As filed with the Securities and Exchange Commission on June 6, 1997
Registration No. 333-16893
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM SB-2/A
AMENDMENT No. 6
Registration Statement
Under
The Securities Act of 1933
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer in Its Charter)
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<CAPTION>
<S> <C> <C>
Ontario, Canada 1381 98-0164357
(I.R.S. Employer Identification Number)
(State or Other Jurisdiction of (Primary Standard Industrial Classification
Incorporation or Organization) Code Number)
8350 North Central Expressway 8350 North Central Expressway Patty Dickerson
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 Intended Principal Place of Business)
Principal Executive Offices) (Name, Address and Telephone Number of
Agent for Service)
</TABLE>
------------------------------
<TABLE>
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<S> <C> <C>
Maurice J. Bates, L.L.C. Copies to: Norman R. Miller, Esq.
8214 Westchester, Suite 500 Wolin, 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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<CAPTION>
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be RegisteredRegistered(1) Offering Price per UnitAggregate Offering PriceRegistration Fee
- - ----------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Units for public sale(2) 300,000(3) $10.00(3) $ 3,000,000(3) $ 600(3)
- - ----------------------------------------- --------------------------------------------------------------
Common Stock, no par value(4)1,800,000 - - -
- - ----------------------------------------- --------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants(5) 1,980,000(6) $2.08(6) ) $4,118,400(6) $ 824(6)
- - ----------------------------------------- --------------------------------------------------------------
Units subject to Placement
Agents' Warrants(7) 30,000 $12.00 $ 360,000 $ 72
- - ----------------------------------------- --------------------------------------------------------------
Common stock, no par value(8)3,960,000 - - -
- - ----------------------------------------- --------------------------------------------------------------
Total - - $7,478,000 $1,496
========================================= ==============================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 300,000 Units proposed for sale to the public.
(3) Includes the Common Stock and the Redeemable Common Stock Purchase Warrants
for which no additional consideration will be received.
(4) Represents 1,800,000 shares underlying Units proposed for sale to the
public.
(5) Includes 1,800,000 warrants underlying Units proposed for sale to the
public, and 180,000 warrants underlying the Units subject to Placement
Agents' 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.
(7) Represents 30,000 Units that the Placement Agents have the right to acquire
upon exercise of Placement Agents' Warrants.
<PAGE>
(8) Includes 1,980,000 shares included in the Units for which no separate fee
is required pursuant to Rule 457(i); and 1,980,000 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)
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<CAPTION>
Item
No. Caption Location in Prospectus
<S> <C>
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; Plan of
Placement
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Inapplicable
8. Plan of Distribution................................. Outside Front Cover Page; Plan of
Placement
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; Market
for Common Equity
21. Executive Compensation............................... Management
22. Financial Statements................................. Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. Inapplicable
</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 June 6, 1997
COTTON VALLEY RESOURCES
CORPORATION
300,000 Units
Consisting of Six Shares of Common Stock, Without Par Value
and Six Redeemable Common Stock Purchase Warrants
Cotton Valley Resources Corporation ("Cotton Valley" or "Company") is
offering a maximum of 300,000 units ("Unit(s)") by this prospectus at an initial
public offering price estimated to be $10.00 per Unit. Each Unit consists of six
shares of Cotton Valley's common stock, without par value ("Common Stock") and
six Redeemable Common Stock Purchase Warrants ("Warrants"). The Units will be
separated into Common Stock and Warrants upon being purchased. Cotton Valley has
applied for listing of the Warrants on the NASD bulletin board under the symbol
" CTVW", and through the Canadian Dealing Network ("CDN") under the symbol
"CVZC.WT". See "Plan of Placement."
The offering price of the Units is based on the closing bid price of the
Common Stock on CDN on June __, 1997. Each Warrant represents the right to
purchase one share of Common Stock for $2.08 (125% of the public offering
price per share of Common Stock) (subject to adjustment) at any time until April
30, 2000. After October 1, 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, 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". Cotton Valley has applied to have its Common Stock
listed on the Toronto Stock Exchange under the symbol "CVZ", but there is no
assurance it will be successful.
THE UNITS OFFERED BY THIS PROSPECTUS ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION
INCLUDED IN "RISK FACTORS" BEGINNING ON PAGE 5 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 Placement Agents' Commission (1) Proceeds to Cotton Valley (2)
- - ----------------- -------------------- -------------------------------- ---------------------------
<S> <C> <C> <C>
Per Unit $10.00 $1.00 $9.00
- - ----------------- -------------------- -------------------------------- ---------------------------
Total Maximum $3,000,000 $300,000 $2,700,000
================= ==================== ================================ ===========================
</TABLE>
(1) Does not include additional compensation to be received by the Placement
Agents in the form of a 1.8% nonaccountable expense allowance, and Warrants
to purchase up to 30,000 Units at 120% of the public offering price
exercisable between the first and third anniversaries of the date of this
prospectus ("Placement Agents' Warrants"). No commissions will be paid with
respect to Units directly placed by the Company. In addition, Cotton Valley
has agreed to indemnify the Placement Agents against certain liabilities,
including liabilities under the Securities Act of 1933, as amended
("Securities Act"). See "Plan of Placement."
(2) Before deducting estimated offering expenses of up to $170,000 including
the Placement Agents' 1.8% nonaccountable expense allowance.
These Units are being offered by Cotton Valley through National Securities
Corporation (the "Lead Placement Agent") and other NASD Placement Agents (the
"Placement Agents"), on a "best efforts" basis for sixty days following the date
hereof, unless extended by Cotton Valley for thirty days. Cotton Valley reserves
the right to accept or reject any order in whole or in part and to withdraw,
cancel or modify this offering without notice.
NATIONAL SECURITIES CORPORATON
------------------------------------
------------------------------------
The date of this Prospectus is , 1997
4
<PAGE>
INSIDE FRONT COVER
MAP OF CHENEYBORO FIELD
IN CONNECTION WITH THIS OFFERING, THE PLACEMENT AGENTS MAY 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 NASD BULLETIN BOARD.
STABILIZING ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS 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, "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 6,700 net 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 U. S. directors. Cotton Valley may in the future continue
from the Yukon Territory to the State of Wyoming. Management believes, but has
not received formal legal advice, that 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 will not
proceed with the reincorporation until after completion of this offering, and
after filing a registration statement with the SEC, and after having obtained
the approval of Cotton Valley's stockholders.
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 that they
will 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.
3
<PAGE>
The Offering
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<CAPTION>
<S> <C>
Securities offered by Cotton Valley ... Maximum of 300,000 Units, each Unit consisting of six shares
of Common Stock and six Warrants. Units may be sold for
cash, exchanged for indebtedness, or exchanged for assets.
See "Description of Securities."
Description of Warrants ............... Each Warrant entitles the holder to purchase one share of
Common Stock for $2.08 (125% of the offering price) per
share until April 30, 2000. The Warrants are 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 ............................. Maximum of 300,000 (1)
Warrants to be outstanding after this
offering .............................. Maximum of 1,800,000 Warrants (1)
Common Stock to be outstanding after this
offering .............................. Maximum of 13,861,272 shares (2) (3)
Use of Proceeds ....................... For development drilling, to acquire acreage, to reduce debt
and for working capital. See "Use of Proceeds."
Symbols(4): NASD's Canadian Dealing
Bulletin Board Network
Warrants ........................... CTVW CVZC.WT
Common Stock ....................... CTVYF CVZC
</TABLE>
---------------------
(1) Excludes Securities underlying the Placement Agents' Warrants . See "Plan
of Placement."
(2) Excludes up to 1,800,000 shares issuable upon exercise of the Warrants
underlying Units offered by this prospectus, up to 360,000 shares
underlying the Placement Agents' Warrants, 980,000 shares subject to
employee stock options, 1,887,906 shares subject to options and warrants
issued in Canadian financings, 500,000 shares subject to warrants issued to
Liviakis Financial Communications, Inc. and 100,000 shares to be issued
pursuant to a financial consulting agreement. See "Principal Shareholders-
Liviakis", "Plan of Placement", "Placement Agents' Warrants" and
"Description of Securities--Other Options and Warrants."
(3) Based upon the closing bid price on the Canadian Dealing Network on June
___, 1997, six shares of Common Stock underlying the Units are included.
(4) Cotton Valley's Common Stock is traded on NASD's bulletin board and through
the Canadian Dealing Network under the symbols shown and Cotton Valley has
applied for additional listing of the Units and Warrants at both locations
under the symbols shown. Cotton Valley has also applied for listing of its
Common Stock on the Toronto Stock Exchange under the symbol "CVZ." 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."
4
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
From February 15, 1995 (Unaudited)
For the year ended (inception) Nine months ended
Statement of operations data: June 30,1996 to June 30, 1995 March 31, 1997
------------ ---------------- --------------
<S> <C> <C> <C>
Net loss $712,360 $49,917 $965,418
Net loss per common share $0.06 - $0.07
Weighted average shares outstanding 11,403,000 10,655,000 13,390,524
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
(Unaudited) March 31, 1997
Balance sheet data: June 30,1996 March 31, 1997 Adjusted(1)
------------ -------------- ------------
<S> <C> <C> <C>
Total assets $11,979,330 $12,333,997 $14,863,997
Long-term obligations 757,758 149,710 149,710
Working capital 286,381 (1,142,292) 1,387,708
Shareholders' equity $9,116,883 $9,800,054 $12,330,054
</TABLE>
----------------------------
(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 as of June 30, 1996. 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.
5
<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 $965,418 (unaudited) for the nine month period ended March 31,
1997. No assurance can be given that Cotton Valley will be profitable in the
future. See "Management's Discussion and Analysis or Plan of Operation."
Ability to Continue as a Going Concern
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
Except for its recent acquisition of properties in Oklahoma, almost all of
Cotton Valley's proved reserves are classified as proved undeveloped, meaning
very little production currently exists in Texas and no production exists in
Alabama. 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 $0.2 million and $3.0
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."
6
<PAGE>
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.
The net proceeds of this offering will not be sufficient to fully develop
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 wall 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 March 1997, prices were
7
<PAGE>
$20.41 per Bbl and $1.57 per Mcf. Prices for oil and gas probably will continue
to fluctuate, depending upon a number of conditions over which Cotton Valley has
no control. These conditions include, but are not limited to, actions taken by
the Organization of Petroleum Exporting Countries, turmoil in the Middle East,
the price of alternative fuels, weather and general economic conditions. A major
decline in oil or gas prices could have a material adverse effect on Cotton
Valley's operations, financial condition, proved reserves and the costs of
developing its oil and gas reserves.
