with the Person having made such offer or with any Affiliate of such
Person, unless prior to the consummation of such consolidation, merger or sale
the holders of Underwriter Warrants shall have been given a reasonable
opportunity to then elect to receive upon the exercise of Underwriter Warrants
either the stock, securities or assets then issuable with respect to the Common
Stock or Underlying Common Stock of the Company or the stock, securities or
assets, or the equivalent issued to previous holders of Common Stock in
accordance with such offer. The term "Person" as used in this subparagraph shall
mean and include an individual, a partnership, a corporation, a trust, a joint
venture, an unincorporated organization and a government or any department or
agency thereof. For the purposes of this subparagraph, an "Affiliate" of any
Person shall mean any Person directly or indirectly controlling, controlled by
or under direct or indirect common control with, such other Person. A Person
shall be deemed to control a corporation if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.
(d) Effect of Dissolution or Liquidation. In case the Company
shall dissolve or liquidate all or substantially all of its assets, all rights
under this Agreement shall terminate as of the date upon which a certificate of
dissolution or liquidation shall be filed with the Secretary of the State of
Texas (or, if the Company theretofore shall have been merged or consolidated
with a corporation incorporated under the laws of another state, the date. upon
which action of equivalent effect shall have been taken); provided, however,
that (i) no dissolution or liquidation shall affect the rights under Subsection
6(c) of any holder of an Underwriter Warrant, and (ii) if the Company's Board of
Directors shall propose to dissolve or liquidate the Company, each holder of an
Underwriter Warrant shall be given written notice of such proposal at the
earlier of (i) the time when the Company's shareholders are first given notice
of the proposal, or (ii) the time when notice to the Company's shareholders is
first required.
(e) Notice of Change of Purchase Price. Whenever the Purchase
Price per Unit or the kind or amount of securities purchasable under the
Underwriter Warrants shall be adjusted pursuant to any of the provisions of this
Agreement, the Company shall forthwith thereafter cause to be sent to each
holder of an Underwriter Warrant, a certificate setting forth the adjustments in
the Purchase Price per Unit and/or in such number of Units, and also setting
forth in detail the facts requiring such adjustments, including without
limitation a statement of the consideration received or deemed to have been
received by the Company for any additional securities issued by it requiring
such adjustment. In addition, the Company at its expense shall within 90 days
following the end of each of its fiscal years during the term of this Agreement,
and promptly upon the reasonable request of any holder of an Underwriter Warrant
in connection with the exercise from time to time of all or any portion of any
Underwriter Warrant, cause independent certified public accountants of
recognized standing selected by the Company to compute any such adjustment in
accordance with the terms of the Underwriter Warrants and prepare a certificate
setting forth such adjustment and showing in detail the facts upon which such
adjustment is based.
<PAGE>
(f) Notice of a Record Date. In the event of (i) any taking
by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend payable out of earned surplus of the
Company) or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, (ii) any transfer of all or
substantially all of the assets of the Company to, or consolidation or merger of
the Company with or into, any other person or (iii) any voluntary or involuntary
dissolution or liquidation of the Company, then and in each such event the
Company will mail or cause to be mailed to each holder of an Underwriter Warrant
a notice specifying not only the date on which any such record is to be taken
for the purpose of such dividend, distribution or right and stating the amount
and character of such dividend, distribution or right, but also the date on
which any such transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock or preferred Stock (or other Securities) for securities
or other property deliverable upon such transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be mailed at least 20
days prior to the proposed record date therein specified.
7.FURTHER COVENANTS OF THE COMPANY.
(a) Reservation of Stock. The Company shall at all times
reserve and keep available, solely for issuance and delivery upon the exercise
of the Underwriter Warrants, all shares of the Underlying Common Stock and
Warrant Stock from time to time issuable upon the exercise of the Underlying
Warrants and the Underwriter Warrants and shall take all necessary actions to
ensure that the par value per share, if any, of the Underlying Common Stock and
Warrant Stock is, at all times equal to or less than the then effective Purchase
Price per Unit attributable to each share of Common Stock as the case may be.
(b) Title to Units. All Units, all Underlying Warrants, all
Underlying Common Stock and all Warrant Stock delivered upon the exercise of the
Underwriter Warrants and the Underlying Warrants shall be validly issued, fully
paid and nonassessable; each holder of an Underwriter Warrant shall receive good
and marketable title to the Units, the Underlying Common Stock, the Underlying
Warrants and the Warrant Stock free and clear of all voting and other trust
arrangements, liens, encumbrances, equities and claims whatsoever; and the
Company shall have paid all taxes, if any, in respect of the issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the
Company at any time shall list any Units, Common Stock or Warrants on any
national securities exchange, the Company will, at its expense, simultaneously
list on such exchange, upon official notice of issuance upon the exercise of the
Underwriter Warrants, and maintain such listing of, all Units, all Underlying
Securities and all Warrant Stock from time to time issuable upon the exercise of
the Underwriter Warrants; and the Company will so list on any national
securities exchange, will so register and will maintain such listing of, any
Other Securities if and at the time that any securities of like class or similar
type shall be listed on such national securities exchange by the Company.
