As filed with the Securities And Exchange Commission on October 6, 1998
Registration No. 333-48027
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer in its Charter)
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YUKON TERRITORY, CANADA 1381 98-0164357
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
-------------------------
COTTON VALLEY RESOURCES CORPORATION EUGENE A. SOLTERO
6500 Abrams Road, Suite 300 CHIEF EXECUTIVE OFFICER
DALLAS, TEXAS 75231 6500 Abrams Road, Suite 300
(214) 221-6500 DALLAS, TEXAS 75231
(Address and Telephone Number of Principal (214) 221-6500
Executive Offices and Principal Place of (Name, Address and Telephone Number
Business) of Agent for Service)
-------------------------
Copies to:
RICHARD B. GOODNER, ESQ. WAYNE T. EGAN, ESQ
JACKSON WALKER L.L.P. WEIR AND FOULDS
901 MAIN STREET, SUITE 6000 2 FIRST CANADIAN PLACE, SUITE 1600
DALLAS, TEXAS 75202 TORONTO, ONTARIO M5X 1J5
PHONE NO. (214) 953-6167 CANADA
FAX NO. (214) 953-5822 PHONE NO. (416) 947-5086
FAX NO. (416) 365-1876
-------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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, 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. [ ]
If any securities being registered on this Form are to be offered on a
delayed or continuous basis, pursuant to Rule 415 under the Securities Act,
check the following box. [x]
-------------------------
CALCULATION OF REGISTRATION FEE
=============================================================================
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------
Common Stock, no
par value(2)(3) . $12,742,984 $0.50 $6,371,492 $1,930.57
- -----------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . $1,930.57(4)
- -----------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. The price
per share of Common Stock has been calculated on the basis of the
closing sales price per share of $.50 as quoted on the American Stock
Exchange on October 1, 1998.
(2) Includes 5,142,875 shares of Common Stock currently outstanding and being
offered for sale by the Selling Stockholders, 2,913,309 shares reserved
for issuance upon exercise of outstanding warrants held by certain
Selling stockholders, 2,324,706 shares reserved for issuance upon
conversion of the outstanding Convertible Debentures and 640,000 shares
reserved for issuance upon exercise of the Debenture Warrants which will
be issued to the Convertible Debenture holders upon conversion of the
Convertible Debentures.
(3) Pursuant to Rule 416, this Registration Statement also covers such
indeterminate number of shares of Common Stock as may be issuable upon
exercise of the referenced warrants and conversion of the Convertible
Debentures pursuant to antidilution provisions.
(4) The amount of $6,035.90 has previously been paid.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
=============================================================================
<PAGE>
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 OCTOBER 5, 1998
PROSPECTUS
COTTON VALLEY RESOURCES CORPORATION
12,742,984 Shares of Common Stock
The 12,742,984 shares of common stock, no par value (the "Shares"), of
Cotton Valley Resources Corporation (the "Company"), offered hereby,
are being sold by certain stockholders of the Company (the "Selling
Stockholders"). The Shares include 6,864,969 shares of Common Stock
currently outstanding, 2,913,309 shares to be issued to various Selling
Stockholders upon exercise of outstanding warrants, up to 2,324,706
shares to be issued to certain Selling Stockholders upon conversion of
the outstanding 7% Secured Convertible Debentures due December 31, 2001
(the "Convertible Debentures") and up to 640,000 shares to be issued to
Convertible Debenture holders upon exercise of the Debenture Warrants
(as defined herein). The Company will not receive any proceeds from the
sale of the Shares by the Selling Stockholders. See "Business and
Properties -- Recent Developments; Sale of Convertible Debentures,"
Description of Securities," "Selling Stockholders" and "Agreements
with Selling Stockholders."
The Shares may be offered by the Selling Stockholders from time to
time in open market transactions (which may include block transactions)
or otherwise through the American Stock Exchange ("AMEX"), Canadian
Dealing Network ("CDN"), or in private transactions at prices relating
to prevailing market prices or at negotiated prices. The Selling
Stockholders may effect such transactions at prices relating to
prevailing market prices or at negotiated prices. The Selling
Stockholders may effect such transactions by selling Shares to or
through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or purchasers of the Shares, as the case
may be, from whom such broker-dealers may act as agent or to whom they
sell as principal or both. The Selling Stockholders and any broker-
dealer acting in connection with the sale of the Shares offered hereby
may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), in which event any
discounts, concessions or commissions received by them, which are not
expected to exceed those customary in the types of transactions
involved, or any profit on resales of the Shares by them, may be deemed
to be underwriting commissions or discounts under the Securities Act.
See "Selling Stockholders" and "Plan of Distribution."
The costs, expenses and fees incurred in connection with the
registration of the Shares, which are estimated to be $115,000
(excluding selling commissions and brokerage fees incurred by the
Selling Stockholders), will be paid by the Company.
The Company's common stock, no par value (the "Common Stock"), is
traded on the AMEX under the symbol "KTN" and on the CDN under the
symbol "CVZC." On October 1, 1998, the closing sales price of the
Common Stock was US $.50 per share on the AMEX. On July 14, 1998, the
closing bid price was C$1.00 per share on the CDN. There have been no
significant trades in the Company's Common Stock on the CDN since July
14, 1998.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED
IN CONNECTION WITH AN INVESTMENT
IN THE SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is , 1998
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated herein, the
financial, business activities, management and other pertinent information
herein relates on a consolidated basis to the Company and its wholly-owned
subsidiaries. Each prospective investor is urged to read this Prospectus in its
entirety and to particularly consider the information set forth under the
heading "RISK FACTORS." Except as otherwise indicated, financial data in this
Prospectus is presented in accordance with generally accepted accounting
principles in the United States ("USGAAP") for all periods presented. All
dollar amounts set forth in this Prospectus are in United States dollars, except
where denoted "C$" which represents Canadian dollars. Unless otherwise
indicated, all share and per share data and information relating to the number
of shares of Common Stock outstanding in the Prospectus (i) assume no exercise
of outstanding options and warrants to purchase an aggregate of 4,238,975
shares at prices ranging from $0.60 to $3.50 per share and (ii) assume that the
Company's outstanding 7% Secured Convertible Debentures due December 31, 2001
("Convertible Debentures") are not converted.
THE COMPANY
General
Cotton Valley Resources Corporation (referred to herein as either "Cotton
Valley" or the "Company") is a development stage independent energy company
engaged in the exploration and development, acquisition and operation
of oil and gas properties with a geographic focus in major oil and gas producing
regions in the United States. The Company was incorporated in the Province of
Ontario, Canada, originally as Cotton Valley Energy Limited, on February
15, 1995. From its inception through June 30, 1997, the Company was engaged
principally in organization and capitalization activities and did not generate
material revenues from operations. For the year ended June 30, 1998, the
Company, still in the development stage, concentrated on acquiring additional
properties and integrating its engineering.
On June 30, 1995 in a one-for-one share and warrant exchange, the Company
acquired all the issued and outstanding shares of Cotton Valley Energy
Corporation ("CV Energy"), a Nevada corporation. On June 17, 1996, the
Company completed an amalgamation with Arjon Enterprises, Inc. ("Arjon"), a
Province of Ontario, Canada corporation. As a result of the Arjon amalgamation,
the Company's name was changed to Cotton Valley Resources Corporation and
its shares of Common Stock began trading through the Canadian Dealing Network.
Arjon was a public Canadian company formed more than 50 years ago to operate a
gold mine. At the time of the amalgamation, Arjon 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 received 686,551 shares of Common Stock in the
amalgamation.
On April 30, 1996, the Company organized Cotton Valley Operating Company, a
Texas corporation ("CV Operating") to operate the Company's oil and gas
properties. The Company on February 25, 1997, organized Cotton
Valley Energy, Inc., an Oklahoma corporation ("CVEI") to acquire and operate the
N.E. Alden Field properties in Caddo County, Oklahoma. CVEI commenced
operations on March 3, 1997. Aspen Energy Corporation, a Nevada corporation
("Aspen"), was an inactive subsidiary of the Company, formed on May 1, 1996,
which was used to accommodate the merger of Aspen Energy Corporation, a New
Mexico corporation ("Old Aspen") into Aspen on July 31, 1997. The
principal asset of Old Aspen was its interest in the Means Unit in Andrews
County, Texas (the "Means Unit"). On May 27, 1998, Aspen organized Cotton
Valley Means, Inc. as a Texas corporation ("CV Means") and transferred all of
its interest in the Means Unit to CV Means to facilitate a $10 million financing
relating to the development of this property. See "Business and Properties--
Recent Developments; Means Unit Credit Facility."
In addition to CV Energy, CV Operating, CVEI, Aspen and CV Means, the
Company recently organized Mustang Well Servicing Company, a Nevada corporation
("Mustang Well Servicing"), Mustang Oilfield Equipment Company, a Nevada
corporation ("Mustang Equipment"), and Mustang Horizontal Services, Inc., a
Nevada corporation ("Mustang Horizontal") (collectively, the "Mustang Service
Companies"). All of the Company's subsidiaries are wholly owned by the Company,
except for CV Means, which is a wholly-owned subsidiary of Aspen.
<PAGE> -2-
On December 30, 1997, the Company completed the private placement of
$4,320,000 of Convertible Debentures to a group of nine institutional investment
firms. Approximately $1 million of the cash proceeds and $220,000
of Convertible Debentures were used to purchase certain well servicing
equipment. The remaining funds have been used for the acquisition and
development of oil and gas properties, purchase of oil field equipment and
working capital.
Mustang Service Companies
At the time of acquisition and formation of the Mustang Service Companies,
in the period August through December 1997, the Company believed that the
demand in the petroleum industry for drilling and production equipment
and services in general, and particularly horizontal drilling equipment would
provide the Company with an opportunity to increase revenues and cash flow
through the acquisition and refurbishment of used oil field equipment and the
use of well servicing rigs and related equipment. The Company had augmented its
property acquisition and development strategy with the addition of the Mustang
Service Companies which the Company believed could provide timely, quality
services at competitive costs as well as providing the Company with the
capabilities to perform workovers, horizontal drilling, and most significantly,
the equipment and personnel necessary for the Company to conduct its exploration
and development activities. The significant drop in oil prices during 1998 has
seriously affected that strategy and most of the well service and horizontal
drilling work has been for the Company's account and not for third parties.
Current Operations
Since January 1997, the Company has acquired oil and gas properties in
Oklahoma and Texas, certain horizontal drilling technology and equipment, and
two workover rigs and related equipment. The Company also purchased and sold
a Canadian property. To finance the acquisitions, the Company has raised
capital through the private sale of shares of Common Stock and warrants, the
issuance of debt instruments, including $4,320,000 of Convertible Debentures and
proceeds from the exercise of options and warrants. On June 12, 1998, the
Company, through its subsidiary, CV Means, obtained a $10 million credit
facility from two institutional lenders which provides up to $1 million for
working capital and up to $9 million for the development of the Means Unit. See
"Business and Properties -- Recent Developments; Means Unit Credit Facility."
For the fiscal year ended June 30, 1998, the Company recorded revenues of
$1,825,852 and a net loss of $830,600. As of June 30, 1998, the Company had an
accumulated deficit of $3,599,755 and working capital of $20,823.
The Company does not have a bank line of credit. The Company has funded its
operating losses, acquisitions and expansion costs primarily through a
combination of private offerings of debt and equity securities, including the
issuance of the Convertible Debentures. See A Selected Historical Consolidated
and Combined Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties
- -- Recent Developments."
Yukon Continuance
On February 9, 1998, the Company continued from the Province of Ontario,
Canada to Yukon Territory, Canada (the "Yukon Continuance") in accordance with
applicable Canadian law. Under the Yukon Business Corporation
Act (the "YBCA"), the Company's board of directors need not be comprised of a
majority of Canadian residents as required under Ontario law. Since the
Company's principal offices, management and properties are located in the United
States, the Company's board of directors believed it to be in the best interest
of the Company to have a majority of the Company's directors be residents of the
United States. The Yukon Continuance was approved by the shareholders of
the Company at a meeting held on December 10, 1996, for which proxies were
solicited in accordance with applicable Canadian laws, but the transaction was
not registered under the Securities Act of 1933. The Staff of the Commission
has advised the Company that the registration of the Yukon Continuance was
required under Section 5 of the Securities Act. As a result, the Company may
have a contingent liability to certain of its shareholders. The Company is
unable to quantify the amount of such contingent liability, if any. See "Yukon
Continuance" and "Risk Factors -- Possible Contingent Liability for Violation of
Securities Act."
Business Strategy
The Company's current business strategy is to (i) continue to increase
reserves, production and cash flows by acquiring properties, or companies with
properties, with development opportunities, (ii) develop existing reserves
through low risk developmental drilling or recompletion programs, (iii)
concentrate on development activities within a limited number of core areas;
(iv) acquire and refurbish used oil field equipment for use in development
<PAGE> -3-
activities and for resale; and (v) provide well servicing for the Company's and
other wells. Although the Company continuously is seeking acquisitions of
reserves and oil field equipment, there can be no assurance that the Company
will be able to identify and acquire reserves or oil field equipment upon terms
favorable to the Company or obtain the necessary financing on favorable terms.
See "Business and Properties".
The following are key elements of the Company's strategy:
Exploitation and Development of Existing Properties. The Company has a
significant inventory of exploitation projects, including development
drilling, workovers and recompletions. The Company intends to maximize
the value of its properties through development activities including
in-fill drilling, waterflooding and other enhanced recovery techniques.
Management of Operating Costs. The Company emphasizes strict cost
controls in all aspects of its business and intends to seek the lowest
cost of operations by either operating its own properties or having the
properties operated by others under contract.
Property Acquisitions. Although the Company has a significant
inventory of exploitation and development opportunities, it continues
to pursue strategic acquisitions which fit its objectives of increasing
oil and gas reserves with development potential.
The success of the Company in maintaining positive working capital and
obtaining the necessary capital resources to fund future costs associated with
its operations and expansion plans is dependent upon the Company's ability
to (i) increase revenues through acquisitions and recovery of proved producing
and proved developed non-producing reserves; (ii) implement stringent cost
controls at the corporate administrative office and in field operations; (iii)
convert Convertible Debentures to equity; (iv) obtain the exercise of
outstanding warrants; and (v) obtain asset based commercial financing. However,
even if the Company achieves some success with its plans to maintain or increase
its working capital, there can be no assurance that it will be able to generate
sufficient revenues to achieve significant profitable operations or fund its
expansion and acquisition plans.
Currency Translation
The Company publishes annual financial statements in United States and
Canadian dollars. For the convenience of the reader, this Prospectus contains
translations of certain Canadian dollar amounts into United States dollars.
These translations should not be construed as representations that the Canadian
dollar amounts actually represent United States dollar amounts or could be
converted into United States dollars at the rate indicated. Unless otherwise
indicated, the translations of Canadian dollars into United States dollars have
been made at the rate of US$1.00 = C$0.70. Except as noted, financial data in
this Prospectus are presented in accordance with generally accepted accounting
principles as applied in the United States ("USGAAP").
Effective January 31, 1996, each 2.5 outstanding shares of the Company's
Common Stock were consolidated into one share and the previously authorized
unlimited number of special shares were canceled. The financial statements
of the Company reflect the consolidation of common shares as if it occurred on
inception of the Company. Unless otherwise indicated herein, the financial,
business activities, management and other pertinent information herein relates
on a consolidated basis to the Company and its subsidiaries. The Company's
financial statements have been prepared as if the Company had acquired CV Energy
at its inception. The Arjon amalgamation was accounted for as an issuance
of stock for the net monetary assets of Arjon accompanied by a recapitalization.
The Aspen acquisition was accounted for using the purchase method of accounting
for business combinations. See "Selected Historical Consolidated and
Combined Financial Information."
Offices
The Company maintains its executive offices at 6510 Abrams Road, Suite 300,
Dallas, Texas 75231, telephone number (214) 221-6500.
<PAGE> -4-
The Offering
Securities Offered by the Selling
Stockholders(1) 12,742,984 shares of Common Stock. See
"Description of Securities C Common Stock,"
"Selling Stockholders," "Plan of Distribution"
and "Agreements with Selling Stockholders."
Outstanding Securities
Securities
Presently
Outstanding
-----------
Common Stock(2) 19,439,572
Warrants(3) 2,913,309
Risk Factors An investment in the Shares offered hereby involves
a high degree of risk. See "Risk Factors."
Trading Symbols American Canadian
Stock Dealing
Exchange Network
-------- -------
Common Stock KTN CVZC
(1) Includes 6,864,969 shares of Common Stock currently outstanding and
being offered for sale by the Selling Stockholders,
2,913,309 shares reserved for issuance upon exercise of outstanding
warrants held by certain Selling Stockholders, 2,324,706
shares reserved for issuance upon conversion of the outstanding
Convertible Debentures and approximately 640,000 shares
reserved for issuance upon exercise of the Debenture Warrants which
will be issued upon conversion of the Convertible
Debentures. See "Description of Securities," "Selling Stockholders"
and "Agreements with Selling Stockholders."
(2) Unless otherwise indicated herein, the information contained in
this Prospectus regarding the Company's outstanding securities
includes the Waiver Shares and Interest Shares (as defined herein), but
does not include approximately 2,913,309 shares reserved for issuance
upon exercise of outstanding warrants ; 1,325,666 shares
reserved for issuance upon exercise of outstanding employee warrants
and options; 800,000 shares reserved for future grant of
options under the Company's 1997 Stock Compensation Plan ("1997 Plan");
200,000 shares reserved for future grant of options
under the Company's Non-Employee Directors Stock Plan (the "Directors
Plan"); up to 4.8 million shares reserved for issuance
to Convertible Debenture holders upon conversion of the Convertible
Debentures; or up to 1.2 million shares of Common Stock
reserved for issuance upon exercise of the Debenture Warrants.
Upon sale of all of the Shares offered hereby, the Company will
have approximately 26,437,587 outstanding shares of Common Stock.
See "Business and Properties - Recent Developments; Sale of Convertible
Debentures", "Management -- Options," "Stock Option Plans" and
"Description of Securities."
(3) Does not include outstanding employee options or the 1.2 million
Debenture Warrants reserved for issuance upon conversion of
the Convertible Debentures. See "Description of Securities --
Convertible Debentures."
<PAGE> -5-
Summary Selected Historical Consolidated and Combined Financial Information
The following summary selected historical consolidated and combined
financial information has been derived from the financial statements of the
Company. This financial information should be read in conjunction with the
historical consolidated financial statements and notes thereto of the Company
and Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
Statement of Operations Data: Year Ended Year Ended Year Ended
June 30, June 30, June 30,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Oil and gas sales $ 835,684 $ 272,243 $ -0-
Equipment sales 987,811 -0- -0-
Oil and gas production costs 615,162 252,272 -0-
Equipment purchase and rework 660,373 -0- -0-
General and administrative expenses 1,330,361 1,434,046 518,826
Compensation expense related to common
stock issuances at less than fair value -0- 1,391,632 446,950
Income/(loss) from operations (1,160,530) (2,832,707) (1,099,360)
Interest and financing expense 814,845 97,158 138,970
Income tax benefit (expenses) 467,678 919,000 387,000
Net income/(loss) (830,600) (2,006,878) (712,360)
Net loss per weighted-average share of
common stock outstanding
Basic and Diluted $ (0.05) $ (0.18) $ (0.07)
Number of weighted-average shares of
common stock outstanding 16,301,723 11,403,000 9,901,000
</TABLE>
<TABLE>
<S> <C> <C>
Balance Sheet Data: June 30, 1998 June 30, 1997
Current assets $ 1,592,630 $ 753,410
Oil and gas properties 24,331,189 11,821,346
Total assets 26,537,856 12,615,405
Current liabilities 1,571,807 1,348,037
Long-term debt 4,654,638 139,710
Total liabilities 8,194,434 2,156,747
Stockholders' equity 18,343,422 10,458,658
Working capital (deficit) 20,823 (594,627)
</TABLE>
<PAGE> -6-
Oil and Gas Reserves
The following tables set forth the estimated Proved Reserves of oil and gas
of the Company and the present value of future reserves discounted at 10% (PV-
10) thereof as of June 30, 1998.
<TABLE>
Estimated Proved Oil and Gas Reserves
At June 30, 1998
----------------
<S> <C>
Net Gas Reserves (Mcf):
Proved Developed Producing 161,204
Proved Developed Non-Producing Reserves 837,134
Proved Undeveloped Reserves 11,763,141
----------
Total Proved Gas Reserves 12,761,479
==========
</TABLE>
<TABLE>
<S> <C>
Net Oil Reserves (Bbl):
Proved Developed Producing Reserves 156,657
Proved Developed Non-Producing Reserves 198,667
Proved Undeveloped Reserves 5,414,700
---------
Total Proved Oil Reserves 5,770,024
=========
Total Proved Reserves (BOE) 7,896,937
=========
</TABLE>
<TABLE>
Estimated PV-10 of Proved Reserves
At June 30, 1998(1)
-------------------
<S> <C>
Estimated PV-10(2):
Proved Developed Producing $ 594,857
Proved Developed Non-Producing Reserves 1,710,935
Proved Undeveloped Reserves 28,841,250
----------
Total PV-10 of Proved Reserves $ 31,147,042
==========
</TABLE>
(1) Prices based on $13.01 per Bbl of oil and $2.04 per Mcf of gas. See
"Business and Properties -- Oil and Gas Reserves."
(2) PV-10 differs from the standardized measure of discounted future net
cash flows set forth in the notes to the Consolidated
Financial Statements of the Company, which is calculated after
provision for future income taxes. Both measures utilize existing
oil and gas prices and costs as of the evaluation date held constant
for the life of the properties.
<PAGE> -7-
YUKON CONTINUANCE
Background of Yukon Continuance
On December 10, 1996, the Company's shareholders of record as of November
4, 1996, approved the Yukon Continuance. The Company mailed proxy solicitation
materials to its shareholders on November 8, 1996. The Company
received an opinion of its Canadian counsel that the Notice, Information
Circular and Proxy delivered to its shareholders complied in all material
respects with applicable corporate and securities laws of the Province of
Ontario. A total of 1,791,195 shares voted for the Yukon Continuance (19.5% of
the 9,204,318 shares then outstanding), with 86 shares voting against. No
shareholder exercised his dissenter's rights under Ontario law. On February 9,
1998, the Company filed Articles of Continuance with the Registrar of Yukon
Territory, changing the domicile of the Company from the Province of Ontario to
the Yukon Territory.
At the time of the December 10, 1996 meeting of shareholders, the Company
believed it to be in the best interest of its shareholders to continue its
domicile into the Yukon Territory because under Yukon Territory law the
Company's Board of Directors need not be comprised of a majority of Canadian
residents as required under Ontario law. The Company believed that since its
principal executive office, management and principal properties were located
in the United States, it would be advantageous to both its U.S. and Canadian
shareholders to have a majority of its Board of Directors comprised of U.S.
Residents. The Company's Charter and bylaws were not changed as a result of the
Yukon Continuance. The Company has been advised by its Canadian counsel that
there are no significant differences in corporate law concerning shareholder
rights between the Province of Ontario and Yukon Territory except for the
allowance of a majority of U.S. Residents as directors under Yukon law. The
Company intended to eventually reincorporate into the United States after
completion of the Yukon Continuance since its future business activities would
primarily be in the United States.
On November 27, 1996, the Company filed with the Commission a Registration
Statement on Form SB-2 (the "1996 Registration Statement") for the purpose of
registering securities to be offered in an underwritten public offering.
On or about February 6, 1997, the Staff of the Commission orally advised the
former Chief Financial Officer of the Company that the Yukon Continuance, as
approved by the shareholders on December 10, 1996, involved a transaction
which would require registration under the Securities Act. As a result of the
Staff's position, the 1996 Registration Statement was amended to state that the
Company would not proceed with the Yukon Continuance until after the filing
of a registration statement covering the Yukon Continuance under the Securities
Act. The 1996 Registration Statement was never declared effective and was
subsequently withdrawn by the Company.
On February 10, 1997 and as a result of the Staff's advice to the Company,
the Company filed with the Commission a Current Report on Form 8-K which stated
that the Company's continuance from Ontario to the Yukon Territory would require
registration under the Securities Act and would be delayed until after such
registration had been effected and further shareholder approval had been sought.