In addition, Cotton Valley assesses the carrying value of its assets
annually in accordance with generally accepted accounting principles under the
full cost method. If oil and gas prices decline, the carrying value of Cotton
Valley's assets could be subject to downward revision.
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
8
<PAGE>
prohibitions on spills, releases or emissions of various substances produced in
association with Cotton Valley's past and current operations. The legislation
also requires that refineries, wells and facility sites be operated, maintained,
abandoned and reclaimed to the satisfaction of applicable regulatory
authorities. Compliance with such legislation can require significant
expenditures and a breach may result in the imposition of fines and penalties.
Environmental legislation is evolving in a manner expected to result in stricter
standards and enforcement, larger fines and liability and potentially increased
capital expenditures and operating costs. Although Cotton Valley believes that
it is currently in substantial compliance with all existing material
environmental regulations, no assurance can be given that future environmental
costs will not have a material adverse effect on Cotton Valley's financial
condition or results of operations.
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 and "over-the-counter" in Canada on
the Canadian Dealing Network. Application has been made to list the Warrants for
trading in these markets. 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
certain Placement Agents by reference to the value of Cotton Valley's oil and
gas reserves compared to other oil and gas companies. See "Plan of Placement."
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 has applied to have its Common Stock listed on the Toronto
Stock Exchange. There is no assurance the Company's securities will be listed on
the Toronto Stock Exchange.
Immediate Substantial Dilution
This offering involves immediate substantial dilution to investors in the
net tangible book value per share of Common Stock underlying each Unit from the
public offering price. See "Dilution."
Securities Eligible for Future Sale
Upon completion of this offering, a maximum of 300,000 Units and 12,061,272
shares of Common Stock issued prior to this offering will be outstanding. The
components of 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 and are currently eligible for sale without
restriction in Canada and subject to Rule 144 in the United States. The sale of
significant quantities of these shares could have an adverse effect on the
market price of Cotton Valley's Securities.
9
<PAGE>
Furthermore, the 12,061,272 shares of Common Stock are eligible for sale
(subject to control block issues) under Canadian and Ontario rules. Cotton
Valley's Common Stock trades on 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 October 1, 1997, 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".
Placement Agents' Warrants; Risk of Further Dilution
Cotton Valley has agreed to sell to the Placement Agents, for nominal
consideration, warrants to purchase up to 30,000 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 Placement Agents certain registration rights with respect
to the Securities issuable upon exercise of the Placement Agents' Warrants. The
Placement Agents' Warrants and any profits realized by the Placement Agents on
the sale of the Securities underlying the Placement Agents' Warrants could be
considered additional compensation. For the term of the Placement Agents'
Warrants, the holders are given, at nominal cost, the opportunity to profit from
the difference, if any, between the exercise price of the Placement Agents'
Warrants and the value of or market price, if any, for the Securities, with a
resulting dilution in the interest of existing shareholders. The Placement
Agents' 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 by the Placement
Agents' Warrants.
See "Plan of Placement."
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, 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.
10
<PAGE>
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 a maximum of 300,000
Units pursuant to this prospectus at an assumed public offering price of $10.00
per Unit are estimated to be approximately $2,530,000 after deducting estimated
Placement Agent commissions and offering expenses.
Approximately $600,000 of the Units will be used to repay certain
liabilities and part of the 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 $816,000 was outstanding
as of March 31, 1997. $586,000 of 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. Management anticipates it will be able to extend the
payment term on the balance of the debt until sufficient cash from operations is
generated. Certain debt holders have agreed to accept Units in exchange for
indebtedness, in the amount of approximately $600,000. See "Management's
Discussion and Analysis or Plan of Operation", "Business and Properties--Recent
Developments" and note 3 of Notes to Consolidated Financial Statements.
Cotton Valley intends to use the remaining net proceeds of this offering for
development drilling on its Texas and Alabama properties, and deepening one well
on its Oklahoma property. Seven wells are scheduled to be drilled within 12
months after this offering. Cotton Valley anticipates cash generated from the
first wells and/or sales of participation to third parties will be sufficient to
fund the drilling of the rest of the wells. No assurance can be given that any
wells will be drilled or completed or produce oil or gas in commercial
quantities. See "Business--Properties--Cheneyboro Field" and "--Movico Field."
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.
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<PAGE>
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 March 31, 1997 as
reflected in the unaudited financial statements, the pro forma capitalization of
Cotton Valley as of March 31, 1997 giving effect to the sale of 300,000 Units at
$10.00 per Unit in this offering and application of the estimated net proceeds
as described in this prospectus. See "Use of Proceeds." The table should be read
in conjunction with the consolidated financial statements and notes and the
other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
June 30, 1996 March 31, 1997 March 31, 1997
Actual Actual As Adjusted
------ ------ -----------
Total debt, including current maturities:
<S> <C> <C> <C>
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 $149,710 $149,710
---------- ------- --------
$ 987,758 $965,759 $149,710
---------- ------- --------
Shareholders' equity:
Common stock without par value, unlimited
shares authorized, 9,191,596 shares
outstanding on June 30, 1996, 11,708,881
outstanding on March 31, 1997 and
13,508,881 on March 31, 1997 as
adjusted(4) $9,879,160 $11,527,749 $14,057,749
Accumulated deficit (762,277) (1,727,695) (1,727,695)
------------ ----------- ------------
Total shareholders' equity $9,116,883 $9,800,054 $12,330,054
------------ ----------- -----------
Total capitalization $10,104,641 $10,765,813 $12,479,764
=========== =========== ===========
</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 1,800,000 shares issuable upon exercise
of the Warrants underlying Units offered by this prospectus, 360,000 shares
underlying the Placement Agents' Warrants, 980,000 shares subject to
employee stock options, 1,887,906 shares subject to options and warrants
issued in Canadian financings, 500,000 shares subject to warrants issued to
Liviakis Financial Consultants, Inc. and 100,000 shares to be issued
pursuant to a financial consulting agreement. See "Principal
Shareholders--Liviakis", "Placement Agent--Placement Agents' Warrants" and
"Description of Securities--Other Options and Warrants."
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<PAGE>
DILUTION
As of March 31, 1997, Cotton Valley's unaudited net tangible book value was
$9,800,054 or $0.84 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 300,000 Units (consisting
of 1,800,000 shares of Common Stock and 1,800,000 Warrants) at an offering price
per Unit of $10.00, or $1.67 per share of Common Stock (no value assigned to
Warrants), application of the estimated net sale proceeds (after deducting
Placement Agent commissions and other offering expenses) Cotton Valley's net
tangible book value as of March 31, 1997 would increase from $9,800,054 to
$12,330,054, and the net tangible book value per share would increase from $0.84
to $0.91. This represents an immediate increase in net tangible book value of
$0.07 per share to current shareholders, and immediate dilution of $.76 per
share to new investors or 46%, as illustrated in the following table:
Public offering price per share of Common Stock $1.67
Net tangible book value per share before this offering.... $0.84
Increase per share attributable to new investors.......... $0.07
-----
Adjusted net tangible book value per share after this offering $0.91
-----
Dilution per share to new investors........................... $0.76
Percentage dilution........................................... 46%
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
Number Percent Amount Percent Average per Share
------ ------- ------ ------- -----------------
<S> <C> <C> <C> <C> <C>
Current Common Stockholders 11,708,881 86.7% $12,971,005 81.2% $1.11
New Investors 1,800,000 13.3% 3,000,000 18.8% $1.67
--------- ----- --------- ----
13,508,881 100.0% $15,971,005 100.0%
========== ====== ============ ======
</TABLE>
13
<PAGE>
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."
MARKET FOR COMMON EQUITY
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
April 30, 1997, 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. During this period, the Canadian Dollar traded in
the $.73 to $.74 range. On April 30, 1997 one Canadian Dollar was worth $.73.
High Low
---- ---
June 24-30, 1996 $2.80 $2.50
July 1-September 30, 1996 $2.60 $1.20
October 1-December 31, 1996 $1.90 $0.97
January 1-March 31, 1997 $3.45 $1.45
April 1-April 30, 1997 $2.45 $1.95
Cotton Valley's Common Stock began trading through the NASD Bulletin Board
on January 14, 1997 under the symbol "CTVYF". From January 14, 1997 to April 30,
1997 (the latest practicable date) the following table sets forth the high and
low bid information for Cotton Valley's Common Stock in U.S. currency as
reported on the NASD Bulletin Board. The information that the table reflects is
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
High Low
---- ---
January 14 -March 31, 1997 $2.20 $1.00
April 1- April 30, 1997 $1.75 $1.38
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
First Nine Months Fiscal 1997 and First Nine Months Fiscal 1996
During the nine months ended March 31, 1997, Cotton Valley incurred a
net loss of $965,418. From February 15, 1995 (inception), to March 31, 1997,
Cotton Valley accumulated a deficit of $1,727,695.
The loss of $1,465,418 for the first nine months of 1997 compares to a
loss of $783,341 during the first nine months of 1996. There was greater
business activity during the first nine months of fiscal 1997 and during this
period Cotton Valley issued 1,141,000 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 $832,930.
During the first nine 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 $74,473 during the first
nine months of 1997.
Cotton Valley acquired its interest in the Alden Field in December 1996
for $416,328 of which $35,000 was paid in December 1996 and $381,328 was paid
upon closing on March 3, 1997.
During the nine months ended March 31, 1997, 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 1,141,000 shares of common stock to Liviakis Financial
Communications, Inc. (See "Principal Shareholders--Liviakis") which was recorded
at $832,930, issued 416,667 shares of common stock to former Arjon shareholders
on exercise of warrants for $200,449, issued 300,000 shares of common stock in
Canadian private placements for proceeds of $235,425 (before deducting costs of
$14,600), issued 500,000 shares of common stock to Liviakis Financial Services,
Inc. for cash of $375,000, and issued 48,980 shares of common stock to the agent
involved in Canadian Financings on exercise of agent's options for $78,215.
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
15
<PAGE>
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. Cotton Valley has applied for listing on the Toronto
Stock Exchange. There is however, no assurance that Cotton Valley will be
successful.