(d) Exchange of Underwriter Warrants. Subject to Subsection
3(a) hereof, upon surrender for exchange of any Warrant Certificate to the
Company, the Company at its expense will promptly issue and deliver to or upon
the order of the holder thereof a new Warrant Certificate or certificates of
like tenor, in the name of such holder or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate
for the purchase of the number of Units called for on the face or faces of the
Warrant Certificate or Certificates so surrendered.
(e) Replacement of Underwriter Warrants. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant Certificate and, in the case of any such loss,
theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, upon surrender and cancellation of such Warrant Certificate, the
Company, at the expense of the holder of such Underwriter Warrant will execute
and deliver, in lieu thereof, a new Warrant Certificate of like tenor.
<PAGE>
(f) Reporting by the Company. The Company agrees that, if it
files a registration statement during the term of the Underwriter Warrants, it
will use its best efforts to keep current in the filing of all forms and other
materials which it may be required to file with the appropriate regulatory
authority pursuant to the Exchange Act, and all other forms and reports required
to be filed with any regulatory authority having jurisdiction over the Company.
(g) Fractional Shares. No fractional shares of Underlying
Common Stock or Warrant Stock are to be issued upon the exercise of any
Underwriter Warrant or Warrant, but the Company shall pay a cash adjustment in
respect of any fraction of a share which would otherwise be issuable in an
amount equal to the same fraction of the highest market price per share of
Underlying Common Stock or Warrant Stock on the day of exercise, as determined
by the Company.
(h) Reorganizations and Reclassifications. While any
Underwriter Warrant remains outstanding, the Company shall not effect any
capital reorganization of the Company, or any reclassification or
recapitalization of the capital stock of the Company; provided, however, that
the Company may re- incorporate in another state if such re-incorporation does
not involve a change in the capital structure of the Company, and the Company
may change the par value of the Common Stock, subject to the anti-dilution
provisions hereof.
8. OTHER HOLDERS.
The Underwriter Warrants are issued upon the following terms, to all of
which each holder or owner thereof by the taking thereof consents and agrees as
follows: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Subsection 3(a) hereof, of an Underwriter Warrant properly
endorsed shall take such Underwriter Warrant subject to the provisions of
Subsection 3(a) hereof and thereupon shall be authorized to represent himself as
absolute owner thereof and, subject to the restrictions contained in this
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; (b) each prior
taker or owner waives and renounces all of his equities or rights in such
Underwriter Warrant in favor of each such permitted bona fide purchaser, and
each such permitted bona fide purchaser shall acquire absolute title thereto and
to all rights presented thereby; (c) until such time as the respective
Underwriter Warrant is transferred on the books of the Company, the Company may
treat the registered holder thereof as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary and (d) all references to
the word "you" in this Agreement shall be deemed to apply with equal effect to
any person to whom a Warrant Certificate or Certificates have been transferred
in accordance with the terms hereof, and where appropriate, to any person
holding Units, Underlying Securities or Warrant Stock.
9. MISCELLANEOUS.
All notices, certificates and other communications from or at the
request of the Company to the holder of any Underwriter Warrant shall be mailed
by first class, registered or certified mail, postage prepaid, to such address
as may have been furnished to the Company in writing by such holder, or, until
an address is so furnished, to the address of the last holder of such
Underwriter Warrant who has so furnished an address to the Company, except as
otherwise provided herein. This Agreement and any of the terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas. The headings in
this Agreement are for reference only and shall not limit or otherwise affect
any of the terms hereof. This Agreement, together with the forms of instruments
annexed hereto as Schedule I, constitutes the full and complete agreement of the
parties hereto with respect to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on this _____ day of ______________, 1997, in Dallas, Texas, by its
proper corporate officers thereunto duly authorized.
Cotton Valley Resources Corporation
By:______________________
Eugene A. Soltero, Chairman
The above Warrant and Registration Rights Agreement is confirmed this
_____ day of __________, 1997.
National Securities Corporation
By:
<PAGE>
SCHEDULE I
COTTON VALLEY RESOURCES CORPORATION
UNIT PURCHASE WARRANT
Certificate Evidencing Right to Purchase
This is to certify that _________________________________
("_____________") or assigns, is entitled to purchase at any time or from time
to time after 9 :00 A.M., Dallas, Texas time, on ____, 1998 and until 9: 00
A.M., Dallas, Texas time, on _______________, 2002 up to the above referenced
number of Units consisting of two shares of the Company's Common Stock (the
"Shares") and two Redeemable Common Stock Purchase Warrant (the "Warrants"), of
Cotton Valley Resources Corporation., a corporation organized under the laws of
Ontario, Canada (the "Company"), for the consideration specified in Subsection
1(d) of the Warrant and Registration Rights Agreement dated _____________, 1997
between the Company and National Securities Corporation, as representative of
the several Underwriters (as defined therein) (the "Warrant Agreement"),
pursuant to which this Warrant is issued. All rights of the holder of this
Warrant are subject to the terms and provisions of the Warrant Agreement, copies
of which are available for inspection at the office of the Company.
