As filed with the Securities and Exchange Commission on April 9, 1997
Registration No. 333-16893
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM SB-2/A
AMENDMENT No. 4
Registration Statement
Under
The Securities Act of 1933
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Ontario, Canada 1381 98-0164357
(I.R.S. Employer Identification Number)
(State or Other Jurisdiction of Incorporation (Primary Standard Industrial
or Organization) Classification Code Number)
8350 North Central Expressway 8350 North Central Expressway Peter Lucas
Suite M2030 Suite M2030 8350 North Central Expressway
Dallas, Texas 75206 Dallas, Texas 75206 Suite M2030
(214) 363-1968 Dallas, Texas 75206
(Address of Principal Place of (214) 363-1968
(Address and Telephone Number of Principal Business or Intended
Executive Offices) Principal Place of Business) (Name, Address and Telephone Number of
Agent for Service)
</TABLE>
------------------------------
<TABLE>
<S> <C> <C> <C>
Norman R. Miller, Esq. Copies to: Maurice J. Bates, L.L.C.
Wolin, Ridley & Miller LLP 8214 Westchester, Suite 500
1717 Main Street, Suite 3100 Dallas, Texas 75225
Dallas, Texas 75201 Telephone: (214) 692-3566
Telephone: (214) 939-4906 Fax: (214) 987-2091
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. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered(1) Offering Price per Unit(1) Aggregate Offering Price(1) Registration Fee
- -------------------------------- ----------------- --------------------------- ----------------------------- ------------------
Units for public sale(2) 345,000(3) $10.00(3) $ 3,450,000(3) $690.00(3)
- -------------------------------- ----------------- --------------------------------------------------------- ------------------
Common Stock, no par value(4) 3,750,000 - - -
- -------------------------------- ----------------- --------------------------------------------------------- ------------------
Redeemable Common Stock
Purchase Warrants(5) 1,875,000(6) $2.50(6) $4,687,500(6) $937.50(6)
- -------------------------------- ----------------- --------------------------------------------------------- ------------------
Units subject to Underwriters'
Warrants(7) 30,000 $12.00 $ 360,000 $ 72.00
- -------------------------------- ----------------- --------------------------------------------------------- ------------------
Common stock, no par value(8) 6,900,000 - - -
- -------------------------------- ----------------- --------------------------------------------------------- ------------------
Total - - $8,497,500 $1699.50
================================ ================= ========================================================= ==================
</TABLE>
(1) Estimated solely for the purpose of calculating the
registration fee.
(2) Includes 300,000 Units proposed for sale to the public and
45,000 Units underlying the Underwriters' over-allotment
option.
(3) Includes the Common Stock and the Redeemable Common Stock
Purchase Warrants for which no additional consideration
will be received.
(4) Represents_________ shares underlying Units proposed for
sale to the public and subject to the Underwriters'
over-allotment option and _______ shares underlying Units
subject to Underwriters' warrants.
(5) Includes 1,725,000 warrants underlying Units proposed for
sale to the public and subject to the Underwriters'
over-allotment option and 150,000 warrants underlying
Units subject to Underwriters' warrants.
(6) Pursuant to Rule 457(g), represents additional
consideration to be received upon exercise of, and
includes common stock underlying, the Redeemable Common
Stock Purchase Warrants.
(7) Represents 30,000 Units that the Underwriters have the
right to acquire upon exercise of Underwriters' Warrants.
<PAGE>
(8) Includes _________ shares included in the Units for which
no separate fee is required pursuant to Rule 457(i); and
_________ 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>
<TABLE>
CROSS REFERENCE SHEET
(Between Items of SB-2 and the Prospectus)
<CAPTION>
Item
No. Caption Location in Prospectus
<S> <C> <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;
Underwriting
6. Dilution......................................................... Dilution
7. Selling Security Holders......................................... Inapplicable
8. Plan of Distribution............................................. Outside Front Cover Page;
Underwriting
9. Legal Proceedings................................................ Business and Properties--Legal
Proceedings
10. Directors, Executive Officers, Promoters and Control Persons..... Management
11. Security Ownership of Certain Beneficial Owners and
Management......................................................... Principal Shareholders
12. Description of Securities........................................ Description of Securities; Shares
Eligible for Future Sale
13. Interest of Named Experts and Counsel............................ Inapplicable
14. Disclosure of SEC Position on Indemnification for Securities Act
Liabilities........................................................ Inapplicable
15. Organization Within Last 5 Years................................. Prospectus Summary; Business and
Properties
16. Description of Business.......................................... Business and Properties
17. Managements's Discussion and Analysis or Plan of Operation....... Management's Discussion and
Analysis or Plan of Operation
18. Description of Property.......................................... Business and Properties
19. Certain Relationships and Related Transactions................... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related Shareholder Matters......... Description of Securities; Market
for Common Equity
21. Executive Compensation........................................... Management
22. Financial Statements............................................. Financial Statements
23. Changes in and Disagreements with Accountants on Accounting Inapplicable
and Financial Disclosure...........................................
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Subject to Completion, Dated April 9, 1997
COTTON VALLEY RESOURCES CORPORATION
300,000 Units
Consisting of
_________ Shares of Common Stock, Without Par Value,
and ________ Redeemable Common Stock Purchase Warrants
Cotton Valley Resources Corporation ("Cotton Valley") is offering 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 ____ shares of Common
Stock ("Common Stock") and ____ Redeemable Common Stock Purchase Warrants
("Warrants"). Cotton Valley intends to apply for listing of the Units, Common
Stock, and Warrants (collectively, the "Securities") on the ___________ Stock
Exchange under the symbols ___, ___, ___ and ___, respectively. The Common Stock
and the Warrants will be traded together in Units until the earlier of January
31, 1998, or the third day after Cotton Valley receives written notice that they
may be traded separately from National Securities Corporation, the
representative ("Representative") of the underwriters ("Underwriters"). See
"Underwriting."
The offering price of the Securities is based on the closing bid price of
the common stock on April __, 1997. Each Warrant represents the right to
purchase one share of common stock for $____(125% of the public offering
price per share
of Common Stock) (subject to adjustment) at any time after the Common Stock and
the Warrants become tradable separately until April 30, 2002. After January 31,
1998, 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 Securities
listed on a domestic exchange 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.
Price to Underwriting Proceeds to
Public Discount (1) Cotton Valley (2)
- -------------------- ------------- ----------- -------------
Per Unit ........... $ 10.00 1.00 $ 9.00
- -------------------- ------------- ----------- -------------
Total (3) .......... $ 3,000,000 $ 300,000 $ 2,700,000
==================== ============= =========== =============
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a 2.5% nonaccountable expense allowance,
and (ii) warrants to purchase 30,000 Units at 120% of the public offering
price exercisable between the first and fifth anniversaries of the date of
this prospectus ("Underwriters' Warrants"). In addition, Cotton Valley has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended ("Securities
Act"). See "Underwriting."
(2) Before deducting estimated offering expenses of $400,000, including the
Representative's 2.5% nonaccountable expense allowance.
(3) Cotton Valley has granted the Underwriters an option, exercisable within 45
days after the date of this prospectus, to purchase up to 45,000 additional
Units to cover over-allotments, if any. If the Underwriters exercise this
option in full, then the total Price to Public, Underwriting Discount and
Proceeds to Cotton Valley will be $3,450,000, $345,000, and $3,105,000,
respectively. See "Underwriting."
--------------------------------------------
The Units are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, subject to approval of certain
legal matters by counsel and other conditions. The Underwriters reserve the
right to withdraw, cancel or modify this offering without notice and to reject
any order, in whole or in part. Delivery of certificates representing Units is
expected to be made upon payment at the offices of the Representative at
Seattle, Washington on _____, 1997.
National Securities Corporation
--------------------------------------------
The date of this prospectus is ______________, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. STABILIZING TRANSACTIONS MAY BE EFFECTED ON THE _____________ STOCK
EXCHANGE. STABILIZING ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Certificates representing Units will be delivered against payment on or
about a date that is longer than the third business day following the date of
this prospectus ("T+3"). Prospective investors should note that the ability to
settle secondary market trades of Units will be affected by a settlement period
longer than T+3.
The enforcement by investors of civil liabilities under securities laws of
the United States may be affected adversely by the fact that Cotton Valley is
incorporated under the laws of the Province of Ontario, Canada, that some or all
of its officers and directors may be residents of Canada and that some or all of
the Underwriters or the experts named in the registration statement may be
residents of Canada.
ADDITIONAL INFORMATION
Cotton Valley has filed with the SEC a registration statement on Form SB-2
under the Securities Act with respect to the Securities. This prospectus, which
forms a part of the registration statement, does not contain all of the
information set forth in the registration statement as permitted by applicable
SEC rules and regulations. Statements in this prospectus about any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the registration
statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
this reference.
The registration statement may be inspected without charge and copies may
be obtained at prescribed rates at the SEC's public reference facilities at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549, or on
the Internet at http://www.sec.gov. Copies of the registration statement may
also be inspected without charge at the SEC's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, copies of the registration statement
may be obtained by mail, at prescribed rates, from the SEC's Public Reference
Branch at 450 Fifth Street, NW, Washington, DC 20549.
Cotton Valley is currently a foreign private issuer as defined under the
Securities Exchange Act. Upon filing a registration statement on Form SB-2,
Cotton Valley entered the reporting system for small business issuers.
Consequently, Cotton Valley files periodic reports, proxy statements and other
information with the SEC under the small business disclosure system. The
periodic reports, proxy statements and other information will be available for
inspection and copying at the SEC's public reference facility and regional
offices referred to above.
Cotton Valley will furnish to its shareholders annual reports containing
audited financial statements reported on by independent public accountants for
each fiscal year and make available quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
Cotton Valley has applied to list its securities on the_________ 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 a principal office of _____________ Exchange at
____________. There is no assurance Cotton Valley's securities will be accepted
for listing.
1
<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, (i) all information in this
prospectus assumes that the Underwriters' over-allotment option will not be
exercised, and (ii) "Cotton Valley" refers to Cotton Valley Resources
Corporation and all of its subsidiaries.