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 March 31, 1997, Cotton Valley had a working capital deficiency of
$1,142,292, calculated by subtracting accounts payable of $710,184 and the
current portion of long-term debt of $586,049 from current assets of $153,941.
Management estimates that aggregate capital expenditures of approximately $13.5
million will be required to develop its reserves, of which $0.2 million and $3.0
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, and sale of participation in wells, of which no assurance can
be given.
16
<PAGE>
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 deepen two wells from approximately 8,000 feet to
approximately 10,000 feet in the Alden Field within 12 months of 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 March 31, 1997, Cotton Valley had a working capital deficiency of
$1,142,292 calculated by subtracting accounts payable of $710,184 and the
current portion of long-term debt of $586,049 from current assets of $153,941.
Included in accounts payable is $230,000 representing an unpaid part of the
purchase price of the Movico Field 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.
Approximately $600,000 of the estimated net proceeds of this offering
will be used to repay certain liabilities and part of the 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 $816,000 was outstanding as of March 31, 1997. $586,000 of 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.
Management anticipates it will be able to extend the payment term on the balance
of the debt until sufficient cash from operations is generated. Certain debt
holders have agreed to accept Units in exchange for $600,000 of indebtedness.
See "Business and Properties--Recent Developments".
During the first nine months of fiscal 1997, Cotton Valley purchased oil
and gas interests in the Alden Field, Caddo County, Oklahoma for $416,328.
Cotton Valley paid $35,000 in the second and $381,328 in the third quarter of
fiscal 1997 and $40,000 will be paid to purchase additional interests during the
fourth 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 U.S. equity markets and further
suggested that the funds be raised in Canada.
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.
17
<PAGE>
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 purchased 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.
Cotton Valley has paid $350,000 on the purchase of the Alden Field.
Management expects to pay the outstanding amount of the Alden Field purchase of
$40,000 from cash generated from operations.
Cotton Valley has entered into an agreement with a foreign investor to
privately place up to Cdn$ 600,000 of shares of Common Stock and Warrants at the
lower of Cdn$ 2.25 per share or the daily average closing price from January 30,
1997 to the date the final payment is made for purchase of the interests in the
Alden Field.
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 fully
develop 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 development 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.
18
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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 four wholly owned subsidiaries, Cotton Valley Energy
Corporation ("CV Energy"), a Nevada corporation, Cotton Valley Operating Company
("CV Operating"), a Texas corporation, CV Trading Company ("CV Trading"), a
Nevada corporation, and Cotton Valley Energy, Inc. ("CVEI"), an Oklahoma
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. CVEI was formed to own and operate the Alden
Field and commenced operations on March 3, 1997. See "Business and Properties-
Alden Field."
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 U.S. 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 will not proceed with the reincorporation until after completion
of this offering, and after filing a registration statement with the SEC, and
after having obtained the approval of Cotton Valley's stockholders.
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.
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Properties
Cheneyboro Field
Cotton Valley owns or has options to acquire approximately 6,700 net
acres of producing and non-producing oil and gas leases (with options and rights
of first refusal to acquire additional leases) in the Cheneyboro Field of
Navarro County, Texas. Cotton Valley has entered into an Area of Mutual Interest
("AMI") Agreement with a number of unaffiliated parties covering approximately
33,000 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
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in the producing zone. Directional drilling technology has advanced to the point
that the drill-bit can be kept in one geological horizon for many hundreds of
feet away from the vertical well bore. It is no longer necessary to strike a
localized fracture zone accurately with a vertical well. Instead, a well can be
drilled horizontally through an area where fractured zones are known to exist
with a greater chance of encountering the vertical fractures. A single
horizontal well can encounter several localized fracture zones.
Horizontal drilling was first developed over 20 years ago, and has been
used successfully in oil and gas fields as diverse as those located in West
Virginia, the North Sea, Saskatchewan, Argentina, Prudhoe Bay and South Texas,
to extract oil and gas where vertical drilling is impossible or uneconomical.
Horizontal drilling has also increased production of oil and gas from fields
with thin pay zones, low permeability sands, vertical fractured reservoirs,
discontinuous formations and reservoirs with gas and water coning problems. High
angle directional drilling has been performed extensively onshore in California
to reach bottom holes in congested cities or harbors where vertical drilling
would not be feasible. Horizontal drilling has been used extensively offshore to
drill many wells from one platform.
Movico Field
Cotton Valley owns a 25% interest in 1,145 acres of oil and gas leases
(with an AMI covering an additional 6,000 acres of leases) in the Movico Field
of Mobile County, Alabama.
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 million Mcf + 49 million Bbl), Chunchula (207 million
Mcf + 52 million Bbl), Chatom (135 million Mcf + 15 million Bbl) and Jay Field (
491 million 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
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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 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 3.2 million Mcf of gas.
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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 $438,247.
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.
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California's active tectonic history over the last few million years has
formed the large linear anticlinal features which trap the oil and gas. Marine
seismic surveys have been used to locate and define these structures offshore.
Recent seismic surveying utilizing modern 3-D seismic technology, coupled with
exploratory well data, has greatly improved knowledge of the size of planned
reserves in development and in fields for which development is planned.
Currently, 17 platforms are producing from nine fields in the Santa
Barbara Channel and offshore Santa Maria Basin OCS. At least 10 additional
fields may be brought into production during this decade. The number of
platforms needed to develop these fields will be less than required in the past.
Implementation of extended high-angle to horizontal drilling methods will result
not only in the reduction of platforms, but also in the total number of wells
drilled. Use of these new drilling methods and seismic technologies will enhance
environmental protection and improve development economics. At present, four
major Sword area facilities are producing significant volumes of oil and gas
from seven platforms, making this area one of the more significant oil and gas
producing provinces in the United States.
The 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
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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 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
U.S. 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. On March 3, 1997, Cotton Valley paid $350,000 of the purchase price
and completed substantially all of the transaction. The properties, consisting
of approximately 550 net acres of oil and gas leases, seven producing oil and
gas wells, three injection wells and five shut in wells, contain proved
developed and undeveloped net
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reserves of approximately 200,000 Bbl of oil and 1,600,000 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 is included in the purchase price. The gathering system
is connected to a pipeline, access to which is available to Cotton Valley.
Cotton Valley has entered into negotiations to purchase the remaining 18% of the
pipeline.
Cotton Valley began operating the field on March 3, 1997. Production began
at 22 Bbl of oil and 360 Mcf of gas per day and increased to 87 Bbl of oil and
621 Mcf of gas per day on March 26, 1997. These production figures are gross;
Cotton Valley's interest is approximately 75%.
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 took place in
stages during February and March, 1997, with the final stage estimated to occur
before June 30, 1997. 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 of 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 and all of its Oklahoma 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, Alabama, and proved and probable reserves in Oklahoma. 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.
26
<PAGE>
<TABLE>
<CAPTION>
Reserves by State
Item Texas(1) Alabama(2) Total
- - ---- -------- ---------- -----
Reserves
Proved producing
<S> <C> <C> <C>
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
=========== ========== ===========
</TABLE>
---------------------
(1) Prices based on $21.21 per Bbl of oil and $2.09 per Mcf of gas.
(2) Prices based on $21.46 per Bbl of oil and $2.66 per Mcf of gas.
The reserve data set forth in this prospectus are only estimates. Numerous
uncertainties are inherent in estimating oil and gas reserves and their values,
including many factors beyond the control of the producer. Reserve engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers often
vary. In addition, estimates of reserves are subject to revision by the results
of later drilling, testing and production. Accordingly, reserve estimates often
differ from the quantities of oil and gas ultimately recovered. The
meaningfulness of estimates is highly dependent upon the accuracy of the
assumptions upon which they are based.
In general, oil and gas production declines as reserves are depleted.
Except to the extent that Cotton Valley acquires proven reserves or succeeds in
exploring and developing its own reserves, or both, Cotton Valley's proven
reserves will decline as they are produced. Cotton Valley's future oil and gas
production is, therefore, highly dependent upon its ability to acquire or
develop additional reserves.
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.
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
27
<PAGE>
Competition
Competition in the oil and gas industry is intense generally. Cotton Valley
believes that price is the determinative factor in competition for drilling
prospects, equipment and labor. Major and independent oil and gas companies and
syndicates actively bid for desirable oil and gas properties and equipment and
labor required to operate and develop them. Many of Cotton Valley's competitors
have substantially greater financial resources and exploration and development
budgets than those of Cotton Valley. Cotton Valley expects difficulty in
competing for future drilling prospects.
Markets
General. Oil and gas operating revenues are highly dependent upon prices
and demand for oil and production. Numerous factors beyond Cotton Valley's
control can impact the prices of its oil and gas. Decreases in oil and gas
prices would have an adverse effect on Cotton Valley's proved reserves,
revenues, profitability and cash flow.
Cotton Valley has not engaged in any crude oil and gas price swaps or other
hedging transactions to reduce its exposure to price fluctuations. It may,
however, engage in such transactions from time to time as management deems
advisable.
Gas Sales. Cotton Valley has not produced or sold any significant volume of
gas. It has arranged to sell gas produced in the Cheneyboro Field through an
existing gathering system and pipeline. Management believes that gas produced in
the Movico Field can be sold through an existing pipeline.
Oil Sales. Cotton Valley expects to sell its oil production under
short-term arrangements at prices no less than the purchaser's posted prices for
the respective areas less standard deductions. Numerous buyers are expected to
be available for Cotton Valley's oil.
Regulation
Oil and gas exploration, production and related operations are heavily
regulated by federal and state authorities. Failure to comply with applicable
law can result in substantial penalties. The cost of regulatory authorities will
increase Cotton Valley's cost of doing business and affect its profitability.
Regulation of oil and gas activities has changed many times. Consequently,
Cotton Valley is unable to predict the future cost or impact of complying with
such laws. Texas and Alabama require drilling permits and bonds and operating
reports and impose other burdens relating to oil and gas exploration and
production. Both states also require conservation measures, including pooling of
oil and gas properties, establishing maximum production rates from oil and gas
wells, and spacing, plugging and abandoning wells. These laws limit the rate at
which oil and gas can be produced from Cotton Valley's properties.
The transportation and sale of gas in interstate commerce is regulated by
United States law and the Federal Energy Regulatory Commission.
Environmental
Cotton Valley's operations will be subject to extensive federal, state and
local environmental regulation. Permits are required for various operations to
be undertaken by Cotton Valley, and these permits are subject to revocation,
modification and renewal by issuing authorities. Increasingly strict
requirements may be imposed by environmental laws and enforcement policies.