The Units issuable upon the exercise of this Warrant have not been
registered under the Securities Act of 1933, as amended (the "Act"), and no
distribution of the Units, Shares or Warrants issuable upon exercise of this
Warrant may be made until the effectiveness of a registration statement under
the Act covering such Units. Transfer of this Warrant Certificate is restricted
as provided in Subsection 3(a) of the Warrant Agreement.
This Warrant has been issued to the registered owner in reliance upon
written representations necessary to ensure that this Warrant was issued in
accordance with an appropriate exemption from registration under any applicable
state and federal securities laws, rules and regulations. This Warrant may not
be sold, transferred, or assigned unless, in the opinion of the Company and its
legal counsel, such sale, transfer or assignment will not be in violation of the
Act, applicable rules and regulations of the Securities and Exchange Commission,
and any applicable state securities laws.
Subject to the provisions of the Act and of the Warrant Agreement, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
offices of the Company, by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant, together with the Assignment hereof
duly endorsed. Until transfer of this Warrant on the books of the Company, the
Company may treat the registered holder hereof as the owner hereof for all
purposes.
Any Units, Warrants or Common Stock which are acquired pursuant to the
exercise of this Warrant shall be acquired in accordance with the Warrant
Agreement and certificates representing all securities so acquired shall bear a
restrictive legend reading substantially as follows:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933
AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION OF COUNSEL (SATISFACTORY TO THE
COMPANY) THAT REGISTRATION IS NOT REQUIRED."
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on this _____ day of ___________, 1997, in Dallas, Texas, by its proper
corporate officer's thereunto duly authorized.
Cotton Valley Resources Corporation
(I) BY:________________________
Eugene A. Soltero, Chairman
ATTEST:________________________
<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To Cotton Valley Resources Corporation:
The undersigned, the holder of the enclosed Warrant, hereby
irrevocably elects to exercise the purchase right represented by such
Warrant for, and to purchase thereunder, _________________ Units (as
defined in the Warrant and Registration Rights Agreement to which the
form of this Subscription was attached) and herewith makes payment of
$______________ therefor, and requests that the certificate or
certificates for such Units be issued in the name of and delivered to
the undersigned.
Date:
(Signature must conform in all respects to name of holder as specified
on the face of the Warrant)
(Address)
Insert the number of Units called for on the face of the Warrant
(or, in the case of a partial exercise, the portion thereof as to which
the Warrant is being exercised), in either case without making any
adjustment for additional Units or other securities or property or cash
which, pursuant to the adjustment provisions of the Warrant, may be
deliverable upon exercise.
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and
transfers unto _______________________________ the right represented by
the enclosed Warrant to purchase ________ Units with full power of
substitution in the premises.
The undersigned represents and warrants that the transfer, in
whole in or in part, of such right to purchase represented by the
enclosed Warrant is permitted by the terms of the Warrant and
Registration Rights Agreement pursuant to which the enclosed Warrant
has been issued, and the transferee hereof, by his acceptance of this
Assignment, represents and warrants that he is familiar with the terms
of such Warrant and Registration Rights Agreement and agrees to be
bound by the terms thereof with the same force and effect as if a
signatory thereto, including without limitation Section 3 thereof.
Date:
(Signature must conform in all respects to name of holder as specified
on the face of the Warrant)
(Address)
Signed in the presence of:
January *, 1997
Cotton Valley Resources Corporation
8350 North Central Expressway
Suite 2030M
Dallas, Texas
75206, U.S.A.
Dear Sirs/Mesdames:
Re: Cotton Valley Resources Corporation ("Cotton Valley")
We have acted as counsel to Cotton Valley, an Ontario, Canada
corporation, with respect to the registration under the Securities Act of 1933,
as amended (the "Securities Act") of 2,500,000 shares of common stock without
par value (the "Common Stock") and 2,500,000 redeemable Common Stock purchase
warrants (the "Warrants") of Cotton Valley to be offered to the public by Cotton
Valley in a firm commitment underwriting by National Securities Corporation.
A registration on Form SB-2 (SEC File No. 333-16893) was filed
with the Securities and Exchange Commission on November 26, 1996 (the
"Registration Statement") and Amendment No. 1 thereto is being filed herewith.
In connection with rendering this opinion, we have examined executed copies of
the Registration Statement and all exhibits thereto and Amendment No. 1 and all
exhibits thereto. We have also examined and relied upon the Articles of
Amalgamation of Cotton Valley, the bylaws of Cotton Valley, the minutes and
records of the corporate proceedings of Cotton Valley with respect to the
issuance of the Common Stock and Warrants and related matters, and such other
agreements and instruments relating to Cotton Valley as we have deemed necessary
or desirable for the purposes of the opinion expressed herein.