During the Staff's review of the Company's 1996 Registration Statement
(November 1996 through June 1997), the Company's principal officer and liaison
with the Staff was the Company's former Chief Financial Officer and it was
with him in February 1997 that the Staff discussed by telephone the
applicability of Rule 145 to the Yukon Continuance. In October 1997, the Chief
Financial Officer resigned his position as an officer of the Company.
Unfortunately, during the review process of the Company's 1996 Registration
Statement by the Staff, the significance and materiality of the
Yukon Continuance registration issue was not effectively communicated to current
management of the Company.
In December 1997, management of the Company was advised by its Canadian
counsel that the Company should initiate the process of filing its Articles of
Continuance with the Registrar of the Yukon Territory prior to the end of 1997
or it could be necessary to again seek shareholder approval of the Yukon
Continuance. Current management, without the knowledge of the significance of
the previous discussions between the Staff of the Commission and the Company's
former Chief Financial Officer regarding the Yukon Continuance issue, decided
that it would be in the Company's best interest to complete the Yukon
Continuance as directed and approved by its shareholders at the December 10,
1996 meeting. The Yukon Continuance was effected in conformity with applicable
Canadian law on February 9, 1998.
<PAGE> -8-
Possible Liability for Violation of Securities Act
On March 16, 1998, the Company filed with the Commission a Registration
Statement on Form SB-2 (the "1998 Registration Statement") of which this
Prospectus is a part. On May 1, 1998, the Company received a letter of comments
from the Staff of the Commission (the "May 1998 Staff Comment Letter") relating
to the 1998 Registration Statement. In the May 1998 Staff Comment Letter, the
Staff advised the Company that it should have registered the Yukon
Continuance under the Securities Act.
The Company in its supplemental response on May 26, 1998 to the Staff's May
1998 Comment Letter contended, with the concurrence of Jackson Walker L.L.P.,
the Company's U.S. securities counsel, that the Yukon Continuance was a
transaction not subject to the registration requirements of Section 5 of the
Securities Act. The Staff has advised the Company that is does not agree with
the Company and its U.S. securities counsel's conclusion regarding
the Yukon Continuance.
Assuming the Yukon Continuance violated Section 5 of the Securities Act
because it was not registered under the Securities Act, shareholders of the
Company would have a cause of action against the Company for damages under
Section 12(a)(1) of the Securities Act. Section 12(a)(1) of the Securities Act
provides as follows:
"Section 12. (a) In General. Any person who:
(1) offers or sells a security in violation of Section 5, or
(2) offers or sells a security (whether or not exempted by the
provisions of section 3, other than paragraph (2) of
subsection (a) thereof, by the use of any means or
instruments of transportation or communication in
interstate commerce or of the mails, by means
of a prospectus or oral communication, which includes an
untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements, in
light of the circumstances under which they were made, not
misleading (the purchaser not knowing of such untruth or
omission), and who shall not sustain the burden of proof
that he did not know, and in the exercise of reasonable
care could not have known, of such untruth or omission,
shall be liable, subject to subsection (b), to the person
purchasing such security from him, who may sue either at law
or in equity in any court of competent jurisdiction, to
recover the consideration paid for such security with
interest thereon, less the amount of any income
received thereon, upon the tender of such security, or
for damages if he no longer owns the security."
The Company, therefore, may have a contingent liability to certain of its
shareholders, who may sue the Company to recover the consideration paid, if any,
for shares of the Company's Common Stock, with interest thereon, from the date
of the Yukon Continuance to the date of repayment by the Company less the amount
of any income received thereon, upon tender of such securities, or for damages
if the shareholder no longer owns such securities. The Company intends to
vigorously defend any such shareholder lawsuit and believes that it may have
valid defenses, including the running of applicable statutes of limitations,
against claims by some or all of its shareholders. However, to the extent
that any of the Company's shareholders obtain a judgment for damages against the
Company, the Company's net assets and net worth will be reduced, which in turn
could reduce the Company's ability to obtain financing for its exploration
and drilling operations and cause the Company to curtail operations. The
Company is unable to quantify the amount of such contingent liability. Nothing
herein should be construed as an admission by the Company that it has violated
any provision of the Securities Act. See "Risk Factors - Possible Contingent
Liability for Violation of Securities Act."
<PAGE> -9-
RISK FACTORS
Before deciding whether to purchase shares of Common Stock in this
Offering, prospective investors should carefully consider all of the information
contained in this Prospectus and, in particular, the factors discussed below.
Information contained in this Prospectus contains "forward-looking statements"
including, without limitation, statements containing the words "believes,"
"expects," "intends," "seeks to," "may," "will," "should," "anticipates" and
similar words or the negative thereof, other variations thereon, comparable
terminology or by discussions of strategy. There is no assurance that future
results or events which are covered by forward-looking statements will be
achieved. The following paragraphs of this section of the Prospectus identify
factors with respect to certain forward-looking statements that could cause
actual results to vary materially from future results to which such forward-
looking statements refer. Other factors which are not discussed in this
section also could cause actual results to vary materially from future results
referred to in forward-looking statements. An investment in the securities
offered hereby involves a high degree of risk. Prospective investors should
consider carefully the following risk factors in addition to the other
information set forth in this Prospectus.
Limited Operating History; Capital Intensive Business; Need for Additional
Funds. From its inception in February 1995 through June 30, 1997, the Company
was engaged principally in organization and capitalization activities
and did not generate material revenues from operations. The Company's business
is highly capital intensive requiring continuous development and acquisition of
oil and gas reserves. In addition, capital is required to operate and expand
the Company's oil field operations and purchase equipment. At June 30, 1998,
the Company had a working capital of approximately $20,823. Because of the
limited operating history of the Company and the recent acquisitions of reserves
and oil field equipment, the Company's working capital requirements increased
significantly over the last 12 months and are expected to continue to do so.
The Company anticipates, based on its currently proposed plans and assumptions
relating to its operations, including proceeds from the exercise of outstanding
warrants, and proceeds from the private offerings of debt and equity securities,
together with cash expected to be generated from operations, that it will be
able to meet its cash requirements for at least the next 12 months. However, if
such plans or assumptions change or prove to be inaccurate, the Company could be
required to seek additional financing sooner than currently anticipated.
Although the Company is currently negotiating with private investors and lenders
with respect to additional financing, the Company has no commitments to obtain
any additional debt or equity financing and there can be no assurance that
additional funds will be available, when required, on terms favorable to the
Company. Any future issuances of equity securities would likely result in
dilution to the Company's then existing shareholders while the incurring of
additional indebtedness would result in increased interest expense and debt
service changes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business and Properties -- Business
Strategy" and "-- Recent Developments."
Consequences of Default under Convertible Debentures. The Company has
$4,220,000 of outstanding 7% Secured Convertible Debentures due December 31,
2001 (the "Convertible Debentures"), representing approximately
17% of the Company's capitalization at June 30, 1998. The Convertible
Debentures are secured with approximately 32% of the Company's assets and are
subject to various operating and financial covenants. The Company's ability to
meet its debt service obligations will depend on the Company's future
operations, which are subject to prevailing industry conditions and other
factors, many of which are beyond the Company's control. In the event of a
violation by the Company of any of its loan covenants or any other default by
the Company on its obligations relating to its indebtedness, the lenders could
declare such indebtedness to be immediately due and payable and, in certain
cases, foreclose on some of the Company's assets. Moreover, to the extent that
32% of the Company's assets continue to be pledged to secure outstanding
indebtedness under the Convertible Debentures, such assets will not be available
to secure additional indebtedness, which may adversely affect the Company's
ability to borrow in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business and Properties --
Recent Developments; Sale of Convertible Debentures" and "Description of
Securities -- Convertible Debentures."
History of Losses. The Company incurred losses before income tax benefits
of $2,925,878 and $1,298,278 for the fiscal years ended June 30, 1997 and 1998,
respectively. The Company's accumulated deficit as of June 30, 1998 was
$3,599,755. The Company does not have a bank line of credit. The Company has
funded its operating losses, acquisitions and expansion costs primarily through
a combination of private offerings of debt and equity securities,
including the issuance of the Convertible Debentures. The success of the
Company in obtaining the necessary capital resources to fund future costs
associated with its operations and expansion plans is dependent upon the
Company's ability to (i) increase revenues through acquisitions and recovery of
the Company's proved producing and proved developed non-producing revenues; (ii)
implement cost controls at the corporate administrative office and in field
<PAGE> -10-
operations; (iii) convert the Convertible Debentures to equity; (iv) obtain the
exercise of outstanding warrants; and (v) obtain asset based commercial
financing. However, even if the Company achieves some success with its plans,
there can be no assurance that it will be able to generate sufficient revenues
to achieve significant profitable operations or fund its expansion and
acquisition plans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Possible Contingent Liability for Violation of Securities Act. On February
9, 1998, the Company effected a Continuance of its domicile from the Province of
Ontario to Yukon Territory (the "Yukon Continuance") in accordance
with applicable Canadian law. The Yukon Continuance was approved by the
shareholders of the Company at a meeting held on December 10, 1996, for which
proxies were solicited in accordance with applicable Canadian laws, but the
transaction was not registered under the Securities Act. The Staff of the U.S.
Securities and Exchange Commission (the "Commission") has advised the Company
that the registration of the Yukon Continuance was required pursuant to
Rule 145 and that the failure to register the Yukon Continuance was a violation
of Section 5 of the Securities Act. As a result, the Company may have a
contingent liability to certain of its shareholders, who may sue the Company to
recover the consideration paid, if any, for shares of the Company's Common
Stock, with interest thereon from the date of the Yukon Continuance to the date
of repayment by the Company, less the amount of any income received thereon,
upon the tender of such securities, or for damages if the shareholder no longer
owns such securities. The Company intends to vigorously defend any such
shareholder lawsuit and believes that it may have valid defenses, including the
running of applicable statutes of limitations, against claims by some or all of
its shareholders. However, to the extent any of the Company's shareholders
obtain a judgment against the Company for damages, the Company's net assets and
net worth will be reduced, which in turn could reduce the Company's ability to
obtain financing for its exploration and drilling operations and cause the
Company to curtail operations. There is no assurance that the Company will have
the necessary funds or sufficient assets to pay any such judgment obtained by
any shareholder against the Company. The Company is unable to quantify the
amount of such contingent liability, if any. See "Yukon Continuance."
Significant Capital Expenditures Necessary for Undeveloped Properties.
Almost all of the Company's oil and gas reserves are classified as Proved
Undeveloped Reserves, meaning very little production currently exists. Recovery
of the Company's Proved Undeveloped Reserves will require significant capital
expenditures. Management estimates that aggregate capital expenditures of
approximately $20 million will be required to fully develop these reserves, of
which $9 million will be available under the recently negotiated $10 million
development credit facility. No assurance can be given that the Company's
estimates of capital expenditures will prove accurate, that its financing
sources will be sufficient to fully fund its planned development activities or
that development activities will be either successful or in accordance with
the Company's schedule. Additionally, any significant decrease in oil and gas
prices or any significant increase in the cost of development could result in a
significant reduction in the number of wells drilled and/or reworked. No
assurance can be given that any wells will produce oil or gas in commercially
profitable quantities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business and Properties -- Description
of Properties" and "-- Oil and Gas Reserves."
No Assurance of Additional Financing. Development of the Company's
properties will require additional capital resources. Although the Company is
presently negotiating with private lenders and investors with respect to
sources of additional financing to supplement its existing $10 million credit
facility, the Company has no commitments to obtain any additional debt or equity
financing and there can be no assurance that additional financing will be
available, when required, on favorable terms to the Company. The inability to
obtain additional financing would have a material adverse effect on the Company,
including requiring the Company to curtail significantly its oil and gas
acquisition and development plans or farm-out development of its properties.
Any additional financing may involve substantial dilution
to the interests of the Company's shareholders at that time. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business and Properties - Recent Developments; Means Unit Credit Facility."
Increased Cash Flow Dependent Upon Ability to Develop Current Properties
and Acquire Additional Reserves. The Company's future oil and gas reserves and
production, and therefore its cash flows, are highly dependent upon its success
in exploiting its current reserve base and acquiring or discovering additional
reserves. Without the addition of reserves through acquisition, exploration or
development activities, the Company'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, the Company's ability to make the necessary capital investments to
<PAGE> -11-
maintain and expand its oil and gas reserves will be impaired. In addition, no
assurance can be given that the Company will be able to find and develop or
acquire additional reserves to replace production at acceptable costs.
Dependence upon Company's Ability to Manage Growth and Expansion. The
Company's ability to manage its growth, if any, will require it to continue to
improve and expand its management, operational and financial systems
and controls. Any measurable growth in the Company's business will result in
additional demands on its management, administrative, operation, financial and
technical resources. There can be no assurance that the Company will be able to
successfully address these additional demands. There also can be no assurance
that the Company's operating and financial control systems will be adequate to
support its future operations and anticipated growth. Failure to manage the
Company's growth properly could have a material adverse effect upon the
Company's business, financial condition and results of operations. The Company
may also seek potential acquisitions of oil and gas properties and related
service businesses that could complement or expand the Company's business. In
the event the Company were to identify an appropriate acquisition candidate,
there is no assurance that the Company would be able to successfully negotiate,
finance or integrate such acquired properties or businesses into current
operations. Furthermore, such an acquisition could cause
a diversion of management's time and resources. There can be no assurance that
a given acquisition, when consummated, would not materially adversely affect the
Company's business and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Business and
Properties" and "Management."
Acquisition Risks. The Company has grown primarily through acquisitions
and intends to continue acquiring oil and gas properties. Although the Company
performs a review of the properties proposed to be acquired, such reviews
are subject to uncertainties. It generally is not feasible to review in detail
every individual property involved in an acquisition. Ordinarily, management
review efforts are focused on the higher-valued properties. However, even a
detailed review of all properties and records may not reveal existing or
potential problems; nor will it permit the Company to become sufficiently
familiar with the properties to assess fully their deficiencies and
capabilities. Inspections are not always performed on every well, and potential
problems, such as mechanical integrity of equipment and environmental
conditions that may require significant remedial expenditures, are not
necessarily observable even when an inspection is undertaken. See "Business and
Properties -- Business Strategy."
The Company has recently begun to focus its acquisition efforts on larger
packages of oil and gas properties, such as the properties included in the East
Binger Unit and Zama Lake Property. The acquisition of larger oil and gas
properties may involve substantially higher costs and may pose additional issues
regarding financing, operations and management. There can be no assurance that
oil and gas properties acquired by the Company will be successfully
integrated into the Company's operations or will achieve desired profitability
objectives. See "Business and Properties -- Recent Developments."
Exploration and Development Risks; Waterflood Projects. The Company
intends to increase its development and, to a lesser extent, exploration
activities. The Company does not intend to engage in any significant
exploration drilling activities in 1998. Exploration drilling and, to a lesser
extent, development drilling of oil and gas reserves involve
a high degree of risk that no commercial production will be obtained and/or that
production will be insufficient to recover drilling and completion costs. The
cost of drilling, completing and operating wells is often uncertain. The
Company's drilling operations may be curtailed, delayed or canceled as a result
of numerous factors, including title problems, weather
conditions, compliance with governmental requirements and shortages or delays in
the delivery of equipment. Furthermore, completion of a well does not assure a
profit on the investment or a recovery of drilling, completion and
operating costs. See "Business and Properties -- Development and Exploration
Activities."
There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques, and drilling activities in
general. Part of the Company's inventory of development prospects consists of
waterflood projects. Waterflooding involves significant capital expenditures
and uncertainty as to the total amount of secondary reserves that can be
recovered. In waterflood operations, there is generally a delay between the
initiation of water injection into a formation containing hydrocarbons and any
increase in production that may result. The operating cost per unit of
production of waterflood projects is generally higher during the initial phases
of such projects due to the purchase of injection water and related costs, as
well as during the later stages of the life of the project as production
declines. The degree of success, if any, of any secondary recovery program
depends on a large number of factors, including the porosity of the formation,
the technique used and the location of injector wells. See "Business and
Properties -- Development and Exploration Activities."
<PAGE> -12-
Volatility of Oil and Gas Prices. The Company's revenues, profitability
and the carrying value of its oil and gas properties are substantially dependent
upon prevailing prices of, and demand for, oil and gas and the costs of
acquiring, finding, developing and producing reserves. The Company's ability to
maintain or increase its borrowing capacity, to repay current or future
indebtedness, and to obtain additional capital on favorable terms is also
substantially dependent upon oil and gas prices. Historically, the markets for
oil and gas have been volatile and are likely to continue to be volatile
in the future. Prices for oil and gas are subject to wide fluctuations in
response to: (i) relatively minor changes in the supply of, and demand for, oil
and gas; (ii) market uncertainty; and (iii) a variety of additional factors, all
of which are beyond the Company's control. These factors include domestic and
foreign political conditions, the price and availability of domestic and
imported oil and gas, the level of consumer and industrial demand, weather,
domestic and foreign government relations, the price and availability of
alternative fuels and overall economic conditions. Furthermore, the
marketability of the Company's production depends in part upon the availability,
proximity and capacity of gathering systems, pipelines and processing
facilities. Volatility in oil and gas prices could affect the Company's ability
to market its production through such systems, pipelines or facilities.
Substantially all of the Company's gas production is currently
sold to gas marketing firms or end users either on the spot market on a month-
to-month basis at prevailing spot market prices or under long-term contracts
based on current spot market prices. The Company normally sells its oil under
month-to-month contracts with a variety of purchasers. Accordingly, the
Company's oil and gas sales expose it to the commodities risks associated with
changes in market prices. See "Business and Properties -- Marketing of
Production."
Uncertainty of Estimates of Reserves and Future Net Cash Flows. This
Prospectus contains estimates of the Company's oil and gas reserves and the
future net cash flows from those reserves, which have been prepared or audited
by certain independent petroleum consultants. There are numerous uncertainties
inherent in estimating quantities of Proved Reserves of oil and gas and in
projecting future rates of production and the timing of development
expenditures, including many factors beyond the Company's control. The
estimates in this Prospectus are based on various assumptions,
including, for example, constant oil and gas prices, operating expenses, capital
expenditures and the availability of funds, and, therefore, are inherently
imprecise indications of future net cash flows. Actual future production, cash
flows, taxes, operating expenses, development expenditures and quantities of
recoverable oil and gas reserves may vary substantially from those assumed in
the estimates. Any significant variance in these assumptions could materially
affect the estimated quantity and value of reserves set forth in this
Prospectus. Additionally, the Company's reserves may be subject to
downward or upward revision based upon actual production performance, results of
future development and exploration, prevailing oil and gas prices and other
factors, many of which are beyond the Company's control. See "Business and
Properties -- Oil and Gas Reserves."
The PV-10 of Proved Reserves referred to in this Prospectus should not be
construed as the current market value of the estimated Proved Reserves of oil
and gas attributable to the Company's properties. In accordance with
applicable requirements of the Commission, the estimated discounted future net
cash flows from Proved Reserves are generally based on prices and costs as of
the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by (i) the timing of both production and related expenses; (ii) changes in
consumption levels; and (iii) governmental regulations or taxation. In
addition, the calculation of the present value of the future net cash flows
using a 10% discount as required by the Commission is not necessarily
the most appropriate discount factor based on interest rates in effect from time
to time and risks associated with the Company's reserves or the oil and gas
industry in general. Furthermore, the Company's reserves may be subject to
downward or upward revision based upon actual production, results of future
development, supply and demand for oil and gas, prevailing oil and gas prices
and other factors. See "Business and Properties -- Oil and Gas Reserves."
Under full cost accounting, the Company would be required to take a non-
cash charge against earnings to the extent capitalized costs of acquisition,
exploration and development (net of depletion and depreciation), less deferred
income taxes, exceed the PV-10 of its Proved Reserves and the lower of cost or
fair value of unproved properties after income tax effects. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Background."
Operating Hazards and Uninsured Risks; Production Curtailments. The
Company's oil and gas business involves a variety of operating risks, including,
but not limited to, unexpected formations or pressures, uncontrollable
flows of oil, gas, brine or well fluids into the environment (including
groundwater contamination), blowouts, fires, explosions, pollution and other
risks, any of which could result in personal injuries, loss of life, damage to
properties and substantial losses. Although the Company carries insurance at
levels which it believes are reasonable, it is not fully insured
against all risks. The Company does not carry business interruption insurance.
Losses and liabilities arising from uninsured or under-insured events could have
<PAGE> -13-
a material adverse effect on the financial condition and operations of the
Company.
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
have been subject to production curtailments. The curtailments range from
production being partially restricted to wells being completely shut-in. The
duration of curtailments varies from a few days to several months. In most
cases the Company is provided only limited notice as to when production will be
curtailed and the duration of such curtailments. The Company is not currently
experiencing any material curtailment on its production.
Laws and Regulations. The Company's operations are affected by extensive
regulation pursuant to various federal, state and local laws and regulations
relating to the exploration for and development, production, gathering and
marketing of oil and gas. Matters subject to regulation include discharge
permits for drilling operations, drilling and abandonment bonds or other
financial responsibility requirements, reports concerning operations, the
spacing of wells, unitization and pooling of properties, and taxation. From
time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and gas
wells below actual production capacity in order to conserve supplies of oil and
gas. See "Business and Properties - Regulation"
Compliance with Environmental Regulations. Operations of the Company are
also subject to numerous environmental laws, including but not limited to, those
governing management of waste, protection of water, air quality,
the discharge of materials into the environment, and preservation of natural
resources. Non-compliance with environmental laws and the discharge of oil,
gas, or other materials into the air, soil or water may give rise to liabilities
to the government and third parties, including civil and criminal penalties, and
may require the Company to incur costs to remedy the discharge. Laws and
regulations protecting the environment have become more stringent in recent
years, and may in certain circumstances impose retroactive, strict, and joint
and several liability rendering entities liable for environmental damage without
regard to negligence or fault. From time to time the Company has agreed to
indemnify sellers of producing properties from whom the Company has acquired
reserves against certain liabilities for environmental claims associated with
such properties. There can be no assurance that new laws or regulations, or
modifications of or new interpretations of existing laws and regulations, will
not increase substantially the cost of compliance or otherwise
adversely affect the Company's oil and gas operations and financial condition or
that material indemnity claims will not arise against the Company with respect
to properties acquired by or from the Company. While the Company does not
anticipate incurring material costs in connection with environmental compliance
and remediation, it cannot guarantee that material costs will not be incurred.
See "Business and Properties - Regulation; Environmental Regulation."
Competition. The Company encounters substantial competition in acquiring
properties, marketing oil and gas, securing trained personnel and operating its
properties. Many competitors have financial and other resources that
substantially exceed those of the Company. The Company's competitors in
acquisitions, development, exploration and production include major oil
companies, numerous independents, individual proprietors and others. Therefore,
competitors may be able to pay more for desirable leases and to evaluate, bid
for and purchase a greater number of properties or prospects than the financial
or personnel resources of the Company will permit. See "Business and
Properties -- Competition."
Dependence on Key Personnel. The Company depends to a large extent on the
services of Eugene A. Soltero, the Company's Chairman of the Board and Chief
Executive Officer, James E. Hogue, the President and Chief Operating
Officer of the Company, and Leon A. Romero, Senior Vice President and Chief
Financial Officer. The loss of the services of any one of these individuals
could have a material adverse effect on the Company's operations. The Company
has not entered into any employment contracts with any of its executive
officers, nor has it obtained key personnel life insurance. The Company
believes that its success is also dependent on its ability to continue to employ
and retain skilled technical personnel. See "Management."
Concentration of Voting Power. Upon the sale of all of the Shares offered
hereby, the Company's executive officers, directors and their affiliates will
beneficially own approximately 20% of the Company's then outstanding
26,437,587 shares of Common Stock, and two officers of the Company have the
right under certain Voting Agreements to vote an additional approximately 2.0
million shares of Common Stock representing approximately 8% of the then
outstanding shares of Common Stock upon sale of all of the Shares offered
hereby. As a result, officers, directors and their affiliates will have the
ability to exert significant influence over the business affairs of the Company,
<PAGE> -14-
including the ability to influence the election of directors and result of
voting on all matters requiring stockholder approval. See "Management -- Voting
Agreements" and "Principal Stockholders."