Cotton Valley does not anticipate material capital expenditures to comply with
environmental laws.
Operating Hazards and Uninsured Risks
The acquisition, development, exploration for, and production,
transportation and storage of, crude oil, gas liquids and gas involves a high
degree of risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Cotton Valley's operations are subject
to all of the risks normally incident to drilling gas and
28
<PAGE>
oil wells, operating and developing gas and oil properties, transporting,
processing, and storing gas, including encountering unexpected formations or
pressures, premature reservoir declines, blow-outs, equipment failures and other
accidents, craterings, sour gas releases, uncontrollable flows of oil, gas or
well fluids, adverse weather conditions, pollution, other environmental risks,
fires and spills. Oil production requires high levels of investment and has
particular economic risks, such as retaining wall 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 March 31, 1997, Cotton Valley had seven employees. Four employees are
executive officers, two are administrative and one works in the field. Cotton
Valley uses contract services in its oil and gas field operations. Cotton Valley
also uses consultants to evaluate company projects, reserves and other oil and
gas assets for potential acquisitions.
Legal Proceedings
As of the date of this prospectus, Cotton Valley is not a party to any
legal proceedings.
Recent Developments
Cotton Valley has entered into an agreement with the holder (the "Note
Holder") of approximately $600,000 of secured indebtedness, to exchange Units
for the outstanding indebtedness. If each Unit contains six or more shares of
Common Stock, the exchange will be at face value of the Units. If each Unit
contains fewer than six shares of Common Stock, the exchange will be made as if
each Unit contained six shares of Common Stock. In connection with the exchange,
the Note Holder will release its lien on approximately 3,000 net acres of oil
and gas leases in the Cheneyboro Field.
Cotton Valley has made arrangements with a Texas investment partnership
to establish a line of credit in the maximum amount of $1,000,000 to be secured
by the oil and gas leases upon release by the Note Holder. Principal use of the
funds drawn under the line of credit will be to pay Cotton Valley's share of the
cost of drilling the first two wells at Cheneyboro, both of which would be on
the leases securing the line of credit. The terms include interest at 10% per
annum, a primary term of eighteen months and a small overriding royalty carved
out of the leases securing the debt.
Cotton Valley has entered into an agreement with Swartz Investments, LLC
("Swartz") to place up to $2,500,000 of the Units as a non-exclusive Placement
Agent pursuant to this prospectus, through an NASD broker dealer. The placement
would be on a best-efforts basis to qualified institutional and accredited
investors who would agree to restrict resale of the components of their Units
for a period of six months following the closing of this offering. Cotton Valley
has agreed to reserve $2,500,000 of the offering for placement by Swartz until
five days following the effective date of this prospectus, and $1,000,000 of the
offering for placement by Swartz until fifteen days prior to the termination
date of this offering.
There can be no assurance that the transactions described above will be
closed, and, if closed, will be on final terms and conditions substantially in
accordance with those described above.
29
<PAGE>
MANAGEMENT
Directors and Executive Officers
Cotton Valley's directors and executive officers are:
Name Age Position
- - ---- --- --------
Eugene A. Soltero 54 Chairman of the Board and Chief Executive Officer
James E. Hogue 60 Director, President and Chief Operating Officer
Peter Lucas 43 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.
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
30
<PAGE>
1984 to form his own tax practice. Six years later, Mr. Lucas' practice was
merged into Coopers & Lybrand, with whom he was a partner until April 1992. He
holds a bachelor of commerce degree from the University of Alberta.
C. Ronald Burden joined Cotton Valley in April 1996. From July 1994 until
he joined Cotton Valley, Mr. Burden served as Petroleum Geologist for Texakoma
Oil and Gas in Dallas, Texas. He was an independent oil and gas consultant from
September 1993 to July 1994. From November 1990 to September 1993, Mr. Burden
was Exploration Manager for Enron Oil and Gas Corp. at Tyler, Texas. He has
spent the past 25 years developing and managing oil and gas exploration projects
in West Texas, Alaska, offshore Texas, offshore Louisiana, South Texas and
particularly specializing in recent years in the East Texas Basin. Mr. Burden is
a member of the American Association of Petroleum Geologists. He is a graduate
of Texas Tech University with a master's degree in 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.
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.
31
<PAGE>
Executive Compensation
The following table sets forth the compensation paid or to be paid to
Cotton Valley's executive officers, directly or indirectly, for services
rendered in all capacities for the period from inception to June 30, 1995, and
fiscal 1996:
SUMMARY COMPENSATION TABLE
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>
<CAPTION>
Name Number of Percent of Total
---- Securities(1) Underlying Options Granted to Exercise or Expiration
Options Granted Employees in Fiscal Year Base Price Date
--------------- ------------------------ ---------- ----
<S> <C> <C> <C> <C>
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.
32
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
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
- - ---- ------------------------- -------------------------
<S> <C> <C>
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>
33
<PAGE>
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. As of March 31, 1997, $149,710 of the advances remained
outstanding. The advances are unsecured and without interest and are payable
after June 30, 1997.
During the years ended June 30, 1996 and 1995, Cotton Valley purchased
legal services in the approximate amounts of $40,000 and $50,000, respectively,
from Weir and Foulds. Most of the legal services are provided by Richard Lachcik
and Wayne Egan, directors of Cotton Valley.
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.
34
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Cotton Valley's Common Stock as of May 23, 1997, 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.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of Outstanding
Name Beneficial Ownership Common Stock
---- -------------------- ------------
Currently After This Offering
--------- -------------------
<S> <C> <C> <C>
Eugene A. Soltero (1) 2,955,199 (4) 23.9% 20.9%
James E. Hogue (1) 2,985,199 (5) 24.2% 21.1%
Peter Lucas (1) 350,000 (6) 2.9% 2.5%
C. Ronald Burden (1) 390,000 (7) 3.2% 2.8%
Wayne T. Egan (2) 50,000 (8) 0.4% 0.4%
Michael Kamis (3) 50,000 (8) 0.4% 0.4%
Richard J. Lachcik (2) 50,000 (8) 0.4% 0.4%
All directors and executive officers
as a group (seven persons) 6,830,398 (9) 51.8% 45.6%
Royal Trust Corporation (10) 750,000 6.2% 5.4%
Liviakis Financial Communications, 2,237,000 (11) 18.4% 16.0%
Inc.(11)
</TABLE>
----------------------
(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) The address of Royal Trust Corporation Inc. is Royal Bank Plaza, 200 Bay
Street, Toronto, Ontario, Canada M5J 2J5.
(11) Includes 100,000 shares to be issued for services, and the following
shares, beneficial ownership of which is disclaimed: 125,000 shares owned
by an officer of Liviakis. The address of Liviakis Financial
Communications, Inc. is 2420 'K' Street, Sacramento, CA 95816.
35
<PAGE>
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. Liviakis will play no role in this offering. In consideration of
Liviakis' services, Cotton Valley has sold a total of 500,000 shares of Common
Stock to Liviakis and an officer of Liviakis for $.75 per share and agreed to
issue 1,490,000 shares of Common Stock, of which 1,390,000 shares have been
issued, to Liviakis. Cotton Valley also granted Liviakis and an officer of
Liviakis warrants to purchase 500,000 shares of 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 Common 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.
Liviakis has agreed to vote its shares for directors nominated by Messrs.
Soltero and Hogue. Cotton Valley has agreed to file a registration statement
before the end of 1997 which includes theCommon Stock held by Liviakis.
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.
36
<PAGE>
DESCRIPTION OF SECURITIES
General
Cotton Valley is authorized to issue an unlimited number of shares of
common stock, without par value, and an unlimited number of shares of preferred
stock, without par value, issuable in series. As of the date of this prospectus,
Cotton Valley's issued and outstanding capital securities consist of 12,061,272
shares of Common Stock and 3,467,906 options and warrants to acquire Common
Stock (including 600,000 shares of Common Stock to be issued to Liviakis
Financial Communications, Inc. for cash and services). After giving effect to
this offering, the capitalization of Cotton Valley will consist of 12,061,272
shares of Common Stock, maximum 300,000 Units, 1,800,000 shares of Common Stock
and 1,800,000 Warrants underlying the Units, 980,000 employee stock options and
1,887,906 options and warrants issued in Canadian financings and 600,000 shares
to be issued to Liviakis Financial Communications, Inc. In addition, the
Placement Agents will be issued warrants to purchase up to 30,000 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," "Plan of Placement" 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" and "over-the-counter" in Canada on the Canadian
Dealing Network under the symbol "CVZC". Cotton Valley has applied for listing
of its Common Stock on the Toronto Stock Exchange.
Units
Each Unit consists of six shares of Common Stock and six Warrants. The
Common Stock and the Warrants will be immediately separated from the Units upon
issue.
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of shareholders. They are entitled to receive dividends when
and as declared by the board of directors out of legally available funds and to
share ratably in the assets of Cotton Valley legally available for distribution
upon liquidation, dissolution or winding up.
Holders of Common Stock do not have subscription, redemption or conversion
rights, nor do they have any preemptive rights. The Common Stock underlying the
Units offered by this prospectus will be, when issued and paid for, fully paid
and nonassessable.
Holders of Common Stock do not have cumulative voting rights, which means
that the holders of more than half of all voting rights with respect to Common
Stock and preferred stock can elect all of Cotton Valley's directors. The board
of directors is empowered to fill any vacancies on the board of directors
created by resignations, subject to quorum requirements.
All shareholder action is taken by vote of a majority of voting shares of
the capital stock of Cotton Valley present at a meeting of shareholders at which
a quorum (a majority of the issued and outstanding shares of the voting capital
stock) is present in person or by proxy. Directors are elected by a plurality
vote.
For certain fundamental changes, the corporate legislation under which
Cotton Valley was formed may require each class of outstanding stock to vote
separately.
As of April 15, 1997, Cotton Valley had 1,375 record holders of its Common
Stock, 244 of whom have United States addresses.
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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
$2.08 (125% of the offering price) per share until April 30, 2000. The Warrants
are immediately exercisable and are transferable separately from the Common
Stock.
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 October 1,
1997, 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 $4.16 (250% of the offering price) per share for 20 of 30 consecutive
trading days ending within 15 days of the date notice of redemption is given.
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 $1.83 per share. These options expire in 1999 and 2000.