The Company
Cotton Valley is a development stage oil and gas exploration, development
and production company, with no operating history. It was incorporated in
Ontario, Canada, originally as Cotton Valley Energy Limited, on February 15,
1995. Through its wholly owned subsidiary Cotton Valley Energy Corporation, a
Nevada corporation, Cotton Valley owns (i) approximately 6,000 acres of
primarily non-producing oil and gas leases in the Cheneyboro Field of Navarro
County, Texas, (ii) a 25% working interest in 1,145 acres of oil and gas leases
in the Movico Field of Mobile County, Alabama, and (iii) an option to acquire a
51.8% working interest in the Sword Unit, offshore Santa Barbara, California.
Cotton Valley recently acquired an interest in the Alden Field of Oklahoma. At
June 30, 1996, Cotton Valley's proved oil reserves were approximately 4.8
million Bbl, and its proved gas reserves were approximately 13.5 million Mcf.
Cotton Valley intends to reincorporate in Canada's Yukon Territory during
1997. Under Yukon Territory law, Cotton Valley's board of directors need not be
comprised of a majority of Canadian residents as currently required under
Ontario law. Since Cotton Valley's principal offices, management and properties
are located in the United States, Cotton Valley believes it is advantageous to
have a majority of US directors. Cotton Valley may in the future continue from
the Yukon Territory to the State of Wyoming. Management believes 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 obtaining the
approval of Cotton Valley's stockholders at that time.
Cotton Valley's principal executive offices are located at 8350 North
Central Expressway, Suite M2030, Dallas, Texas 75206. Its telephone number is
(214) 363-1968.
Business Strategy
Cotton Valley intends to drill up to 10 horizontal wells on its Texas
acreage within 24 months after this offering. Cotton Valley intends to drill two
vertical wells on its Alabama property within 12 months after this offering. No
assurance can be given that any wells will be drilled or completed or produce
oil or gas in commercial quantities. Cotton Valley plans in the future to
exercise its option in the Sword Unit, to retain an 11.8% working interest and
to sell the remainder. See "Management's Discussion and Analysis or Plan of
Operation--12-Month Operating Plan", and "Business and Properties--Cheneyboro
Field--Horizontal Drilling", "--Movico Field", "--Sword Unit," and "--Alden
Field."
Cotton Valley's business strategy is to continue to increase reserves and
commence and increase production and cash flows by concentrating on:
o Acquiring properties, or companies with properties, with
development and exploration opportunities and/or significant cost
reduction potential;
o Developing existing reserves through low-risk development drilling
or recompletion programs capitalizing on reserves left in existing
wells by major oil companies;
o Exploring for new reserves utilizing state-of-the-art technology
to reduce exploration risk;
o Concentrating on focused geographic areas to achieve operating
and technical efficiencies; and
o Maintaining financial flexibility to take advantage of additional
development and acquisition opportunities as they develop.
2
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Securities offered by Cotton Valley ........... 300,000 Units, each Unit consisting of ____ shares of
Common Stock and ____ Warrants. See "Description of
Securities."
Description of Warrants ....................... Each Warrant entitles the holder to purchase one share of
Common Stock for $____ (125% of the offering price) per
share until April 30, 2002. The Warrants are not immediately
exercisable. Cotton Valley may redeem the Warrants at $0.01
per Warrant under certain conditions. See "Description of
Securities--Warrants."
Units to be outstanding after this offering ... 300,000 (1)
Warrants to be outstanding after this offering _______ Warrants (1)
Common stock to be outstanding after this
offering ...................................... 13,508,881 shares (2) (3)
Use of Proceeds ............................... For development drilling, to acquire acreage, to reduce debt
and for working capital. See "Use of Proceeds."
__________ Stock Exchange Symbols(4):
Units ...................................... ______
Warrants ................................... ______
Common stock ............................... ______
- ---------------------
</TABLE>
(1) Excludes Securities underlying the Underwriters' Warrants and the
Underwriters' over-allotment option. See "Underwriting."
(2) Excludes _________ shares issuable upon exercise of the Warrants underlying
Units offered by this prospectus, _______ shares underlying the
Underwriters' over-allotment option, _______ shares underlying the
Underwriters' Warrants, 980,000 shares subject to employee stock options,
1,919,572 shares subject to options and warrants issued in Canadian
financings, and 849,000 shares to be issued pursuant to a financial
consulting agreement. See "Principal Shareholders- Liviakis",
"Underwriting--Underwriters' Warrants" and "Description of
Securities--Other Options and Warrants."
(3) Based upon the closing bid price on April ___, 1997, ______ shares of
Common Stock underlying the Units are included.
(4) Cotton Valley has applied for listing of the Securities on the _________
Stock Exchange. Such listing, if approved, does not imply that a
meaningful, sustained market for the Securities will develop.
Risk Factors
The Units offered by this prospectus are speculative and involve a high
degree of risk. They should not be purchased by investors who cannot afford to
lose their entire investment. See "Risk Factors."
3
<PAGE>
Summary Financial Data
(Unaudited)
From February Six months
For the year 15, 1995 ended
ended (inception) to December 31,
Statement of operations data: ... June 30,1996 June 30, 1995 1996
------------ --------------- -----------
Net loss ........................ $ 712,360 $ 49,917 $ 602,116
Net loss per common share ....... $ 0.06 -- $ 0.05
Weighted average
shares outstanding .............. 11,403,000 10,655,000 13,390,524
(Unaudited)
(Unaudited) December 31, 1996
Balance sheet data: . June 30,1996 December 31, 1996 Adjusted(1)
------------ ----------------- ------------
Total assets ........ $ 11,979,330 $ 12,115,820 $ 14,415,820
Long-term obligations 757,758 171,709 171,709
Working capital ..... 286,381 (1,078,321) 1,221,679
Shareholders' equity $ 9,116,883 $ 9,332,885 $ 11,632,885
------------
(1) Adjusted to reflect the sale of the Units offered by this prospectus.
Summary Oil and Gas Reserve Data (1)
Alabama Texas Total
------- ----- -----
Proved producing
Oil (Bbl)............. 0 93,327 93,327
Gas (Mcf)............. 0 279,979 279,979
Proved undeveloped
Oil (Bbl)............. 481,843 4,200,812 4,682,655
Gas (Mcf)............. 573,440 12,602,434 13,175,874
----------------------------
(1) Estimated. See "Business and Properties--Oil and Gas Reserves."
TO CALIFORNIA RESIDENTS ONLY:
California residents can only purchase the Securities if they have a
minimum gross income of $65,000 during the last tax year and have (based on a
good faith estimate) a minimum gross income of $65,000 during the current tax
year and have a net worth (at fair market value but excluding home equity, home
furnishings and automobile) of $100,000, or have a net worth of $250,000.
4
<PAGE>
RISK FACTORS
INVESTING IN THE UNITS INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
Development Stage Company
Cotton Valley was incorporated in February 1995 and is still in its
development stage. Cotton Valley's operations are subject to all of the risks
inherent in establishing a new business enterprise. Cotton Valley's potential
for success must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business. No assurance can be given that Cotton Valley will be successful. See
"Business and Properties."
History of Losses
Cotton Valley incurred operating losses of $712,360 for the fiscal year
ended June 30, 1996, and $49,917 from inception to June 30, 1995. The
accumulated deficit as of June 30, 1996 was $762,277. The Company incurred an
operating loss of $602,116 (unaudited) for the six month period ended December
31, 1996. No assurance can be given that Cotton Valley will be profitable in the
future. See "Management's Discussion and Analysis or Plan of Operation."
Going Concern Risk
Cotton Valley's financial statements for the fiscal year ended June 30,
1996, and the period from inception to June 30, 1995, were audited by its
independent certified public accountants, whose report includes an explanatory
paragraph stating that the financial statements have been prepared assuming
Cotton Valley will continue as a going concern and that Cotton Valley has
incurred significant operating losses to date and has a working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. See "Independent Auditor's Report" and "Financial Statements."
No Substantial Producing Properties
Almost all of Cotton Valley's proved reserves are classified as proved
undeveloped, meaning no production currently exists. No assurance can be given
that any wells will be drilled or completed or produce oil or gas in
commercially profitable quantities. See "Business and Properties."
Capital Expenditures for Undeveloped Properties
Recovery of Cotton Valley's proved undeveloped reserves will require
significant capital expenditures and successful drilling operations. Management
estimates that aggregate capital expenditures of approximately $13.5 million
will be required to develop these reserves, of which $1.9 million and $6.6
million are expected to be incurred during the remainder of the year ending June
30, 1997, and during the year ending June 30, 1998, respectively. Cotton Valley
intends to finance development with the proceeds from this offering and cash
from operations. No assurance can be given that Cotton Valley's estimates of
capital expenditures will prove accurate, that its financing sources will be
sufficient to fund its planned development activities fully or that development
activities will be either successful or in accordance with Cotton Valley's
schedule. Additionally, any significant decrease in oil and gas prices or any
significant increase in the costs of development could result in a significant
reduction in the number of wells drilled. See "Management's Discussion and
Analysis or Plan of Operation."
Limited Capital; Need for Significant Additional Financing
Cotton Valley anticipates that the net proceeds of this offering will
satisfy its operating cash requirements for at least 12 months after this
offering is consummated. However, no assurance can be given that Cotton Valley
will not require additional financing sooner than currently anticipated.
5
<PAGE>
The net proceeds of this offering will not be sufficient to develop fully
the properties. Development of the properties may require capital resources
substantially greater than the net proceeds of this offering or resources
otherwise currently available to Cotton Valley. Cotton Valley has no current
arrangements with respect to or sources of additional financing. No assurance
can be given that additional financing will be available to Cotton Valley on
acceptable terms or at all. The inability to obtain additional financing would
have a material adverse effect on Cotton Valley, including requiring Cotton
Valley to curtail significantly or farm-out development of the properties. Any
additional financing may involve substantial dilution to the interests of Cotton
Valley's shareholders at that time. See "Management's Discussion and Analysis or
Plan of Operation."