Conflicts of Interests. Certain officers, directors and related parties
have engaged in business transactions with the Company which were not the result
of arms'-length negotiations between independent parties. Management believes
that the terms of these transaction were as favorable to the Company as those
that could have been obtained from unaffiliated parties under similar
circumstances. All future transactions between the Company and its affiliates
will be on terms no less favorable than could be obtained from unaffiliated
third parties and will be approved by a majority of the disinterested members of
the Board of Directors of the Company. See "Certain Relationships and Related
Transactions."
Public Market and Possible Volatility of Securities. The Common Stock is
traded on the AMEX and "over-the-counter" in Canada on the Canadian Dealing
Network ("CDN"). The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of drilling results by the Company and other events or factors.
In addition, the U.S. 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 Company's securities. See "Common
Stock Price Ranges and Dividends."
No Dividends. The Company's board of directors presently intends to retain
all of its earnings for the expansion of its business. The Company therefore
does not anticipate the distribution of cash dividends in the foreseeable
future. Any future decision of the Company's board of directors to pay cash
dividends will depend, among other factors, upon the Company's earnings,
financial position and cash requirements. See "Dividend Policy."
Possible Dilution for Future Sales of Common Stock. Under the Company's
Articles of Amalgamation, the Board of Directors has the authority to issue an
unlimited number of shares of Common Stock and to issue options and
warrants to purchase shares of the Company's Common Stock without stockholder
approval. Under the rules and regulations of the AMEX, stockholder approval must
be obtained if the Company issues more than 20% of its then
outstanding shares. The issuance of additional shares of Common Stock or the
issuance of stock upon exercise of outstanding options or warrants may result in
dilution of the equity represented by the then outstanding shares of
Common Stock held by other stockholders. The issuance of additional shares of
Common Stock, while potentially providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Board could issue large blocks of
Common Stock to fend off unwanted tender offers or hostile takeovers without
further stockholder approval. See "Description of Securities" and "Shares
Eligible for Future Sale."
Unlimited Availability of Preferred Stock; Anti-Takeover Provisions. The
Company's board of directors is authorized, without further stockholder action,
to issue an unlimited number of shares of preferred stock in one or more
series and may designate the dividend rate, voting rights and other rights,
preferences and restrictions of each series. The Board of Directors has
authorized the issuance of up to 2,000,000 shares of 8% Cumulative Convertible
Preferred Stock (the "Convertible Preferred Stock"). There are no outstanding
shares of preferred stock and the Company has no plans to issue any preferred
stock, including the Convertible 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 the Company without further action by the stockholders. See "Description of
Securities -- Preferred Stock."
<PAGE> -15-
Shares Eligible for Future Sale; Possible Adverse Effect on Public Market.
Sales of the Shares offered hereby could have an adverse effect on the market
price of the Common Stock. As of the date of this Prospectus, there
will be approximately 19,439,572 shares of Common Stock outstanding, which
amount does not include 4,238,975 shares which underlie outstanding options and
warrants, including 2,913,309 shares reserved for issuance upon exercise of
outstanding warrants held by certain Selling Stockholders, or up to 2,964,706
million Shares offered hereby by the Convertible Debenture holders, assuming
conversion of the Convertible Debentures and exercise of Debenture Warrants.
Substantially all of the Company's outstanding shares of Common Stock and the
Shares are eligible for public sale without restrictions, except for shares
purchased by affiliates (those controlling or controlled by or under common
control with the Company and generally deemed to include officers and directors)
of the Company. Approximately 600,000 shares of the Company's Common Stock are
"restricted securities" as that term is defined under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Subject to
the volume and holding period limitations of Rule 144, 600,000 outstanding
shares of Common Stock are eligible for sale under Rule 144 as of the date of
this Prospectus. No prediction can be made as to the effect, if any, that
future sales of additional shares of Common Stock or the availability of such
shares for sale under Rule 144, other applicable exemptions or otherwise will
have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect prevailing market
prices of the Common Stock. See "Principal Stockholders", "Selling
Stockholders", and "Shares Eligible for Future Sale."
Exchange Rate Fluctuations. The Company is exposed to foreign exchange
risks since it has granted stock options and warrants 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 the Company receives upon
exercise of warrants and options.
Current Prospectus Required in Connection with Sale of Shares Offered
Hereby. The Selling Stockholders will be able to sell the Shares offered hereby
only if (i) there is a current prospectus relating to the Shares offered hereby
under an effective registration statement filed with the Commission, and (ii)
such Shares are then qualified for sale or exempt therefrom under applicable
state securities laws of the jurisdictions in which the various Selling
Stockholders reside. The Company has agreed to use its best efforts to maintain
the effectiveness of the registration of the Shares being offered hereunder for
three years from the date of this Prospectus or such earlier date when all of
the Shares being offered hereunder have been sold or may be sold without volume
or other restrictions pursuant to Rule 144 under the Securities Act, as
determined by counsel to the Company pursuant to a written opinion letter.
There can be no assurance, however, that the Company will be successful in
maintaining a current registration statement. After a registration statement
becomes effective, it may require updating by the filing of a post-effective
amendment. A post-effective amendment is required (i) any time after nine
months subsequent to the effective date when any information contained in the
prospectus is over 16 months old, (ii) when facts or events have occurred which
represent a fundamental change in the information contained in the registration
statement, or (iii) when any material change occurs in the information relating
to the plan or distribution of the securities registered by such registration
statement. The Company anticipates that it will be required to file a post-
effective amendment to this Registration Statement from time to time during the
next 12 months to reflect current information regarding the Company.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Common Stock began trading through the Canadian Dealing Network ("CDN")
on June 24, 1996, under the symbol "CVZC". From June 24, 1996, through December
31, 1997, the following table sets forth the high and low bid information for
the Company'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 $.69 to $.74 range. On December 31, 1997 one Canadian
dollar was worth $0.72 U.S. Since July 14, 1998, there have been no significant
trades on the C.D.N. On July 14, 1998, the closing bid price of the Company's
Common Stock was C$1.00.
<PAGE> -16-
High Low
June 21-30, 1996 C$2.80 C$2.50
July 1 - September 30, 1996 C$2.60 C$1.20
October 1 - December 31, 1996 C$1.90 C$0.75
January 1 - March 31, 1997 C$3.45 C$1.45
April 1 - June 30, 1997 C$2.55 C$1.50
July 1 - September 30, 1997 C$6.50 C$1.95
October 1 - December 31, 1997 C$4.17 C$3.91
The Company's Common Stock began trading through the NASD Electronic
Bulletin Board on January 14, 1997 under the symbol "CTVYF". On July 1, 1997,
the Company's symbol was changed to "CTVY". The following table
sets forth the high and low bid information for the Company's Common Stock in
U.S. currency as reported on the NASD Electronic Bulletin Board since January
14, 1997. The table reflects inter-dealer prices, without retail mark-up, mark-
down or commission, and may not necessarily represent actual transactions. The
Company's Common Stock was not traded through the NASD Electronic Bulletin Board
after October 17, 1997.
High Low
January 14 - March 31. 1997 $2.20 $1.00
April 1- June 30, 1997 $1.81 $1.12
July 1- September 30, 1997 $4.81 $1.38
October 1-17, 1997 $3.45 $3.12
On October 17, 1997, the Common Stock was listed on the American Stock
Exchange under the symbol "KTN". The following table sets forth the high and
low sales prices for the Common Stock since October 17, 1997.
High Low
October 17 - December 31, 1997 $6.00 $2.12
January 1 - March 31, 1998 $2.94 $1.38
April 1 - June 30, 1998 $1.75 $0.88
July 1 - September 15, 1998 $1.19 $0.50
As of June 30, 1998, there were approximately 1,065 record holders of the
Company's Common Stock.
DIVIDEND POLICY
The Company has not previously paid any cash dividends on its Common Stock
and does not anticipate or contemplate paying dividends on the Common Stock in
the foreseeable future. It is the present intention of management
to utilize all available funds for the development of the Company's business.
In addition, the Company may not pay any dividends on common equity unless and
until all dividend rights on outstanding preferred stock, if any, have been
satisfied. The only other restrictions that limit the ability to pay dividends
on common equity or that are likely to do so in the future, are those
restrictions imposed by law or by certain credit agreements.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 and on a pro forma basis to reflect the exercise of certain warrants,
including the Debenture Warrants, held by Selling Stockholders and conversion
of the Convertible Debentures. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
<PAGE> -17-
June 30, 1998
Actual(1) Pro
forma(2)
Current maturities of long-term debt $ -0- $ -0-
Long-term debt(3) 4,654,638 334,638
----------- ---------
Total debt 4,654,638 334,638
Common Stock, no par value; 17,273,278 shares and
26,437,587, respectively, issued and outstanding(2) 21,119,482 31,012,477
Warrants and beneficial conversion feature 823,695 -
Accumulated deficit in development stage (3,599,755) (3,599,755)
Total stockholders' equity 18,343,422 27,412,722
---------- ----------
Total capitalization $ 22,998,060 $27,747,360
========== ==========
(1) Assumes no exercise of outstanding warrants and options and no
conversion of Convertible Debentures.
(2) Assumes that 2,913,309 shares of Common Stock are issued to various
Selling Stockholders upon exercise of outstanding warrants other
than the Debenture Warrants, resulting in proceeds to the Company
of approximately $3,949,300; 2,324,706 shares are issued to the
Convertible Debenture holders upon conversion of the Convertible
Debentures; and 640,000 shares are issued to the Convertible
Debenture holders upon exercise of the Debenture Warrants at an
estimated exercise price of $1.25 per share, resulting in
additional proceeds to the Company of $800,000. Upon exercise of
the warrants, including the Debenture Warrants, held by Selling
Stockholders, and conversion of the Convertible Debentures, the
Company will have approximately 26,437,587 outstanding shares of
Common Stock. See "Business and Properties -- Recent Developments;
Sale of Convertible Debentures," "Description of Securities,"
"Selling Stockholders" and "Agreements with Selling Stockholders."
(3) Includes outstanding $4,320,000 Convertible Debentures. See
"Business and Properties C Recent Developments; Sale of Convertible
Debentures" and "Description of Securities -- Convertible
Debentures."
SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The following summary selected historical consolidated and combined
financial information has been derived from the financial statements of the
Company. This financial information should be read in conjunction with the
historical consolidated financial statements and notes thereto of the Company
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
Statement of Operations Data: Year Ended Year Ended Year Ended
June 30, June 30, June 30,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Oil and gas sales $ 835,684 $ 272,243 $ -0-
Equipment sales 987,811 -0- -0-
Oil and gas production costs 615,162 252,272 -0-
Equipment purchase and rework 660,373 -0- -0-
General and administrative expenses 1,330,361 1,434,046 518,826
Compensation expense related to common
stock issuances at less than fair value -0- 1,391,632 446,950
Income/(loss) from operations (1,160,530) (2,832,707) (1,099,360)
Interest and financing expense 814,845 97,158 138,970
Income tax benefit (expenses) 467,678 919,000 387,000
Net income/(loss) (830,600) (2,006,878) (712,360)
Net loss per weighted-average share of
common stock outstanding
Basic and Diluted $ (0.05) $ (0.18) $ (0.07)
Number of weighted-average shares of
common stock outstanding 16,301,723 11,403,000 9,901,000
</TABLE>
<PAGE> -18-
<TABLE>
<S> <C> <C>
Balance Sheet Data: June 30, 1998 June 30, 1997
Current assets $ 1,592,630 $ 753,410
Oil and gas properties 24,331,189 11,821,346
Total assets 26,537,856 12,615,405
Current liabilities 1,571,807 1,348,037
Long-term debt 4,654,638 139,710
Total liabilities 8,194,434 2,156,747
Stockholders' equity 18,343,422 10,458,658
Working capital (deficit) 20,823 (594,627)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and "Selected Historical Consolidated and
Combined Financial Information" and respective notes thereto, included
elsewhere herein. The information below should not be construed to imply that
the results discussed herein will necessarily continue into the future or that
any conclusion reached herein will necessarily be indicative of actual operating
results in the future. Such discussion represents only the best present
assessment of management of the Company. Because of the
Company's recent acquisitions and the limited scale of the Company's operations
prior to 1996, the results of operations from period to period are not
necessarily comparative.
Background
The Company pursued its acquisition program with the addition of three
properties in fiscal years 1998 and 1997. Two Texas properties were acquired:
the Means Unit in Andrews County and the Sears Ranch Prospect in Nolan
and Fisher Counties. One Oklahoma property was also acquired: the N.E. Alden
Field in Caddo County. The acquisition of the East Binger Unit, located in
Caddo County, Oklahoma, was scheduled to close on May 31, 1998. As a result of
declining oil and gas prices, the Company elected not to purchase the East
Binger property. Combined with the Cheneyboro Field in Navarro County, Texas,
these properties provide an excellent opportunity for future exploration and
development drilling. The Company also purchased and subsequently resold an
interest in the Zama Lake area in Alberta, Canada, acquired certain horizontal
drilling technology and equipment, and acquired two recently rebuilt well
servicing rigs and related transportation and service equipment. See "Business
and Properties -- Recent Developments."
Management has focused on purchasing properties that are strong candidates
for either secondary recovery initiatives or the employment of specialized
drilling and production methods, such as horizontal drilling. The Company
also believes that its ability to use the Mustang Servicing Companies to drill
both conventional vertical and advanced horizontal wells should lower the
Company's finding and development costs.
The Company uses the full cost method of accounting for its investment in
oil and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. Because the
Company, during fiscal year 1998 used its well service and horizontal drilling
equipment solely for its own properties, such equipment is included in the full
cost pool. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value of estimated future net cash flow from Proved Reserves of oil and gas,
discounted at 10% and the lower of cost or fair value of unproved properties,
after combined income tax effects, such excess costs are charged to operations.
Once incurred, a write-down of oil and gas properties is not reversible at a
later date even if oil or gas prices increase. While the Company has never been
required to write-down its asset base, significant downward revisions of
quantity estimates or declines in oil and gas prices from those in effect on
June 30, 1998 which are not offset by other factors could result in a write-down
for impairment of oil and gas properties.
Certain statements in this section of the Prospectus and elsewhere herein
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
<PAGE> -19-
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, (i) significant variability in the
Company's quarterly revenues and results of operations as a result of variations
in the Company's production in a particular quarter while a significant
percentage of its operating expenses are fixed in advance, (ii) changes in the
prices of oil and gas, (iii) the Company's ability to obtain capital, (iv) other
risk factors commonly faced by development stage oil and gas companies.
Fiscal Year 1998 as Compared to Fiscal Year 1997
During the fiscal year ended June 30, 1998, the Company had a net loss of
$830,600 on revenues of $1,825,852 as compared with a net loss of $2,006,878 on
revenues of $272,243 for the fiscal year ended June 30, 1997. The
improvement results from the first used equipment sales by the Company's
subsidiary, Mustang Oilfield Equipment Company, oil and gas production beginning
March 1997 from the N.E. Alden Field and August 1997 from the Aspen
properties, oil and gas production beginning November 1997 from the Sears Ranch
Prospect, and continued production from the Company's Cheneyboro properties, as
well as reductions in general and administrative costs, and gain from the
purchase and sale of a Canadian property, which were offset by costs associated
with the financing and development of the Company.
Oil and gas sales increased 207% from $272,243 for the fiscal year ended
June 30, 1997 to $835,684 for the fiscal year ended June 30, 1998, reflecting
the addition of the Aspen, N.E. Alden and Sears Ranch acquisitions. Oil and
gas production costs increased 144% for the fiscal year ended June 30, 1998,
reflecting the addition of oil and gas properties and continued remedial work
required at the N.E. Alden Field. The Company did not have any significant oil
and gas production costs for the fiscal year ended June 30, 1997.
Equipment sales for the fiscal year ended June 30, 1998 were $987,811 as
compared to no sales for the fiscal year ended June 30, 1997. Equipment
purchase and refurbishing expenses were $660,373 for the fiscal year ended
June 30, 1998 as compared to zero expenses for the comparable period ended June
30, 1997.
General and administrative costs were $1,330,361 for the fiscal year ended
June 30, 1998, a decrease of $1,495,317 or 53% less than the $2,825,678 incurred
for the fiscal year ended June 30, 1997. A substantial portion of
the decrease was due to the expiration of the investor relations contract with
Liviakis Financial Communications, Inc. ("LFC") and an administrative cost
reduction program instituted by management in mid-June 1997. In addition, the
Company allocated that portion of its general and administrative expenses that
were directly associated with oil and gas acquisition and development activities
during the fiscal year ended June 30, 1998 to oil and gas properties. No such
costs were allocated during the fiscal year ended June 30, 1997 because the
Company was primarily involved in fund raising activities during that time
period.
The Company purchased and sold a Canadian oil and gas property during
January 1998 that resulted in a gain of $629,660.
The Company will recognize an income tax benefit of $467,678 for the fiscal
year ended June 30, 1998 as compared to recognition of an income tax benefit of
$919,000 for the fiscal year ended June 30, 1997. This is directly
related to the size of the profit or loss before income taxes during such
periods.
Fiscal Year 1997 As Compared to Fiscal Year 1996
During the fiscal year ended June 30, 1997, the Company incurred a net loss
of $2,006,878 as compared to a loss of $712,360 for fiscal 1996. This 182%
increase in net loss is primarily attributable to increases in general and
administrative expenses.
General and administrative costs were $2,825,678 in fiscal 1997, an
increase of $1,859,902 or 193% over the $965,776 incurred in fiscal 1996.
Included in 1997 general and administrative expenses is a compensation expense
of $1,286,800 (approximately 46% of total general and administrative expenses)
representing the value of shares and warrants issued to LFC for certain investor
relations services, and approximately $212,000 representing costs incurred with
respect to a public offering of securities which did not materialize. The
remaining increase in general and administrative expense can be attributed to
the addition of staff and technical personnel during 1997 as compared to a
relatively small staff which was in place for only a part of 1996. See "Certain
Relationships and Related Transactions."
<PAGE> -20-
Oil and gas production costs were $252,272 in 1997 as compared to none in
1996. These costs primarily relate to the N.E. Alden Field and particularly to
rehabilitation costs which were not capitalized. The Company initially
acquired its interest in the N.E. Alden Field in December 1996 for $390,000 of
which $35,000 was paid in December 1996 and $355,000 was paid upon closing on
March 3, 1997. Oil and gas sales from the N.E. Alden Field in fiscal 1997
were approximately $200,000. Rehabilitation work on two wells in the Cheneyboro
Field in the fourth quarter of fiscal 1996 resulted in oil and gas sales of
$74,473 during fiscal 1997. The Company recognized an income tax benefit of
$919,000 in fiscal 1997 compared to $387,000 in fiscal 1996. This is directly
related to the size of the loss before income taxes during such periods.
During fiscal 1996, the Company issued 300,000 shares to two former
officers of the Company for services which was recorded at $446,950. Other
expenses during this period were $657,796 which includes $138,970 in interest
expense and officers and staff compensation. The loss before income tax benefit
of $387,000 was $1,099,360 during fiscal 1996.
Liquidity and Capital Resources
As of June 30, 1998, the Company had a net working capital of $20,823,
before adjustments of $396,411 for non-cash accrued liabilities, leaving an
effective working capital of $417,234. For fiscal year 1999, the Company
anticipates a capital budget of approximately $10 million, of which $8 million
would be spent developing the Means Unit, $0.5 million is allocated to workovers
at N.E. Alden and $1.5 million will be used at Cheneyboro. The Means Unit and
N.E. Alden funding is scheduled to be provided by the $10 million line of
credit. The Company plans to obtain the capital for its initial Cheneyboro
drilling from a combination of reduction of its oilfield equipment inventory,
vendor financing, exchange of horizontal tools for services and private
offerings of securities. No assurance can be given that the Company will be
successful in these efforts. See "Business and Properties - Recent
Developments, Means Credit Facility"
During the fiscal year ended June 30, 1998, the Company used $604,084 net
cash for its operating activities, of which $891,359 was used for increases in
materials and supplies inventory for its used equipment resale business and
$216,380 was loss before non-cash charges, offset by $503,655 net increases in
cash from net changes to receivables and payables. Cash of $6,661,848 was used
in investing activities, primarily in oil and gas properties, and well service
and horizontal drilling equipment. Net cash from investing activities was
$6,709,082, consisting of: (i) $8,387,331 generated from the issuance of long
term notes, sale of common stock, exercise of warrants, and the issuance of the
Convertible Debentures; less (ii) $1,678,249 used for payment of liability
related to the Aspen acquisition, costs related to sale of stock and notes, and
repayments of advances payable, notes payable and long-term debt. See "Business
and Properties -- Recent Developments; Sale of Convertible Debentures" and
"Description of Securities -- Warrants; WPM Warrants."
The Convertible Debentures require payments of interest only, at 7%, until
December 31, 2001, at which time principal is due in full. Interest payments
may be made in shares of the Company's Common Stock, at the Company's
election. The Debentures may be converted, at the option of the holders, at the
lesser of $1.50 per share or 85% of the average of the three lowest closing bid
prices during the ten trading days prior to the notice of conversion. If the
conversion price is below $1.25 per share, no more than 10% of the Debentures of
any holder may be converted in any 30-day period. The Company recorded an
expense of $425,200 in fiscal year 1998 and will record approximately
$260,000 of additional expense in fiscal year 1999 for the difference between
the conversion price and the market price of the Company's Common Stock at the
time the Debentures become eligible for conversion.
During the first quarter of fiscal year 1999, through September 15, 1998,
the Company has raised $142,500 through the sale, in a private offering, of
285,000 shares of its Common Stock and warrants to purchase 285,000 shares,
exercisable at $0.60 per share until December 31, 2001, and obtained from an
investor a subscription agreement for an additional $430,000 to be paid prior to
December 31, 1998.
For the remainder of fiscal year 1999, the Company expects that its cash
for operations and capital expenditure requirements will be met in the aggregate
as follows:
- - through the proceeds received from the exercise of outstanding warrants;
- - institutional reserves based development mezzanine loans;
- - traditional commercial bank asset lending;
- - private sales of securities;
<PAGE> -21-
- - conversion of debt to equity;
- - reduction of oilfield equipment inventory;
- - exchange of drilling and well servicing equipment for drilling services;
- - farmout and/or sale of oil and gas property interests; and
- - revenues from operations.
Management believes a combination of the above sources of capital will
provide the necessary liquidity to operate the Company over the next 12 months.
No assurance can be given that any additional financing will be available
to the Company on acceptable terms, if at all. The inability to obtain
additional financing would have a material adverse effect on the Company,
including requiring the Company to curtail significantly development of its
properties. Any financing may involve substantial dilution to the interests of
the Company's then existing shareholders.
On February 9, 1998, the Company effected the Yukon Continuance in
accordance with applicable Canadian law. The Yukon Continuance was approved by
the shareholders of the Company at a meeting held on December 10,
1996, for which proxies were solicited in accordance with applicable Canadian
laws, but the transaction was not registered under the Securities Act. The
Staff of the Commission has advised the Company that the registration of the
Yukon Continuance was required pursuant to Rule 145 and that the failure to
register the Yukon Continuance was a violation of Section 5 of the Act. As a
result, the Company may have a contingent liability to certain of its
shareholders, who may sue the Company to recover the consideration paid, if any,
for shares of the Company's Common Stock, with interest thereon from the date of
the Yukon Continuance to the date of repayment by the Company, less the amount
of any income received thereon, upon the tender of such securities, or for
damages if the shareholder no longer owns such securities. The Company intends
to vigorously defend any such shareholder lawsuits and believes that it may have
valid defenses, including the running of applicable statutes of limitations,
against claims by some or all of its shareholders. However, to
the extent any of the Company's shareholders obtain a judgment against the
Company for damages, the Company's net assets and net worth will be reduced,
which in turn could reduce the Company's ability to obtain financing for its
exploration and drilling operations and cause the Company to curtail operations.
There is no assurance that the Company will have the necessary funds or
sufficient assets to pay any such judgment obtained by any shareholder against
the Company. The Company is unable to quantify the amount of such contingent
liability, if any. See "Yukon Continuance" and "Risk Factors -- Possible
Contingent Liability for Violation of Securities Act."
Changes in Prices
During recent years, there has been significant changes in oil and gas
prices with corresponding changes in property acquisition and development costs.
The results of operations and cash flow of the Company have been, and will
continue to be, affected to a certain extent by the volatility in oil and gas
prices. Should the Company experience a significant increase in oil and gas
prices that is sustained over a prolonged period, it would expect that there
would also be a corresponding increase in oil and gas finding costs, lease
acquisition costs, and operating expenses. The Company has agreed with Triassic
Energy Partnerhs, L.L.C. ("Triassic") to hedge, if requested, its production
from the Means Field. See "Business and Properties - Recent Developments; Means
Credit Facility."