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Canadian Financings. In connection with financing activities completed in Canada
and the acquisition of Arjon, Cotton Valley granted options and warrants as
reflected in the table below. At April 30, 1997, 1,887,906 options or warrants
were outstanding. Each option or warrant entitles the holder to purchase one
share of common stock at the prices set forth in the table.
Number Exercise Price Cdn$ Exercise Price US $ Expiration Date
------ ------------------- ------------------- ---------------
1,329,485 $2.75 $2.00 December 31, 1997
100,000 $2.25 $1.64 April 30, 1998
91,755 $2.25 $1.64 December 31, 1997
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. The Company has reserved for issuance an additional
100,000 shares of Common Stock to be earned under the Liviakis Consulting
Agreement.
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.
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SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, maximum 13,861,272 shares of Common
Stock, including the maximum 1,800,000 shares of Common Stock underlying the
Units, (but not underlying the Warrants) 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 securities will
be freely transferable upon expiration of the applicable one-year holding period
and other provisions. In addition, Cotton Valley has granted 3,467,906 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 one-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 130,000 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 two 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 two-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, a very limited 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.
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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 (i) 6%
with respect to dividends paid in 1996 and 5% thereafter if the beneficial owner
of the dividends is a company which owns at least 10% of the voting stock of
Cotton Valley, and (ii) 15% in all other cases.
United States Federal Income Tax Considerations
The following is a general description of the material United States
federal income tax consequences applicable to U.S. holders of the Securities.
The following discussion deals only with Securities held as a capital asset by
U.S. holders. It does not deal with special situations, such as those of foreign
persons, dealers in securities, financial institutions, life insurance
companies, holders whose "functional currency" is not the United States dollar,
or certain "straddle" or hedging transactions. A "U.S. holder" is (i) a citizen
(not resident in Canada pursuant to the convention) or resident of the United
States, (ii) a corporation created or organized under the laws of the United
States or any state thereof (including the District of Columbia) or (iii) a
person otherwise subject to United States federal income tax on its worldwide
income. Prospective purchasers are urged to consult their tax advisors regarding
the particular tax consequences arising under any state or local law.
The gross amount of a distribution with respect to common stock will
include the amount of any Canadian federal income tax withheld and will be
includible in gross income as a taxable dividend to the extent of Cotton
Valley's current and accumulated earnings and profits (calculated under United
States tax principles), as a return of capital to the extent in excess of such
earnings and profits and not in excess of the holder's tax basis in the common
stock, and as capital gain to the extent of any balance. Dividends will not be
eligible for the dividends-received deduction. Holders generally will be
entitled, subject to certain limitations, to a credit against their United
States federal income tax for Canadian federal income taxes withheld from such
dividends. Holders may claim a deduction for such taxes if they do not elect to
claim such foreign tax credit.
If a dividend distribution is paid in Canadian dollars, the amount
includible in income will be the United States dollar value, on the date of
receipt, of the Canadian dollar amount distributed. Any subsequent gain or loss
in respect of such Canadian dollars arising from exchange rate fluctuations will
be ordinary income or loss.
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The sale of common stock will generally result in the recognition of gain
or loss in an amount equal to the difference between the amount realized on the
sale and the holder's adjusted basis in such common stock. Gain or loss upon the
sale of the common stock will be long-term or short-term capital gain or loss,
depending on whether the common stock has been held for more than one year.
Special rules are applicable to United States persons holding stock in a
"passive foreign investment company" (PFIC), any foreign corporation of which at
least 75% of its gross income for the taxable year is passive income (the
"Income Test") or at least 50% by value of the assets it holds during the
taxable year produce or are held for the production of passive income (the
"Asset Test"). For that purpose, "passive income" includes the excess of gains
over losses from certain commodities transactions, including certain
transactions involving oil and gas. Gains from commodities transactions,
however, are generally excluded from the definition of passive income if
"substantially all" of a merchant's, producer's or handler's business is as an
active merchant, producer or handler of such commodities.
Cotton Valley believes it is not currently and will not become a PFIC.
However, the application of the PFIC provisions of the Internal Revenue Code of
1986, as amended (the "Code"), to oil and gas producers is somewhat unclear.
Therefore, no assurance can be made regarding the PFIC status of Cotton Valley.
If Cotton Valley were a PFIC, a U.S. holder of common stock would be
subject to a special tax regime with respect to certain dividends and with
respect to gain on a disposition of such shares (including a gift or pledge of
shares). Such income would be allocated ratably over the holder's holding period
for the shares, would be taxed, in the year of dividend or disposition, at
ordinary income tax rates (using the highest tax rate in effect for each period
to which the income is allocated), and would be subject to an interest charge
reflecting the deferral of tax from the year to which the income was allocated
to the year of dividend or disposition.
Purchasers of Units are urged to consult their tax advisors regarding the
potential application of the matters described above.
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PLAN OF PLACEMENT
Cotton Valley will offer the Securities offered hereby only by its officers
and directors and through licensed securities dealers (the "Placement Agents")
in the United States who are members of the National Association of Securities
Dealers, Inc. ("NASD") or who reside outside the United States and agree to be
bound by NASD guidelines, pursuant to the terms and subject to the conditions
contained in an agreement (the "Placement Agent Agreement") between Cotton
Valley and the Placement Agents, for whom National Securities Corporation (the
"Lead Placement Agent") is acting as lead. A ten percent (10%) commission shall
be paid to the Placement Agents.
Cotton Valley has agreed to pay the Placement Agents a nonaccountable
expense allowance of 1.8% of the gross amount of the Units sold by them (maximum
$54,000 upon the sale of the Units offered). Each Placement Agent's expenses in
excess thereof will be paid by such Placement Agent. To the extent that the
expenses of the placement are less than that amount, such excess shall be deemed
to be additional compensation to the Placement Agents.
Payment for Units sold through Placement Agents shall be made to Cotton
Valley as set forth in the Placement Agent Agreement. Purchases arranged by
Placement Agents will be closed at Cotton Valley's offices in Dallas, Texas on
one or more dates (the "Closing Dates"), no earlier than ten business days
following the date this prospectus is effective, as requested by any Placement
Agents upon 48 hours written notice to Cotton Valley. Placement Agents may
deduct their commissions and non-accountable expense allowance when sending in
clients' orders. Any commissions and non-accountable expense allowances payable
not deducted from payments made for Units will be remitted by Cotton Valley to
Placement Agents within five business days after each Closing Date. Payments for
Units sold directly by officers and directors of Cotton Valley shall be made to
the Company c/o Weir & Foulds, 2 First Canadian Place, Toronto, Ontario, M5X
1J5, Attn: Wayne Egan. Cotton Valley may accept or reject any order to purchase
Units in whole or in part. Pursuant to an agreement with a Placement Agent,
Cotton Valley has reserved $2,500,000 of Units until five days after this
prospectus is effective and $1,000,000 of Units until fifteen days prior to the
termination of this offering. See "Business and Properties--Recent
Developments."
Placement Agents' Warrants
Upon the closing of this offering, Cotton Valley has agreed to sell to the
Placement Agents, for nominal consideration, 30,000 Warrants (the "Placement
Agents' Warrants"). The Placement Agents' Warrants are exercisable at 120% of
the public offering price per Unit for a two-year period commencing one year
from the date of this offering. The Placement Agents' 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 Placement Agents and their
successors and dealers participating in the offering and/or their partners or
officers. The Placement Agents' Warrants will contain antidilution provisions
providing for appropriate adjustment of the number of shares subject to the
Placement Agents' Warrants under certain circumstances. The holders of the
Placement Agents' Warrants have no voting, dividend or other rights as
shareholders of Cotton Valley with respect to shares underlying the Placement
Agents' Warrants until the Placement Agents' Warrants have been exercised.
For the term of the Placement Agents' 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 Placement Agents' Warrants can be expected to
exercise the Placement Agents' 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
Placement Agents' Warrants. Such facts may adversely affect the terms on which
Cotton Valley can obtain additional financing. Any profit realized by the
Placement Agents on the sale of the Placement Agents' Warrants or shares
issuable upon exercise of the Placement Agents' Warrants may be deemed
additional compensation.
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Indemnification
The Selling Agreement provides for indemnification between Cotton Valley
and the Placement Agents against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Placement Agents'
Warrants provide for indemnification among Cotton Valley and the holders of the
Placement Agents' 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 of the Units was determined by
negotiation between Cotton Valley and the Lead Placement Agent. 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 and the
closing bid price of Cotton Valley's Common Stock on June__, 1997. 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 Units may be converted, and the exercise price
of the Warrants, was determined by negotiation between Cotton Valley and the
Placement Agent.
Toronto Stock Exchange
Cotton Valley has applied to list its Common Stock on the Toronto 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.
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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.
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
Placement Agents by Maurice J. Bates, L.L.C., 8214 Westchester, Suite 500,
Dallas, Texas 75225.
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 summarized in this prospectus, have been so included in reliance upon the
authority of such firms as experts in petroleum engineering.
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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 has applied to list its Common Stock on the Toronto Stock
Exchange, notwithstanding that Cotton Valley may not meet the basic requirements
for such listing. If Cotton Valley's application is accepted, then reports,
proxy statements and other information concerning Cotton Valley will be
available for inspection at the principal office of the Toronto Stock Exchange
at 2 First Canadian Place, Toronto, Ontario, Canada. There is no assurance
Cotton Valley's Securities will be accepted for listing.
------------------------------------
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 Placement Agents or the experts named in the registration statement may be
residents of Canada.
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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 and/or gas production net
of all other interests 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
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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.
47
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
as of June 30, 1996 and for the periods
ended June 30, 1996 and 1995
Independent Auditor's Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholder' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Supplementary Information (Unaudited)
as of June 30, 1996
Estimates of Natural gas and Oil Reserves F-13
FINANCIAL STATEMENTS (UNAUDITED)
as of March 31, 1997 and for the periods
ended March 31, 1997 and 1996
Condensed Consolidated Balance Sheet (Unaudited) F-15
Condensed Consolidated Statements of Operations (Unaudited) F-16
Condensed Consolidated Statements of Cash Flows (Unaudited) F-17
Notes to Unaudited Condensed Consolidated Financial Statements F-18
48
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Cotton Valley Resources Corporation
(Formerly Cotton Valley Energy Limited)
Dallas, Texas
We have audited the consolidated balance 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
F-2
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED BALANCE SHEET
(Expressed in U. S. Dollars)
June 30, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
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
=================
</TABLE>
See accompanying notes to these financial statements
F-3
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEBRUARY 15, FEBRUARY 15,
YEAR ENDED 1995 TO 1995 TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to these financial statements
F-4
<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>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK SPECIAL SHARES IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STAGE TOTAL
------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
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 ($1.49 per share) 107,258 160,008 - - - 160,008
Repayment and conversion to equity of notes payable,
net of amortized discount - (72,000) - - - (72,000)
Issued December 29, 1995 to officers upon conversion
of special shares ($.004 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-5
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C>
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-6
<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-7
<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 athe future
ies represent 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 lifemanagement's
based on 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-8
<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 affreported mounts 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 noas of $586,049 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 rDuring report. 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.