Operating Hazards and Other Uncertainties
The acquisition, development, exploration for and production,
transportation and storage of, crude oil, gas liquids and gas involves a high
degree of risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Cotton Valley's operations are subject
to all of the risks normally incident to drilling oil and gas wells, operating
and developing oil and gas properties, transporting, processing, and storing
gas, including encountering unexpected formations or pressures, premature
reservoir declines, blow-outs, equipment failures and other accidents,
craterings, sour gas releases, uncontrollable flows of oil, gas or well fluids,
adverse weather conditions, pollution, other environmental risks, fires and
spills. Oil production requires high levels of investment and has particular
economic risks, such as retaining well failure, fires, explosions, gaseous
leaks, spills and migration of harmful substances, any of which can cause
personal injury, damage to property, equipment and the environment and severely
interrupt operations. Cotton Valley is also subject to deliverability
uncertainties related to the proximity of its reserves to pipeline and
processing facilities and the inability to secure space on pipelines that
deliver oil and gas to commercial markets. Although Cotton Valley maintains
insurance in accordance with customary industry practice, it is not fully
insured against all of these risks, nor are all such risks insurable. Losses
resulting from the occurrence of these risks could have a material adverse
impact on Cotton Valley. See "Business and Properties."
Competition
The oil and gas business is highly competitive and has few barriers to entry.
Cotton Valley will be competing with other oil and gas companies and investment
partnerships for desirable prospects, contracts with third parties to develop
oil and gas properties and purchase equipment necessary to complete wells. Many
of Cotton Valley's competitors are larger than Cotton Valley and have
substantially greater access to capital and technical resources than does Cotton
Valley and may therefore have a significant competitive advantage. Many of
Cotton Valley's competitors are capable of making a greater investment in a
given area than is Cotton Valley, although large and small companies alike are
subject to the economics of cost effectiveness. See "Business and
Properties--Competition." California Option
The Company has an option to acquire a 51.8% working interest in an oil field
offshore California. In addition to geophysical, environmental, and regulatory
factors, management perceives that an anti-drilling sentiment exists in
California. This may make it difficult for the Company to sell part of its
option as it intends or to obtain financing to participate in the project. The
Company has recorded the option at $438,247, and it is possible that the Company
may have to record an impairment of this value at some time in the future. See
"Description of Property-Sword Unit"
Volatility of Oil and Gas Prices
Oil and gas prices fluctuated from $33.00 per Bbl of oil in January 1991 to
$13.52 per Bbl in December 1993 and $1.10 per Mcf of gas in February 1992 to
$3.72 per Mcf in February 1996. At the end of March 1997, prices were $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.
6
<PAGE>
In addition, Cotton Valley assesses the carrying value of its assets annually in
accordance with generally accepted accounting principles under the full cost
method. If oil and gas prices decline, the carrying value of Cotton Valley's
assets could be subject to downward revision.
Uncertainty of Reserve Estimates
The reserve estimates included in this prospectus could be materially different
from the quantities and values ultimately realized. Reserve data set forth in
this prospectus are only estimates. In general, estimates of economically
recoverable oil and gas reserves and future net cash flows from them are based
upon a number of variable factors and assumptions, such as historical production
from the properties, the assumed effects of governmental regulation and future
operating costs, all of which may vary considerably from actual results. All
such estimates are to some degree speculative, and classifications of reserves
are only attempts to define the degree of speculation involved. For those
reasons, estimates of the economically recoverable oil and gas reserves
attributable to any particular group of properties, classification of such
reserves based on risk of recovery and estimates of future net revenues expected
from them, prepared by different engineers or by the same engineers at different
times, may vary substantially. Cotton Valley's actual production, revenues,
taxes and development and operating expenditures with respect to its reserves
will vary from such estimates, and such variances could be material. Numerous
uncertainties are inherent in estimating proved reserves, including many factors
beyond Cotton Valley's control.
Estimates with respect to proved reserves that may be developed and produced in
the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variation, which may be material, in the
estimated reserves.
Estimated discounted future net cash flows from estimated proved reserves are
based on prices and costs as of the date of the estimate unless prices or costs
are contractually determined at that date. Actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as actual production, supply and demand for oil and gas,
curtailments or increases in consumption by gas purchasers, changes in
governmental regulation or taxation and the impact of inflation on costs. See
"Business and Properties--Oil and Gas Reserves."
Need to Replace Reserves
Cotton Valley's future oil and gas reserves and production, and therefore its
cash flows, are highly dependent upon Cotton Valley's success in exploiting its
current reserve base and acquiring or discovering additional reserves. Without
the addition of reserves through exploration, acquisition or development
activities, Cotton Valley's reserves and production will decline over time as
reserves are exploited. The business of exploring for, developing or acquiring
reserves is capital intensive. To the extent cash flows from operations are
insufficient and external sources of capital become limited or unavailable,
Cotton Valley's ability to make the necessary capital investments to maintain
and expand its oil and gas reserves will be impaired. In addition, no assurance
can be given that Cotton Valley will be able to find and develop or acquire
additional reserves to replace production at acceptable costs.
Environmental Risks
All phases of the oil and gas business present environmental risks and hazards
and are subject to environmental regulation pursuant to a variety of
international conventions and United States and Canadian federal, provincial,
state and municipal laws and regulations. Environmental legislation provides
for, among other things, restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with Cotton Valley's
past and current operations. The legislation also requires that refineries,
wells and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties. Environmental legislation is evolving in a
manner expected to result in stricter standards and enforcement, larger fines
and liability and potentially increased capital expenditures and operating
costs. Although Cotton Valley believes that it is currently in
7
<PAGE>
substantial compliance with all existing material environmental regulations, no
assurance can be given that future environmental costs will not have a material
adverse effect on Cotton Valley's financial condition or results of operations.
Use of Proceeds
As of the date of this prospectus, management has not specifically determined
the use of a portion of the estimated net proceeds. Management will decide how
to apply this portion of the net proceeds in its discretion without shareholder
input. Accordingly, investors in this offering will be entrusting this portion
of their funds to management without any determination as to its use. See "Use
of Proceeds."
Dependence on Key Personnel
Cotton Valley depends to a large extent on the services of Messrs. Soltero,
Hogue and Burden. The loss of the services of any one of them could have a
material adverse effect on Cotton Valley's operations. Cotton Valley has not
entered into any employment contracts with any of its executive officers, nor
has it obtained key personnel life insurance. Cotton Valley believes that its
success is also dependent on its ability to continue to employ and retain
skilled technical personnel. See "Management."
Limited Public Market and Possible Volatility of Securities
Prior to this offering, Cotton Valley's common shares have traded
"over-the-counter" on NASD's bulletin board and "over-the-counter" in Canada on
The Canadian Dealing Network. No assurance can be given that an active public
market will develop or be sustained after the offering. The initial public
offering price of the Units has been determined by negotiations between Cotton
Valley and the Underwriters by reference to the value of Cotton Valley's oil and
gas reserves compared to other oil and gas companies. See "Underwriting." The
trading price of the Securities could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcements of
drilling results by Cotton Valley and other events or factors. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price for many
companies and which often have been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market
price of the Securities.
The Company has applied to have its common stock, Units and Warrants listed
on the _________ Stock Exchange, effective upon the completion of the initial
public offering. The Company has not currently applied to have its securities
listed. There is no assurance the Company's securities will be listed on the
___________ 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, 300,000 Units and 11,708,881 shares of common
stock issued prior to this offering will be outstanding. The Units will be
eligible for sale without restriction immediately after completion of the
offering. 9,204,318 shares of common stock were registered on Form 20-F are
currently eligible for sale without restriction 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.
Furthermore, the 11,708,881 shares of common stock are eligible for sale
(subject to control block issues) under Canadian and Ontario rules. Cotton
Valley's common stock trades over the Canadian over-the-counter system known as
The Canadian Dealing Network. See "Securities Eligible for Future Sale."
8
<PAGE>
Risk of Redemption of Warrants
Cotton Valley may redeem the Warrants for $0.01 per Warrant at any time after
January 31, 1998, on 30 days prior written notice under certain circumstances.
Notice of redemption could force the holders to exercise their Warrants and pay
the exercise price at a time when it might be disadvantageous or difficult for
the holder to do so, sell the Warrants at the current market price when they
might otherwise wish to hold the Warrants, or accept the redemption price, which
is likely to be less than the market price of the Warrants at the time of
redemption. See "Description of Securities-- Warrants".
Underwriters' Warrants; Risk of Further Dilution
Cotton Valley has agreed to sell to the Underwriters, for nominal consideration,
warrants to purchase 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 Underwriters certain registration rights with respect to the Securities
issuable upon exercise of the Underwriters' Warrants. The Underwriters' Warrants
and any profits realized by the Underwriters on the sale of the Securities
underlying the Underwriters' Warrants could be considered additional
underwriting compensation. For the term of the Underwriters' Warrants, the
holders are given, at nominal cost, the opportunity to profit from the
difference, if any, between the exercise price of the Underwriters' Warrants and
the value of or market price, if any, for the Securities, with a resulting
dilution in the interest of existing shareholders. The Underwriters' Warrants
may be exercised at a time when, in all likelihood, Cotton Valley would be able
to obtain any needed capital by a new placement of Securities on terms more
favorable than those provided for or by the Underwriters' Warrants. See
"Underwriting."
Regulation
Cotton Valley's business is subject to federal, state and local regulation
relating to the development, production and transmission of oil and gas, as well
as environmental and safety matters. No assurance can be given that current or
future regulation will not adversely affect Cotton Valley's exploration for, and
production and transmission of, oil and gas or its financial condition and
results of operations. See "Business and Properties--Regulation."
No Dividends
Cotton Valley's board of directors presently intends to retain all of Cotton
Valley's earnings for the expansion of its business. Cotton Valley therefore
does not anticipate the distribution of cash dividends in the foreseeable
future. Any future decision of Cotton Valley's board of directors to pay cash
dividends will depend, among other factors, upon Cotton Valley's earnings,
financial position and cash requirements. See "Dividend Policy."
Availability of Preferred Stock
Cotton Valley's board of directors is authorized, without further shareholder
action, to issue preferred stock in one or more series and may designate the
dividend rate, voting rights and other rights, preferences and restrictions of
each series. No preferred stock currently is outstanding and Cotton Valley has
no plans to issue any preferred stock. Any future preferred stock issuances
could have the effect of, among other things, restricting common stock
dividends, diluting common stock voting power, impairing common stock
liquidation rights and delaying or preventing a change in control of Cotton
Valley without further action by the shareholders.
Exchange Rate Fluctuations
Cotton Valley is exposed to foreign exchange risks since it has granted stock
options, warrants and agent's options denominated in Canadian currency while the
majority of its expenditures will be in United States dollars. Any significant
reduction in the value of the Canadian dollar may decrease the value of funds in
United States dollars Cotton Valley receives upon exercise of warrants and
options.