The Company markets oil and gas for its own account, which exposes the
Company to the attendant commodities risk. Substantially all of the Company's
gas production is currently sold to gas marketing firms or end users
either on the spot market on a month-to-month basis at prevailing spot market
prices or under long-term contracts based on current spot market prices. The
Company normally sells its oil under month-to-month contracts with a variety of
purchasers.
Year 2000 Modifications
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications. Many of the companies with whom the Company has material
transactions have responded to the Company's inquiring and stated that they are
Year 2000 compliant, or are currently examining Year 2000 compliance
issues.
<PAGE> -22-
Other Matters
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
SFAS 128 requires companies with complex capital structures that have publicly
held common stock or common stock equivalents to present both basic and diluted
earnings per share ("EPS") on the face of the income statement. The
presentation of basic EPS replaces the presentation of primary EPS
currently required by Accounting Principles Board Opinion No. 15 ("APB No. 15").
Basic EPS is calculated as income available to common stockholders divided by
the weighted average number of common shares outstanding during the
period. Diluted EPS is calculated using the "if converted" method for
convertible securities and the treasury stock method for options and warrants as
prescribed by APB No. 15. This statement is effective for financial statements
issued for interim and annual periods ending after December 15, 1997. The
Company adopted SFAS 128 as of December 31, 1997 for the period ended December
31, 1997 and all prior periods. The adoption of SFAS 128 has not had a
significant impact on the Company's reported EPS to date.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, Disclosures of Information About
Capital Structure ("SFAS 129") which establishes standards for
disclosing information about an entity's capital structure. The disclosures are
not expect to have a significant impact on the consolidated financial statements
of the Company. SFAS 129 is effective for financial statements ending after
December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130") which established standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 is
effective for years beginning after December 15, 1997. The Company does
not anticipate a material impact to its consolidated financial statements upon
adoption of this standard.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS 131") which establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes the related
disclosures about products and services, geographic areas and major customers.
SFAS 131 replaces the "industry segment" concept of Financial Accounting
Standard No. 14 with a "management approach" concept as the basis for
identifying reportable segments. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company expects
additional disclosures will be required, but otherwise does not anticipate a
material impact to its consolidated financial statements upon adoption of this
standard.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits ("SFAS 132"), and SFAS 133,
Accounting for Derivative Instruments and Hedging Activities." SFAS 132 is
effective for fiscal years beginning after December 15, 1997, and SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company does not
anticipate a material impact to its consolidated financial statements upon
adoption of these standards.
BUSINESS AND PROPERTIES
General
The Company, through its subsidiaries, is engaged in the exploration and
development, acquisition and operation of oil and gas properties with a
geographic focus in major oil and gas producing regions in the United States.
The Company was incorporated in the Province of Ontario, Canada, originally as
Cotton Valley Energy Limited, on February 15, 1995. From its inception through
June 30, 1997, the Company was engaged principally in organization and
capitalization activities and did not generate material revenues from
operations. For the year ended June 30, 1998, the Company concentrated on
acquiring additional properties and integrated engineering and development.
<PAGE> -23-
On June 30, 1995 in a one-for-one share and warrant exchange, the Company
acquired all the issued and outstanding shares of CV Energy. The Company
intends to conduct most of its acquisition, exploration and development
of oil and gas properties through CV Energy.
As a result of the Arjon amalgamation, which was completed on June 14,
1996, the Company's name was changed to Cotton Valley Resources Corporation and
its shares of Common Stock began trading through the Canadian
Dealing Network ("CDN"). Arjon was a public Canadian company formed more than
50 years ago to operate a gold mine. At the time of the amalgamation, Arjon 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 stockholders of Arjon received 686,551 shares of
Common Stock in the amalgamation.
On April 30, 1996, the Company organized Cotton Valley Operating Company, a
Texas corporation ("CV Operating") to operate the Company's oil and gas
properties. The Company on February 25, 1997, organized Cotton
Valley Energy, Inc., an Oklahoma corporation ("CVEI") to acquire and operate the
N.E. Alden Field properties in Caddo County, Oklahoma. CVEI commenced
operations on March 3, 1997. Aspen Energy Corporation, a Nevada corporation
("Aspen"), was an inactive subsidiary of the Company, formed on May 1, 1996,
which was used to accommodate the merger of Aspen Energy Corporation, a New
Mexico corporation ("Old Aspen") into Aspen on July 31, 1997. The
principal asset of Old Aspen was its interest in the Means Unit in Andrews
County, Texas (the "Means Unit"). On May 27, 1998, Aspen organized Cotton
Valley Means, Inc. as a Texas corporation ("CV Means") and transferred all of
its interest in the Means Unit to CV Means to facilitate a $10 million financing
relating to the development of this property.
In addition to CV Energy, CV Operating, CVEI, Aspen and CV Means, the
Company recently organized Mustang Well Servicing Company, a Nevada corporation
("Mustang Well Servicing"), Mustang Oilfield Equipment
Company, a Nevada corporation ("Mustang Equipment"), and Mustang Horizontal
Services, Inc., a Nevada corporation ("Mustang Horizontal") (collectively, the
"Mustang Service Companies"). All of the Company's subsidiaries are wholly
owned by the Company, except for CV Means which is a wholly-owned subsidiary of
Aspen.
The Company believes that the current demand in the petroleum industry for
drilling and production equipment and services in general, and particularly
horizontal drilling equipment, provides the Company with an opportunity to
increase revenues and cash flow through the acquisition and refurbishment of
used oil field equipment and the use of well servicing rigs and related
equipment. The Company has augmented its property acquisition and development
strategy with the addition of the Mustang Service Companies which the Company
believes can provide timely, quality services at competitive costs as well as
providing the Company with the capabilities to perform workovers, horizontal
drilling, and most significantly, the equipment and personnel necessary for the
Company to conduct its exploration and development activities.
Business Strategy
The Company's current business strategy is to (i) continue to increase
reserves, production and cash flows by acquiring properties, or companies with
properties, with development opportunities, (ii) develop existing reserves
through low risk developmental drilling or recompletion programs, (iii)
concentrate on development activities within a limited number of core areas;
(iv) acquire and refurbish used oil field equipment for use in development
activities and for resale; and (v) provide well servicing for the Company's and
other wells. Although the Company continuously is seeking acquisitions of
reserves and oil field equipment, there can be no assurance that the Company
will be able to identify and acquire reserves or oil field equipment upon terms
favorable to the Company or obtain the necessary financing on favorable terms.
The following are key elements of the Company's strategy:
Exploitation and Development of Existing Properties. The Company
has a significant inventory of exploitation projects, including
development drilling, workovers and recompletions. The Company
intends to maximize the value of its properties through development
activities including in-fill drilling,
waterflooding and other enhanced recovery techniques.
Management of Operating Costs. The Company emphasizes strict cost
controls in all aspects of its business and intends to seek the
lowest cost of operations by either operating its own properties
or having the properties operated by others under contract.
<PAGE> -24-
Property Acquisitions. Although the Company has a significant
inventory of exploitation and development opportunities, it
continues to pursue strategic acquisitions which fit its
objectives of increasing oil and gas reserves with development
potential.
The success of the Company in maintaining positive working capital and
obtaining the necessary capital resources to fund future costs associated with
its operations and expansion plans is dependent upon the Company's ability
to (i) increase revenues through acquisitions and recovery of proved producing
and proved developed non-producing reserves; (ii) implement stringent costs
controls at the corporate administrative office and in field operations; (iii)
convert Convertible Debentures to equity; (iv) obtain the exercise of
outstanding warrants; and (v) obtain asset based commercial financing. However,
even if the Company achieves some success with its plans to maintain or increase
its working capital, there can be no assurance that it will be able to generate
sufficient revenues to achieve significant profitable operations
or fund its expansion and acquisition plans.
Recent Developments
Aspen Acquisition. Effective June 30, 1997, the Company, through its
wholly-owned subsidiary, Aspen, acquired Old Aspen, whose principal asset
consisted of a 100% working interest in the Means Unit in Andrews County,
Texas. The purchase price consisted of $200,000 cash, $300,000 of short-term
notes, 2,511,317 shares of Common Stock, of which 269,970 shares were returned
to the Company by the Old Aspen shareholders in settlement of notes
payable to Old Aspen in the amount of $425,000. The acquisition also included
various interests, having an aggregate value of less than $500,000, in two wells
in Utah, which were subsequently sold by the Company for $200,000, two wells
in Latimer County, Oklahoma, one well in Harrison County, Texas and several
shallow wells in Gregg County, Texas. See "- Description of Properties; Means
Unit" and "Agreements with Selling Stockholders -- Aspen Acquisition."
Sears Ranch Prospect. In October, 1997, the Company, through its
subsidiary, CV Energy, completed the acquisition of a 100% working interest in
approximately 6,600 acres in the Sears Ranch area of Nolan and Fisher
Counties, Texas (the "Sears Ranch Prospect") for cash and other consideration.
Other consideration received by the Company included pooling rights, existing
contracts related to the Sears Ranch Prospect and all personal property
(including equipment) located on or used in connection with the Sears Ranch
Prospect. The primary purpose of this acquisition was to acquire oil field
equipment, including pumpjacks, tank batteries, injection pumps, separators,
tubing and casing. See "-Description of Properties; Sears Ranch Prospect".
M&M Acquisition. Effective November 5, 1997, the Company, through its
subsidiary, Mustang Horizontal, acquired certain horizontal drilling technology
and equipment from M&M Directional Drilling Consultants ("M&M").
In connection with the purchase, the Company issued warrants to purchase 60,000
shares of Common Stock and warrants to purchase 100,000 shares of Common Stock
(the "Mustang Warrants") to M&M and LFC, respectively. LFC directed that 25,000
of its Mustang Warrants be issued to Robert B. Prag, an officer of LFC. The
Mustang Warrants are exercisable at any time at an exercise price of $3.50
per share until December 31, 2000. In addition, the Company paid M&M $550,000
cash for the horizontal drilling technology and equipment. Subsequent to the
acquisition, the M&M personnel and equipment were used to drill a single
three-lateral horizontal well on one of the Company's properties, which was
completed as a water injection well for a waterflood program. This well will be
tested for injection for a number of months before a decision would be made to
drill additional horizontal wells on the same property. As a result of the
recent downturn in oil and gas prices, third party service work is not
economically available for Mustang Horizontal and the horizontal drilling of
other Company properties has been delayed pending increases in development
capital availability. Accordingly, the horizontal equipment has been
stacked and the appropriate personnel laid off. The company is currently
seeking to exchange the equipment with a larger horizontal contractor in return
for the horizontal drilling of a test well on the Company's Cheneyboro property.
See "Description of Securities -- Warrants; Mustang Warrants."
Equipment Acquisition. On December 30, 1997, the Company, through its
subsidiary, Mustang Well Servicing, acquired from three institutional lenders,
who had obtained the equipment through a foreclosure proceeding, two recently
rebuilt well servicing rigs and related transportation and service equipment
(the "Equipment") for $1 million in cash and issuance of $220,000 of the
Convertible Debentures described below. The Equipment was tooled out at Mustang
Well Servicing's facilities at Odessa, Texas and began workover and horizontal
drilling re-entry operations in February 1998 on the Company's Means Unit in
Andrews County, Texas and Sears Ranch Prospect in Nolan and Fisher Counties,
Texas.
<PAGE> -25-
Sale of Convertible Debentures. On December 30, 1997, the Company
completed the private placement of $4,320,000 of its 7% Secured Convertible
Debentures ("Convertible Debentures") to a group of eight institutional
investment firms led by a Fort Worth, Texas institutional energy investor.
Approximately $1 million of the cash proceeds and $220,000 of Convertible
Debentures were used to purchase the Equipment. The remaining funds were used
for the acquisition and development of oil and gas properties and purchase of
oil field equipment.
The Convertible Debentures are due December 31, 2001 and are secured by the
Equipment and other assets of the Company, including the Company's properties at
N.E. Alden and Sears Ranch as well as a portion of the Cheneyboro properties.
The Convertible Debentures are convertible into a minimum of approximately 2.88
million shares of the Common Stock and a minimum of 720,000 warrants ("Debenture
Warrants"), subject to adjustment upon certain events, exercisable at
prices related to the market price at the time of conversion, with limits on
rights to convert if the conversion price of the Common Stock falls below a
floor price of $1.25 per share (the "Floor Price"). The conversion price is the
lesser of $1.50 per share or 85% of the average of the three lowest closing bid
prices during the ten trading days prior to the notice of conversion. During
any thirty-day period, any investor may not tender for conversion more than the
greater of $100,000 or 10% of his originally purchased Convertible Debentures at
a conversion price less than the Floor Price. The Company may elect to redeem
(for a 10% premium) any Convertible Debentures tendered for conversion at any
price below the Floor Price.
Under the terms of the Convertible Debentures, the Company was obligated to
obtain on or before May 30, 1998 an effective registration statement covering
the shares of Common Stock to be issued upon conversion of the
Convertible Debentures and exercise of the Debenture Warrants. The Company was
not successful in obtaining the effectiveness of the registration statement
which event, with notice, would be an event of default under the Convertible
Debentures. The Company and each Convertible Debentureholder have agreed,
effective October 5, 1998, to certain amendments to the Convertible Debentures
and related documents, including a waiver of the prospective event of default.
As consideration for the waiver, the Company is obligated to issued a total of
400,000 shares (the "Waiver Shares") on a pro rata basis to each Convertible
Debentureholder. The Waiver Shares are valued by the board of directors at
$0.425 per share. Additionally, the Company is obligated to issue to the
Convertible Debentureholders approximately 720,000 shares of common stock in
lieu of accrued interest of approximately $302,000 on the Convertible Debentures
for December 30, 1997 through December 31, 1998.
During September 1998, $100,000 of Convertible Debentures were converted
into 235,294 shares of Common Stock.
The 4.32 million shares of Common Stock registered herein for the
Convertible Debentureholders consist of 400,000 Waiver Shares, 720,000 Interest
Shares, 235,294 shares issued prior to the date hereof for conversions of
Convertible Debentures, 2,324,706 shares to be issued upon conversion of
Convertible Debentures, and 640,000 shares to be issued upon exercise of the
Debenture Warrants.
In addition to the usual and customary covenants contained in convertible
debenture agreements of this nature, the Company is required to reserve shares
of Common Stock in an amount not less than 200% of the number of shares
of Common Stock that would be issuable upon conversion in full of the
Convertible Debentures and full exercise of the Debenture Warrants granted
thereunder. In furtherance of this covenant, the Company is required to seek
stockholder approval of an increase in the Company's authorized shares if
necessary to maintain such reserves. Furthermore, any holder of Convertible
Debentures shall not be permitted to convert its Convertible Debentures or
exercise its Debenture Warrants to the extent that such conversion or exercise
would result in a beneficial ownership in the Company in excess
of 4.999%. The Convertible Debenture holders have a right of first refusal for
future financing of the Company under certain conditions. The Company has
listed an additional 3.2 million shares, and has prepared an application for the
listing of an additional 1.12 million shares of its Common Stock on AMEX. The
4.32 million shares include Waiver Shares, Interest Shares, shares underlying
the Convertible Debentures and shares to be issued upon exercise of the
Debenture Warrants. Although the Company's Registration Statement, of which
this Prospectus is a part, includes 3.2 million shares which the Company
currently believes will provide sufficient shares upon the conversion of the
Convertible Debentures and upon exercise of all the Debenture Warrants, the
Company has reserved for issuance a total of up to 4.8 million shares of its
Common Stock to be issued, if necessary, upon conversion of the Convertible
Debentures and up to 1.2 million shares to be issued, if necessary, upon
exercise of the Debenture Warrants. See "Description of Securities --
Convertible Debentures," "Selling Stockholders" and "Agreements with Selling
Stockholders."
<PAGE> -26-
Zama Lake Property Purchase and Sale. In January 1998, the Company
completed the purchase of substantially all of the oil and gas interests in the
Zama Lake area in Alberta, Canada (the "Zama Property") owned by
a Canadian independent oil and gas producer. The purchase price was
approximately $6.9 million. Immediately following the purchase of the Zama
Property, the Company sold all of its interests to Phillips Petroleum Resources,
Ltd. and certain of its affiliates for approximately $7.5 million.
The Zama Property consists of a total of 23,400 gross acres (11,672 net
acres) of oil and gas leases and 42 producing wells in northwest Alberta
approximately 55 miles northeast of Rainbow Lake. At the time of this
transaction, the Zama Property's production net to the interests acquired
averaged approximately 270 Bbls/D of oil, 6 MMcf/D of gas and 30 Bbls/D of
natural gas liquids.
Option to Purchase East Binger Unit, Caddo County, Oklahoma. On January
14, 1998, CVEI, a subsidiary of the Company, and Phillips Petroleum Company
("Phillips") entered into an agreement for the purchase by CVEI of all of
Phillips' interests in certain oil and gas leases (the "Leases"), including the
wells, equipment and personal property located on the Leases, in the East Binger
Unit, Caddo County, Oklahoma ("East Binger Unit") for $4,000,000. Closing of
the transaction was subject to CVEI obtaining financing for the purchase by May
31, 1998. As a result of declining oil and gas prices, the Company was unable to
obtain the necessary financing by the scheduled closing date. The Company
did not incur any liability as a result of the failure of the East Binger Unit
to close.
Means Credit Facility. On June 12, 1998, CV Means entered into a credit
agreement with Triassic Energy Partners, L.P. ("Triassic"), an affiliate of
Cambrian Capital Corporation whereby CV Means could borrow up to
$10,000,000 on a multiple-advance, non-revolving basis (the "Means Credit
Facility"). Repayment of amounts advanced under the Means Credit Facility is
guaranteed by the Company and all its subsidiaries.
Under the Means Credit Facility, up to $1,000,000 may be advanced for new
project development working capital purposes. The remaining $9,000,000 may be
advanced for the development of the Company's Means (Queen
Sand) Unit in Andrews County, Texas (the "Means Unit"). As of September 15,
1998, the Company had drawn down $350,000 for working capital and $388,600 for
Means Unit property development purposes. A $10,000,000 promissory
note dated June 12, 1998 with interest at the prime rate of Citibank N.A., New
York, New York plus 2% was issued to Triassic by CV Means in accordance with the
terms of the Means Credit Facility. Until the maturity date, May 31, 2002,
the Company will deliver to Triassic each month a percentage of the revenues
from the Means Unit to be applied to accrued interest and payment of principal
of the note. On the maturity date, the accrued interest and outstanding
principal balance of the note is due and payable. As security for the Means
Credit Facility, CV Means granted a security interest in substantially all the
assets of CV Means, including the Means Unit and all income generated thereby.
As further security for the Means Credit Facility, Aspen, the sole shareholder
of CV Means, pledged all the outstanding shares of
CV Means to Triassic.
As further consideration for the Means Credit Facility, CV Means assigned a
net profits overriding royalty interest in the Means Unit to Cambrian Capital
Partners, L.P. ("Cambrian") and also entered into a commodities swap agreement
with Triassic. The Company also issued a Unit Purchase Option to Cambrian which
allows Cambrian to purchase up to 100,000 units of the Company for $1.75 per
unit. Each unit consists of 1.085 shares of the Company's Common Stock
and one warrant, which grants to the warrant holder the right to purchase two
shares of Common Stock at an exercise price of $2.02 per share. All shares
issuable under this Unit Purchase Option are subject to a registration rights
agreement that requires the Company to register such shares under certain
circumstances.
Description of Properties
Cheneyboro Field. The Company owns approximately 6,700 net acres of
producing and non-producing oil and gas leases (with rights of first refusal to
acquire additional leases) in the Cheneyboro Field of Navarro County, Texas (the
"Cheneyboro Field"). The Company 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. The Company 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.
<PAGE> -27-
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. Between 1978 and 1987, marginal wells
were drilled defining the limits of the field. Approximately 30 interior
additional vertical wells in the Cheneyboro Field produced approximately 2.7
million Bbls of oil, representing an average of approximately 90,000 Bbls per
well. Some of the vertical wells have produced over 200,000 Bbls, indicating
better drainage where the wells penetrated the fracture system. In 1989,
approximately 12,000 acres of this field was expropriated and several producing
wells were plugged in order to build Richland/Chambers Creek Reservoir, a water
supply reservoir for the City of Fort Worth, Texas. See "-- Oil and Gas
Reserves."
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.
The Company believes that horizontal drilling techniques will lead to
higher initial rates and better recovery efficiencies in this field than those
experienced in the original vertical well completions. Since much of the field
is under water, some 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 and does not anticipate
any special risks associated with drilling near a reservoir. See "--
Regulation; Environmental Regulation."
Means Unit. The Cotton Valley Means (Queen Sand) Unit (the "Means Unit")
originally consisted of 2,096 acres on four leases in north central Andrews
County, Texas. Production began in 1954 and development followed rapidly. By
1960, when a secondary project of water injection was initiated, there were 41
total wells in the Means Unit. Most wells were completed in casing, perforated
and fractured with a large number flowing initially. The best wells flowed more
than 400 barrels of oil per day ("Bopd") initially and the initial potentials of
32 of the 41 wells (78%) exceeded 100 Bopd.
Primary production peaked in 1957 at 1096 Bopd from 41 wells. By 1960, the
production was down to 327 Bopd, a decline of more than 70%. Secondary response
was rapid in some wells and peak secondary production occurred
from 1961 through 1964, with almost flat production, at slightly above 833 Bopd.
The original waterflood used 21 injection wells and 20 producers, for an overall
spacing of 50 acres per well, and an injection to producing well ratio of
approximately 1 to 1. However, during the period of greatest production
decline, starting in 1968, several injection wells were down for extended
periods of time because of severe corrosion of the tubing strings. This was the
result of not using protected tubing (plastic coated, fiberglass or cement
lined) in the injection wells. Also, several of the injection
wells had severe injectivity losses due to plugging problems (scale and iron-
sulfide) partly caused by being at the far end of the Exxon Means Injection
System. As a result, less water than needed to properly flood the reservoir was
used.
Old Aspen purchased the leases in 1996 for the purpose of instituting a 20-
acre infill redevelopment program. Several redevelopments have been completed
since 1988 in other Queen Sand fields in Andrews County and adjacent
Gaines County and all of the redevelopments designed with adequate injection
support have been very successful. A study of 11 offset redevelopment
waterfloods in the Means, McFarland and Magutex fields indicated that 35.3% of
the original oil in place had been produced on average for these units. The
cumulative production to date (both primary and secondary) in the initial 2096
acre Means Unit, prior to being purchased by the Company, has been 4.136 million
barrels of oil, which the Company believes is equal to approximately 16.% of the
original oil in place.
During March and April of 1998, the Company, using personnel and tools
belonging to its Mustang subsidiaries, re-entered the Spinks #2 well and
horizontally drilled three lateral legs of 1,500-2,000 feet length in the Queens
"B", Queen "C" and Queen "D" Sands. The well has been permitted as a water
injection well and the Company has planned an extensive test program to
<PAGE> -28-
determine whether a horizontal injection pattern would provide increased
recovery.
The Company, during May and June 1998, acquired two more leases adjacent to
the original 2,096 acre Means Unit and extended it to approximately 2,600 acres.
Accordingly, the pattern has been increased and the additional property
was included in a reserves report by K&A Energy Consultants Inc., dated as of
June 30, 1998 which estimates that the 2600 acre extended Means Unit contains
net proved reserves of 2.8 million barrels of oil and 0.8 Bcf of gas. See "--
Oil and Gas Reserves."
N.E. Alden Field. On March 3, 1997, the Company purchased all of the
interests held by the Homestake Company and certain other parties in the N.E.
Alden Field, Caddo County, Oklahoma. Subsequently, the Company acquired
additional interests from other parties. The properties, consisting of
approximately 550 net acres of oil and gas leases, 11 producing oil and gas
wells, three injection wells and two shut in wells, contain, as of June 30,
1998, proved developed and undeveloped net reserves of approximately 418,000 Bbl
of oil and 4.6 Bcf of gas. Working interests in the wells ranges from 50% to
100% and the net revenue interest is at least 75% of the respective working
interests. As a result of recent workover activity in the Hunton Formation, the
Company expects certain reserves currently classified as probable will be
reclassified as proved reserves.