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
F-9
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
77,928 Class A warrants (see Note 5), and agreed to pay $230,000 as
conThe 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 canceled.
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.
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.
F-10
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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 canceled.
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 estimated 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>
<CAPTION>
JUNE 30,
--------
1996 1995
---- ----
Deferred tax liabilities:
<S> <C> <C>
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>
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.
F-11
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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-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
=========== ===========
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.
F-12
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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 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>
<CAPTION>
AT JUNE 30,
1996 1995
------------ -------------
<S> <C> <C>
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>
F-13
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(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
---- ----
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
========== ==========
F-14
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEET
(Expressed in U.S. Dollars)
March 31, 1997
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash $ 57,145
Accounts receivable 64,145
Prepaid expenses 32,651
-------------
Total Current Assets 153,941
PROVED OIL AND GAS PROPERTIES (full cost method) 12,033,974
OFFICE EQUIPMENT, net of accumulated depreciation of $10,900 44,562
OTHER ASSETS 101,520
-------------
Total Assets $ 12,333,997
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 710,184
Current portion of long-term debt 586,049
---------------
Total Current Liabilities 1,296,233
ADVANCES FROM RELATED PARTIES 149,710
DEFERRED INCOME TAXES 1,088,000
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited, none issued
Common Stock, no par value, authorized-unlimited, 11,708,881 issued 11,527,749
Deficit accumulated in development stage (1,727,695)
Total Stockholders' Equity 9,800,054
---------------
Total Liabilities and Stockholders' Equity $12,333,997
===============
</TABLE>
See accompanying notes to these financial statements
F-15
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Period from
Period from July 1, Period from July 1, February 15, 1995
1996 to March 31, 1995 to March 31, to March 31, 1997
1997 1996
------------------ ------------------- -----------------
<S> <C> <C> <C>
REVENUE - Oil and gas sales $ 131,986 $ - $ 131,986
EXPENSES:
Direct costs 80,757 - 80,757
General and administrative 1,462,532 741,467 2,497,839
Interest 54,115 41,874 193,085
------ ------ -------
Total Expenses 1,597,404 783,341 2,771,681
--------- ------- ---------
LOSS BEFORE INCOME TAXES (1,465,418) (783,341) (2,639,695)
INCOME TAX BENEFIT 500,000 275,000 912,000
------- ------- -------
NET LOSS $ (965,418) $ (508,341) $ (1,727,695)
================ =============== =============
NET LOSS PER SHARE $ (0.07) $ (0.04)
================ ===============
WEIGHTED AVERAGE SHARES 13,390,524 9,923,236
============== ==============
</TABLE>
See accompanying notes to these financial statements
F-16
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Period from July 1, Period from July 1, Period from July 1, 1996 to
1996, to March 31, 1997 1995 to March 31, 1996 to March 1997
----------------------- ---------------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (965,418) $ (508,341) $(1,727,695)
Adjustments to reconcile net loss to net
cash used by operating activities:
Deferred income tax benefit (500,000) (275,000) (912,000)
Amortization of debt discount - - 88,000
Depreciation 9,216 - 10,900
Common stock issued for services 863,862 446,950 1,312,993
Change in accounts payable 193,495 107,759 480,184
Other (204,800) - (198,957)
-------- --------- --------
Net Cash Used by Operating Activities (603,645) (228,632) (946,575)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties (21,999) 171,709 149,710
Sale of common stock 889,089 - 2,988,961
Issuance of convertible debentures - 415,650 426,474
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 852,490 733,659 3,287,469
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties (893,250) (506,027) (2,182,229)
Purchase of other assets (101,520) - (101,520)
------------ --------- ---------
Net cash used by investing activities (994,770) (506,027) (2,283,749)
------------ --------- ---------
INCREASE (DECREASE) IN CASH (745,925) (1,000) 57,145
CASH - Beginning of period 803,070 1,000 -
CASH - End of period $ 57,145 $ nil $ 57,145
========== ========== ============
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 35,162 $ 18,920 $ 72,172
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
Oil and gas property acquired with note 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 notes to these financial statements
F-17
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTE TO CONDENSED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
(1) Nature of Business and Basis of Preparation and Presentation
The Company's primary business focus is the acquisition of ownership
interests in, and the production of oil and gas from, existing oil and gas
fields that indicate a potential for increased production through
rehabilitation.
The condensed consolidated 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 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 condensed consolidated 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 condensed
consolidated 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 nine months ended March 31, 1997, 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 1,141,000 shares of common stock to Liviakis
Financial Communications, Inc. which was recorded at $832,930, issued
416,667 shares of common stock to former Arjon stockholders on exercise of
warrants for $200,449, issued 300,000 shares of common stock in Canadian
private placements for proceeds of $235,425 (before deducting costs of
$14,600), issued 500,000 shares of common stock to Liviakis Financial
Communications, Inc. for cash of $375,000, and issued 48,980 shares of
common stock to the agent involved in Canadian financings on exercise of
agents' options for $78,215.
(3) Liviakis Financial Communications, Inc.
During the period, Cotton Valley entered into an agreement with Liviakis
Financial Communications, Inc. of Sacramento, California ("Liviakis") to
assist and consult with Cotton Valley in matters concerning corporate
finance, mergers and acquisitions, and to provide investor communications
and public relations services. In consideration of Liviakis' services,
Cotton Valley issued a total of 500,000 shares of common stock to Liviakis
and an officer of Liviakis for $.75 per share and will issue 1,490,000
shares of its common stock to Liviakis for services of which 1,141,000
shares were issued during this period. Cotton Valley 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. Based
on the value of the Company's stock on the Canadian Dealing Network at the
time the contract was negotiated, the Company will record an expense of
$1,087,700 during the year ended June 30, 1997. The statement of operations
for the period ended March 31, 1997 reflects an expense of $559,004 in this
regard.
F-18
<PAGE>
INSIDE BACK COVER
MAP OF MOVICO AREA
<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 300,000 Units authorized by Cotton Valley or the
Placement Agents. 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.
----------------------
TABLE OF CONTENTS
Page
Prospectus Summary ................................. 3
Risk Factors........................................ 6
Use of Proceeds ....................................11
Capitalization .....................................12
Dilution ...........................................13
Dividend Policy ....................................14
Market for Common Equity ...........................14
Management's Discussion and Analysis or
Plan of Operation ...............................15
Business and Properties ............................19
Management .........................................30
Certain Relationships and Related Transactions .....34
Principal Shareholders .............................35
Description of Securities ..........................37
Securities Eligible for Future Sale ................40
Certain Income Tax Considerations ..................41
Plan of Placement ..................................43
Limitations on Director Liability ..................45
Legal Matters ......................................45
Experts ............................................45
Additional Information..............................46
Glossary ...........................................47
Index to Financial Statements .....................F-1
----------------------
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.
300,000 Units
COTTON VALLEY
RESOURCES
CORPORATION
Consisting of
Six Shares of Common Stock
and
Six Redeemable Warrants to Purchase Common
Stock
---------------------------
PROSPECTUS
---------------------------
NATIONAL SECURITIES CORPORATION
,1997
--------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Cotton Valley has no contract or arrangement that insures or indemnifies a
controlling person, director or officer of Cotton Valley which affects his or
her liability in that capacity. Cotton Valley's bylaws provide for such
indemnification, subject to applicable law.
If available at reasonable cost, Cotton Valley intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by reason of their
positions as officers and directors.
Item 25. Other Expenses of Issuance and Distribution.
Expenses in connection with the public offering of Securities by Cotton
Valley pursuant to this prospectus are as follows:
Securities and Exchange Commission Filing Fee $ 1,496
Toronto Stock Exchange Listing Fee and Expenses 20,000*
Accounting Fees and Expenses 20,000*
Legal Fees and Expenses 24,000*
Printing and Engraving 16,000*
Fees of Transfer Agent and Registrar 5,000*
Blue Sky Fees and Expenses 15,000*
Placement Agents' Nonaccountable Expense Allowance 54,000*
Miscellaneous 14,504*
-------
Total $170,000*
=========
- - ---------------------
*Estimated
Item 26. Recent Sales of Unregistered Securities.
The following is a summary of transactions by Cotton Valley since February
15, 1995 (date of incorporation) involving securities which were not registered
under the Securities Act. With regard to all of the following transactions,
which 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>
<CAPTION>
Date Transaction Number Consideration
---- ----------- ------ -------------
<C> <C> <C>
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
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 In
a $250,000 note and a $146,000 note, net 107,258 88,008
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Date Transaction Number Consideration
---- ----------- ------ -------------
<C> <C> <C>
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
Canadian Private Placements 400,000 310,425
To former Arjon shareholders on exercise of warrants 127,656 61,509
01/97 To former Arjon shareholders on exercise of warrants 114,000 54,925
02/97 To the Canadian Agent on exercise of Agent's Options 48,980 78,215
To Liviakis for services 741,000 540,930
To Liviakis for cash pursuant to contract 400,000 300,000
03/97 To former Arjon shareholders in excise of Warrants 6,667 10,951
05/97 To Liviakis for services 234,000 170,820
To Oxford Capital for services 20,400 37,500
Canadian Private Placements 91,324 150,000
Share issuance costs(3) (930,385)
------------------ ---------
TOTAL ISSUED AND OUTSTANDING 12,061,272 $12,040,620
========== ===========
</TABLE>
- - ----------------------
(1) Cotton Valley sold in Canada units, consisting of one common share and
one-half a warrant to purchase a common share until December 31, 1997, at
Cdn$ 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 ($1.48) per share of common
stock.