9
<PAGE>
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 300,000 Units pursuant to
this prospectus at an assumed public offering price of $10.00 per Unit are
estimated to be approximately $2,300,000 after deducting estimated underwriting
discounts and offering expenses ($2,694,000 if the Underwriters' over-allotment
option is exercised in full).
Cotton Valley intends to use approximately $1.9 million of the estimated 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 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."
Approximately $400,000 of the estimated net proceeds will be used to partially
repay debt that Cotton Valley incurred to acquire its Texas and Alabama
properties. The original principal amount of the debt on the Texas properties
was $1,086,050, of which approximately $586,000 was outstanding as of December
31, 1996. This debt bears interest at 12.0% and matures on July 17, 1997. The
remaining $230,000 does not bear interest and is payable upon transfer of title.
Management anticipates it will be able to extend the payment term on the balance
of the debt until sufficient cash from operations is generated. See
"Management's Discussion and Analysis or Plan of Operation" and note 3 of Notes
to Consolidated Financial Statements.
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.
10
<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 December 31, 1996 as reflected in the
unaudited financial statements, the pro forma capitalization of Cotton Valley as
of December 31, 1996 giving effect to the sale of 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.
(Unaudited)(Unaudited)
June December December
30, 1996 31, 1996 31, 1996
Actual Actual As Adjusted
-------- -------- -----------
Total debt, including current maturities:
Accounts payable on oil and gas interests(1) $230,000 $230,000 $ --
Notes payable on oil and gas interests(2) . $586,049 $586,049 $416,049
Advances from related parties(3) ........... $171,709 $171,709 $171,709
--------- -------- --------
$987,758 $987,758 $587,758
--------- -------- --------
Shareholders' equity:
Common stock without par value,
unlimited shares authorized, 9,191,596
shares outstanding on June 30, 1996,
10,404,901 outstanding on December 31, 1996
and 12,204,901 on December 31, 1996 as
adjusted(4) $9,879,160 $10,697,279 $12,997,279
Accumulated deficit (762,277) (1,364,394) (1,364,394)
----------- ---------- ------------
Total shareholders' equity $9,116,883 $9,332,885 $11,632,885
----------- ---------- -----------
Total capitalization $10,104,641 $10,320,643 $12,220,643
---------------------------
(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 _________ shares issuable upon exercise of
the Warrants underlying Units offered by this prospectus,
_______ shares underlying the Underwriters' over-allotment option, _______
shares underlying the Underwriters' Warrants, 980,000 shares subject to
employee stock options, 1,999,220 shares subject to options and warrants
issued in Canadian financings, and 1,990,000 shares to be issued pursuant
to a financial consulting agreement. See "Principal
Shareholders--Liviakis", "Underwriting--Underwriters' Warrants" and
"Description of Securities--Other Options and Warrants."
11
<PAGE>
DILUTION
As of December 31, 1996, Cotton Valley's unaudited net tangible book value
was $9,332,885 or $0.90 per share of common stock. Net tangible book value is
the aggregate amount of Cotton Valley's tangible assets less its total
liabilities. Net tangible book value per share represents Cotton Valley's total
tangible assets less its total liabilities, divided by the number of shares of
common stock outstanding. After giving effect to the sale of 300,000 Units
(consisting of 1,800,000 shares of Common Stock and _________ Warrants) at an
offering price per Unit of $10.00, or $1.67 per share of Common Stock (no value
assigned to Warrants, which are not immediately exercisable), application of the
estimated net sale proceeds (after deducting underwriting discounts and other
offering expenses) Cotton Valley's net tangible book value as of December 31,
1996 would increase from $9,332,885 to $11,632,885, and the net tangible book
value per share would increase from $0.90 to $0.95. This represents an immediate
increase in net tangible book value of $0.05 per share to current shareholders,
and immediate dilution of $.72 per share to new investors or 43%, 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 ........ $ 0.90
Increase per share attributable to new investors .............. $ 0.05
---------
Adjusted net tangible book value per share after this offering ..... $ 0.95
---------
Dilution per share to new investors ................................ $ 0.72
Percentage dilution ................................................ 43%
Shares Purchased Total Consideration Average
Number Percent Amount Percent per Share
--------------------- --------------------- ----------
Current Common
Stockholders 10,404,901 85.3% $11,627,664 79.5% $1.12
New Investors 1,800,000 14.7% 3,000,000 20.5% $1.67
--------------------- --------------------- -----------
12,204,901 100.0% $14,627,664 100.0%
===================== ===================== ===========
12
<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
March 31, 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 March 31, 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 $1.70
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 March 31,
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 $1.63
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
First Six Months Fiscal 1997 and First Six Months Fiscal 1996
During the six months ended December 31, 1996, Cotton Valley incurred a
net loss of $602,116. From February 15, 1995 (inception), to December 31, 1996,
Cotton Valley accumulated a deficit of $1,364,394.
The loss of $602,116 for the first six months of 1997 compares to a loss
of $426,203 during the first six months of 1996. There was greater business
activity during the first six months of fiscal 1997 and during this period
Cotton Valley issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. for services. The stock was valued at $.73 per share, based
on trading on the Canadian over-the-counter market, for a total expense of
$292,000.
During the first six months of fiscal 1996, Cotton Valley issued 300,000
shares for services which was recorded at $446,950. Other expenses during this
period were $209,253. The loss before income tax benefit of $230,000 was
$656,203.
Rehabilitation work on two wells in the Cheneyboro Field in the fourth
quarter of fiscal 1996 resulted in oil and gas sales of $41,365 during the first
six months of 1997.
Cotton Valley acquired its interest in the Alden Field in December 1996
for $390,000 of which $35,000 was paid and $355,000 is payable upon closing
which is expected to be in February or March 1997.
During the six months ended December 31, 1996, Cotton Valley issued 36,888
shares of common stock to individuals for services which was recorded at
$30,932, issued 73,750 shares of common stock to settle debts which was recorded
at $53,838, issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. (See "Principal Shareholders--Liviakis") which was recorded
at $292,000, issued 302,667 shares of common stock to former Arjon shareholders
on exercise of warrants for $145,524, issued 300,000 shares of common stock in
Canadian private placements for proceeds of $235,425 (before deducting costs of
$14,600), and issued 100,000 shares of common stock to Liviakis Financial
Services, Inc. for cash of $75,000.
Fiscal Year 1996 and Fiscal Period 1995
From February 15, 1995 (inception), to June 30, 1996, Cotton Valley
accumulated a deficit of $762,277 after an income tax benefit of $412,000.
During this period, Cotton Valley acquired its properties, merged with Arjon
Enterprises, Inc., issued debentures and notes and sold stock for cash.
Legal, audit and accounting fees were $190,053, which represents 17% of
the net loss before tax through June 30, 1996.
Management fees of $82,840 and salaries of $163,309, for a total of
$246,149, represent 22% of the net loss before tax through June 30, 1996. Cotton
Valley paid management fees of $10,000 per month from incorporation to July 31,
1995, and $20,000 per month from August 1, 1995 to March 31, 1996, for the
full-time services of two of its officers. Effective April 1, 1996, each of
these officers received a salary of $10,000 per month. A third officer earned
$10,000 per month from August 1, 1995. A fourth officer earned $10,000 per month
from May 1, 1996.
Management fees and salaries totaling $194, 951 from inception through
June 30, 1996, were capitalized into oil and gas properties and are thus not
included in the accumulated deficit as of that date. These costs represent the
estimated portion of the compensation directly attributable to acquisition of
the properties in the Cheneyboro Field and related development activities.
14
<PAGE>
Cotton Valley acquired its interest in the Cheneyboro Field from 18
different property owners in March 1995 in exchange for 3,252,533 shares of
common stock, 406,567 Class A Warrants, and $1,086,050, of which approximately
$500,000 has been paid. See "Description of Securities--Other Options and
Warrants--Canadian Financings."
Cotton Valley also acquired a one-quarter interest in 1,145 acres of oil
and gas leases in the Movico Field of Mobile County, Alabama. It issued 623,424
Common Shares, granted 77,928 Class A Warrants and agreed to pay $230,000 as
consideration.
Cotton Valley purchased an option to acquire a 51.8% working interest in
the Sword Unit, offshore Santa Barbara, California, through an interest in an
Option Agreement held by PetroGreen Company to purchase all of Conoco, Inc.'s
interest in the Sword Unit (the "Option Agreement"). All leases and the unit are
held under a current Minerals Management Service of the Department of Interior
("MMS") Suspension of Operations Order ("SOO") with no short-term drilling
obligations. The Option Agreement remains effective through the California
Offshore Oil and Gas Energy Resources ("COOGER") regional data collection study
or until 30 days after the SOO is terminated. COOGER is a joint venture
involving federal, state and local agencies and all of the Pacific outer
continental shelf and California State Tidelands lease owners organized to study
the environmental implications and methods of producing from the area. In
connection with its participation in the COOGER study, MMS has stated that its
SOO would not be terminated until after the COOGER study is completed.
Completion of the COOGER study is scheduled for the fourth quarter of 1997, but
it appears to be behind schedule. On November 5, 1996 the MMS extended its SOO
until December 31, 1998. Cotton Valley is responsible for paying Conoco's share
of the cost of the COOGER study, which portion is expected to be approximately
$60,000.
Cotton Valley intends to exercise its option, to retain an 11.8% working
interest in the Sword Unit and to sell the remainder of its interest to industry
participants. No assurance can be given, however, that Cotton Valley will be
successful in selling all or any part of the remainder of its interest on terms
and conditions satisfactory to Cotton Valley. Upon purchase of the Conoco
interest in the Sword Unit, the original option owner is entitled to an
overriding royalty interest of 31/3% proportionally reduced as to Conoco's
interest, on all the leasehold interests being acquired. The net revenue
interest remaining to Cotton Valley will be 80% of its working interest. Cotton
Valley cannot exercise its option under the Option Agreement unless it, and its
syndicate of co-owners, are acceptable to the MMS.
Cotton Valley intended to have its shares of Common Stock listed on The
Toronto Stock Exchange and therefore acquired Arjon Enterprises Inc.,which was a
Canadian public company. In the future, Cotton Valley intends to re-apply for
listing on The Toronto Stock Exchange. There is however, no assurance that
Cotton Valley will be successful.