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
9,300 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 gathering
system and a one-mile pipeline owned by the Company.
In addition to the current production, there are also potential zones
either behind existing wells, or reachable by deepening existing well bores.
During fiscal year 1998, Cotton Valley completed a number of workovers of the
existing wells, which improved production from existing zones and opened new
zones for additional production and reserves. During fiscal 1999, the Company
expects to deepen at least one well to develop proved reserves in the Arbuckle
Formation offsetting a well which had initial flow rates of approximately 7,000
MCF of gas per day.
Sears Ranch Prospect. In October 1997, the Company, through its
subsidiary, CV Energy, completed the acquisition of a 100% working interest in
approximately 6,200 acres in the Sears Ranch area of Nolan and Fisher
Counties, Texas (the "Sears Ranch Prospect") for cash and other considerations.
The assets received by the Company included pooling rights, existing contracts
related to the Sears Ranch Prospect and all personal property (including
equipment) located on or used in connection with the Sears Ranch Prospect. The
primary purpose of this acquisition was to acquire oil field equipment,
including pumpjacks, tank batteries, injection pumps, separators, tubing and
casing.
The Sears Ranch Prospect has been productive in the Odem Lime formation,
with cumulative production of approximately eight million barrels. Attempts to
waterflood this property by predecessor operators have been
unsuccessful. According to reports by the Company's independent consultants,
the Sears Ranch Prospect is an excellent candidate for redevelopment using
horizontal drilling. In February 1998, the Company began testing this prospect
as a horizontal drilling prospect in the Odem Lime formation. During September
1998, the Company initiated a pilot waterflood project consisting of one
injection well and four producing wells. There can be no assurance that the
Company can economically develop any remaining reserves from the Sears Ranch
Prospect through either horizontal or vertical drilling or a different
waterflood pattern.
Option to Acquire Additional Property. Since 1995, the Company has owned
an option to acquire a 51.8% working interest in the Sword Unit, Offshore Santa
Barbara, California (the "Sword Unit"), which the Company believes contains
significant reserves of heavy crude oil. As a result of lower crude oil prices
during 1998, the Company has been unable to arrange a syndicate to complete the
purchase and re-assigned its option back to the original holders. The Company
did not incur any liability as a result of this re-assignment of property.
<PAGE> -29-
Title of Properties
The Company follows industry practice when acquiring undeveloped properties
on minimal title investigation. A title opinion is obtained before drilling
begins on the properties. The Company has title opinions for a majority of its
properties . The Company's properties are subject to royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens that
the Company believes do not materially interfere with their use or value. The
Company 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.
Development and Exploration Activities
Overview. The Company presently intends to focus its exploration and
development efforts on its inventory of oil and gas properties, further
acquisitions and, to a lesser extent, selected exploratory drilling prospects.
The Company intends to conduct its drilling and workover activities through its
Mustang Service Companies and, if necessary, contracting with independent
drilling contractors and by outsourcing other services. The Company typically
compensates its drilling subcontractors on a turnkey (fixed price), footage or
day rate basis depending on the Company's assessment of risk and cost
considerations. The Company occasionally utilizes contract services in its oil
field operations and will employ independent consultants from time to time to
evaluate Company prospects, reserves and other oil and gas assets.
Development Drilling and Workover. The Company's development strategy
focuses on maximizing the value and productivity of its oil and gas asset base
through development drilling, workovers and enhanced recovery projects.
The Company has budgeted approximately $10 million for exploitation and
development activities for fiscal year 1999. The Company has identified
numerous development drilling and workover locations (including both production
and injection wells) on its properties. In exploiting its producing properties,
the Company relies upon its in-house technical staff and utilizes the services
of outside consultants on a selective basis.
Waterfloods. The Company believes it can enhance the value of its Means
Unit through in-fill drilling and water injection. While waterfloods typically
take considerable time to respond to fluid injection, the Mean Unit has some
potential, based on staged installation of water flood facilities that would
result in a somewhat faster increase in production and cash flow. The Company
has budgeted approximately $8 million in fiscal 1999 for the Means Unit
waterflood project.
Exploratory Drilling. Although the Company is not currently engaged in any
significant exploration drilling, it intends to increase its activities in this
area in the future and may spend up to $500,000 during the next 12 months for
exploratory drilling, if funding becomes available. The Company will attempt to
lessen the risks inherent in exploratory drilling by (i) concentrating in
specific areas in the United States where the Company's technical staff has
considerable experience and which are in known producing trends where the
potential for significant reserves exists; (ii) diversifying
through investment in multiple prospects; (iii) utilizing 3-D seismic and other
advanced technologies, including directional and horizontal drilling, and (iv)
promoting out interests to industry partners.
Markets
General. Oil and gas operating revenues are highly dependent upon prices
and demand for oil and gas. 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 the Company's proved reserves, revenues,
profitability and cash flow.
The Company has not engaged in any crude oil and gas price swaps or other
hedging transactions to reduce its exposure to price fluctuations. Pursuant to
the terms of the Means Credit Facility, the lender may initiate crude oil
commodity swaps with the Company for its production from the Means Unit. The
Company may also, however, engage in other similar transactions from time to
time as management deems advisable.
Gas Sales. Gas from its wells in East Texas (Cheneyboro Field) and
Southwest Oklahoma (N.E. Alden Field) are sold at spot prices on contracts with
thirty-day cancellation provisions and are gathered and delivered to purchasers
through pipeline systems owned by the Company. During fiscal year 1998, the
Company sold its gas to eight different purchasers, no single one of which
accounted for more than 10% of the Company's gross revenues.
<PAGE> -30-
Oil Sales. The Company sells its oil production under short-term
arrangements at prices no less than the purchaser's posted prices for the
respective areas less standard deductions. Management believes that numerous
buyers are available for the Company's oil. During fiscal year 1998, the
Company sold its oil to six different purchasers, one of which, National
Cooperative Refinery Association, accounted (at 11.7%) for more than 10% of the
Company's gross revenues.
Oilfield Equipment Sales. The Company sells its oilfield equipment and
supplies to numerous retail and wholesale customers located in several states
and Canada. During fiscal year 1998, one Customer, Dunnam Pumping
Units (at 18.1%) accounted for more than 10% of the Company's gross revenues.
Oil and Gas Reserves
General. All information set forth in this Prospectus regarding estimated
proved reserves, related estimated future net cash flows and PV-10 of the
Company's oil and gas interests is taken from a report prepared by K&A Energy
Consultants, Inc., as of June 30, 1998. The estimates of these independent
petroleum engineers were based upon their review of production histories and
other geological, economic, ownership and engineering data provided by the
Company.
In accordance with Commission guidelines, the estimates of future net cash
flows from Proved Reserves and their PV-10 are made using oil and gas sales
prices in effect as of the dates of such estimates and are held constant
throughout the life of the properties. The Company's estimates of Proved
Reserves, future net cash flows and PV-10 were estimated based on $13.01 per Bbl
of oil and $2.04 per Mcf of gas, before deduction of production taxes.
All reserves are evaluated at contract temperature and pressure which can
affect the measurement of gas reserves. Operating costs, development costs and
certain production-related and ad valorem taxes were deducted in
arriving at the estimated future net cash flows. No provision was made for
income taxes. The following estimates set forth reserves considered to be
economically recoverable under normal operating methods and existing conditions
at the prices and operating costs prevailing at the dates indicated above. The
estimates of the PV-10 from future net cash flows differ from the standardized
measure of discounted future net cash flows set forth in the notes to the
Consolidated Financial Statements of the Company, which is calculated after
provision for future income taxes. There can be no assurance that these
estimates are accurate predictions of future net cash flows from oil and gas
reserves or their present value.
Except for the effect of changes in oil and gas prices, no major discovery
or other favorable or adverse event is believed to have caused a significant
change in these estimates of the Company's proved reserves since June 30, 1998.
No estimates of Proved Reserves of oil and gas have been filed by the
Company with, or included in any report to, any United States authority or
agency (other than the Commission).
Proved Reserves. Proved oil and gas reserves are the estimated quantities
of crude oil, natural gas, and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimated is made. Prices
include consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a reservoir
considered proved includes: (A) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining
portions not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
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.
<PAGE> -31-
Estimates or proved reserves do not include the following (A) oil that may
become available from known reservoirs but is classified separately as
"indicated additional reserves; (B) crude oil, natural gas, and natural gas
fluids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic
factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; (D) crude oil, natural gas, and natural gas liquids, that
may be recovered from oil shales, coal, gilsonite and other such sources.
Company Reserves. The following table summarizes the Company's estimated
net proved oil and gas reserves as of June 30, 1998 as estimated by K&A Energy
Consultants, Inc.
<TABLE>
Estimated Proved Oil and Gas Reserves
At June 30, 1998
----------------
<S> <C>
Net Gas Reserves (Mcf):
Proved Developed Producing 161,204
Proved Developed Non-Producing Reserves 837,134
Proved Undeveloped Reserves 11,763,141
----------
Total Proved Gas Reserves 12,761,479
==========
Net Oil Reserves (Bbl):
Proved Developed Producing Reserves 156,657
Proved Developed Non-Producing Reserves 198,667
Proved Undeveloped Reserves 5,414,700
----------
Total Proved Oil Reserves 5,770,024
==========
Total Proved Reserves (BOE) 7,896,937
</TABLE>
<TABLE>
Estimated PV-10 of Proved Reserves
At June 30, 1998(1)
-------------------
<S> <C>
Estimated PV-10(2):
Proved Developed Producing $ 594,857
Proved Developed Non-Producing Reserves 1,710,935
Proved Undeveloped Reserves 28,841,250
------------
Total PV-10 of Proved Reserves $ 31,147,042
</TABLE>
(1) Prices based on $13.01 per Bbl of oil and $2.04 per Mcf of gas.
See "Business and Properties -- Oil and Gas Reserves."
(2) PV-10 differs from the standardized measure of discounted future
net cash flows set forth in the notes to the Consolidated
Financial Statements of the Company, which is calculated after
provision for future income taxes. Both measures utilize
existing oil and gas prices and costs as of the evaluation
date held constant for the life of the properties.
Oil and Gas Production, Prices and Costs
The following table shows the approximate net production attributable to
the Company's oil and gas interests, the average sales price and the average
production expense attributable to the Company's oil and gas production for the
periods indicated. Production and sales information relating to properties
acquired or disposed of is reflected in this table only since or up to the
closing date of their respective acquisition or sale and may affect the
comparability of the data between the periods indicated.
<PAGE> -32-
<TABLE>
Year Ended June 30,
1996 1997 1998
--------- --------- --------
<S> <C> <C> <C>
Oil and Gas Production:
Oil (Bbls) - 8,981 27,584
Gas (Mcf) - 43,301 181,423
Oil Equivalents (BOE) - 16,198 57,821
Average Sales Price(1):
Oil (per Bbl) - $19.22 $13.01
Gas (per Mcf) - $ 2.21 $ 2.04
Oil Equivalents (per BOE) - $16.81 $14.33
Oil and gas production expenses (per BOE)(2) - $15.57 $10.55
</TABLE>
(1) Before deduction of production taxes.
(2) Includes lease operating expenses and production and ad
valorem taxes, if applicable.
Drilling Activity
The Company did not drill any wells during the two fiscal years ended June
30, 1997. During the year ended June 30, 1998, the Company participated for a
12.5% working interest in a single exploratory well which was a dry hole.
The Company also successfully completed the drilling of a horizontal water
injection well in which its working interest is 100%.
Oil and Gas Wells
The following table sets forth the number of productive oil and gas wells
in which the Company had a working interest at June 30, 1998.
Productive Wells
Gross(1) Net(2)
-------------------- ----------------------
Location Oil Gas Total Oil Gas Total
----------------- ----- ----- ----- ----- ------ -----
Texas 34 1 35 34 1 35
Oklahoma 10 4 14 9 3 12
----- ----- ----- ----- ------ -----
Total 44 5 49 43 4 47
===== ==== ===== ===== ====== =====
(1) The number of gross acres is the total number of acres in which a
working interest is owned.
(2) The number of net acres is the sum of fractional working interests
owned in gross acres expressed as whole numbers and fractions
thereof.
Oil and Gas Acreage
The following table summarizes the Company's developed and
undeveloped leasehold acreage at June 30, 1998.
Developed Undeveloped
Location Gross(1) Net(2) Gross(1) Net(2)
----------------- -------- ------ -------- -------
Texas 3,729 3,729 13,056 13,056
Oklahoma 1,350 1,181 -0- -0-
------ ------ ------ ------
Total 5,079 4,810 13,056 13,056
====== ====== ====== ======
- ------------------
<PAGE> -33-
(1) The number of gross acres is the total number of acres in which a
working interest is owned.(2) The number of net acres is the sum of
fractional working interests
owned in gross acres expressed as whole numbers and fractions thereof.
Substantially all of the Company's interests are leasehold working
interests or overriding royalty interests (as opposed to mineral or fee
interests) under standard onshore oil and gas leases. As is customary in the
industry, the Company generally acquires oil and gas acreage without any
warranty of title except as to claims made by, through or under the transferor.
Although the Company has title examined by a landman or title attorney prior to
acquisition of developed acreage in those cases in which the economic
significance of the acreage justifies the cost, there can be no
assurance that losses will not result from title defects or from defects in the
assignment of leasehold rights. In many instances, title opinions may not be
obtained if in the Company's judgment it would be uneconomical or impractical to
do so.
Competition
The oil and gas industry is highly competitive. Competitors of the Company
include major and other independent oil and gas companies, and individual
producers and operators, many of which have substantially greater
financial resources and larger staffs and facilities than those of the Company.
In addition, the Company frequently encounters competition in the acquisition of
oil and gas properties, and in its well service and equipment business. The
principal means of competition for acquisitions are the amount and terms of the
consideration offered. The principal means of such competition with respect to
the sale of oil and gas production are product availability and price. The
price at which the Company's gas may be sold will continue to be affected by a
number of factors, including the price of alternate fuels such as oil and coal
and competition among various gas producers and marketers. See "Risk Factors --
Competition."
Regulation
General Federal and State Regulation. The Company's oil and gas
exploration, production and related operations are subject to extensive rules
and regulations promulgated by federal and state agencies. Failure to comply
with such rules and regulations can result in substantial penalties. The
regulatory burden on the oil and gas industry increases the Company's cost of
doing business and affects its profitability. Because such rules and
regulations are frequently amended or reinterpreted, the Company is unable to
predict the future cost or impact of complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of such wells. Many states restrict
production to the market demand for oil and gas. Some states have enacted
statutes prescribing ceiling prices for gas sold within their states.
FERC regulates interstate gas transportation rates and service conditions,
which affect the marketing of gas produced by the Company, as well as the
revenues received by the Company for sales of such production. Since the
mid-1980s, FERC has issued a series of orders, culminating in Order Nos. 636,
636-A and 636-B ("Order 636"), that have significantly altered the marketing and
transportation of gas. Order 636 mandates a fundamental restructuring of
interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sale, transportation, storage and other
components of the city-gate sales services such pipelines previously performed.
One of FERC's purposes in issuing the orders is to increase competition within
all phases of the gas industry. Order 636 and subsequent FERC orders on
rehearing have been appealed and are pending judicial review. Because these
orders may be modified as a result of the appeals, it is difficult to predict
the ultimate impact of the orders on the Company and its gas marketing efforts.
Generally, Order 636 has eliminated or substantially reduced the interstate
pipelines' traditional role as wholesalers of gas, and has substantially
increased competition and volatility in gas markets.
The price the Company receives from the sale of oil and natural gas liquids
is affected by the cost of transporting products to market. Effective January
1, 1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. The Company is not
<PAGE> -34-
able to predict with certainty the effects, if any, of these regulations on its
operations. However, the regulations may increase transportation costs or
reduce wellhead prices for oil and natural gas liquids. Finally, from time to
time regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below natural
production capacity in order to conserve supplies of oil and gas. See "Risk
Factors -- Laws and Regulations."
Environmental Regulation. The Company's exploration, development, and
production of oil and gas, including its operation of water injection and
disposal wells, are subject to various federal, state and local environmental
laws and regulations. Such laws and regulations can increase the costs of
planning, designing, installing and operating oil and gas
wells. The Company's domestic activities are subject to a variety of
environmental laws and regulations, including but not limited to, the Oil
Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), the Resource
Conservation and Recovery Act ("RCRA"), the Clean Air Act ("CAA"), and the Safe
Drinking Water Act ("SDWA"), as well as state regulations promulgated under
comparable state statutes. The Company also is subject to regulations governing
the handling, transportation, storage, and disposal of naturally occurring
radioactive materials that are found in its oil and gas operations. Civil and
criminal fines and penalties may be imposed for non-compliance with these
environmental laws and regulations. Additionally, these laws and regulations
require the acquisition of permits or other governmental authorizations before
undertaking certain activities, limit or prohibit other activities because of
protected areas or species, and impose substantial liabilities for
cleanup of pollution.
Under the OPA, a release of oil into water or other areas designated by the
statute could result in the Company being held responsible for the costs of
remediating such a release, certain OPA specified damages, and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in the Company being held responsible under the CWA for the costs of
remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws, can
impose joint and several and retroactive liability, without regard to fault or
the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions, and entities that arrange for the disposal or treatment of,
or transport hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including but not limited to, crude oil,
gas and natural gas liquids from the definition of hazardous substance, the
Company's operations may involve the use or handling of other
materials that may be classified as hazardous substances under CERCLA.
Furthermore, there can be no assurance that the exemption will be preserved in
future amendments of the act, if any.
RCRA and comparable state and local requirements impose standards for the
management, including treatment, storage, and disposal of both hazardous and
nonhazardous solid wastes. The Company generates hazardous and
nonhazardous solid waste in connection with its routine operations. From time
to time, proposals have been made that would reclassify certain oil and gas
wastes, including wastes generated during pipeline, drilling, and production
operations, as "hazardous wastes" under RCRA which would make such solid wastes
subject to much more stringent handling, transportation, storage, disposal, and
clean-up requirements. This development could have a significant impact
on the Company's operating costs. While state laws vary on this issue, state
initiatives to further regulate oil and gas wastes could have a similar impact.
Because oil and gas exploration and production, and possibly other
activities, have been conducted at some of the Company's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, the Company
has agreed to indemnify sellers of producing properties from whom the Company
has acquired reserves against certain liabilities for environmental claims
associated with such properties. While the Company does not believe that costs
to be incurred by the Company for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.
<PAGE> -35-
Additionally, in the course of the Company's routine oil and gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and the Company incurs costs for waste handling and
environmental compliance. Moreover, the Company is able to control directly the
operations of only those wells for which it acts as the operator.
Notwithstanding the Company's lack of control over wells owned by the
Company but operated by others, the failure of the operator to comply with
applicable environmental regulations may, in certain circumstances, be
attributable to the Company.
It is not anticipated that the Company will be required in the near future
to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. There can be no assurance
that more stringent laws and regulations protecting the environment will not be
adopted or that the Company will not otherwise incur material expenses in
connection with environmental laws and regulations in the future.
See "Risk Factors -- Laws and Regulations."
Employees
At September 15, 1998, the Company had 21 full-time employees, of which six
were management, five were administrative, and 10 were field employees. None of
the Company's employees are represented by a union. The Company has experienced
no work stoppages and management considers its relations with employees to be
good. The Company uses contract services in its field operations and employs
independent consultants, as needed, to evaluate Company prospects, reserves and
other oil and gas assets for potential acquisitions.
Facilities
The Company occupies approximately 7,132 square feet of office space at
6510 Abrams Road, Suite 300, Dallas, Texas 75231 under a five-year lease that
expires on April 30, 2003. Monthly basic rent is $7,430. The Company leases
a field office and an equipment yard in Odessa, Texas and also leases a
warehouse, shop and field office in Mineral Wells, Texas.
Legal Proceedings
There are no legal proceedings pending against the Company which could
materially adversely affect the Company.
Changes in Company's Certifying Accountant
Effective August 3, 1998, the Board of Directors of the Company, as well as
the Audit Committee of the Board of Directors of the Company, approved the
engagement of Lane Gorman Trubitt L.L.P. ("LGT") as the Company's
independent auditors for the fiscal year ending June 30, 1998 to replace the
firm of Hein + Associates L.L.C. ("Hein") who declined to stand for re-
appointment, effective the same date.
The reports of Hein on the Company's financial statements for the past two
fiscal years did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principals, except for the report on the Company's financial statements for the
year ended June 30, 1996, which included a paragraph regarding uncertainty as to
the Company's ability to continue as a going concern.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended June 30 1996 and June 30, 1997, and in the
subsequent interim period, there were no disagreements with Hein on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the satisfaction of Hein
would have caused Hein to make reference to the matter in their reports. In
addition, during the aforementioned fiscal years and the interim period during
which Hein served the Company preceding its dismissal, the Company had no
reportable events as defined in Item 304(a)(1)(y) of Regulation S-K, promulgated
pursuant to the Securities Exchange Act of 1934.
<PAGE> -36-
Hein has not advised the Company during the two most recent fiscal years
and in the subsequent interim period that: (i) the internal controls necessary
for the Company to develop reliable financial statements do not exist; (ii)
information has come to their attention that has led them to no longer be able
to rely on management's representations, or that has made them unwilling to be
associated with the financial statements prepared by management; (iii) there was
a need to expand significantly the scope of its audits, or (iv) information has
come to their attention that they have concluded will, or that
if further investigated might, materially impact the fairness or reliability of
either previously issued audit reports or the underlying financial statements,
or the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent audited financial statements, except
that Hein has informed the Company of the need to adjust certain accounts and
continue to investigate unresolved questions regarding other accounts which will
significantly reduce income reported in the Company's previously filed Form 10-Q
for the period ended March 31, 1998 when its investigation is complete.
No consultations occurred between the Company and LGT during the two fiscal
years and any interim period preceding the appointment of LGT regarding the
application of accounting principles, the type of audit opinion that might
be rendered or other information considered by the Company in reaching a
decision as to any accounting, auditing or financial reporting issue.
The Company has not authorized Hein to respond to the inquiries of LGT
concerning the subject matter of disagreements with Hein on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures, as no disagreements exist between the Company and Hein.
MANAGEMENT
Directors and Executive Officers
The following is a list of the names and ages of each of the Company's
directors and executive officers:
Name Age Position
Eugene A. Soltero 55 Chairman of the Board and Chief
Executive Officer
James E. Hogue 62 Director, President and
Chief Operating Officer
Leon A. Romero 46 Director, Senior Vice President and
Chief Financial Officer
Patricia A. Dickerson 52 Vice President, Corporate
Affairs/Investor Relations
and Secretary
Wayne T. Egan(1) 33 Director
(1) Member, Audit Committee, Compensation Committee
Directors of the company are elected by the stockholders at each annual
meeting and serve until the next annual meeting of stockholders or until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed, or their earlier resignation or removal from office.
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 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
<PAGE> -37-
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.
Leon A. Romero has served as a director, and, on an interim basis, as
Senior Vice President and Chief Financial Officer of the Company since February
1998. From August 1997 through February 1998, Mr. Romero was an Advisory
Director of the Company. From 1992 to August 1997, Mr. Romero was the President
and co-founder of Old Aspen. Mr. Romero is President of MAR Oil and Gas
Corporation. Mr. Romero is a former Director of the Independent Petroleum
Association of New Mexico and member of the New Mexico Oil and Gas Association.
Mr. Romero received his Bachelor of Science in Accounting from the University of
Albuquerque. He also holds a Master of Business Administration degree from New
Mexico Highlands University. He completed a program in Entrepreneurial
Development from the University of California at Los Angeles.
Patricia A. Dickerson has served as Director of Investor Relations of the
Company since March, 1997. In February 1998, she was elected as Vice President,
Corporate Affairs/Investors Relations. She was formerly employed
with Box Energy Corporation, a Dallas, Texas based and Nasdaq listed independent
oil and gas exploration company, from 1985 to 1997 where she served as Senior
Assistant to the Chairman of the Board. She also served as Director of
Investor Relations for Box Energy Corporation. Ms. Dickerson holds a B.A.
degree in Government from Texas Woman's University, Denton, Texas and a Juris
Doctorate degree from Texas Tech University, Lubbock, Texas. She is a member
of the National Association of Investor Relations Professionals and the Texas
Investor Relations Association for the Petroleum Industry.