<PAGE>
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In connection with the opinion hereinafter expressed, we have
also reviewed and examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records of Cotton Valley and
such certificates of officers of Cotton Valley, government officials and others
and such other corporate records and documents as we have deemed necessary as a
basis for such opinion.
For the purposes of this opinion, we have assumed the
genuineness of all signatures, the authenticity of all documents and instruments
submitted to us as originals, the conformity to the originals of all documents
submitted to us as certified or photostatic copies or as facsimile of such
originals and the authenticity of the originals of such certified or photostatic
copies or facsimiles.
We are solicitors qualified to carry on the practice of law in
the Province of Ontario and we express no opinion herein as to any laws, or
matters governed by any laws, other than the laws of the Province of Ontario and
the federal laws of Canada applicable therein, all as of the date hereof.
Based and relying upon and subject to the foregoing, we are of
the opinion that the Common Stock and the Common Stock issuable upon exercise of
the Warrants, to be issued by Cotton Valley in the Offering as described in the
Registration Statement have been duly and validly authorized for issuance and
sale and the Common Stock, the Warrants, and the Common Stock issuable upon
exercise of the Warrants, when issued by Cotton Valley under the terms of the
Offering, will be issued as fully paid and non-assessable.
This opinion is rendered solely for the benefit of the
addressee hereof and may not be used or relied upon, circulated, quoted,
distributed or otherwise referred to by any other person or entity or for any
other purpose without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and Amendment No. 1 thereto.
Yours truly,
Weir & Foulds
.
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement"), dated and effective as of November
7, 1996 is entered into by and between COTTON VALLEY RESOURCES CORPORATION, an
Ontario, Canada corporation (herein referred to as the "Company") and LIVIAKIS
FINANCIAL COMMUNICATIONS, INC., a California corporation (herein referred to as
the "Consultant").
RECITALS
WHEREAS, Company is a publicly held corporation with its common stock
traded through the Canadian Dealing Network; and
WHEREAS, Consultant has experience in the area of corporate finance,
investor communications and financial and investor public relations; and
WHEREAS, Company desires to engage the services of Consultant to assist
and consult with the Company in matters concerning corporate finance and to
represent the company in investors' communications and public relations with
existing shareholders, brokers, dealers and other investment professionals as to
the Company's current and proposed activities;
NOW THEREFORE, in consideration of the promises and the mutual
covenants and agreements hereinafter set forth, the parties hereto covenant and
agree as follows:
1. Term of Consultancy. Company hereby agrees to retain the Consultant to act in
a consulting capacity to the Company, and the Consultant hereby agrees to
provide services to the Company commencing November 7, 1996 and ending on
January 2, 1998.
2. Duties of Consultant. The Consultant agrees that it will generally provide
the following specified consulting services through its officers and employees
during the term specified in Section 1.:
(a) Advise and assist the Company in developing and implementing
appropriate plans and materials for presenting the Company and its business
plans, strategy and personnel to the financial community, establishing an image
for the Company in the financial community, and creating the foundation for
subsequent financial public relations efforts;
(b) Introduce the Company to the financial community;
(c) With the cooperation of the Company, maintain an awareness during the
term of this Agreement of the Company's plans, strategy and personnel, as they
may evolve during such period, and advise and assist the Company in
communicating appropriate information regarding such plans, strategy and
personnel to the financial community;
(d) Assist and advise the Company with respect to its (i) stockholder and
investor relations, (ii) relations with brokers, dealers, analysts and other
investment professionals, and (iii) financial public relations generally;
(e) Perform the functions generally assigned to investor/stockholder
relations and public relations departments in major corporations, including
responding to telephone and written inquiries (which may be referred to the
Consultant by the Company); preparing or reviewing press releases, reports and
other communications with or to shareholders, the investment community and the
general public; advising with respect to the timing, form, distribution and
other matters related to such releases, reports and communications; and
consulting with respect to corporate symbols, logos, names, the presentation of
such symbols, logos and names, and other matters relating to corporate image;
(f) Disseminate information regarding the Company to shareholders,
brokers, dealers, other investment community professionals and the general
investing public;
(g) Conduct meetings, in person or by telephone, with brokers, dealers,
analysts and other investment professionals to advise them of the Company's
plans, goals and activities, and assist the Company in preparing for press
conferences and other forums involving the media, investment community
professionals and the general investment public;
(h) At the Company's request, review business plans, strategies, mission
statements budgets, proposed transactions and other plans for the purpose of
advising the Company of the investment community implications thereof; and,
(i) Otherwise perform as the Company's financial relations and public
relations consultant.
It is understood that until January 2, 1997, the Consultant will only be
responsible to advise the Company on matters concerning corporate finance and to
assist the Company in creation of its investor relations infastructure. The
Consultant will not be expected to perform any proactive investor relations or
financial public relations activities until January 2, 1997.
3. Allocation of Time and Energies. The Consultant hereby promises to
perform and discharge well and faithfully the responsibilities which may be
assigned to the Consultant from time to time by the officers and duly authorized
representatives of the Company in connection with the conduct of its financial
and investor public relations and communications activities, so long as such
activities are in compliance with applicable securities laws and regulations.