During the year ended June 30, 1996, Cotton Valley issued 1,272,500 shares
of Common Stock in Canadian private placements for cash of $2,089,872 and issued
288,529 shares of Common Stock upon conversion of debentures sold in Canada for
$426,474. Share issuance costs associated with these transactions amounted to
$915,785; the net amount was $1,174,087.
Cotton Valley has not sold any working interests in its properties at this
time.
12-Month Operating Plan
As of December 31, 1996, Cotton Valley had a working capital deficiency of
$1,078,321, calculated by subtracting accounts payable of $732,177 and the
current portion of long-term debt of $586,049 from cash of $239,905. Management
estimates that aggregate capital expenditures of approximately $13.5 million
will be required to develop its reserves, of which $3.5 million and $5.0 million
are expected to be incurred during the remainder of the year ending June 30,
1997, and during the year ending June 30, 1998, respectively. Cotton Valley
intends to finance development with the proceeds from this offering and cash
from operations.
Cotton Valley does not intend to significantly increase the number of
employees during the 12 months following the offering.
15
<PAGE>
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 December 31, 1996, Cotton Valley had a working capital deficiency of
$1,078,321 calculated by subtracting accounts payable of $732,177 and the
current portion of long-term debt of $586,049 from cash of $239,905. Included in
accounts payable is $230,000 representing an unpaid part of the purchase price
of the Movico Filed which is not due until others who hold an interest in the
property decide to commence drilling. The current portion of long-term debt is
described in the following paragraph.
Cotton Valley has promissory notes payable totaling $586,049 for the
unpaid purchase price of the Cheneyboro oil and gas properties. The notes are
collateralized by the properties and are due July 17,1997. Interest is payable
quarterly at 12%. Management believes the notes will be extended if Cotton
Valley is unsuccessful in its initial public offering.
During the first six months of fiscal 1997, Cotton Valley purchased oil
and gas interests in the Alden Field, Caddo County, Oklahoma for $390,000.
Cotton Valley paid $350,000 in the second and third quarters of fiscal 1997 and
$40,000 will be paid 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 US 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.
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.
16
<PAGE>
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 currently anticipates that the net proceeds of this offering
will be sufficient to satisfy its operating cash requirements for at least 12
months following the consummation of this offering. No assurance can be given,
however, that Cotton Valley will not require additional financing sooner than
currently anticipated.
The net proceeds of this offering and the anticipated sale of an interest
in the offshore California property will not be sufficient to develop fully the
properties. If the cash flow generated from the first five wells is less than
expected, the development of properties may require capital resources greater
than the net proceeds of this offering or resources otherwise currently
available to Cotton Valley. Cotton Valley has no current arrangements with
respect to, or sources of, additional financing. No assurance can be given that
any additional financing will be available to Cotton Valley on acceptable terms
or at all. The inability to obtain additional financing would have a material
adverse effect on Cotton Valley, including requiring Cotton Valley to curtail
significantly its deployment of the properties. Any additional financing may
involve substantial dilution to the interests of Cotton Valley's then existing
shareholders.
Estimated Reserves
The carrying value of Cotton Valley's oil and gas properties is supported
almost entirely by proved undeveloped reserves. Cotton Valley emphasizes that
reserve estimates of new discoveries or undeveloped properties are more
imprecise than those of producing oil and gas properties. Accordingly, these
estimates are expected to change materially as future information becomes
available.
17
<PAGE>
THE COMPANY
Cotton Valley is a development stage, independent oil and gas exploration,
production and development company. It was incorporated in Ontario, Canada,
originally as Cotton Valley Energy Limited, on February 15, 1995. Cotton Valley
was formed, and its present name adopted, on June 14, 1996, as a result of the
merger of Cotton Valley Energy Limited and Arjon Enterprises Inc., both Ontario
corporations. Arjon Enterprises Inc. was a Canadian public company formed more
than 50 years ago to operate a gold mine. At the time of the merger, Arjon
Enterprises Inc. had not engaged in business for more than 25 years, it had no
material liabilities, and its only asset was a Cotton Valley Energy Limited
debenture in the amount of $146,300. The shareholders of Arjon Enterprises Inc.
received 686,551 shares of Cotton Valley common stock in the merger,
representing 7.5% of Cotton Valley's then outstanding common stock. Cotton
Valley accounted for the merger as a purchase. See "Certain Relationships and
Related Transactions."
Cotton Valley has four wholly owned subsidiaries, Cotton Valley Energy
Corporation ("CV Energy"), 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 US directors. Cotton Valley may in the future continue from
the Yukon Territory to the State of Wyoming. Management believes there are no
significant differences in corporate law concerning material shareholder rights
between the Province of Ontario, Yukon Territory and the State of Wyoming.
Cotton Valley will not proceed with the reincorporation until after completion
of this offering, and after filing a registration statement with the SEC, and
after obtaining the approval of Cotton Valley's stockholders at that time.
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.
18
<PAGE>
Properties
Cheneyboro Field
Cotton Valley owns or has options to acquire approximately 6,000 net acres
of producing and non-producing oil and gas leases (with options and rights of
first refusal to acquire additional leases) in the Cheneyboro Field of Navarro
County, Texas. Cotton Valley has entered into an Area of Mutual Interest ("AMI")
Agreement with a number of unaffiliated parties covering approximately 33,000
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
19
<PAGE>
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 (203,000 Mcf + 49 million Bbl), Chunchula (207,000 Mcf + 52
million Bbl), Chatom (135,000 Mcf + 15 million Bbl) and Jay Field (491,000 Mcf +
380 million Bbl), porosity and permeability reach maximum development at or near
their structural crests and typically decrease on the flanks. At Movico Field,
management expects the best developed reservoir rock to occur 200-300 feet updip
to the offsetting wells based on results in the neighboring fields. Development
of this porosity could create a Smackover net pay section of over 100 feet.
Thick pay sections of over 80 feet occur in Chunchula, Hatter's Pond and Chatom
Fields.
20
<PAGE>
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 3,200 Mcf of gas.
21
<PAGE>
Sword Unit
The Company has entered into option agreements to acquire a working
interest in the Sword Unit, Offshore Santa Barbara, California. The Company has
paid $400,00 as of June 30, 1996. To complete the option and acquire the working
interest, the Company must pay $8,000,000 in cash and $4,000,000 in marketable
securities ( which may consist of the Company's common shares) on closing
sometime in 1998 or later, and participate in a $4,000,000 letter of credit to
fund development. The option has been recorded at a cost of $400,000, plus the
Company's share of environmental studies and other costs of $38,247 for a total
of $38,247.
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.
22
<PAGE>
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
23
<PAGE>
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 US
Gulf Coast.
Thus, the value of the proved undeveloped reserves, if acquired by the
Company upon exercise of the option, will be significantly lower than if the
same reserves were located onshore in a less environmentally sensitive area of
the United States that could be developed sooner. Although prices are not
currently regulated, they have been in the past and could be regulated in the
future. Also the rate of production could be affected by Minerals Management
Service regulations, which could also lower the value of the property.
Cotton Valley currently does not have the capital, manpower, or technical
resources to exploit the Sword leases successfully, assuming exercise of the
option. In order to effectively develop the Sword leases at the 51.8% working
interest level, the Company would require significant recapitalization and
reorganization or would have to seek a merger with, or become a subsidiary of, a
much larger oil and gas company having significantly larger resources. The
Company's current strategy for development of Sword is to retain only that
portion of the 51.8% it feels it will be able to financially and technically
support over the next five years (currently estimated at 11.8%) and seek joint
venture partners to participate in and operate the remainder. Due to the factors
discussed above relating to regulation and environmental compliance, the Santa
Barbara OCS is an area that many large independent oil and gas producers have
avoided, and the task of locating appropriate joint venture partners will be
difficult. If unsuccessful in financing the project or finding partners by the
time the option expires at the end of 1998, the Company may be forced to drop
its option and take a write-off of up to $500,000.
Alden Field
On December 10, 1996, Cotton Valley entered into agreements to purchase
all of the interests held by the Homestake Company and certain other parties in
the NE Alden Field, Caddo County, Oklahoma for an aggregate purchase price of
$390,000. 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
24
<PAGE>
reserves of approximately 200,000 Bbl of oil and 1,600 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 to Properties. Cotton Valley follows industry practice when
acquiring undeveloped properties on minimal title investigation. A title opinion
is obtained before drilling begins on the properties. Title opinions cover
approximately 36% of Cotton Valley's Texas properties 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.
25
<PAGE>
Reserves by State
Item ............................... Texas(1) Alabama(2) Total
Reserves
Proved producing
Oil (Bbl) .................... 93,327 0 93,327
Gas (Mcf) .................... 279,979 0 279,979
Proved undeveloped
Oil (Bbl) .................... 4,200,812 481,843 4,682,655
Gas (Mcf) .................... 12,602,434 573,440 13,175,874
Estimated future net revenues
before income taxes
Proved producing ................ $ 1,618,891 $ 0 $ 1,618,891
Proved undeveloped .............. $88,924,623 $ 9,119,922 $98,044,615
Total ........................ $90,543,514 $ 9,119,922 $99,663,506
Estimated future net revenues
before income taxes
discounted at 10%
Proved producing ................ $ 1,129,799 $ 0 $ 1,129,799
Proved non-producing ............ $60,149,064 $ 5,982,903 $66,131,967
Total ........................ $61,278,863 $ 5,982,903 $67,261,766
---------------------
(1) Prices based on $21.21 per Bbl of oil and $2.09 per Mcf of gas.
(2) Prices based on $21.46 per Bbl of oil and $2.66 per Mcf of gas.
The reserve data set forth in this prospectus are only estimates. Numerous
uncertainties are inherent in estimating oil and gas reserves and their values,
including many factors beyond the control of the producer. Reserve engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers often
vary. In addition, estimates of reserves are subject to revision by the results
of later drilling, testing and production. Accordingly, reserve estimates often
differ from the quantities of oil and gas ultimately recovered. The
meaningfulness of estimates is highly dependent upon the accuracy of the
assumptions upon which they are based.
In general, oil and gas production declines as reserves are depleted.