(3) Costs relate to the sale of common shares and units in Canada, the sale of
debentures in Canada and the merger with Arjon.
b) Reserved Shares
In addition to the shares of Common Stock issued by Cotton Valley, Cotton
Valley has reserved for issuance 3,467,906 shares of Common Stock pursuant to:
(i) 1,266,985 Class A Warrants, where each Class A Warrant entitles
the holder to purchase one share of Common Stock until December
31, 1997, at the price of Cdn$ 2.75 ($2.00). These Class A
Warrants were issued:
(a) 636,250 in connection with a sale of units in Canada;
II-2
<PAGE>
(b) 112,390 in connection with conversion of debenture; and
(c) 518,345 in connection with the acquisition of oil and gas
interests.
(ii) 162,500 Agent's Options in connection with the sale of debentures
and units. The terms are:
(a) 62,500 at Cdn$ 2.75 ($2.00) until December 31, 1997; and
(b) 100,000 at Cdn$ 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 ($1.83) and expire August 6,
1999 (130,000), November 7, 1999 (50,000) and July 1, 2000
(800,000).
(iv) 91,755 Series B Warrants granted to former Arjon shareholders.
Each Series B Warrant is exercisable at Cdn$ 2.25 ($1.64) until
December 31, 1997.
(v) 200,000 warrants issued in connection with private placement of
shares in December 1996. Each warrant is exercisable at Cdn$ 1.00
($.73) until December 31, 1999.
(vi) 500,000 warrants issued to Liviakis Financial Communications,
Inc. in connection with a financial consulting contract. Each
warrant is exercisable at Cdn$ 1.10 ($.80) from January 2, 1998
until November 7, 2001.
(vii)100,000 shares of Common Stock to be issued to Liviakis
Financial Communications, Inc. for services to be rendered during
1997.
(viii) 166,666 warrants issued to the spouses of Eugene A. Soltero and
James E. Hogue to replace warrants exercised at the request of
Cotton Valley. Each warrant is exercisable at Cdn$ 1.00 ($.73)
until December 31, 1999.
Item 27. Exhibits
The following documents are filed as exhibits to this registration
statement:
Exhibit Number Description Sequentially
Numbered Page
1* Placement Agent Agreement
2** 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 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.
II-3
<PAGE>
23(d)** Consent of Wendell & Associates
27* Financial Data Schedule
- - -----------------------
* 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 Placement Agent(s) at each closing specified in the
Selling Agreement certificates in such denominations and registered in
such names as required by the Placement Agents to permit prompt
delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that, in the opinion of the
SEC, such indemnification is against public policy, as expressed in
the Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the shares
of common stock being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time the SEC declared it effective.
(7) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on _____________, 1997.
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
<TABLE>
<CAPTION>
<S> <C>
By: ___________________________________ By: ___________________________________
Eugene A. Soltero Peter Lucas
Chairman of the Board and Chief Executive Senior Vice President and Chief Financial
Officer Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
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. Ronald Burden _______________, 1997
Director
- - ----------------------------------
Wayne T. Egan _______________, 1997
Director
- - ----------------------------------
Michael Kamis _______________, 1997
Director
- - ----------------------------------
Richard J. Lachcik _______________, 1997
</TABLE>
II-5
EXHIBIT 1
300,000 Units
COTTON VALLEY RESOURCES CORPORATION
Each Unit Consisting of
Six Shares of Common Stock and
Six Redeemable Common Stock Purchase Warrants
1997
PLACEMENT AGENT AGREEMENT
-------------------------
NATIONAL SECURITIES CORPORATION
As Lead Placement Agent
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 through you
and other placement agents who have signed "Selling Agreements" in the form of
Schedule I hereto (collectively, the "Placement Agents"), for whom National
Securities Corporation is acting as the lead placement agent and representative
(the "Representative"), an aggregate of 300,000 Units (individually a "Unit" and
collectively the "Units"), each Unit consisting of six shares of Common Stock,
without par value, of the Company (the "Common Stock") and six Redeemable Common
Stock Purchase Warrants (individually, a "Warrant"), which entitles the holder
thereof to purchase one share of Common Stock at a price of $2.08 per share,
subject to certain conditions. Such Units, together with (a) the shares of
Common Stock and the Warrants comprising such Units and (a) the shares of Common
Stock issuable upon exercise of such Warrants, are collectively referred to
herein as the "Placement Securities." In addition, the Company proposes to sell
to the Placement Agents the "Placement Agents" Warrants (described in Section 7
hereof) to purchase up to an aggregate of 30,000 additional Units of the
Underwritten Securities (such additional Units, together with (a) the shares of
Common Stock and Warrants comprising such additional Units and) the shares of
Common Stock issuable upon exercise of such Warrants, are collectively referred
to herein as the "Placement Agents' Securities"). The Placement Securities and
the Placement Agents' 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 tile event any post-effective
amendment thereto becomes effective prior to the Closing Date (as hereinafter
defined) or any settlement date pursuant to Section 3(1,) 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.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each Placement Agent that:
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(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(a)(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.
(1.) 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 Placement Agent 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").
(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
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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 fights 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 fights, and will conform in all respects to the description
thereof contained in the Prospectus; the Warrants and Placement Agents'
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 Placement
Agents' Warrants); and the Warrants and Placement Agents' 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. 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.
(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).
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(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 placement of the Securities by the
Placement Agents.
(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.
(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.
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(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 tide 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.
(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
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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 Placement Agents, 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.
(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 p]an 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 Placement Agents shall also be
deemed a representation and warranty of the Company to the Placement
Agents as to the matters covered thereby.
2. Purchase and Sale. Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company agrees to offer
and sell through the Placement Agents a maximum of 300,000 Units, with each Unit
consisting of six shares of Common Stock and six Warrants. Each of the Placement
Agents agrees, severally and not jointly, to use its best efforts to place the
number of Units set forth on the signature page of the Selling Agreement. The
purchase price shall be $10.00 per Unit. Any order arranged by a Placement Agent
may be accepted or rejected in whole or in part by the Company.
3. Delivery and Payment. Delivery of the certificates for the components of the
Units described in Section 2 placed through any Placement Agent and accepted by
the Company 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 dates, not
earlier than the tenth full business day following the Effective Date of the
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Registration Statement, as such Placement Agent shall designate by at least 48
hours' prior notice to the Company (each such date, time of delivery and payment
for such Securities being herein called a Closing Date). Delivery of the
certificates for such Securities to be purchased on a Closing Date shall be made
as provided in the preceding sentence for the respective accounts of the several
Placement Agents against payment by the several Placement Agents through the DTC
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 Placement Agent may request not less than three full
business days in advance of the related Closing Date. The Company agrees to have
the certificates for the Securities to be purchased on a 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 such Closing Date.
4. Offering through Placement Agents. It is understood that the several
Placement Agents propose to make the Securities available to the public solely
as agents of the Company as set forth in the Prospectus.
5. Agreements of the Company. The Company agrees with the several Placement
Agents 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 notice to the Representative. 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
Placement Agent 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 Placement Agent as many copies as the
Representative may request of an amended or supplemented Prospectus
complying with Section 10(a)(3) of the Act.
(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 September 15,
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
Placement Agents, without charge, three signed copies of the
Registration Statement and any amendments thereto (including exhibits
thereto) and to each other Placement Agent a conformed copy of the
Registration Statement and any amendments thereto (without exhibits
thereto) and, so long as delivery of a prospectus by a Placement Agent
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.
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(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 reasonably request, 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 wilt 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) use its best efforts cause the
Securities (other than the Placement Agents' Warrants) to be listed on a
recognized national or regional stock exchanges in the United States,
(ii) comply with all registration, filing and reporting requirements of
the Exchange Act and the such 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
flied 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.
(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 make publicly available and unaudited quarterly reports
of earnings and will furnish to you and, upon request, to the other
Placement Agents 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, 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 has reserved and shall continue to reserve a
sufficient number of shares of Common Stock for issuance upon exercise
of the Placement Agents' Warrants and Warrants (including the Warrants
included in the Placement Agents' Warrants).
(l) 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
l0b-6, Rule l0b-7 or Rule l0b-l8 under the Exchange Act.
6. Conditions to the Obligations of the Placement Agents. The obligations of the
Placement Agents to offer, as agents, the Units described in Sections 2(a) and
2b) 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, each 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 any 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, thirty days
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<PAGE>
following the execution date hereof or at such later date and time as
you may approve in writing and, at any 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
Placement Agent, 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.
(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 Placement Agent addressed to the
Placement Agent and dated on each 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 Placement Agents' 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 Placement Agents' Warrants); and the Warrants and
Placement Agents' 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.
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.
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<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 die
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.
(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
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<PAGE>
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 Placement Agents 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
each 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.
(c) The Representative shall have received from Maurice J. Bates,
L.L.C., counsel for the Placement Agents, an opinion dated each 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 each
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 each 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
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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 each Closing Date (and any
settlement date pursuant to Section 3(b) hereof) with the same
effect as if made on and as of each Closing Date (and any
settlement date pursuant to Section 3(b) hereof).
(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) On each 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 nine months ended March 31, 1997 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 theft 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
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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 March 31, 1997 and the related unaudited statements of operations for
the nine months ended March 31, 1997, 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.
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) The Company shall not have sustained any uninsured substantial loss
as a result of fire, flood, accident or other calamity.
(h) 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.
(i) 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 Placement Agents
hereunder may be terminated at, or at any time prior to, each 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 Placement Agents' 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 Placement Agent 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 Placement Agents 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;
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(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) incident to the sale and delivery of
the Securities through the Placement Agents to the initial purchasers
thereof;
(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 any regional or national stock
exchange.
(h) The cost of printing, producing and distributing this
Agreement, the Selling 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;
(1) A nonaccountable expense allowance of 1.8% of the gross
proceeds from the offering placed by the several Placement Agents
payable to the Placement Agents pro rata with the number of Units placed
by each Placement Agent.
(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, the Placement Agents shall be entitled to receive, as partial
compensation for their services, unit purchase warrants for the purchase
of up to an additional 30,000 Units (the "Placement Agents' Warrants").