Wayne T. Egan is a partner in the law firm of Weir and Foulds and serves in
the securities law section of said firm. 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 and Foulds serves as Cotton
Valley's corporate counsel.
Committees of the Board of Directors
The Board of Directors of the Company has established an Audit Committee
and a Compensation Committee. The Audit Committee reviews and makes
recommendations to the Board of Directors with respect to the engagement
of the Company's independent public accountants, reviewing with such accountants
the plans for and the results and scope of the auditing engagement and certain
other matters relating to the services provided to the Company, including the
independence of such accountants. The Audit Committee held one meeting during
the fiscal year ended June 30, 1998. Mr. Egan is the sole member of the Audit
Committee.
The Compensation Committee reviews on behalf of, and makes recommendations
to, the Board of Directors with respect to compensation of directors, executive
officers and key employees of the Company and will administer the
Company's 1997 Stock Compensation Plan and Non-Employee Directors Stock Option
Plan. The Compensation Committee held one meeting during the fiscal year ended
June 30, 1998. Mr. Richard Lachcik who resigned as a director
in July, 1998, was the sole member of the Compensation Committee. Mr. Egan will
serve as the sole interim member of the Compensation Committee until a
replacement for Mr. Lachcik is elected.
<PAGE> -38-
Compensation of Directors
Each director who is not an employee of the Company is paid $500 for each
meeting of the Board of Directors attended (exclusive of telephonic meetings)
and $500 for each meeting of a committee of the Board of Directors attended
(exclusive of committee meetings occurring on the same day as Board Meetings),
and will be reimbursed for expenses incurred in attending such meetings.
Directors who are employees of the Company are not paid any additional
compensation for attendance at Board of Directors or committee meetings. During
the fiscal year ended June 30, 1998, the Board of Directors held one meeting and
acted by unanimous consent on 12 occasions.
Family Relationships
There are no family relationships among the Company's directors or
executive officers.
Involvement in Certain Legal Proceedings
None of the Company's directors or executive officers have been involved
during the past five years in any legal proceedings material to an evaluation of
such persons ability or integrity.
Executive Compensation
The following Summary Compensation Table sets forth for the years
indicated, the cash compensation paid, distributed or accrued for services,
including salary and bonus amounts received in all capacities for the Company to
its senior executive officers and other executive officers who received annual
remuneration in excess of $100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation(1) Compensation
Name and Principal Position Year Other Annual Restricted
Salary Compensation Stock
Awards(2)
Eugene A. Soltero, Chairman
of the Board, Chief
Executive Officer 1998 $160,000 $0 $ 0
1997 $120,000 $ 60,000
1996 $115,000 $0
1995 $ 25,000 $0
James E. Hogue, President
and Chief Operating Officer 1998 $160,000 $0
1997 $120,000 $ 60,000
1996 $115,000 $0
1995 $ 25,000 $0
Leon A. Romero, Senior Vice
President and Chief
Financial Officer 1998 $ 40,000 $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.
(2) During fiscal 1997 each of Messrs. Soltero and Hogue received
warrants to purchase 83,333 shares of Common Stock at a per warrant
exercise price of $.72. The warrants expire December 31, 1999. Ms.
Dickerson received a stock bonus award during fiscal year 1998 of
25,000 common shares.
Employment Agreements
Cotton Valley does not have employment contracts with any of its executive
officers.
<PAGE> -39-
Options
The following table sets forth information regarding options granted to
executive officers under Cotton Valley's employee stock option plan in fiscal
1998:
Option Grants in Last Fiscal Year
(Individual Grants)
Number of Percent of Total
Securities(1) Options Granted to
Underlying Employees in Exercise or Expiration
Name Options Granted Fiscal Year Base Price Date
- ---------------- --------------- ------------------ ----------- ---------
Eugene A. Soltero 300,000 48% 1.65 2/28/03
James E. Hogue 300,000 48% 1.65 2/28/03
______________________
(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, 1998. During
fiscal 1998, Peter Lucas, a former executive officer exercised 200,000 options,
Richard Lachick, a former director exercised 50,000 options, and Wayne Egan, a
current director exercised 30,000 options.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------- ------------------------- -------------------------
Eugene A. Soltero 500,000/0 $0/$0
James E. Hogue 500,000/0 $0/$0
Wayne Egan 20,000/0 $0/$0
Voting Agreements
Under the terms of a Voting Trust Agreement (the "Voting Agreement"),
unaffiliated parties that transferred their interests in certain properties to
the Company in 1995 in exchange for securities provided a power of attorney to
Eugene A. Soltero and James E. Hogue to vote approximately 3.28 million shares
of Common Stock held by such property contributors until January 1, 2001. The
Voting Agreement expires with respect to any of the shares of Common
Stock transferred to an unaffiliated third party by such shareholder. The
Company believes that as of June 30, 1998, approximately 2.0 million shares of
Common Stock were subject to the Voting Agreement. See "Principal
Stockholders."
LFC and its affiliates have agreed that, with respect to any shares of
Common Stock acquired by them pursuant to the LFC Consulting Agreement with the
Company, they will vote such shares of Common Stock until January 1, 2001 for
directors nominated by Messrs. Hogue and Soltero and certain other matters.
Approximately 2 million shares are currently subject to this voting rights
covenant. See "Certain Relationships and Related Transactions" and "Principal
Stockholders."
Pursuant to the terms of the definitive acquisition agreement, the four
previous shareholders of Old Aspen agreed, for a period of five years, to vote
their shares of Common Stock of the Company for directors nominated by
Messrs. Hogue and Soltero. Messrs. Hogue and Soltero were obligated, upon the
Company's continuance into the Yukon Territory, a jurisdiction which allows a
majority of the directors to be U.S. citizens, to nominate and vote for Mr. Leon
A. Romero, former President of Old Aspen, as a director of the Company. In
February 1998, Mr. Romero was elected as a director, Senior Vice President and
Chief Financial Officer of the Company. Approximately 2 million shares are
currently subject to this voting covenant. See "Business and Properties --
Recent Developments; Aspen Acquisition" and "Principal Stockholders."
<PAGE> -40-
Section 16(a) Beneficial Ownership Reporting Compliance
In the Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997, the Company reported that all persons or entities subject to the
reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), timely filed all reports required
under the rules and regulations promulgated thereunder. Subsequent to the
filing of the Annual Report with the Commission, the Company became aware that
both Wayne T. Egan and Richard J. Lachcik, each directors of the Company, failed
to file a Form 3 -- Initial Statement of Beneficial Ownership of Securities,
which filing was due in December 1996, and Form 4's -- Statement of Changes in
Beneficial Ownership of Securities for the months ended September and October
1997. On December 19, 1997, Messrs. Egan and Lachcik filed with the Commission
appropriate forms promulgated under Section 16(a) of the Exchange Act
for the purpose of reporting their respective ownership interest and related
transactions in the Company's Common Stock for the noted periods.
Except for the events described in the foregoing paragraph, the Company is
not aware of any transactions in its outstanding securities by or on behalf of
any director, executive officer or 10% holder of the Common Stock, which
would require the filing of any report pursuant to Section 16(a) that was not
filed with the Company.
Stock Option Plans
1995 Plan. Shortly after incorporation in February 1995, the stockholders
of the Company approved the 1995 Stock Option Plan (the "1995 Plan"). The 1995
Plan provided for the reservation of an amount of shares necessary to
cover the issuance of shares upon exercise of all options granted thereunder,
provided such reservation did not exceed 10% of the issued Common Stock of the
Company, or such greater number of shares as determined by the Board of
Directors or approved, if necessary, by the stockholders. There presently are
outstanding options to purchase 584,000 shares of Common Stock at a price of
$1.83 per share. The Company does not intend to issue any further options under
the 1995 Plan.
1997 Plan. On February 10, 1998, the stockholders of the Company approved
the 1997 Stock Compensation Plan of Cotton Valley Resources Corporation (the
"1997 Plan") and reserved 1,400,000 shares of Common Stock for
issuance under the plan. The 1997 Plan terminates on November 13, 2007 unless
previously terminated by the Board of Directors. The 1997 Plan is administered
by the Compensation Committee or the entire Board of Directors as determined
by the Board of Directors.
Eligible participants in the 1997 Plan include full time employees,
directors (other than Non-Employee Directors) and advisors of the Company and
its subsidiaries. Options granted under the 1997 Plan are intended to qualify
as "incentive stock options" pursuant to the provisions of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or options which do not
constitute incentive stock options ("nonqualified options") as determined by the
Company's Compensation Committee (the "Committee").
Under the 1997 Plan the Company may also grant "Restricted Stock" awards.
"Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1997 Plan subject to the satisfaction by the recipient
of certain conditions and enumerated in the specific Restricted Stock grant.
Conditions which may be imposed include, but are not limited to, specified
periods of employment, attainment of personal performance standards or the
overall performance of the Company. The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1997 Plan to promote
the development of the Company, and may be used by the Company as another means
of attracting and retaining qualified individuals to serve as employees of the
Company or its subsidiaries.
Incentive stock options may be granted only to employees of the Company or
a subsidiary who, in the judgment of the Committee, are responsible for the
management or success of the Company or a subsidiary and who, at the time
of the granting of the incentive stock option, are either an employee of the
Company or a subsidiary. No incentive stock option may be granted under the
1997 Plan to any individual who would, immediately before the grant of such
incentive stock option, directly or indirectly, own more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company unless
(i) such incentive stock option is granted at an option price not less than one
hundred ten percent (110%) of the fair market value of the shares on the date
the incentive stock option is granted and (ii) such incentive stock option
expires on a date not later than five years from the date the incentive stock
option is granted.
<PAGE> -41-
The purchase price of the shares of the Common Stock offered under the 1997
Plan must be one hundred percent (100%) of the fair market value of the Common
Stock at the time the option is granted or such higher purchase price as may be
determined by the Committee at the time of grant; provided, however, if an
incentive stock option is granted to an individual who would, immediately before
the grant, directly or indirectly own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company, the purchase price
of the shares of the Common Stock covered by such incentive stock option may not
be less than one hundred ten percent (110%) of the fair market value of such
shares on the day the incentive stock option is granted. If the Common Stock is
listed upon an established stock exchange or exchanges, the fair market value of
the Common Stock shall be the highest closing price of the Common Stock on the
day the option is granted or, if no sale of the Common Stock is made on an
established stock exchange on such day, on the next preceding day on which there
was a sale of such stock. As the price of the Common Stock is currently quoted
on the American Stock Exchange, the fair market value of the Common Stock
underlying options granted under the 1997 Plan shall be the closing sales price
of the Common Stock on the day the options are granted. If there is no market
price for the Common Stock, then the Board of Directors and the Committee may,
after taking all relevant facts into consideration, determine the fair market
value of the Common Stock.
Options are exercisable in whole or in part as provided under the terms of
the grant, but in no event shall an option be exercisable after the expiration
of ten years from the date of grant. Except in case of disability or death, no
option shall be exercisable after an optionee ceases to be an employee of the
Company, provided that the Committee shall have the right to extend the right to
exercise for a period not longer than three months following the date of
termination of an optionee's employment. If an optionee's employment is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year following the date of termination of the
optionee's employment. If an optionee dies while in the employ of the Company
and shall not have fully exercised his options, the options may be exercised in
whole or in part at any time within one year after the optionee's death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.
Under the 1997 Plan, an individual may be granted one or more options,
provided that the aggregate fair market value (determined at the time the option
is granted) of the shares covered by incentive options which may be exercisable
for the first time during any calendar year shall not exceed $100,000. There
presently are outstanding options to purchase 600,000 shares of Common Stock at
a price of $1.65 per share. Under the 1997 Plan, the Company granted in
February 1998 to each of Eugene A. Soltero and James E. Hogue, 300,000 options,
each exercisable at a price of $1.65 per share until February 23, 2003.
Non-Employee Directors Stock Option Plan. The stockholders of the Company
in February 1998 approved the Non-Employee Directors Stock Option Plan of Cotton
Valley Resources Corporation (the "Directors Plan") and reserved for issuance
200,000 shares of Common Stock for issuance under the plan. The Directors Plan
terminates on November 13, 2007 unless previously terminated by the Board of
Directors. The Directors Plan is administered by the Stock Option Committee or
by the entire Board of Directors as determined by the Board of Directors.
Eligible participants in the Directors Plan are non-employee directors of
the Company and its subsidiaries. Options which do not constitute incentive
stock options (non-qualified options) may only be granted under the Directors
Plan. The Directors Plan shall be administered by the Company's Stock Option
Committee (the "Stock Option Committee").
Each non-employee director shall be granted, without further action on the
part of the Board of Directors or such individual an option to purchase 1,000
shares of Common Stock on the day of the non-employee director's
appointment or election to the Board of Directors, which ever comes first.
Thereafter, on each anniversary of the non-employee director's election or
appointment to the Board, such individual, without further action of the Board
of Directors or the individual shall receive an option to purchase 1,000 shares
of Common Stock, assuming said individual continues to be a non-employee
director. Discretionary option grants may also be made to eligible participants
by the Stock Option Committee or the Board of Directors.
<PAGE> -42-
The purchase price of the shares of the Common Stock offered under the
Directors Plan must be one hundred percent (100%) of the fair market value of
the Common Stock at the time the option is granted or such higher purchase
price as may be determined by the Stock Option Committee at the time of grant.
If the Common Stock is listed upon an established stock exchange or exchanges,
the fair market value of the Common Stock shall be the highest closing price
of the Common Stock on the day the option is granted or, if no sale of the
Common Stock is made on an established stock exchange on such day, on the next
preceding day on which there was a sale of such stock. As the price of the
Common Stock is currently quoted on the American Stock Exchange, the fair market
value of the Common Stock underlying options granted under the Directors Plan
shall be the closing sales price of the Common Stock on the day the options are
granted. If there is no market price for the Common Stock, then the Board of
Directors and the Stock Option Committee may, after taking all relevant facts
into consideration, determine the fair market value of the Common Stock. There
presently are no outstanding options granted under the Directors Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1995, the Company issued a total of 560,001 shares of Common
Stock to Eugene A. Soltero, Chairman of the Board and Chief Executive Officer,
and James E. Hogue, President and Chief Operating Officer, for pre-
incorporation services valued at $1,401. Shortly after incorporation, the
Company issued 2,100,000 special shares to Messrs. Soltero and Hogue which were
subsequently exchanged for 1,440,000 shares of Common Stock of the Company
valued at $5,840. See "Management" and "Principal Stockholders."
In December 1995, the Company issued 80,000 shares of Common Stock to each
of Messrs. Soltero and Hogue for pre-incorporation services valued at $0.04 per
share. Additionally, since June 14, 1996, the Company has granted
to each of Messrs. Soltero and Hogue options to purchase 83,333 shares of Common
Stock at $0.73 per share and options to purchase 500,000 shares at prices
ranging from $1.65 to $1.83 per share.
During the fiscal years ended June 30, 1996 and 1995, the Company paid
management fees to two family corporations controlled by Messrs. Soltero and
Hogue aggregating $160,000 and $50,000, respectively, in lieu of salaries.
In addition, the Company has received advances from these two companies which
totaled $139,710 at June 30, 1997. As of December 31, 1997, $119,710 of the
advances remained outstanding. The advances are unsecured and without interest
and are payable after January 1, 1999.
During each of the years ended June 30, 1998 and June 30, 1997, the Company
paid to Weir & Foulds approximately $50,000 in legal fees. Most of the legal
services were provided by Richard Lachcik, a former director, and
Wayne Egan, a director of the Company, who were members of Weir & Foulds.
Messrs. Lachcik and Egan each received in fiscal year 1997 options to purchase
50,000 shares of Common Stock at $1.83 per share. Legal fees paid to Weir &
Foulds are commensurate with fees that would have been paid to unaffiliated
legal counsel for performing the identical legal services.
In November 1996, the Company entered into a consulting agreement (the "LFC
Consulting Agreement") with Liviakis Financial Communications, Inc., a
California corporation ("LFC"). Under the terms of the LFC Consulting
Agreement, LFC was retained to assist and consult with the Company in matters
concerning corporate finance and to represent the Company in investors'
communications and public relations with existing stockholders, brokers and
other investment professionals. As consideration for LFC undertaking the
engagement, the Company issued and delivered to LFC an aggregate of 1,490,000
shares of Company's Common Stock as non-forfeitable compensation. The stock
issuance was recorded at $1,087,700 based on the Company's stock price at the
date of the LFC Consulting Agreement.
In connection with LFC undertaking the consulting engagement, the Company
sold to LFC and Robert B. Prag, an affiliate of LFC, 500,000 units (the "Units")
for $375,000 or $0.75 per Unit. Each Unit consisted of one share of the
Company's Common Stock and one stock purchase warrant (a "LFC Warrant") which
entitled the holder thereof to purchase a share of the Company's Common Stock at
an exercise price of $0.80 through November 7, 2001. The estimated value of the
stock purchase warrants of $199,000 was recorded as an expense. See
"Description of Securities -- Warrants; LFC Warrants" and "Selling
Stockholders."
The LFC Consulting Agreement provided that any shares of Common Stock
received by LFC and its affiliate under the LFC Consulting Agreement, either
directly or indirectly through the exercise of warrants, shall be voted in
connection with the election of directors for such nominees as may be designated
by Eugene A. Soltero, Chairman of the Board and Chief Executive Officer of the
<PAGE> -43-
Company, and James E. Hogue, President and Chief Operating Officer of the
Company, and with respect to related matters in such manner as Messrs. Soltero
and Hogue may designate. The voting rights covenant is applicable for any vote
of stockholders for the election of directors or any related matter (such as
increasing or decreasing the number of directors or creating a classified board
of directors) until January 1, 2001. Any shares of Common Stock transferred by
LFC and its affiliate to persons or entities not subject to the control of LFC
shall be transferred free of this voting rights covenant. At September 15,
1998, approximately 2 million outstanding shares of the Company's Common Stock
owned by LFC and its affiliates were subject to the voting rights covenant. The
LFC Consulting Agreement expired on January 2, 1998. See "Management -- Voting
Agreements," "Principal Stockholders" and "Selling Stockholders."
As further compensation to LFC, the Company agreed to compensate LFC
with a fee in the event that LFC introduces the Company, or its nominees, to a
lender or equity purchaser, not already having a pre-existing relationship
with the Company and such financing is ultimately consummated. In connection
with the sale by the Company of its Convertible Debentures in December 1997, LFC
received a cash fee of $108,000. See "Business and Properties -- Recent
Developments; Sale of Convertible Debentures" and "Description of Securities --
Convertible Debentures."
On June 24, 1997, the Company issued to LFC a 9% Convertible Secured
Promissory Note (the "LFC Note") for a $579,000 loan. On December 3, 1997, the
Company repaid $479,000 of the principal amount of the LFC Note and
accrued interest. LFC converted the remaining principal amount of $100,000 into
60,000 shares of the Company's Common Stock ($1.67 per share). As additional
consideration for the loan, the Company issued to LFC warrants (the
"Liviakis Warrants") expiring April 3, 2002 to purchase 161,351 shares of the
Company's Common Stock at an exercise price of $2.08 per share. See
"Description of Securities -- Warrants; Liviakis Warrants."
Additionally, in December 1997, the Company agreed to issue to LFC warrants
to purchase 100,000 shares of the Company's Common Stock exercisable at $3.50
per share until December 31, 2000 (the "LFC Mustang Warrants"), as additional
compensation for LFC's assistance to the Company in completing acquisitions and
other financings during calendar 1997. LFC directed the Company to issue 25,000
of the Mustang Warrants to Robert B. Prag, an officer of LFC. See "Description
of Securities -- Warrants; Mustang Warrants."
The LFC Consulting Agreement further provides that the Company shall file
with the Commission a registration statement under the Securities Act covering,
among other securities, the shares of Common Stock issued to LFC and its
affiliates including shares of stock underlying the LFC Warrants, Liviakis
Warrants and LFC Mustang Warrants. Of the 12,742,984 Shares offered hereby,
2,811,351 shares are being offered by LFC and Robert B. Prag. See "Selling
Stockholders" and "Description of Securities -- Warrants."
Leon A. Romero, Senior Vice President, Chief Financial Officer and a
director of the Company received 977,771 net shares of Common Stock from the
Company in July 1997 as a result of the Aspen Acquisition. Mr. Romero was one
of the selling stockholders of Old Aspen. See "Business and Properties --
Recent Developments; Aspen Acquisition," "Management," "Selling Stockholders"
and "Agreements with Selling Stockholders."
The transactions described in this section were ratified by a majority of
the Company's independent directors who did not have an interest in the
transactions and who had access, at the Company's expense, to the Company's or
independent counsel.
Any future transactions between the Company and its affiliates will be
approved by a majority of disinterested directors and will be on terms no less
favorable to the Company than those which could be obtained from unrelated third
parties. Any forgiveness of loans must be approved by a majority of the
Company's independent directors who do not have an interest in the transactions
and who have access, at the Company's expense, to the Company's or independent
legal counsel.
<PAGE> -44-
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 15, 1998, by (i) each
person who "beneficially" owns more than 5% of all outstanding shares of
Common Stock, (ii) each director and executive officer, and (iii) all directors
and executive officers as a group. Except as otherwise indicated, all persons
listed below have (a) 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 (b) record and beneficial ownership of their shares.
Before Offering After Offering(11)
----------------------------- ----------------------
Amount and Amount and
Nature of Percentage Nature of Percentage
Beneficial of Beneficial of
Name Ownership Ownership Ownership Ownership
Eugene A. Soltero (1) 4,394,333(5) 22.19% 2,394,333 8.99%
James E. Hogue (1) 4,594,333(6) 23.19% 2,594,333 9.74%
Leon A. Romero(1) (2) 973,571 5.06% 0(12) *
Wayne T. Egan (3) 28,000(7) * 280,000 1.05%
Patricia A. Dickerson (4) 50,000(8) * 50,000 *
Liviakis Financial
Communications, Inc. 3,041,851(9) 15.34% 505,500 1.90%
All directors and executive
officers as a group
(five persons) 9,066,666(10) 44.37% 5,318,666(13) 19.97%
*Less than 1%.
(1) Mr. Soltero is the Chairman of the Board, a director and Chief Executive
Officer of the Company and Mr. Hogue is a director, President and Chief
Operating Officer of the Company. Messrs. Soltero and Hogue may be
deemed promoters of the Company. The address of Messrs. Soltero, Hogue
and Romero is 6510 Abrams Road, Suite 300, Dallas, Texas 75231
(2) Mr. Romero is the Senior Vice President, Chief Financial Officer and a
director of the Company. See "Business and Properties -- Recent
Developments; Aspen Acquisitions," "Management," "Selling Shareholders"
and "Agreements with Selling Shareholders."
(3) Mr. Egan is a director of the Company. The address of Messrs. Egan and
Lachcik is Weir and Foulds, Suite 1600, 2 First Canadian Place, Toronto,
Ontario, Canada M5X 1J5
(4) Ms. Dickerson is a Vice President, Corporate Affairs/Investor Relations
and Secretary of the Company. See "Management".
(5) Includes 583,333 shares of Common Stock subject to employee stock
options and the following shares, beneficial ownership of which is
disclaimed: 710,000 shares of Common Stock owned by the Soltero Family
Limited Partnership, 36,000 shares of Common Stock held by Mr. Soltero's
wife and approximately 3,000,000 shares, which represents 50%
of the 6,000,000 shares owned by others subject to a voting trust
agreement and voting covenants under certain agreements. See
"Management -- Voting Agreements."
(6) Includes 583,333 shares of Common Stock subject to employee stock
options and the following shares, beneficial ownership of which is
disclaimed: 740,000 shares of Common Stock owned by the
Hogue Family Limited Partnership, 231,000 shares of Common Stock held
by Mr. Hogue's wife and approximately 3,000,000 shares, which
represents 50% of the 6,000,000 shares owned by others subject to a
voting trust agreement and voting covenants under certain
agreements. See "Management -- Voting Agreements."
(7) Includes 20,000 shares of Common Stock subject to employee stock
options.
(8) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options.