Except to the extent that Cotton Valley acquires proven reserves or succeeds in
exploring and developing its own reserves, or both, Cotton Valley's proven
reserves will decline as they are produced. Cotton Valley's future oil and gas
production is, therefore, highly dependent upon its ability to acquire or
develop additional reserves.
Acreage
The following table provides information regarding Cotton Valley's
undeveloped leasehold acreage as of June 30, 1996. Acreage in which Cotton
Valley's interest is limited to royalty, overriding royalty and similar
interests is excluded.
Developed Acreage Undeveloped Acreage
Gross Net Gross Net
----- --- ----- ---
Cheneyboro Field ................... 820 820 4,660 4,180
Movico Field ....................... 0 0 1,145 286
In December 1996, Cotton Valley acquired proved developed and proved
undeveloped reserves in Alden Field in Caddo County, Oklahoma. These reserves
are not included in the above table.
26
<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
27
<PAGE>
oil wells, operating and developing gas and oil properties, transporting,
processing, and storing gas, including encountering unexpected formations or
pressures, premature reservoir declines, blow-outs, equipment failures and other
accidents, craterings, sour gas releases, uncontrollable flows of oil, gas or
well fluids, adverse weather conditions, pollution, other environmental risks,
fires and spills. Oil production requires high levels of investment and has
particular economic risks, such as retaining well failure, fires, explosions,
gaseous leaks, spills and migration of harmful substances, any of which can
cause personal injury, damage to property, equipment and the environment, and
result in the interruption of operations. Cotton Valley is also subject to
deliverability uncertainties related to the proximity of its reserves to
pipeline and processing facilities and the inability to secure space on
pipelines that deliver oil and gas to commercial markets. Although Cotton Valley
maintains insurance in accordance with customary industry practice, it is not
fully insured against all of these risks, nor are all such risks insurable.
Losses resulting from the occurrence of these risks could have a material
adverse impact on Cotton Valley. See "Business and Properties."
Facilities
Cotton Valley leases approximately 1,900 square feet of office space at
8350 North Central Expressway, Suite M2030, Dallas, Texas 75206, at an annual
base rental of approximately $44,500. Management believes that Cotton Valley's
offices will satisfy its needs for the foreseeable future.
Employees
As of December 31, 1996, Cotton Valley had six employees. Four employees
are officers, one is administrative and one works in the field. Cotton Valley
uses contract services in its oil and gas field operations. Cotton Valley also
uses consultants to evaluate company projects, reserves and other oil and gas
assets for potential acquisitions.
Legal Proceedings
As of the date of this prospectus, Cotton Valley is not a party to any
legal proceedings.
28
<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 42 Senior Vice President and Chief
Financial Officer
C. Ronald Burden 54 Senior Vice President of Exploration
Wayne T. Egan(1) 32 Director
Michael Kamis 44 Director
Richard J. Lachcik(2) 38 Director
- --------------------
(1) Member, Audit Committee
(2) Member, Compensation Committee
Eugene A. Soltero has served Cotton Valley as a director since February
1995. He was President from February 1995 to July 1996 and has been Chairman and
Chief Executive Officer since January 1996. He has been Chairman and Chief
Executive Officer of CV Trading since May 1995. From March 1994 to February
1995, Mr. Soltero was President and Chief Executive Officer of Cimarron
Resources, Inc., an independent gas production company. From August 1991 to
March 1994, he was Chairman of the Board, President and Chief Executive Officer
of Aztec Energy Corporation, a publicly-held independent oil and gas production
company. In June 1994, Aztec Energy Corporation entered into bankruptcy
proceedings. Mr. Soltero has served as Chief Operating Officer and/or Chief
Executive Officer for private and public oil and gas companies for more than 20
years, including directing the formation and growth of start-up companies. Early
in his career, he was trained at Sinclair Oil Corporation in exploration and
production management, served as Manager of Planning for Texas International
Petroleum Corporation, and Petroleum Economist for DeGolyer and MacNaughton,
petroleum exploration and production consultants. Mr. Soltero is a member of the
Society of Petroleum Engineers, a member and former director of the Independent
Petroleum Association of America and the Texas Independent Producers and Royalty
Owners. He has also served, on two separate terms, as a director of the
Independent Petroleum Refiners Association of America. He is a master's graduate
of the Massachusetts Institute of Technology in business (where he was awarded
the Sinclair Fellowship in Petroleum Economics) with an undergraduate
engineering degree from The Cooper Union. Mr. Soltero is a registered
professional engineer in the State of Texas.
James E. Hogue became President, Chief Operating Officer and a director of
Cotton Valley in July 1996 and he served as Chairman of CV Energy from February
1995 to January 1996 and Chairman of CV Trading from May 1995 to January 1996.
He became President of CV Energy and CV Operating in January 1996. Mr. Hogue
also has been director, President and major shareholder of Third Coast Capital,
Inc., a venture capital company, since 1988. Since 1991, Mr. Hogue has served as
President of Martex Oil and Gas, Inc. In 1983, Mr. Hogue formed Mayco Petroleum,
Inc., for which he served as President until 1988. Early in his career, Mr.
Hogue served as a driller for Leatherwood Company and as a core engineer for
Sargent Diamond Bit, Inc. Subsequently, Mr. Hogue became President and major
shareholder of a diamond bit manufacturing company. In the late 1970s, Mr. Hogue
served for four years as President of Union Crude Oil Company, an exploration
and drilling company, and for two years as Vice President of Independent
Producers Marketing Company, a crude oil supply and transportation company. Mr.
Hogue has participated in drilling or furnishing services for over 3,000 wells
in Texas, Oklahoma, New Mexico, Louisiana and Colorado.
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
29
<PAGE>
1984 to form his own tax practice. Six years later, Mr. Lucas' practice was
merged into Coopers & Lybrand, with whom he was a partner until April 1992. He
holds a bachelor of commerce degree from the University of Alberta.
C. Ronald Burden joined Cotton Valley in April 1996. From July 1994 until
he joined Cotton Valley, Mr. Burden served as Petroleum Geologist for Texakoma
Oil and Gas in Dallas, Texas. He was an independent oil and gas consultant from
September 1993 to July 1994. From November 1990 to September 1993, Mr. Burden
was Exploration Manager for Enron Oil and Gas Corp. at Tyler, Texas. He has
spent the past 25 years developing and managing oil and gas exploration projects
in West Texas, Alaska, offshore Texas, offshore Louisiana, South Texas and
particularly specializing in recent years in the East Texas Basin. Mr. Burden is
a member of the American Association of Petroleum Geologists and the East Texas
Geological Society. He is a graduate of Texas Tech University with a master's
degree in Petroleum Geology.
Wayne T. Egan is a partner with Weir & Foulds in the securities law
section for more than the past five years. He holds an L.L.B. from Queen's
University and a Bachelor of Commerce from the University of Toronto, and is a
member of the Canadian Bar Association. Weir & Foulds serves as Cotton Valley's
corporate counsel. See "Legal Matters."
Michael Kamis has served Cotton Valley as a director since November 1996.
Mr. Kamis has a Bachelor of Science degree in Petroleum Engineering from the
University of Wyoming. He has held increasingly responsible positions throughout
the world with oil and gas producers and service companies. Currently 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.
30
<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)
Number of Percent of
Securities(1) Total Options
Underlying Granted to
Name Options Employees in Exercise or Expiration
Granted Fiscal Year Base Price Date
Eugene A. Soltero 200,000 25.0% $1.83 July 1, 2000
James E. Hogue .. 200,000 25.0% $1.83 July 1, 2000
Peter Lucas ..... 200,000 25.0% $1.83 July 1, 2000
C. Ronald Burden 200,000 25.0% $1.83 July 1, 2000
----------------------
(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.
31
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Securities(1) Value of Unexercised
Underlying Unexercised In-the-Money
Name Options at FY-End Options at FY-End
Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Eugene A. Soltero 200,000/0 $0/$0
James E. Hogue 200,000/0 $0/$0
Peter Lucas 200,000/0 $0/$0
C. Ronald Burden 200,000/0 $0/$0
32
<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. The advances are unsecured and without interest and are payable
after June 30, 1997.
The foregoing transactions were on no less favorable terms than could have
been obtained from unaffiliated third parties. Any future transactions between
Cotton Valley and its affiliates will be approved by a majority of disinterested
directors and will be on terms no less favorable to Cotton Valley than those
which could be obtained from unrelated third parties.
33
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Cotton Valley's common stock as of December 31, 1996, and as
adjusted to reflect the sale of Units in this offering, by (i) each person who
"beneficially" owns more than 5% of all outstanding shares of common stock, (ii)
each Cotton Valley director and executive officer, and (iii) all directors and
executive officers of Cotton Valley as a group. Except as otherwise indicated,
all persons listed below have (i) sole voting power and investment power with
respect to their common stock except to the extent that authority is shared by
spouses under applicable law, and (ii) record and beneficial ownership of their
shares. Percentages in the table "After This Offering" do not assume exercise of
Warrants.
Amount and Nature Percentage of Outstanding
of Common Stock
Name Beneficial After This
Ownership Currently Offering
-----------------------------------------
Eugene A. Soltero (1) .............. 2,955,199 24.6% 21.9%
James E. Hogue (1) ................. 2,985,199 24.9% 22.1%
Peter Lucas (1) .................... 350,000 2.9% 2.6%
C. Ronald Burden (1) ............... 390,000 3.3% 2.9%
Wayne T. Egan (2) .................. 50,000 0.4% 0.4%
Michael Kamis (3) .................. 50,000 0.4% 0.4%
Richard J. Lachcik (2) ............. 50,000 0.4% 0.4%
All directors and executive officers
as a group (seven persons) ...... 6,830,398 53.3% 47.7%
Royal Trust Corporation (10) 750,000 6.4% 5.7%
Liviakis Financial Communications, 1,990,000 (11) 16.5% 14.7%
Inc.(11)
---------------------------
(1) The address of Messrs. Soltero, Hogue, Lucas and Burden is 8350 North
Central Expressway, Suite M2030, Dallas, Texas 75206.
(2) The address of Messrs. Egan and Lachcik is Suite 1600, 2 First Canadian
Place, Toronto, Ontario, Canada M5X1J5
(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 349,000 shares to be issued for services, and the following
shares, beneficial ownership of which is disclaimed: 91,000 shares
owned by an officer of Liviakis. The address of Liviakis Financial
Communications, Inc. is 2420 'K' Street, Sacramento, CA 95816.