The Placement Agents' Warrants shall be issued pursuant to the Warrant
and Registration Rights Agreement (the "Placement Agents' Warrant
Agreement") in the form of Exhibit B attached hereto and shall be
exercisable, in whole or in part, for a period of two 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
Placement Agents' Warrants, including the Warrants issuable upon
exercise thereof, shall be non-transferable for one year from the date
of issuance of the Placement Agents' Warrants, except as provided in the
Placement Agents' Warrant Agreement. The terms of the Units subject to
the Placement Agents' Warrants shall be the same as the Units sold to
the public.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Placement
Agent and each person who controls any Placement Agent 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 Placement
Agent 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 Placement Agent (or to the benefit of any person controlling any
such Placement Agent) 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)
14
<PAGE>
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
Placement Agent, 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 Placement Agent or any person who controls such Placement Agent
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 Placement Agent 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 Placement Agent 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 Placement
Agent, but only with reference to written information relating to such
Placement Agent furnished to the Company by or on behalf of such
Placement Agent through the Representative specifically for use in the
Registration Statement or Prospectus. The obligations of each Placement
Agent under this subsection (b) shall be in addition to any liability
which the Placement Agent may otherwise have.
(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.
(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 Placement Agents 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 Placement Agents 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 Placement Agents 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 Placement Agents 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 Placement Agents be
responsible for any amount in excess of the commission on the Units to
be purchased through such Placement Agent 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
15
<PAGE>
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 Placement Agents 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 Placement
Agents 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 Placement Agents 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 Placement
Agents 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 a Placement Agent within the meaning of the Act shall have the
same rights to contribution as such Placement Agent, 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. Best Efforts by Placement Agents. Each Placement Agent shall use its best
efforts to place the securities indicated on the signature page of the Selling
Agreement. However, such amount is non-binding on such Placement Agent and the
several Placement Agents shall have no liability to the Company if Units are not
placed.
10. Termination. This Agreement shall be subject to termination in the absolute
discretion of either or Company or Representative, by notice given to the other
party 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 Company or 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 Placement Agent 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 Placement Agent, 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
16
<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 replaces and supercedes all prior agreements
between Representative and the Company and 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 Placement Agents
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.
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 Placement Agents.
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
Placement Agents who execute the
Selling Agreement.
17
<PAGE>
SCHEDULE I
COTTON VALLEY RESOURCES CORPORATION
300,000 Units
Consisting of
Six Shares of Common Stock, Without Par Value, and
Six Redeemable Common Stock Purchase Warrants
---------,1997
SELLING AGREEMENT
-----------------
NATIONAL SECURITIES CORPORATION (the "Lead Placement Agent") and the one
or more securities broker dealers whose names and signatures appear in
counterpart in the space provided below, collectively, (the "Placement Agents"),
severally, but not jointly, agree with COTTON VALLEY RESOURCES CORPORATION, a
corporation organized under the laws of the Province of Ontario, Canada (the
"Company"): (i) to the terms of the Placement Agent Agreement dated June
_______, 1997 between the Lead Placement Agent and the Company (the "Placement
Agent Agreement") and (ii) to offer, as agent for the Company, on a "Best
Efforts" basis up to a maximum amount of 300,000 units, each unit (the "Unit")
consisting of six shares of common stock, without par value, of the Company
("Common Stock"), and six 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 $2.08 (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 "Securities" and the Units included
therein are referred to as the "Registered Units"), all as set forth in the
Preliminary Prospectus dated June ___, 1997, as amended and supplemented from
time to time, and subject to the terms of this Selling Agreement. The Units and
the terms upon which they are to be offered for sale by the several Placement
Agents are more particularly described in the Preliminary Prospectus, additional
copies of which will be supplied in reasonable quantities upon request by any
Placement Agent to the Lead Placement Agent or the Company.
1. Offering. The Registered Units are to be offered to the public
directly by the Company through its officers and directors and indirectly
through the several Placement Agents at the price per Unit set forth on the
cover page of the Preliminary Prospectus (the "Public Offering Price") which has
been set at $10.00 per Unit. Each Placement Agent 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.
Cotton Valley Resources Corporation Selling Agreement Page 1
<PAGE>
Each Placement Agent who desires to place any of the Registered Units
should sign this agreement and fill out the non-binding indication of interest
as set forth below. A copy of this Selling Agreement should reach the Company
promptly by mail or facsimile transmission at its office at 8350 North Central
Expressway, Suite M2030, Dallas, Texas 75206, facsimile number (214) 363-4294.
The Company reserves the right to accept or 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 each Placement Agent will be confirmed
by the Company as soon as reasonably feasible following the effective date of
the final Prospectus (the "Effective Date").
Any Registered Units offered through Placement Agents 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 effective date of the final Prospectus and the securities or blue
sky laws of the various states or other jurisdictions.
Neither the Placement Agents nor any other person is, or has been, authorized by
the Company 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.
2. Payment and Delivery. Payment for the Registered Units that customers
of the Placement Agents purchase hereunder shall be made by the Placement Agents
directly to the Company or through the Depository Trust Company ("DTC"), payable
in same-day funds to the order of COTTON VALLEY RESOURCES CORPORATION, at such
time and on such dates, no earlier than ten business days following the
Effective Date, as any Placement Agent may designate, (the "Closing Dates")
against delivery of such Registered Units to such Placement Agents through the
facilities of the DTC pursuant to procedures set forth in the Placement Agent
Agreement. Alternate procedures for payment and delivery may be used by any
Placement Agent by separate agreement with the Company.
3. Compensation. Based on a purchase price of $10.00 per Registered
Unit, the Placement Agents will receive a selling commission (the "Commission")
of $1.00 per Registered Unit and a non-accountable expense allowance (the
"Expense Allowance") of $0.18 per Registered Unit. Placement Agents may deduct
their commissions and non-accountable expense allowance when sending in
payments. Any commissions and non-accountable expense allowances payable not
deducted from payments made for Units will be remitted by Cotton Valley to
Placements within five business days after each Closing. Each Placement Agent
shall also receive Placement Agents' Warrants (as described in the Prospectus)
equal to 10% of the Units placed by such Placement Agent.
4. Blue Sky Matters. Upon request, each Placement Agent will be informed
as to the states and other jurisdictions in which the Company has been advised
that the Registered Units are qualified for sale under the respective securities
or blue sky laws of such states or jurisdictions. However, the Company shall not
have any obligation or responsibility with respect to the right of any Placement
Agent to sell the Registered Units in any jurisdiction and each Placement Agent
shall indemnify and hold harmless the Company, its directors and officers, and
any person controlling the Company from and against any and all losses, claims,
damages, expenses or liabilities to which any of them may become subject as a
result of such Placement Agents 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 each Placement Agent 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 Company shall
have determined that the public offering of the Registered Units has been
completed and upon facsimile notice to the Placement Agents of such termination,
or, if not theretofore terminated, it shall terminate 60 days after the initial
public offering of the Registered Units; provided, however, that the Company
Cotton Valley Resources Corporation Selling Agreement Page 2
<PAGE>
shall have the right to extend this Agreement for a period or periods not to
exceed an additional 60 days in the aggregate upon facsimile notice to the
Placement Agents. The Company may terminate this Agreement at any time without
prior notice to the Placement Agents.
6. Obligations and Positions of Placement Agents. The several Placement
Agents are acting as agents of the Company in solely offering the Registered
Units to the public in accordance with the terms and conditions of the Placement
Agents Agreement and the Prospectus. Nothing contained herein shall constitute
the Placement Agents an association or other separate entity, or partners with
the Company or the other Placement Agents, but each Placement Agent will be
responsible for such Placement Agent's share of any liability or expense based
on any claim to the contrary. Neither the Company nor the other Placement Agents
shall be under any liability to any Placement Agent 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
Company and the other Placement Agents in this Agreement, and no obligation on
the part of the Company or the other Placement Agents 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.
The Company 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 Company in this Agreement shall be implied hereby or inferred herefrom.
7. Compliance with Securities Laws. On becoming a Placement Agent, and in
offering and selling the Registered Units, the several Placement Agents agree to
comply with all of the applicable requirements of the Act and the Exchange Act.
Each Placement Agent confirms that it is 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 it has complied and will comply
therewith with respect to the offering of the Registered Units.
8. Stabilization. Each Placement Agent has agreed that, during the term of this
Agreement or such shorter period as the Company 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 this Agreement
The Placement Agents' 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 a Placement Agent to the Company should be mailed or
sent by facsimile transmission to the Company at the addresses and facsimile
numbers set forth in Section 1 hereof. Any notice from the Company to a
Placement Agent shall be mailed or sent by facsimile transmission to the
Placement Agent at the address and facsimile number set forth on the signature
page hereof. Mailed notices shall be sent by registered mail, return receipt
requested. Notices shall be effective upon receipt.
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 offer on a "Best Efforts" basis any Registered Units,
please confirm your agreement by signing and returning to the Company by mail or
facsimile transmission a copy of this Selling Agreement and your indication of
interest as indicated below, even though you may have previously advised the
Company thereof.
Very truly yours,
COTTON VALLEY RESOURCES CORPORATION
Cotton Valley Resources Corporation Selling Agreement Page 3
<PAGE>
BY: __________________________________
EUGENE A. SOLTERO
CHAIRMAN OF THE BOARD
ACCEPTED AND AGREED:
PLACEMENT AGENT
Name:________________________________
Address:______________________________
- - -------------------------------------
Phone: _______________________________
Fax:_________________________________
BY: _________________________________
Printed Name: ______________________
Title: _____________________________
Date: _____________________________
Non-binding indication of interest: _____________ Registered Units.
Cotton Valley Resources Corporation Selling Agreement Page 4
<PAGE>
EXHIBIT A
Form of Lock-Up Agreement
National Securities Corporation
8214 Westchester, Suite 500
Dallas, Texas 75225
, 1997 Re: Agreement Not to Sell
Gentlemen.
Reference is made to the proposed public offering of 300,000 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
placement agents (the "Placement Agents") to be named in an placement agent
agreement.
In consideration of the offer and sale of such Units by the Company and
the Placement Agents and of other good and valuable consideration the receipt of
which is hereby aim knowledge, 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 Placement Agents 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.
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
A-1
<PAGE>
Accepted and Agreed to:
NATIONAL SECURITIES CORPORATION
As Representative of the
Several Placement Agents
By: __________________________________
Title: _________________________________
PLEASE COMPLETE AND RETURN TO:
National Securities Corporation
8214 Westchester
Suite 500
Dallas Texas 75225
A-2
<PAGE>
EXHIBIT B
Placement Agents' Warrant Agreement
[All References to Underwriter are changed to Placement Agent]
B-1