(9) Includes 611,351 shares issuable upon exercise of LFC, Liviakis and LFC
Mustang Warrants held by LFC and does not include 150,000 shares of
Common Stock issuable upon exercise of 125,000 LFC Warrants and 25,000
LFC Mustang Warrants, or 125,000 shares owned by Robert B. Prag, an
officer of LFC. The address of LFC is 2420 >K= Street,
Sacramento, California 95816. See "Certain Relationships and Related
Transactions," "Description of Securities -- Warrants" and "Selling
Stockholders."
(10) Includes approximately 6 million shares subject to a voting trust
agreement and voting covenants under certain agreements. See
"Management -- Voting Agreements."
(11) Upon sale of all of the Shares offered hereby, there will be
approximately 26,437,587 outstanding shares of Common
Stock which includes 2,913,309 shares to be issued upon exercise
of outstanding warrants held by certain Selling Stockholders,
2,324,706 shares to be issued upon conversion of the outstanding
Convertible Debentures and approximately 640,000 shares to be
issued upon exercise of the Debenture Warrants which will be
issued upon conversion of the Convertible Debentures. See
"Description of Securities," "Selling Stockholders" and
"Agreements with Selling Stockholders."
(12) Assumes the sale of all of Mr. Romero's shares in this Offering. See
"Selling Stockholders."
(13) Includes approximately 2.0 million shares that will remain subject to a
voting trust agreement and voting covenants under
certain agreements if all of the Shares offered hereby are sold.
See "Management -- Voting Agreements."
<PAGE> -45-
DESCRIPTION OF SECURITIES
Common Stock
The Company is presently authorized to issue an unlimited number of shares
of Common Stock, no par value, of which 17,273,278 shares were issued and
outstanding at September 15, 1998. The holders of Common Stock are
entitled to equal dividends and distributions, per share, with respect to the
Common Stock when, as and if declared by the Board of Directors from funds
legally available therefor. No holder of any shares of Common Stock has a
preemptive right to subscribe for any securities of the Company nor are any
shares of Common Stock subject to redemption or convertible into other
securities of the Company. Upon liquidation, dissolution or winding up of the
Company, and after payment of creditors and preferred shareholders, if any, the
assets will be divided pro rata on a share-for-share basis among the holders of
the shares of Common Stock. All shares of Common Stock now outstanding are
fully paid, validly issued and non-assessable. Holders of the Common Stock do
not have cumulative voting rights, so that holders of more than 50% of the
combined shares voting for the election of directors may elect all of the
directors, if they choose to do so and, in that event, the holders of the
remaining shares will not be able to elect any members to the Board of
Directors. At September 15, 1998, there are reserved for issuance (i) 2,913,309
shares of Common Stock issuable upon exercise of various outstanding warrants;
(ii) 1,335,666 shares of Common Stock issuable upon exercise of options and
warrants held by management and other employees; (iii) up to 4.8 million shares
of Common Stock reserved for issuance upon conversion of the Convertible
Debentures; (iv) up to 1.2 million shares reserved for issuance upon exercise of
the Debenture Warrants; and (v) 1,000,000 shares reserved for issuance upon
grant of future options under the Company's 1997 Plan and Director's Plan. See
"Business and Properties -- Recent Developments; Sale of Convertible
Debentures," "Management -- Options," and "--C Stock Option Plans." Also see
"-- Warrants" and "-- Convertible Debentures" below.
Preferred Stock
Under the Company's Articles of Amalgamation, as amended, the Board of
Directors has the power, generally without further action by the holders of the
Common Stock, to designate the relative rights and preferences of the
preferred stock, no par value (the "Preferred Stock"), and issue the Preferred
Stock in one or more series as designated by the Board of Directors. The Board
of Directors has authorized the issuance of up to 2,000,000 shares of 8%
Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock.") The
designation of rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, any of which may be dilutive of the interest of the holders of the
Common Stock or other series of Preferred Stock. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company without further shareholder action and may adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. In certain
circumstances, the issuance of Preferred Stock could depress the market price of
the Common Stock. There are no outstanding shares of Preferred Stock and the
Company does not have any present intention of issuing any shares of Preferred
Stock, including the Convertible Preferred Stock.
If the Convertible Preferred Stock was issued, holders thereof would be
entitled to two votes per share on all matters submitted to a vote of the
Company's shareholders. In addition, such holders would be entitled to receive
cumulative dividends at the rate of 8% per annum, payable at the election of the
Company in cash or in shares of Common Stock. Holders of Convertible Preferred
Stock would have a liquidation preference, limited to $6.00 per share of
Convertible Preferred Stock; and each outstanding share of Convertible Preferred
Stock would be convertible at any time by the holder into two shares of Common
Stock.
Warrants
Class A Warrants. In connection with the acquisition of oil and gas
properties, including a property abandoned following its acquisition, the
Company in 1995 granted 518,345 Class A Warrants. In connection with the
issuance of notes payable and debentures in two 1995 Canadian private placements
arranged by Majendie Securities Ltd., the Company granted 112,390 Class A
Warrants. In June 1996, the Company issued an additional 636,250 Class A
Warrants in conjunction with a private placement of shares of Common Stock to
three institutional investors and 52,500 Class A Warrants to the placement agent
upon exercise of the agent's option. Each Class A Warrant entitles the holder
to purchase one share of Common Stock for $2.00 until June 30, 1998. The Class
A Warrants were scheduled to originally expire on December 31, 1997, but were
extended to June 30, 1998 by the Board of Directors. At June 30, 1998,
1,297,354 Class A Warrants have been exercised for total proceeds to the Company
of approximately $2,600,000. At June 30, 1998, 32,131 Class A Warrants expired
without being execised.
<PAGE> -46-
Arjon Warrants. In conjunction with the Arjon amalgamation, 431,755 shares
of Common Stock were issuable to former Arjon shareholders for Arjon warrants
(AArjon Warrants") in existence prior to the amalgamation. The
Company agreed to issue shares of Common Stock of the Company upon exercise of
the Arjon Warrants. Shares of Common Stock of the Company were issuable as
follows upon exercise of the Arjon Warrants: 333,334 shares of
Company Common Stock until December 31, 1998 at an exercise price of $0.48 per
share and 98,421 shares of Common Stock at an exercise price of $1.64 per share
until December 31, 1997. All of the Arjon Warrants have been exercise for
total proceeds to the Company of $321,410. See "Business and Properties --
General."
LFC Warrants. In November 1996, the Company entered into the LFC
Consulting Agreement. In connection with the LFC Consulting Agreement, the
Company sold to LFC and an affiliate 500,000 units (the "Units") for $0.75 per
Unit. Each Unit consisted of one share of Company's Common Stock and one stock
purchase warrant (a "LFC Warrant") entitling the holder thereof to purchase a
share of the Company's Common Stock at an exercise price of $0.80
per share through November 7, 2001. None of the LFC Warrants have been
exercised. See "Certain Relationships and Related Transactions" and "Principal
Stockholders."
Liviakis Warrants. In June 1997, the Company issued the LFC Note to LFC
for a $579,000 loan. As additional consideration for the loan, the Company
issued to LFC 161,351 common stock purchase warrants to purchase 161,351
shares of the Company's Common Stock at $2.08 per share until April 3, 2002.
None of the Liviakis Warrants have been exercised. See "Certain Relationships
and Related Transactions" and "Selling Stockholders."
Hibernia Warrants. In a Canadian private placement completed in November
1996 the Company sold to Hibernia Securities Trust ("HST") 100,000 units (the
"Hibernia Units") for $0.73 per Unit. Each Hibernia Unit consisted of one share
of Common Stock and two stock purchase warrants (the "Hibernia Warrants"),
enabling the holder thereof to purchase one share of Common Stock at an exercise
price of $0.73 per share through December 31, 1999. None of the Hibernia
Warrants have been exercised. See "Selling Stockholders."
HMC Warrants. In a private placement of securities completed in January
1996, the Company issued 200,000 shares of Common Stock and 200,000 warrants to
Hibernia Management Company ("HMC") for total consideration
of $164,425. Each warrant (the "HMC Warrant") enables the holder thereof to
purchase one share of Common Stock at an exercise price of $0.91 per share
through December 31, 1999. None of the HMC Warrants have been exercised.
See "Selling Stockholders."
Malone Warrants. In connection with its capital raising efforts during
fiscal 1997, the Company issued 142,900 warrants (the "Malone Warrants") to John
Malone, P.C. and Steven Sinken. Each Malone Warrant enables the holder
thereof to purchase one share of Common Stock for $1.84 per share until April 3,
2002. None of the Malone Warrants have been exercised. See "Selling
Stockholders" and "Agreements with Selling Stockholders."
HST Warrants. In June 1997, the Company issued 266,667 shares of Common
Stock and issued 266,667 warrants (the "HST Warrants") to HST for total
consideration of $438,000. The HST Warrants are exercisable at $1.68
per share until June 2002. None of the HST Warrants have been exercised. See
"Selling Stockholders."
Cheneyboro Warrants. In June 1997, the Company exchanged $349,000 of notes
payable incurred in acquiring the Cheneyboro leases for 302,191 units (the
"Cheneyboro Units"). Each Cheneyboro Unit consists of one share of
Common Stock and one warrant (a "Cheneyboro Warrant") which enables the holder
thereof to purchase one share of Common Stock for $1.28 through June 30, 2002.
None of the Cheneyboro Warrants have been exercised.
WPM Warrants. In September 1997, the Company completed a private placement
arranged by the WPM Group in which the Company issued to three individuals
promissory notes aggregating $125,000 and issued 272,700 shares of Common Stock
and 322,700 warrants (the "WPM Warrants") to eight investors (the "WPM
Investors") for $454,000. The Company also issued to the WPM Group, an
affiliate of John Malone, P.C., 32,500 WPM Warrants. The
WPM Warrants are exercisable at $2.08 per share until April 3, 2002. None of
the WPM Warrants have been exercised. See "Agreement with Selling Shareholders
- -- WPM Financing."
<PAGE> -47-
Mustang Warrants. In connection with the acquisition of certain equipment
by Mustang Horizontal and Mustang Well Servicing, the Company issued warrants to
purchase 60,000 shares of Common Stock and warrants to purchase 100,000 shares
(the "Mustang Warrants") to M&M Directional Drilling Consultants ("M&M") and LFC
and Robert B. Prag, respectively. Each Mustang Warrant enables the holder
thereof to purchase one share of Common Stock at $3.50 per share until December
31, 2000. None of the Mustang Warrants have been exercised. 60,000 Mustang
Warrants were terminated according to their terms upon the resignation of
certain officers of Mustang Horizontal. See "Business and Properties -- Recent
Developments; M&M Acquisition" and "Certain Relationships and Related
Transactions."
Newport Warrants. As compensation for assisting the Company in obtaining
the exercise of the Company's outstanding warrants during the first half of
fiscal 1998, the Company issued 260,000 warrants (the "Newport Warrants")
to Newport Capital Consultants and National Capital Merchant Group, LLC and two
individuals. Each Newport Warrant enables the holder thereof to purchase one
share of Common Stock for $1.83 per share through July 7, 2000. None of
the Newport Warrants have been exercised.
WH Warrants. In September 1998, the Company sold 285,000 shares of Common
Stock and 285,000 warrants exercisable for $0.60 per share until December 31,
2001 (the "WH Warrants") to HST and three of the WPM Investors
for net proceeds of $142,500. Additionally, HST has executed a subscription
agreement for the purchase of up to 860,000 shares and 860,000 WH Warrants for
up to $430,000 which is scheduled to close prior to December 31, 1998.
In an unrelated transaction, the Company also issued to HST 140,000 shares of
Common Stock and 140,000 WH Warrants for financial advisory and investor
relations services valued at approximately $80,000.
Convertible Debentures
On December 30, 1997, the Company completed the private placement of
$4,320,000 of its 7% Secured Convertible Debentures ("Convertible Debentures")
to a group of nine institutional investment firms led by a Fort
Worth, Texas institutional energy investor. Approximately $1 million of the
cash proceeds and $220,000 of Convertible Debentures were used to purchase the
Equipment. The remaining funds were used for the acquisition and development
of oil and gas properties and purchase of oil field equipment.
The Convertible Debentures are due December 31, 2001 and are secured by the
Equipment and other assets of the Company, including the company's properties at
N.E. Alden and Sears Ranch as well as a portion of Cheneyboro properties. The
Convertible Debentures were originally convertible into a minimum of
approximately 1.6 million shares of the Common Stock and a minimum of 400,000
warrants ("Debenture Warrants"), subject to adjustment upon certain events,
exercisable at prices related to the market price at the time of conversion,
with limits on rights to convert if the conversion price of the Common Stock
falls below a floor price of $1.25 per share (the "Floor Price"). The
conversion price was the lesser of $1.50 per share or 85% of the average of the
three lowest closing bid prices during the ten trading days prior
to the notice of conversion. During any thirty-day period, any investor may not
tender for conversion more than the greater of $100,000 or 10% of his originally
purchased Convertible Debentures at a conversion price less than the Floor
Price. The Company may elect to redeem (for a 10% premium) any Convertible
Debentures tendered for conversion at any price below the Floor Price.
Under the terms of the Convertible Debentures, the Company was obligated to
obtain on or before May 30, 1998 an effective registration statement covering
the shares of Common Stock to be issued upon conversion of the
Convertible Debentures and exercise of the Debenture Warrants. The Company was
not successful in obtaining the effectiveness of the registration statement,
which event, with notice, would be an event of default under the Convertible
Debentures.
The Company and each Convertible Debentureholder agreed effective October
5, 1998, to certain amendments to the Convertible Debentures and related
documents, including a waiver of the prospective event of default. As
consideration for the waiver, the Company is obligated to issued a total of
400,000 shares (the "Waiver Shares") on a pro rata basis to each Convertible
Debentureholder. The Waiver Shares are valued by the board of directors at
$0.425 per share. Additionally, the Company is obligated to issue to the
Convertible Debentureholders approximately 720,000 shares of common stock (the
"Interest Shares") in lieu of accrued interest of approximately $302,000 on the
Convertible Debentures for December 30, 1997 through December 31, 1998.
<PAGE> -48-
During September 1998, $100,000 of Convertible Debentures were converted
into 235,294 shares of Common Stock.
In addition to the usual and customary covenants contained in convertible
debenture agreements of this nature, the Company is required to reserve shares
of Common Stock in an amount not less than 200% of the number of shares
of Common Stock that would be issuable upon conversion in full of the
Convertible Debentures and full exercise of the Debenture Warrants granted
thereunder. In furtherance of this covenant, the Company is required to seek
stockholder approval of an increase in the Company's authorized shares if
necessary to maintain such reserves. Furthermore, any holder of Convertible
Debentures shall not be permitted to convert its Convertible Debentures or
exercise its Debenture Warrants to the extent that such conversion or exercise
would result in a beneficial ownership in the Company in excess
of 4.999%. The Convertible Debenture holders have a right of first refusal for
future financing of the Company under certain conditions. The Company has
listed an additional 3.2 million shares on AMEX, and has prepared an application
for listing of an additional 1.12 million shares of Common Stock on AMEX. The
4.32 million shares include Waiver Shares, Interest Shares, shares underlying
the Convertible Debentures and shares to be issued upon exercise of the
Debenture Warrants. Although the Company's Registration Statement, of which
this Prospectus is a part, includes 3.2 million shares which the Company
currently believes will provide sufficient shares upon the conversion of the
Convertible Debentures and upon exercise of all the Debenture Warrants, the
Company has reserved for issuance a total of up to 4.8 million shares of its
Common Stock to be issued, if necessary, upon conversion of the Convertible
Debentures and up to 1.2 million shares to be issued, if necessary, upon
exercise of the Debenture Warrants. See "Description of Securities --
Convertible Debentures," "Selling Stockholders" and "Agreements
with Selling Stockholders."
Transfer Agent and Registrar
The co-transfer agents and co-registrars for the Company's Common Stock are
Equity Transfer Services Inc. of Toronto, Ontario, Canada and Continental Stock
Transfer & Trust Co. of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Shares offered hereby could have an adverse effect on the market
price of the Common Stock. As of the date of this Prospectus, there are
approximately 19,439,572 shares of Common Stock outstanding, which amount does
not include 4,238,975 shares which underlie outstanding options and warrants,
including 2,913,309 shares reserved for issuance upon exercise of outstanding
warrants held by certain Selling Stockholders, or up to 4.32 million Shares
offered hereby by the Convertible Debenture holders, assuming conversion of the
Convertible Debentures and exercise of Debenture Warrants. Substantially all of
the Company's outstanding shares of Common Stock and the Shares offered
hereby are eligible for public sale without restriction, except for shares
purchased by affiliates of the Company (those controlling or controlled by or
under common control with the Company and generally deemed to include officers
and directors). Approximately 600,000 shares of the Company's outstanding
Common Stock are deemed "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act. See "Management" and
"Description of Securities."
A person, including an affiliate of the Company (or persons whose shares
are aggregated into such affiliate), who has owned restricted shares of Common
Stock beneficially for at least one year is entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of one percent
of the total number of outstanding shares of the same class or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the sale. Subject to the volume and holding period limitations of
Rule 144, approximately 600,000 outstanding shares of Common Stock are eligible
for sale under Rule 144. A person who has not been an affiliate of the Company
for at least the three months immediately preceding the sale and who has
beneficially owned shares of Common Stock for at least two years is entitled to
sell such shares under Rule 144(k) without regard to any of the limitations
described above.
The possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect the prevailing market price for the Common
Stock and could impair the Company's ability to raise capital through the
sale of its equity securities.
<PAGE> -49-
SELLING STOCKHOLDERS
The 12,742,984 Shares offered hereby are being sold pursuant to this
Prospectus by the Selling Stockholders. The Company will not receive any
proceeds from the sale of the Shares by the Selling Stockholders. However, the
Company will receive the proceeds upon exercise of certain outstanding warrants
held by Selling Stockholders. Certain of the Shares offered hereby will be
issued to Selling Stockholders upon exercise of such outstanding warrants. See
"Description of Securities -- Warrants," "Certain Relationships and Related
Transactions," "Plan of Distribution" and "Agreements with Selling
Stockholders."
Except as described below , "Certain Relationships and Related
Transactions" and in "Agreements with Selling Stockholders" herein, none of the
Selling Stockholders has ever held any position or office with the Company or
had any other relationship with the Company or its affiliates.
The table below sets forth the beneficial ownership of the Company's Common
Stock by the Selling Stockholders at October 5, 1998, and after giving effect to
the conversion of the Convertible Debentures, the exercise
of the Debenture Warrants, the exercise of various warrants held by certain
Selling Stockholders and the sale of the Shares offered hereby. See "Certain
Relationships and Related Transactions," "Description of Securities" and
"Agreements with Selling Stockholders."
Beneficial
Ownership Warrants & Ownership Percent of Class
Prior to Shares to After Before After
Selling Stockholders (1) Offering be Sold Offering Offering Offering(2)
Westover Investments L.P. 1,000,000(3) 1,000,000 0 4.96% 0.00%
Montrose Investments L.P. 1,500,000(3) 1,500,000 0 7.30% 0.00%
Lakeshore International 1,000,000(3) 1,000,000 0 5.01% 0.00%
JMG Capital Partners, L.P. 250,000(3) 250,000 0 1.27% 0.00%
Triton Capital Investments,
Ltd. 250,000(3) 250,000 0 1.27% 0.00%
Lionhart Global Appreciation
Fund, Ltd. 136,000(3) 136,000 0 * 0.00%
Palisades Holdings, Inc. 100,000(3) 100,000 0 * 0.00%
Global Perspective
International, Ltd. 56,000(3) 56,000 0 * 0.00%
Global Emerging Markets, Ltd 28,000(3) 28,000 0 * 0.00%
Liviakis Financial
Communications, Inc. 3,041,851(4) 2,536,351 505,500 14.80% 1.91%
Robert B. Prag 275,000(5) 275,000 0 1.40% 0.00%
Leon A. Romero 973,571(6) 973,571 0 5.01% 0.00%
George Peel 816,134 816,134 0 4.20% 0.00%
Albert Sena 232,072 232,072 0 1.19% 0.00%
Dorothy Carter 75,340 75,340 0 * 0.00%
Steven Sinken 26,000(7) 26,000 0 * 0.00%
Rick Blanyer 60,000(8) 60,000 0 * 0.00%
Fred Dulock 83,400(9) 83,400 0 * 0.00%
Bill J. Kemp 150,000(10) 150,000 0 * 0.00%
Jack D. Mabery and
Darlene M. Mabery 10,000(11) 10,000 0 * 0.00%
Jim Phillips 330,000(12) 330,000 0 1.68% 0.00%
Dan Malone 20,000(13) 20,000 0 * 0.00%
WPM Group 32,500(14) 32,500 0 * 0.00%
John Malone, P.C. 116,900(15) 116,900 0 * 0.00%
Hibernia Securities Trust 1,053,334(16)1,053,334 26,667 5.22% *
Hibernia Management Company 212,086(17) 212,086 0 1.08% 0.00%
Euro Coach America
Corporation 431,148(18) 296,148 135,500 1.51% *
NPCS, Inc. 431,148(19) 296,148 135,000 1.51% *
Bill Watson 5,000(20) 5,000 0 * 0.00%
<PAGE> -50-
Paul Page, Jr. 5,000(21) 5,000 0 *
0.00%Newport Capital Consultants 225,000(22) 225,000 0 1.14%
0.00%
National Capital Merchant
Group, LLC 25,000(23) 25,000 0 * 0.00%
John Malone 232,000(24) 232,000 0 1.19% 0.00%
Salzwedel Financial
Communications, Inc 175,000 175,000 0 * 0.00%
VFS, Inc. 175,000 175,000 0 * 0.00%
Van Kaspar & Co. 12,000 12,000 0 * 0.00%
C. B. Harrison, Jr. 30,000 30,000 0 * 0.00%
Landers Horizontal Drill
Inc. 44,000 44,000 0 * 0.00%
Panagea Energy Ltd. 100,000 100,000 0 * 0.00%
Less than 1%.
(1) The persons named in the table have sole voting and investment powers
with respect to the shares of Common Stock shown as
beneficially owned by them.
(2) Assumes 26,437,587 outstanding shares of the Company=s Common Stock
which includes (i) up to 2,964,706 shares to be issued
to the Convertible Debenture Holders upon conversion of the Convertible
Debentures and subsequent exercise of the Debenture
Warrants and (ii) 2,913,309 shares to be issued upon the exercise of
the 500,000 LFC Warrants, the 161,351 Liviakis Warrants,
the 100,000 LFC Mustang Warrants, the 200,000 Hibernia Warrants,
the 200,000 HMC Warrants, the 266,667 HST Warrants,
the 355,200 WPM Warrants, the 60,000 Mustang Warrants, the 260,000
Newport Warrants, the 302,191 Cheneyboro Warrants, the 142,900
Malone Warrants and the 425,000 WH Warrants. See "Description of
Securities" and "Agreements with Selling Stockholders."
(3) See "Agreements with Selling Stockholders -- Convertible Debenture
Holders."
(4) Includes 611,351 shares to be issued to LFC upon exercise of the 375,000
LFC Warrants, the 161,351 Liviakis Warrants and
the 75,000 LFC Mustang Warrants. See "Certain Relationships and Related
Transactions," "Principal Stockholders," "Description of Securities."
(5) Includes 150,000 shares to be issued to Robert B. Prag upon exercise of
125,000 LFC Warrants and 25,000 Mustang Warrants.
See "Certain Relationships and Related Transactions" and "Description of
Securities -- Warrants."
(6) Mr. Romero is an executive officer and a director of the Company. See
"Management."
(7) Includes 26,000 shares to be issued to Mr. Sinken upon exercise of
26,000 Malone Warrants. See "Description of Securities --
Warrants; Malone Warrants."
(8) Includes 30,000 shares to be issued to Mr. Blanyer upon exercise of
30,000 WPM Warrants. See "Description of Securities --
Warrants" and "Agreements with Selling Stockholders -- WPM Financing."
(9) Includes 41,700 shares to be issued to Mr. Dulock upon exercise of
41,700 WPM Warrants. See "Description of Securities --
Warrants" and "Agreements with Selling Stockholders -- WPM Financing."
(10) Includes 30,000 shares to be issued to Mr. Kemp upon exercise of 30,000
WPM Warrants, 45,000 shares to be issued upon exercise of 45,000
warrants. See "Description of Securities -- Warrants; WPM
Warrants, WH Warrants" and "Agreements with Selling Stockholders -
WPM Financing."