Consultant shall diligently and thoroughly provide the consulting services
required hereunder. Although no specific hours-per-day requirement will be
required, Consultant and the Company agree that Consultant will perform the
duties set forth hereinabove in a diligent and professional manner. The parties
acknowledge and agree that a disproportionately large amount of the effort to be
expended and the costs to be incurred by the Consultant and the benefits to be
received by the Company are expected to occur upon and shortly after, and in any
event, within one month of the effectiveness of this Agreement. It is explicitly
understood that Consultant's performance of its duties hereunder will in no way
be measured by the price of the Company's common stock, nor the trading volume
of the Company's common stock, both of which cannot be guaranteed by the
Consultant. It is also understood that the Company is entering into this
Agreement with Liviakis Financial Communications, Inc. ("LFC"), a corporation
and not any individual member of LFC, and with such, Consultant will not be
deemed to have breached this Agreement if any member, officer or director of LFC
leaves the firm or dies or becomes physically unable to perform any meaningful
activities during the term of the Agreement, provided the Consultant otherwise
performs its obligations under this Agreement.
4. Remuneration. As full and complete compensation for services described in
this Agreement, the Company shall compensate Consultant as follows:
4.1 In connection with Consultant undertaking this engagement, the Company
agrees to sell, and Consultant and Robert B. Prag ("RBP"), an affiliate
of consultant, severally agree to buy, for One Canadian Dollar (C$1.00)
per unit five hundred thousand (500,000) units (the "Units"), each
consisting of one share of the Company's common stock ("Common Stock")
and one stock purchase warrant (a "Warrant") entitling the holder
thereof to purchase a share of Common Stock at an exercise price of One
Dollar and Ten Cents Canadian (C$1.10) through November 7, 2001. The
Warrants shall be evidenced by the form of warrant certificate attached
hereto as Exhibit A. It is understood that the Units, the shares of
Common Stock and Warrants constituting the Units, and the shares of
Common Stock issuable upon exercise of the Warrants have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), and consequently such securities constitute and will constitute
"restricted securities" as defined in Rule 144 promulgated under the
Securities Act, unless registered under the Securities Act.
Consultant shall purchase three hundred seventy-five thousand (375,000)
Units, for which he shall deliver to the Company his promissory note in
the amount of Two Hundred Eighty-One Thousand Two Hundred Fifty United
States Dollars (US$281,250), payable in four monthly installments on the
fifteenth (15th) day of December 1996 and January, February and March
1997 of US$56,250, US$75,000, US$75,000 and US$75,000, respectively. RBP
shall purchase one hundred twenty-five thousand (125,000) Units, for
which he shall deliver to the Company his promissory note in the amount
of Ninety-Three Thousand Seven Hundred Fifty United States Dollars
(US$93,750), payable in four monthly installments on the fifteenth
(15th) day of December 1996 and January, February and March 1997 of
US$18,750, US$25,000, US$25,000, and US$25,000 respectively.
Certificates representing the shares of Common Stock and Warrants
constituting the Units shall be issued in the names of Consultant and
RBP and delivered in trust to Weir & Foulds, counsel to the Company,
pursuant to irrevocable instructions under which Weir & Foulds is to
deliver the certificates representing such securities to Consultant and
RBP, respectively, pro rata as such promissory notes are paid.
In addition, as consideration for Consultant undertaking this
engagement, the Company shall issue and deliver to Consultant an
aggregate of one million four hundred ninety thousand (1,490,000) shares
(the "Consideration Shares") of Common Stock. The Consideration Shares
shall be issued by the Company and delivered to Consultant in accordance
with the following schedule:
Number of Shares Date
400,000 Upon execution of this agreement
800,000 January 2, 1997
50,000 January 31, 1997
50,000 February 28, 1997
50,000 March 31, 1997
50,000 April 31, 1997
50,000 May 31, 1997
40,000 June 30, 1997
--------
1,490,000
It is understood that the Consideration Shares have not been registered
under the Securities Act and consequently such securities constitute and
will constitute "restricted securities" as defined in Rule 144
promulgated under the Securities Act, unless registered under the
Securities Act.
The Company agrees that, when issued and delivered to Consultant and
RBP, the Consideration Shares, the shares of Common Stock constituting
part of the Units and the shares of Common Stock issuable upon exercise
of the Warrants shall be duly authorized, validly outstanding, fully
paid and non-assessable. The Company also understands and agrees that
Consultant has foregone significant opportunities to accept this
engagement and that the Company derives substantial benefit from the
execution of this Agreement and the ability to announce its relationship
with Consultant. The Consideration Shares, therefore, constitute payment
for Consultant's agreement to represent the Company and are a
nonrefundable, non-apportionable and non-ratable retainer. If the
Company elects to terminate this Agreement prior to January 2, 1998 for
any reason whatsoever, it is agreed and understood that Consultant will
not be and may not be required or requested by the company to return any
of the Consideration Shares or any securities constituting the Units or
issued upon exercise of the Warrants.