34
<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 its
common stock to Liviakis and an officer of Liviakis for $.75 per share and
agreed to issue 1,490,000 shares of its common stock, of which 1,141,000 shares
have been issued, to Liviakis. 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. Liviakis will
receive no cash compensation or reimbursement. Based on the value of Cotton
Valley's stock on The Canadian Dealing Network at the time the contract was
negotiated, Cotton Valley will record an expense of $1,087,700 during the year
ended June 30, 1997.
Voting Trust Agreement
Unaffiliated parties that transferred their interests in the Texas and
Alabama properties to Cotton Valley in exchange for securities provided a Power
of Attorney to Eugene A. Soltero and James E. Hogue to vote 3,281,732 shares of
common stock held by such property contributors in the attorneys' discretion
between January 1, 1996, and January 1, 2001. Each property contributor may
transfer to unrelated third parties the common stock subject to the Voting Trust
Agreement at any time. The Power of Attorney provided by each of the property
contributors to Messrs. Soltero and Hogue expires with respect to the common
stock transferred by any property contributor.
35
<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 11,708,881
shares of common stock and 3,748,572 options and warrants to acquire common
stock (including 849,000 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 11,708,881
shares of common stock, 300,000 Units, _________ shares of Common Stock and
_________ Warrants underlying the Units, 980,000 employee stock options and
1,919,572 options and warrants issued in Canadian financings and 849,000 shares
to be issued to Liviakis Financial Communications, Inc. In addition, the
Underwriters will be issued warrants to purchase 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,"
"Underwriting" and note 5 of Notes to Financial Statements.
Cotton Valley's common shares trade "over-the-counter" on NASD's bulletin
board under the symbol "CTVYF" and "over-the-counter" in Canada on The Canadian
Dealing Network under the symbol "CVZC". Cotton Valley has applied for listing
of the Securities on the_________ Stock Exchange.
Units
Each Unit consists of ____ shares of Common Stock and ____ Warrants. The
Common Stock and the Warrants may not be traded separately until January 31,
1998, unless separated earlier upon three days' prior written notice to Cotton
Valley from the Representative.
Common Stock
Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of shareholders. They are entitled to receive dividends when
and as declared by the board of directors out of legally available funds and to
share ratably in the assets of Cotton Valley legally available for distribution
upon liquidation, dissolution or winding up.
Holders of common stock do not have subscription, redemption or conversion
rights, nor do they have any preemptive rights. The common stock underlying the
Units offered by this prospectus will be, when issued and paid for, fully paid
and nonassessable.
Holders of common stock do not have cumulative voting rights, which means
that the holders of more than half of all voting rights with respect to common
stock and Preferred Stock can elect all of Cotton Valley's directors. The board
of directors is empowered to fill any vacancies on the board of directors
created by resignations, subject to quorum requirements.
All shareholder action is taken by vote of a majority of voting shares of
the capital stock of Cotton Valley present at a meeting of shareholders at which
a quorum (a majority of the issued and outstanding shares of the voting capital
stock) is present in person or by proxy. Directors are elected by a plurality
vote.
For certain fundamental changes, the corporate legislation under which
Cotton Valley was formed may require each class of outstanding stock to vote
separately.
As of March 17, 1997, Cotton Valley had 1,103 record holders of its
common stock, 214 of whom have United States addresses.
36
<PAGE>
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
$____(125% of the offering price) per share until April 30, 2002. The Warrants
are not immediately exercisable and are not transferable separately from the
Common Stock until January 31, 1998, or earlier upon the third day after Cotton
Valley receives written notice from the Representative.
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 13 months
from the date hereof, upon 30 days written notice, at a price of $0.01 per
Warrant provided that the closing sale or bid price per share of Cotton Valley
common stock equals or exceeds $____ (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.
37
<PAGE>
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 March 31, 1997, 1,919,572 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 Exercise
Price Price
Cdn $ US $ Expiration Date
- --------- ------- -------- -----------------
1,329,485 $ 2.75 $ 2.00 December 31, 1997
125,000 $ 2.25 $ 1.64 April 30, 1998
98,421 $ 2.25 $ 1.64 December 31, 1997
366,666 $ 1.00 $ 0.73 December 31, 1999
Liviakis
In connection with a financial consulting agreement, the Company granted
warrants to Liviakis Financial Communications, Inc. of Sacramento, California to
purchase 500,000 shares of common stock for $.80 per share from January 2, 1998
until November 7, 2001.
Transfer Agent and Registrar
The transfer agent and registrar for Cotton Valley's common stock is
Equity Transfer Services Inc., Toronto, Ontario, Canada. Cotton Valley intends
to appoint Continental Stock Transfer and Trust Company of Jersey City, New
Jersey, as United States transfer agent.
38
<PAGE>
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, __________ shares of common stock,
including the _________ shares of common stock underlying the Units, will be
outstanding. All shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act. However,
shares purchased by an affiliate (in general, a person who is in a control
relationship with Cotton Valley) will be subject to the limitations of Rule 144
promulgated under the Securities Act. 9,204,318 shares of common stock are
registered on Form 20-F and currently eligible for sale without restriction.
This does not include shares held by affiliates. Subject to the limitations of
Rule 144, restricted securities will be freely transferable upon expiration of
the applicable one-year holding period and other provisions. In addition, Cotton
Valley has granted 3,748,572 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.
39
<PAGE>
CERTAIN INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations for United States Residents
The following is a summary of certain of the Canadian federal income tax
considerations which will generally be applicable to holders of common stock
("U.S. residents") who are residents of the United States for the purposes of
the Canada-United States Income Tax Convention (1980) ("the Convention") and are
not residents of Canada for the purposes of the Income Tax Act (Canada) ("the
Canadian Tax Act"), who deal at arm's length with Cotton Valley for the purposes
of the Canadian Tax Act and who do not use or hold and are not deemed to use or
hold such common stock in, or in the course of, carrying on a business in
Canada. This summary is based upon the current provisions of the Canadian Tax
Act and the regulations thereunder, proposed amendments thereto publicly
announced by the Minister of Finance, Canada, prior to the date hereof, and the
provisions of the Convention as in effect on the date hereof.
This summary is of general nature only and is not intended to be legal or
tax advice to any particular U.S. resident. Accordingly, U.S. residents should
consult with their own tax advisors for advice with respect to their
own particular circumstances.
A U.S. resident will not be subject to tax in Canada on any capital gain
realized on a disposition of the Securities unless the value of the Securities
constitutes "taxable Canadian property" of the U.S. resident and the value of
the Securities is derived principally from real property situated in Canada. The
value of these Securities is not derived principally from real property situated
in Canada.
Dividends paid or credited or deemed to be paid or credited to a U.S.
resident in respect of the common stock will generally be subject to Canadian
withholding tax. 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.
40
<PAGE>
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.
41
<PAGE>
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, Cotton Valley has agreed to sell to the Underwriters
named below (the "Underwriters"), and each of the Underwriters, for whom
National Securities Corporation is acting as Representative, have agreed to
purchase the number of Units set forth opposite their respective names in the
following table.
Underwriters Number of
Units
National Securities Corporation...............
--------
Total....................................... 300,000
=======
The Representative has advised Cotton Valley that the Underwriters propose
to offer the Units to the public at the initial public offering price per Unit
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession of not more than $___ per Unit, none of which will be
reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representative. No such reduction shall change the amount of proceeds to be
received by Cotton Valley as set forth on the cover page of this prospectus.
Cotton Valley has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this prospectus, to purchase up to
45,000 additional Units to cover over-allotments, if any, at the same price per
Unit as Cotton Valley will receive for the 300,000 Units that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, the Underwriters will have a firm commitment to purchase approximately
the same percentage of such additional Units that the number of Units to be
purchased by it shown in the above table represents as a percentage of the
300,000 Units offered hereby. If purchased, such additional Units will be sold
by the Underwriters on the same terms as those on which the 300,000 Units are
being sold.
The Underwriters have the right to offer the Securities offered hereby
only through licensed securities dealers in the United States who are members of
the National Association of Securities Dealers, Inc.("NASD") and may allow such
dealers such portion of its ten percent (10%) commission as each Underwriter may
determine.
The Underwriters will not confirm sales to any discretionary accounts.
Cotton Valley has agreed to pay the Representative a nonaccountable
expense allowance of 2.5% of the gross amount of the Units sold ( $75,000 upon
the sale of the Units offered, $86,250 if the over-allotment option is exercised
in full) at the closing of the offering. The Underwriters' expenses in excess
thereof will be paid by the Representative. to the extent that the expenses of
the underwriting are less than that amount, such excess shall be deemed to be
additional compensation to the Underwriters. In the event the offering is
terminated before its successful completion, Cotton Valley may be obligated to
pay the Representative a maximum of $30,000 on an accountable basis for expenses
incurred by the Representative in connection with the offering.
Underwriters' Warrants
Upon the closing of this offering, Cotton Valley has agreed to sell to the
Underwriters, for nominal consideration, 30,000 warrants (the "Underwriters'
Warrants"). The Underwriters' Warrants are exercisable at 120% of the public
offering price per Unit for a four-year period commencing one year from the date
of this offering. The Underwriters' Warrants may not be sold, transferred,
assigned or hypothecated for a period of one year from the date of this offering
except to the officers of the Underwriters and their successors and dealers
participating in the offering and/or their
42
<PAGE>
partners or officers. The Underwriters' Warrants will contain antidilution
provisions providing for appropriate adjustment of the number of shares subject
to the Warrants under certain circumstances. The holders of the Underwriters'
Warrants have no voting, dividend or other rights as shareholders of Cotton
Valley with respect to shares underlying the Underwriters' Warrants until the
Underwriters' Warrants have been exercised.
For the term of the Underwriters' Warrants, the holders thereof will be
given the opportunity to profit from a rise in the market value of Cotton
Valley's shares, with a resulting dilution in the interest of other
shareholders. The holders of the Underwriters' Warrants can be expected to
exercise the Underwriters' Warrants at a time when Cotton Valley would, in all
likelihood, be able to obtain needed capital by an offering of its unissued
shares on terms more favorable to Cotton Valley than those provided by the
Underwriters' Warrants. Such facts may adversely affect the terms on which
Cotton Valley can obtain additional financing. Any profit realized by the
Underwriters on the sale of the Underwriters' Warrants or shares issuable upon
exercise of the Underwriters' Warrants may be deemed additional underwriting
compensation.
Indemnification
The Underwriting Agreement provides for indemnification between Cotton
Valley and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among Cotton Valley and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act and the Securities Exchange Act
of 1934.
Determination of Offering Price
The initial public offering price was determined by negotiation between
Cotton Valley and the Representative. The factors considered in determining the
public offering price include Cotton Valley's business potential and earnings
prospects, the oil and gas industry and the general condition of the securities
markets at the time of the offering and the closing bid price of Cotton Valley's
Common Stock on April ___, 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 Representative. The
offering price of the Securities is significantly different from the current
market price of Cotton Valley's common stock underlying the Units. The offering
price was negotiated at arm's length with the underwriter based on Cotton
Valley's's oil and gas reserves compared to other oil and gas companies.
Stock Exchange
Cotton Valley has applied to list the Securities on the 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.
43
<PAGE>
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
Underwriters by Maurice J. Bates, L.L.C.
EXPERTS
The financial statements of Cotton Valley at June 30, 1996, and for the
period then ended appearing in this prospectus have been audited by Hein +
Associates, LLP, independent certified public accountants, as set forth in their
report appearing elsewhere in this prospectus, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The reserve report of K&A Energy Consultants, Inc. of the proved reserves
and future net revenues attributable to Cotton Valley's properties in the
Cheneyboro Field and the reserve report of Wendell & Associates of the proved
reserves and projected estimated future production and revenue for the Movico
Field included in this Prospectus as Appendix A-1 and Appendix A-2,
respectively, have been so included in reliance upon the authority of such firms
as experts in petroleum engineering.
44
<PAGE>
GLOSSARY
In this prospectus, the following terms have the meanings indicated:
API - The density (weight per volume) of crude oil on a scale adopted by the
American Petroleum Institute. On the API scale, the higher the density the
lighter the oil.
3-D Seismic - The method by which a three-dimensional image of the earth's
subsurface is created through the interpretation of collected seismic data. 3-D
seismic surveys allow for a more detailed understanding of the subsurface than
do conventional seismic surveys and contribute significantly to field appraisal,
development and production.
Bbl - Barrels of oil.
Commercial Quantities Well - A well that will make a profit over the cost of
operating the well.
Completion - The casing, perforation, stimulation and installation of permanent
equipment for the production of oil and gas. Completion costs are the costs
incurred for the services, equipment and labor required therefor.
Development Well - A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Exploratory Well - A well drilled to find a new reservoir in a field previously
found to be productive of oil and gas in another reservoir, or to extend a known
reservoir. Generally, an exploratory well is any well that is not a development
well, a service well or a stratigraphic test well as defined below.
Gas Well - A well capable of producing gas as its primary product.
Gross Acres or Gross Wells - The total acres or well, as the case may be, in
which a working interest is owned.
Injection Well - A well used to inject a gas or liquid into a reservoir with a
view to enhance or replace the natural reservoir drive to increase or maintain
production from nearby productive wells.
Mcf - One thousand cubic feet of gas.
Net Acres - Calculated by multiplying the number of gross acres in which a party
has an interest by the fractional interest of the party in each such acre.
Net Revenue Interest - The share of revenues from oil an/or gas production net
of all other interest burdening the gross revenues such as landowner's royalty
and overriding royalties, etc.
Oil and Gas Lease - Contractual right to enter onto lands to explore for,
develop and produce oil and gas. An oil and gas lease is real property.
Oil Well - well capable of producing oil as its primary product.
Producer or Productive Well - A well that is producing oil or gas or that is
capable of production.
Proved Reserves - The estimated quantities of crude oil and gas, condensate and
gas liquids recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes in existing prices
provided only by contractual arrangements, but not on escalations based upon
future conditions.
(i) Reservoirs are considered proved if economic produceability is
supported by either actual production or conclusive formation test.
The area of a reservoir considered proved includes (A) that portion
delineated
45
<PAGE>
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.
46
<PAGE>
<TABLE>
<S> <C>
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 300,000 Units
been authorized by Cotton Valley or the
Underwriters. This prospectus does not constitute
an offer to sell or the solicitation of an offer to buy COTTON VALLEY RESOURCES
any of the securities to which it relates in any state to CORPORATION
any person to whom it is unlawful to make such offer
or solicitation in such state. Neither the delivery of Consisting of
this prospectus nor any sale hereunder shall, under
any circumstances, create any implication that there 1,500,000 Shares of Common Stock
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.
---------------------------
and
1,500,000 Redeemable Warrants to Purchase
Common Stock
TABLE OF CONTENTS
Page
Prospectus Summary ................................
Risk Factors ......................................
Use of Proceeds ...................................
Capitalization ....................................
Dilution ..........................................
Dividend Policy ................................... -----------------------------
P R O S P E C T U S
-----------------------------
Management's Discussion and Analysis or
Plan of Operation ..............................
Business and Properties ...........................
Management ........................................
Certain Relationships and Related Transactions ....
Principal Shareholders ............................
Description of Securities .........................
Securities Eligible for Future Sale ...............
Certain Income Tax Considerations .................
Underwriting ......................................
Limitations on Director Liability .................
Legal Matters .....................................
Experts ........................................... NATIONAL SECURITIES CORPORATION
Glossary ..........................................
</TABLE>
---------------------------
Until , 1997 (25 days after the date of this prospectus), all dealers effecting
transactions in the Units, whether or not participating in this distribution,
may be required to deliver a prospectus. This is in addition to the obligation
of dealers to deliver a prospectus when acting as Underwriters and with respect
to their unsold allotments or subscriptions.
, 1997
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Cotton Valley has no contract or arrangement that insures or indemnifies a
controlling person, director or officer of Cotton Valley which affects his or
her liability in that capacity. Cotton Valley's bylaws provide for such
indemnification, subject to applicable law.
If available at reasonable cost, Cotton Valley intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by reason of their
positions as officers and directors.
Item 25. Other Expenses of Issuance and Distribution.
Expenses in connection with the public offering of Securities by Cotton
Valley pursuant to this prospectus are as follows:
Securities and Exchange Commission Filing Fee $ 4,312
Stock Exchange Listing Fee and Expenses 25,000*
- -------------------
Accounting Fees and Expenses 60,000*
Legal Fees and Expenses 80,000*
Printing and Engraving 25,000*
Fees of Transfer Agent and Registrar 20,000*
Blue Sky Fees and Expenses 40,000*
Underwriter's Nonaccountable Expense Allowance 75,000*
Miscellaneous 70,688*
-------
Total $400,000*
=========
- ---------------------
*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
<S> <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 and
gas interests 310,800 777
06/95 To two corporations, for Movico Property 623,424 1,137,635
06/95 To an individual for cash 10,000 10,000
12/95 To Dalcun Investments Ltd. and Arjon Enterprises Inc. for
a $250,000 note and a $146,000 note, net 107,258 88,008
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Date Transaction Number Consideration
<S> <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
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
Share issuance costs(3) (930,385)
------------------ ---------
TOTAL ISSUED AND OUTSTANDING 11,708,881 $11,671,349
========== ===========
</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 3,748,572 shares of common stock pursuant to:
(I) 1,266,985 Class A Warrants, where each Class A Warrant
entitles the holder to purchase one share in the common stock
of Cotton Valley until December 31, 1997, at the price of Cdn
$2.75 ($2.00).
These Class A Warrants were issued:
(a) 636,250 in connection with a sale of units in Canada;
(b) 112,390 in connection with conversion of debenture;
and
(c) 518,345 in connection with the acquisition of oil and
gas interests.
II-2
<PAGE>
(ii) 187,500 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) 125,000 at Cdn $2.25 ($1.64) until April 30, 1998.
(iii) 980,000 stock options issued to directors and employees.
These options are exercisable at Cdn $2.50 ($1.83) and
expire August 6, 1999 (130,000), November 7, 1999 (50,000)
and July 1, 2000 (800,000).
(iv) 98,421 Series B Warrants granted to former Arjon
shareholders. Each Series B Warrant is exercisable at Cdn
$2.25 ($1.64) until December 31, 1997.
(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) 349,000 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* Underwriting Agreement
3** Articles of Amalgamation
3** Bylaws
4(a)* Text and Description of Graphics and Images Appearing on
Certificate for Common Stock
4(b)* Text and Description of Graphics and Images Appearing on
Certificate for Units
4(c)* Text and Description of Graphics and Images Appearing on
Certificate for Warrants
5* Opinion of Weir & Foulds
9** Voting Trust Agreement, as amended
10(a)** Property Option Purchase Agreement (Movico)
10(b)** Letter Agreement with Decker Exploration, Inc. (Movico)
10(c)* Consulting Agreement with Liviakis Financial Communications,
Inc.
11* Statement regarding computation of per share loss
21** Subsidiaries
23(a)* Consent of Weir & Foulds
23(b)* Consent of Hein + Associates, LLP
23(c)* Consent of K&A Energy Consultants, Inc.
23(d)* Consent of Wendell & Associates
27 Financial Data Schedule
- -----------------------
* Filed herewith.
** Previously filed and incorporated by reference herein.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i)
include any prospectus required by Section 10(a)(3) of the Securities
Act; (ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and (iii) include any
additional or changed material information on the plan of
distribution. Notwithstanding the foregoing, any increase or decrease
in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that, in the opinion of the
SEC, such indemnification is against public policy, as expressed in
the Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the shares
of common stock being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time the SEC declared it effective.
(7) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-3
<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
</TABLE>
Officer)
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>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
Chairman of the Board and Chief _______________, 1997
Executive Officer
- -----------------------------------------
Eugene A. Soltero
President, Chief Operating Officer and
Director
- -----------------------------------------
James E. Hogue _______________, 1997
Senior Vice President and Chief
Financial Officer
- -----------------------------------------
Peter Lucas _______________, 1997
Senior Vice President of Exploration
- -----------------------------------------
C. Ronald Burden _______________, 1997
Director
- -----------------------------------------
Wayne T. Egan _______________, 1997
Director
- -----------------------------------------
Michael Kamis _______________, 1997
Director
- -----------------------------------------
Richard J. Lachcik _______________, 1997
</TABLE>
II-4
<PAGE>