The Consideration Shares and the shares of Common Stock constituting the
Units shall have the benefit of the same registration rights as the
shares of Common Stock issuable upon exercise of the Warrants receive
pursuant to the terms of the warrant certificates representing the
Warrants. The Company agrees to file by November 30, 1997 and thereafter
to prosecute diligently to effectiveness a registration statement under
the Securities Act covering, among other securities, such Consideration
Shares, shares of common Stock constituting part of the Units, and
shares of Common Stock issuable upon exercise of the Warrants as
Consultant and RBP may request. Consultant and RBP agree that they,
respectively, will not sell shares of Common Stock received hereunder
prior to January 2, 1998.
4.2 Consultant and Prag (hereinafter referred to as "Consultants")
acknowledge that the shares of Common Stock, the Options and the shares
issuable upon the exercise of the Options to be issued pursuant to this
Agreement (collectively, the "Shares") have not been registered under
the Securities Act of 1933, and accordingly are "restricted securities"
within the meaning of Rule 144 of the Act. As such, the Options and the
Shares may not be resold or transferred unless the Company has received
an opinion of counsel reasonably satisfactory to the Company that such
resale or transfer is exempt from the registration requirements of that
Act.
4.3 In connection with the acquisition of Shares hereunder, the Consultants
represent and warrant to the Company as follows:
(a) Consultants acknowledge that the Consultants have been afforded the
opportunity to ask questions of and receive answers from duly
authorized officers or other representatives of the Company concerning
an investment in the Shares, and any additional information which the
Consultants have requested. (b) Consultants' investment in restricted
securities is reasonable in relation to the Consultants' net worth,
which is in excess of ten (10) times the Consultants' cost basis in the
Shares. Consultants have had experience in investments in restricted
and publicly traded securities, and Consultants have had experience in
investments in speculative securities and other investments which
involve the risk of loss of investment. Consultants acknowledges that
an investment in the Shares is speculative and involves the risk of
loss. Consultants have the requisite knowledge to assess the relative
merits and risks of this investment without the necessity of relying
upon other advisors, and Consultants can afford the risk of loss of his
entire investment in the Shares. Consultants are (i) accredited
investors, as that term is defined in Regulation D promulgated under
the Securities Act of 1933, and (ii) a purchaser described in Section
25102 (f) (2) of the California Corporate Securities Law of 1968, as
amended.
(c) Consultants are acquiring the Shares for the Consultants' own
account for long-term investment and not with a view toward resale or
distribution thereof except in accordance with applicable securities
laws.
(d) In any vote of shareholders for the election of directors or any
related matter (such as increasing or decreasing the authorized number
of directors or creating a classified board of directors) held prior to
January 1, 2001, Consultants shall vote any shares of Common Stock
received by Consultants pursuant to this Agreement, either directly or
through the exercise of warrants, and then held by Consultants (i) in
connection with the election of directors for such nominees as may be
designated by Eugene A. Soltero and James E. Houge and (ii) with
respect to related matters in such manner as Messrs. Soltero and Houge
may designate. Any designation regarding voting by Messrs. Soltero and
Houge shall be made in a written notice executed by Messrs. Soltero and
Houge and delivered to Consultants. It is understood that any shares of
Common Stock transferred by Consultants to person or entities not
subject to the control of Consultants shall be transferred free of any
obligation with respect to voting arising under this subparagraph.
5. Financing "Finder's Fee". It is understood that in the event C ONSULTANT
introduces C OMPANY, or its nominees, to a lender or equity purchaser, not
already having a preexisting relationship with the Company, who C OMPANY, or its
nominees, ultimately finances or causes the completion of such financing, C
OMPANY agrees to compensate C ONSULTANT for such services with a "finder's fee"
in the amount of 2.5% of total gross financing provided by C OMPANY payable in
cash. This will be in addition to any fees payable by C OMPANY to any other
intermediary, if any, which shall be per separate agreements negotiated between
C OMPANY and such other intermediary.
5.1 It is further understood that C OMPANY, and not C ONSULTANT, is
responsible to perform any and all due diligence on such lender or
equity purchaser introduced to it by C ONSULTANT under this Agreement,
prior to C OMPANY receiving funds. However, C ONSULTANT will not
introduce any parties to C OMPANY about which C ONSULTANT has any prior
knowledge of questionable, unethical or illicit activities.
5.2 C OMPANY agrees that said compensation to C ONSULTANT shall be paid in
full at the time said financing is closed. Moreover, said compensation,
will be a condition precedent to the closing of such funding or
financing and C OMPANY shall execute any and all documents necessary to
effect said compensation.
5.3 As further consideration to C ONSULTANT, C OMPANY, or its nominees,
agrees not to obtain any other financing from any lender or equity
purchaser supplied or referred to C OMPANY by C ONSULTANT for a period
of five years from the date of this Agreement, either directly or
indirectly through third parties or nominees. In the event of
circumvention by C OMPANY, or its nominees, C ONSULTANT shall receive a
fee equal to that outlined in Section "5" herein.
5.4 Consultant will notify Company of introductions it makes for potential
sources of financing in a timely manner (approximately 3 days within
introduction) via facsimile memo. If Company has a preexisting
relationship with such nominee and believes such party should be
excluded from this Agreement, then Company will notify Consultant
immediately of such circumstance via facsimile memo.
6. Expenses. Consultant agrees to pay for all its expenses (phone, mailing,
labor, etc.), other than extraordinary items (travel required by/or specifically
requested by the Company, luncheons or dinners to large groups of investment
professionals, mass faxing to a sizable percentage of the Company's
constituents, investor conference calls, print advertisements in publications,
etc.) approved by the Company prior to its incurring an obligation for
reimbursement.
7. Indemnification. The Company warrants and represents that all oral
communications, written documents or materials, other than those designated by
the Company to the Consultant as "confidential" or "Company private", furnished
to Consultant by the Company with respect to financial affairs, operations,
profitability and strategic planning of the Company are accurate and Consultant
may rely upon the accuracy thereof without independent investigation. The
Company will protect, indemnify and hold harmless Consultant against any claims
or litigation including any damages, liability, cost and reasonable attorney's
fees with respect thereto resulting from Consultant's communication or
dissemination of any said information, documents or materials not designated by
the Company to the Consultant as "confidential" or "Company private", excluding
any such claims or litigation resulting from Consultant's communication or
dissemination of information not provided or authorized by the Company. To the
extent feasible, the Company agrees to make Consultant an additional insured on
any and all commercial liability and directors and officers liability insurance
policies and to provide Consultant with current Certificates of Insurance
reflecting the same.
8. Representations. Consultant represents that it is not required to maintain
any licenses and registrations under federal or any state regulations necessary
to perform the services set forth herein. Consultant acknowledges that, to the
best of its knowledge, the performance of the services set forth under this
Agreement will not violate any rule or provision of any regulatory agency having
jurisdiction over Consultant. Consultant acknowledges that, to the best of its
knowledge, Consultant and its officers and directors are not the subject of any
investigation, claim, decree or judgment involving any violation of the SEC or
securities laws. Consultant further acknowledges that it is not a securities
Broker Dealer or a registered investment advisor. Company acknowledges that, to
the best of its knowledge, it has not violated any rule or provision of any
regulatory agency having jurisdiction over the Company. Company acknowledges
that, to the best of its knowledge, Company is not the subject of any
investigation, claim, decree or judgment involving any violation of the SEC or
securities laws.
9. Legal Representation. The Company acknowledges that it has been represented
by independent legal counsel in the preparation of this Agreement. Consultant
represents that they have consulted with independent legal counsel and/or tax,
financial and business advisors, to the extent the Consultant deemed necessary.
10. Status as Independent Contractor. Consultant's engagement pursuant to this
Agreement shall be as independent contractor, and not as an employee, officer or
other agent of the Company. Neither party to this Agreement shall represent or
hold itself out to be the employer or employee of the other. Consultant further
acknowledges the consideration provided hereinabove is a gross amount of
consideration and that the Company will not withhold from such consideration any
amounts as to income taxes, social security payments or any other payroll taxes.
All such income taxes and other such payment shall be made or provided for by
Consultant and the Company shall have no responsibility or duties regarding such
matters. Neither the Company or the Consultant possess the authority to bind
each other in any agreements without the express written consent of the entity
to be bound.
11. Attorney's Fee. If any legal action or any arbitration or other proceeding
is brought for the enforcement or interpretation of this Agreement, or because
of an alleged dispute, breach, default or misrepresentation in connection with
or related to this Agreement, the successful or prevailing party shall be
entitled to recover reasonable attorneys' fees and other costs in connection
with that action or proceeding, in addition to any other relief to which it or
they may be entitled.
12. Waiver. The waiver by either party of a breach of any provision of this
Agreement by the other party shall not operate or be construed as a waiver of
any subsequent breach by such other party.
13. Notices. All notices, requests, and other communications hereunder shall be
deemed to be duly given if sent by U.S. mail, postage prepaid, addressed to the
other party at the address as set forth herein below:
To the Company: Mr. James E. Hogue, President
Cotton Valley Resources Corporation
8350 N. Central Expressway
Suite M2030
Dallas, TX 75206
To the Consultant: Liviakis Financial Communications, Inc.
John M. Liviakis, President
2420 "K" Street, Suite 220
Sacramento, CA 95816.
It is understood that either party may change the address to which
notices for it shall be addressed by providing notice of such change to the
other party in the manner set forth in this paragraph.
14. Choice of Law, Jurisdiction and Venue. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of California.
The parties agree that Sacramento County, CA. will be the venue of any dispute
and will have jurisdiction over all parties.
15. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or the alleged breach thereof, or relating to Consultant's activities
or remuneration under this Agreement, shall be settled by binding arbitration in
California, in accordance with the applicable rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrator(s) shall be
binding on the parties and may be entered in any court having jurisdiction
thereof. The provisions of Title 9 of Part 3 of the California Code of Civil
Procedure, including section 1283.05, and successor statutes, permitting
expanded discovery proceedings shall be applicable to all disputes that are
arbitrated under this paragraph.
16. Complete Agreement. This Agreement instrument contains the entire agreement
of the parties relating to the subject matter hereof. This Agreement and its
terms may not be changed orally but only by an agreement in writing signed by
the party against whom enforcement of any waiver, change, modification,
extension or discharge is sought.
AGREED TO:
"Company" COTTON VALLEY RESOURCES CORPORATION
Date: ____________ By: _____________________________
Peter Lucas, Secretary/Treasurer
& Its Duly Authorized Officer
"Consultant" LIVIAKIS FINANCIAL COMMUNICATIONS, INC.
Date:_____________ By:___________________ ___________________
John M. Liviakis Robert B. Prag
President Sr. Vice
President
Statement regarding computation of per share loss:
All warrants, options and shares issued within a year prior to the
initial filing of this Registration Statement are assumed to be
outstanding for each period presented for purposes of the loss per
share calculation
February 2, 1997
Cotton Valley Resources Corporation
8350 North Central Expressway
Suite 2030M
Dallas, Texas
75206, U.S.A.
Dear Sirs/Mesdames:
Re: Cotton Valley Resources Corporation ("Cotton Valley")
We have acted as counsel to Cotton Valleyan Ontario , Canada
corporation, with respect to the registration under the Securities Act of 1933,
as amended (the "Securities Act") of 1,250,000 Units (the "Units"), consisting
2,500,000 shares of common stock without par value (the "Common Stock") , and
2,500,000 redeemable Common Stock purchase warrants (the "Warrants") of Cotton
Valley to be offered to the public by Cotton Valley in a firm commitment
underwriting by National Securities Corporation.
A Registration Statement on Form SB-2 (SEC File No. 333-16893)
was filed with the Securities and Exchange Commission on November 26, 1996 (the
"Registration Statement") and Amendment No. 2 thereto is being filed herewith.
In connection with rendering this opinion, we have examined executed copies of
the Registration Statement and all exhibits thereto and Amendment No. 2 and all
exhibits thereto. We have also examined and relied upon the Articles of
Amalgamation of Cotton Valley, the bylaws of Cotton Valley, the minutes and
records of the corporate proceedings of Cotton Valley with respect to the
issuance of the Units, the Common Stock, the Warrants and related matters, and
such other agreements and instruments relating to Cotton Valley as we have
deemed necessary or desirable for the purposes of the opinion expressed herein.
<PAGE>
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In connection with the opinion hereinafter expressed, we have
also reviewed and examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records of Cotton Valley and
such certificates of officers of Cotton Valley, government officials and others
and such other corporate records and documents as we have deemed necessary as a
basis for such opinion.
For the purposes of this opinion, we have assumed the
genuineness of all signatures, the authenticity of all documents and instruments
submitted to us as originals, the conformity to the originals of all documents
submitted to us as certified or photostatic copies or as facsimile of such
originals and the authenticity of the originals of such certified or photostatic
copies or facsimiles.
We are solicitors qualified to carry on the practice of law in
the Province of Ontario and we express no opinion herein as to any laws, or
matters governed by any laws, other than the laws of the Province of Ontario and
the federal laws of Canada applicable therein, all as of the date hereof.
Based and relying upon and subject to the foregoing, we are of
the opinion that the Units, the Common Stock and the Common Stock issuable upon
exercise of the Warrants, to be issued by Cotton Valley in the Offering as
described in the Registration Statement have been duly and validly authorized
for issuance and sale and the Units, the Common Stock, the Warrants, and the
Common Stock issuable upon exercise of the Warrants, when issued by Cotton
Valley under the terms of the Offering, will be issued as fully paid and
non-assessable.
This opinion is rendered solely for the benefit of the
addressee hereof and may not be used or relied upon, circulated, quoted,
distributed or otherwise referred to by any other person or entity or for any
other purpose without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and Amendment No. 2 thereto.
Yours truly,
Weir & Foulds
ENGINEER'S CONSENT
We consent to the use in the Registration Statement and Prospectus of Cotton
Valley Resources Corporation ("The Company") of our report dated August 27,
1996, concerning the Company's oil and gas reserves in the Cheneyboro Field,
Texas, and to the use of our name and the statement with respect to us, as
appearing under the heading "Experts" in the Prospectus.
K&A Energy Consultants
January 31, 1997
Houston, Texas
ENGINEER'S CONSENT
We consent to the use in the Registration Statement and Prospectus of Cotton
Valley Resources Corporation ("the Company") of our report dated August 29,
1996, concerning the Company's oil and gas reserves in the Movico Field,
Alabama, and to the use of our name and the statements with respect to us, as
appearing under the heading "Experts" in the Prospectus.
Wendell & Associates
January 31, 1997
Fort Worth, Texas