(11) Includes 10,000 shares to be issued to Mr. and Mrs. Mabery upon
exercise of 10,000 WPM Warrants. See "Description of
Securities -- Warrants" and "Agreements with Selling Stockholders -
WPM Financing."
(12) Includes 125,000 shares to be issued to Mr. Phillips upon exercise of
125,000 WPM Warrants and 50,000 shares to issued upon
exercise of 50,000 WH Warrants. See "Description of Securities -
Warrants: WPM Warrants, WH Warrants" and "Agreements with Selling
Stockholders -- WPM Financing."
(13) Includes 20,000 shares to be issued to Mr. Malone upon exercise of
20,000 WPM Warrants. See "Description of Securities -
Warrants" and "Agreements with Selling Stockholders -- WPM Financing."
(14) Includes 32,500 shares to be issued to WPM Group upon exercise of
32,500 WPM Warrants. See "Description of Securities --
Warrants" and "Agreements with Selling Stockholders -- WPM Financing."
(15) Includes 116,900 shares to be issued to John Malone, P.C. upon exercise
of the Malone Warrants. See "Description of Securities -- Warrants"
and "Agreements with Selling Stockholders -- Malone Consulting
Agreement."
(16) Includes 746,667 shares to be issued to Hibernia Securities Trust upon
exercise of 200,000 Hibernia Warrants, 266,667 HST
Warrants and 280,000 WH Warrants. See "Description of Securities -
Warrants; Hibernia Warrants" "-- HST Warrants"
and "Agreements with Selling Stockholders -- Hibernia Securities
Trust Agreement."
(17) Includes 206,043 shares to be issued to Hibernia Management Company
upon exercise of 200,000 HMC Warrants and 6,043 Cheneyboro Warrants.
See "Description of Securities -- Warrants; HMC Warrants"
and "Agreements with Selling Stockholders -- Hibernia Management
Company Agreement."
(18) Includes 148,074 shares to be issued to Euro Coach America Corporation
upon exercise of 148,074 Cheneyboro Warrants. See
"Description of Securities -- Warrants; Cheneyboro Warrants;
WH Warrants" and "Agreements with Selling Stockholders -
Cheneyboro Note Conversion."
(19) Includes 148,074 shares to be issued to NPCS, Inc. upon exercise of
148,074 Cheneyboro Warrants. See "Description of
Securities -- Warrants; Cheneyboro Warrants" and "Agreements
with Selling Stockholders -- Cheneyboro Note Conversion."
(20) Includes 5,000 shares to be issued to Bill Watson upon exercise of
5,000 Newport Warrants. See "Description of Securities --
Warrants; Newport Warrants."
(21) Includes 5,000 shares to be issued to Paul Page, Jr. upon exercise of
5,000 Newport Warrants. See "Description of Securities -
Warrants; Newport Warrants."
<PAGE> -51-
(22) Includes 225,000 shares to be issued to Newport Capital Consultants
upon exercise of 225,000 Newport Warrants. See "Description of
Securities -- Warrants; Newport Warrants."
(23) Includes 25,000 shares to be issued to National Capital Merchant Group,
LLC upon exercise of 25,000 Newport Warrants. See "Description of
Securities -- Warrants; Newport Warrants."
(24) Includes 116,000 shares to be issued to John Malone upon exercise of
66,000 WPM Warrants and 50,000 WH Warrants. See "Description of
Securities -- Warrants; WPM Warrants; WH Warrants."
PLAN OF DISTRIBUTION
The Shares offered hereby may be sold by the Selling Stockholders, or by
pledgees, donees, transferees or other successors in interest thereof.
Offers and sales of the Shares may be made from time to time on one or more
exchanges or in the over-the-counter market, or otherwise, at prices and on
terms then prevailing or at prices related to the then-current market price, or
in negotiated transactions. The methods by which the Shares may be sold may
include, but not limited to, the following: (a) a block trade in which the
broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account in accordance with any method of
sale described herein; (c) an exchange distribution in accordance with the rules
of such exchange; (d) ordinary brokerage transactions in which the broker
solicits purchasers; (e) privately negotiated transactions; (f) short sales; and
(g) a combination of any such methods of sale. In effecting sales, brokers and
dealers engaged by the Selling stockholders may arrange for other brokers or
dealers to participate. Brokers or dealers may receive commissions or discounts
from the Selling Stockholders or from the purchasers in amounts to be negotiated
prior to the sale. The Selling Stockholders may also sell such Shares in
accordance with Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), if available.
From time to time the Selling Stockholders may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith. From time to time Selling Stockholders may pledge their
Shares pursuant to the margin provisions of their respective customer agreements
with their respective brokers. Upon a default by a Selling Stockholder, the
broker may offer and sell the pledged Shares of Common stock from time to time.
The Company has agreed to use its best efforts to maintain the
effectiveness of the registration of the Shares being
offered hereunder for three years from the date of this Prospectus or such
earlier day when all of the Shares being offered hereunder have been sold or may
be sold without volume or other restrictions pursuant to Rule 144 under the
Securities Act, as determined by counsel to the Company pursuant to a written
opinion letter.
The Selling Stockholders and any brokers participating in such sales may be
deemed to be underwriters within the meaning of the Securities Act. There can
be no assurance that the Selling Stockholders will sell any or all of the Shares
offered hereunder.
All proceeds from any such sales will be the property of the Selling
Stockholder who will bear the expense of underwriting documents and selling
commissions. The Company is required to pay all other fees and expenses
incident to the offering and sale of the Shares. The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
AGREEMENTS WITH SELLING STOCKHOLDERS
Aspen Acquisition
On June 30, 1997, the Company acquired all the issued and outstanding
shares of Old Aspen (the "Old Aspen Shares") from Leon A. Romero, George W.
Peel, Albert Sena and Dorothy Carter (the "Aspen Shareholders"). The
purchase price for the Old Aspen Shares consisted of $200,000 cash, $300,000 of
short-term notes, 2,511,317 shares of Common Stock (the "Aspen Shares"), of
which 269,970 shares were returned to the Company by three Old Aspen
Shareholders in settlement of notes payable to Old Aspen in the amount of
$425,000. The acquisition also included various interests, having an aggregate
value of less than $500,000, in two wells in Utah, which were subsequently sold
<PAGE> -52-
by the Company, two wells in Latimer County, Oklahoma, one well in Harrison
County, Texas and several shallow wells in Gregg County, Texas.
WPM Financing
In September 1997, the Company completed a private offering of 15% Two-Year
Promissory Notes (the "WPM Notes") in the aggregate amount of $125,000 and
issued 272,700 shares of its Common Stock and 322,700 WPM
Warrants for $454,500 (the "WPM Financing") to Bill J. Kemp, Dan Malone, Fred B.
Dulock, Jack Mabery, Darlene Mabery, Jim Phillips, John Malone and R.J. Blanyer.
WPM Group, an affiliate of John Malone, P.C., acted as placement
agent and received a cash fee and 32,500 WPM Warrants for its services. See
"Description of Securities -- Warrants; WPM Warrants."
The WPM Notes provide for interest at the rate of 15% per annum with
interest payments due quarterly beginning October 18, 1998 and continuing until
the WPM Notes mature on July 17, 1999, when the entire balance of principal and
accrued interest is due. The WPM Notes are secured by a deed of trust creating
a first lien on certain oil and gas leases situated in Navarro County, Texas.
During March, 1998, the WPM Notes were repaid and the liens released.
Malone Consulting Agreement
On April 3, 1997, the Company entered into a consulting agreement (the
"Malone Consulting Agreement") with John Malone, P.C. ("Malone"). The Malone
Consulting Agreement expires on April 3, 1998. Malone was retained by
the Company to assist the Company with its capital raising efforts during fiscal
1997. As consideration for Malone undertaking this engagement, the Company
agreed to issue to Malone warrants to purchase 80,000 shares of the
Company's Common Stock for $1.84 per share which expire April 3, 2002 as well as
such additional warrants as determined in the sole discretion of the Company
based upon the performance of Malone under the Malone Consulting
Agreement. A total of 116,900 Malone Warrants have been issued to Malone
pursuant to this Agreement. See "Description of Securities -- Warrants; Malone
Warrants."
Hibernia Securities Trust Agreement
Effective January 30, 1997, the Company entered into a subscription
agreement (the "Hibernia Agreement") with Hibernia Securities Trust
(AHibernia"). Pursuant to the terms of the Hibernia Agreement, Hibernia
subscribed for an aggregate of 266,667 Units, at a price of $1.64 per Unit as
determined in accordance with the terms of the Hibernia Agreement. Pursuant to
the terms of the Hibernia Agreement, 266,667 shares of Common Stock and 266,667
HST Warrants were issued to Hibernia for aggregate proceeds of $438,000. See
"Description of Securities -- Warrants; HST Warrants."
Hibernia Management Company Agreement
In a private placement completed in January 1996, the Company issued to HMC
200,000 shares of Common Stock and 200,000 HMC Warrants for total consideration
of $164,250. During March 1997, affiliates of Mr. Soltero and Mr.
Hogue purchased the 200,000 shares from HMC for $164,250. See "Description of
Securities -- Warrants; HMC Warrants."
Cheneyboro Note Conversion
During June 1997, the Company repaid $549,000 of outstanding notes secured
by oil and gas leases in the Cheneyboro Field by delivery to the noteholder of
$200,000 cash, 302,191 shares of Common Stock and 302,191
Cheneyboro Warrants. The securities have been transferred to Euro Coach America
Corporation, NPCS, Inc. and Hibernia Management Company. See "Description of
Securities -- Warrants; Cheneyboro Warrants."
<PAGE> -53-
Convertible Debenture Holders
The Convertible Debentures are due December 31, 2001 and are secured by the
Equipment and other assets of the Company. The Convertible Debentures were
issued to nine institutional investors (the "Convertible Debenture Holders")
in the amounts as set forth next to their names:
Name of Holder Amount of Number of Shares
Westover Investments L.P. $1,000,000 1,000,000
Montrose Investments L.P. 1,500,000 1,500,000
Lakeshore International 1,000,000 1,000,000(1)
JMG Capital Partners, L.P. 250,000 250,000
Triton Capital Investments, Ltd. 250,000 250,000
Lionhart Global Appreciation Fund, Ltd. 136,000 136,000
Global Perspective International, Ltd. 56,000 56,000
Global Emerging Markets, Ltd. 28,000 28,000
Palisades Holdings, Inc. 100,000 100,000
---------- ------------
Total $4,320,000 4,320,000(1)
========== ============
________________________
(1) Includes 235,294 shares received for conversion of $100,000 of
debentures in September 1998.
(2) Includes up to 2,324,706 shares to be issued upon conversion of the
Convertible Debentures and up to 640,000 shares
to be issued upon exercise of the Debenture Warrants.
The Convertible Debentures are convertible into a minimum of 2.88 million
shares of the Company's Common Stock and a minimum of 720,000 warrants
("Debenture Warrants") to purchase 720,000 shares of Common Stock,
subject to adjustment upon certain events, at prices related to the market price
of the Common Stock at the time of conversion, subject to certain adjustments.
The Company has agreed with the Convertible Debenture Holders to register
up to 2,964,706 shares of Common Stock in the Registration Statement of which
this Prospectus is a part to provide sufficient shares of Common Stock of the
Company upon conversion of the Convertible Debentures and the subsequent
exercise of the Debenture Warrants. Although the Company's Registration
Statement of which the Prospectus is a part includes 2,964,706 shares which the
Company currently believes will provide sufficient shares upon the conversion of
the Convertible Debentures and upon the conversion of the Convertible Debentures
and upon exercise of all the Debenture Warrants, the Company has reserved for
issuance a total of up to 4.8 million shares of its Common Stock to
be issued, if necessary upon conversion of the Convertible Debentures and up to
1.2 million shares to be issued, if necessary, upon exercise of the Debenture
Warrants. During September 1998, Lakeshore International converted
$100,000 of the Convertible Debentures into 235,294 shares of Common Stock. See
"Business and Properties -- Recent Developments; Sale of Convertible Debentures"
and "Description of Securities -- Convertible Debentures."
CERTAIN MATERIAL INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations for United States Residents
The following is a summary of certain of the material 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 the Company
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.
<PAGE> -54-
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
stockholders. However, under the Convention, the rate of Canadian withholding
tax which would apply on dividends paid by the Company 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 the Company, 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 Shares. The
following discussion deals only with Shares 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
includable in gross income as a taxable dividend to the extent of the
Company'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
includable in income will be the United States dollar value, on the date of
receipt, of the Canadian dollar amount distributed. Any subsequent gain or loss
in respect of such Canadian dollars arising from exchange rate fluctuations will
be ordinary income or loss.
The sale of Common Stock will generally result in the recognition of gain
or loss in an amount equal to the difference between the amount realized on the
sale and the holder's adjusted basis in such common stock. Gain or
loss upon the sale of the Common Stock will be long-term or short-term capital
gain or loss, depending on whether the Common Stock has been held for more than
one year.
Special rules are applicable to United States persons holding stock in a
"passive foreign investment company" (PFIC), any foreign corporation of which at
least 75% of its gross income for the taxable year is passive
income (the "Income Test") or at least 50% by value of the assets it holds
during the taxable year produce or are held for the production of passive income
(the "Asset Test"). For that purpose, "passive income" includes the excess
of gains over losses from certain commodities transactions, including certain
transactions involving oil and gas. Gains from commodities transactions,
however, are generally excluded from the definition of passive income if
"substantially all" of a merchant's, producer's or handler's business is as an
active merchant, producer or handler of such commodities.
<PAGE> -55-
The Company 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 the
Company.
If the Company was 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 Shares are urged to consult their tax advisors regarding the
potential application of the matters described above.
LIMITATIONS ON DIRECTOR LIABILITY
Under the securities law of the Yukon Territory, 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 the Company is also subject to potential liability under the
Business Corporations Act "Yukon" ("YBCA"). The YBCA 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
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and the Selling Stockholders by Jackson Walker
L.L.P., Dallas, Texas.
<PAGE> -56-
EXPERTS
The financial statements of operations and cash flows of the Company for
the year ended June 30, 1997 and the statement of stockholders' equity for the
period from February 15, 1995 through June 30, 1997 have been audited by Hein +
Associates LLP, independent certified public accountants, as stated in their
report which is included and incorporated by reference herein and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of the Company as of June 30, 1998 and
for the year then ended have been audited by Lane Gorman Trubitt, L.L.P.,
independent certified public accountants, as stated in their report which is
included and incorporated by reference herein and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The reference to the report of K&A Energy Consultants, Inc.,
independent petroleum consultants, contained herein estimating the Proved
Reserves, future net cash flows from such Proved Reserves and the PV-10 of
such estimated future net cash flows for the Company's Oil and Gas Properties as
of June 30, 1998 is made in reliance upon the authority of such firm as experts
with respect to such matters.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the office of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
regional offices of the Commission at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such information can
be obtained by mail from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Additionally, the Commission maintains a web site that contains
reports, proxy statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web site is
http://www.sec.gov. The Company's Common Stock is listed on the
American Stock Exchange and copies of reports, proxy statements and other
information concerning the Company also can be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881.
This Prospectus constitutes a part of a registration statement on Form SB-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission, and
reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company and the
Common Stock. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in each instance,
reference is made to a copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
The Company has its principal executive offices located at 6510 Abrams
Road, Suite 300, Dallas, Texas 75231; its telephone number is 214-221-6500.
<PAGE> -57-
GLOSSARY
The terms defined in this glossary are used throughout this Prospectus.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to oil or other liquid hydrocarbons.
BOPD. One barrel of oil or other liquid hydrocarbons per day.
BCF. One billion cubic feet of gas.
BCFE. One billion cubic feet of natural gas equivalents converting one Bbl of
oil to six Mcf of gas.
BOE. The amount of oil having the same BTU content as a given quantity of gas,
with six Mcf of gas being converted to one BBL.
BTU. British Thermal Unit, the quantity of heat required to raise one pound of
water by one degree Fahrenheit.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
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.
DRY HOLE. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an unproved
area, to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir, or to extend a known reservoir.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be, in
which a working interest is owned.
IN-FILL WELL. A well drilled between known producing wells to better exploit
the reservoir.
MBOE. One thousand barrels of oil or other liquid hydrocarbons equivalents
converting six Mcf of gas to one BBL of oil.
MCF. One thousand cubic feet of gas.
MCFE. One thousand cubic feet of natural gas equivalents converting one Bbl of
oil to six Mcf of gas.
MMCF. One million cubic feet of gas.
MMCFE. One million cubic feet of natural gas equivalents converting one Bbl of
oil to six Mcf of gas.
MMCF/D. One million cubic feet of gas per day.
NATURAL GAS EQUIVALENT. The amount of gas having the same Btu content as a
given quantity of oil, with one Bbl of oil being converted to six Mcf of gas.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned in
gross acres or gross wells.
<PAGE> -59-
NET REVENUE INTEREST. A share of the Working Interest that does not bear any
portion of the expense of drilling and completing a well and that represents the
holder's share of production after satisfaction of all royalty, overriding
royalty, oil payments and other non-operating interests.
PRODUCTIVE WELL. A well that is producing oil or gas or that is capable of
production in paying quantities.
PROVED DEVELOPED RESERVES. Proved developed oil and gas reserves are
reserves that can be expected to be recovered through existing wells with
existing equipment and operation 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 should be 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 RESERVES. Proved oil and gas reserves are the estimated quantities of
crude oil, natural gas, and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operation 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 escalation s based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation
test. The area of a reservoir considered proved includes:
(A) that portion delineated by drilling and defined by gas-oil
and/or oil-water contacts, if any, and (B) the immediately
adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available
geological 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) Estimated or proved reserves do not include the following:
(A) oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
(B) crude oil, natural gas, and natural 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, natural gas, and natural gas
liquids, that may occur in undrilled prospects; and (D) crude
oil, natural gas, and natural gas liquids, that may be recovered
form oil shale, coal, gilsonite and other sources.
PROVED UNDEVELOPED RESERVES. Proved undeveloped oil and gas 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 shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation. Under no circumstances should estimates for
proved undeveloped reserves be 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 reserve.
PV-10. The present value of proved reserves is an estimate of the discounted
future net cash flows from each of the properties at June 30, 1998, or as
otherwise indicated. Net cash flow is defined as net revenues less, after
deducting production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. As required by rules of
the Commission, the future net cash flows have been discounted at an annual rate
of 10% to determine their "present value." The present value is shown to
indicate the effect of time on the value of the revenue stream and should not be
construed as being the fair market value of the properties. In accordance with
Commission rules, estimates have been made using constant oil and gas prices and
operating costs, at June 30, 1998, or as otherwise indicated.
RECOMPLETION. The completion for production of an existing wellbore in a
different formation or producing horizon from that in which the well was
previously completed.
<PAGE> -59-
RESERVE LIFE. The estimated productive life of a proved reservoir based upon
the economic limit of such reservoir producing hydrocarbons in paying quantities
assuming certain price and cost parameters. For purposes of this Prospectus,
reserve life is calculated by dividing the Proved Reserves (on an Mcfe basis) at
the end of the period by projected production volumes for the next 12 months.
RESERVOIR. A porous and permeable underground formation containing a natural
accumulation of producible oil or as that is confined by impermeable rock or
water barriers and is individual and separate from other reservoirs.
ROYALTY INTEREST. An interest in an oil and gas property entitling the owner to
a share of oil and gas production free of cost of production.
SERVICE WELL. A well drilled or completed for the purpose of supporting
production in an existing field. Specific purposes of service wells include gas
injection, water injection, steam injection, air injection, salt-water disposal,
water supply for injection, observation, or injection for in-situ combustion.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
WATERFLOOD. A method of injection water into a reservoir to enhance or replace
the natural reservoir drive.
WORKING INTEREST. The operating interest that 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.
<PAGE> -60-
CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED
SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule Page
Independent Auditor's Reports F-2
Financial Statements
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-11
Supplemental Information (Unaudited) F-25
<PAGE> F1
INDEPENDENT AUDITORS REPORTS
Board of Directors
Cotton Valley Resources Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Cotton Valley
Resources Corporation and subsidiaries (a development stage company) as of June
30, 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended and the period from
February 15, 1995 (date of incorporation) to June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cotton Valley
Resources Corporation and subsidiaries as of June 30, 1998 and the results of
their operations and their cash flows for the year then ended and the period
from February 15, 1995 (date of incorporation) to June 30,
1998, in conformity with generally accepted accounting principles.
The carrying value of the Company's oil and gas properties is supported
primarily by proved undeveloped reserves.
LANE GORMAN TRUBITT, L.L.P.
Dallas, Texas
September 11, 1998
<PAGE> F-2
September 11, 1998
Board of Directors
Cotton Valley Resources Corporation
Dallas, Texas
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Cotton Valley Resources Corporation and
subsidiaries (a development stage company) for the year ended June 30, 1997, and
the period from February 15, 1995 (date of incorporation) to June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the Company's operations and
cash flows for the year ended June 30, 1997, the period from February 15, 1995
(date of incorporation) to June 30, 1995 and the period from February 15, 1995
to June 30, 1997 in accordance with generally accepted accounting principles.
The carrying value of the Company's oil and gas properties is supported
primarily by proved undeveloped reserves.
HEIN + ASSOCIATES, LLP
Dallas, Texas
September 15, 1997
<PAGE> F-3
<TABLE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED BALANCE SHEET
(Expressed in U.S. Dollars)
June 30, 1998
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 85,762
Accounts receivable 396,390
Materials and supplies inventory 891,359
Prepaid expenses 219,119
-----------
Total current assets 1,592,630
Proved Oil & Gas Properties (full cost method) 24,331,189
net of accumulated depletion of $396,008
Office Furniture and Equipment 92,412
net of accumulated depreciation of $24,724
Debenture Financing Costs and Other Assets 521,625
-----------
Total Assets $26,537,856
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,175,396
Accrued expenses 51,288
Accrued interest 158,483
Accrued well plugging costs 186,640
-----------
Total current liabilities 1,571,807
Long Term Debt, net of discount of $53,962 4,654,638
Advances from Related Parties 122,989
Deferred Income Taxes 1,845,000
Stockholders' Equity
Preferred stock, no par value, authorized-unlimited,- issued, none -
Common Stock, no par value, authorized-unlimited:
issued: - 17,273,278 21,119,482
Warrants and beneficial conversion feature 823,695
Deficit accumulated in development state (3,599,755)
-----------
Total liabilities and stockholders equity $26,537,856
===========
See accompanying notes to these financial statements.
</TABLE>
<PAGE> F-4
<TABLE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
Period from
February 15, 1995
Year Ended June 30, to
1998 1997 June 30, 1998
----- ----- --------------
<S> <C> <C> <C>
REVENUE:
Oil and gas sales $ 835,684 $ 272,243 $ 1,107,927
Equipment sales 987,811 987,811
Other income 2,357 - 2,357
---------- ------------ -------------
Total Revenue 1,825,852 272,243 2,098,098
EXPENSES:
Oil and gas production 615,162 252,272 867,434
Cost of equipment sold 542,864 - 542,864
Operating expenses 117,509 - 117,509
General and administrative 1,330,361 2,825,678 5,196,732
Depreciation and depletion 378,920 27,000 405,920
Other expenses 1,566 - 1,566
----------- ----------- --------------
Total Expenses 2,986,382 3,104,950 7,132,025
----------- ----------- --------------
LOSS FROM OPERATIONS (1,160,530) (2,832,707) (5,033,930)
OTHER INCOME (EXPENSES):
Interest and financing expense (814,845) (97,158) (1,050,973)
Gain on sale of assets 629,660 - 629,660
Interest income 47,437 3,987 56,810
----------- ----------- --------------
Total Other (137,748) (93,171) (364,503)
----------- ----------- --------------
LOSS BEFORE INCOME TAX (1,298,278) (2,925,878) (5,398,433)
INCOME TAX BENEFIT 467,678 919,000 1,798,678
----------- ----------- --------------
NET LOSS $ (830,600) $(2,006,878) $(3,599,755)
NET LOSS PER SHARE $ (0.05) $ (0.18) $ (0.30)
WEIGHTED AVERAGE SHARES 16,301,723 11,403,000 11,868,140
See accompanying notes to these financial statements.
</TABLE>
<PAGE> F-5
<TABLE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1998
(Expressed in U.S. Dollars)
COMMON STOCK
COMMON STOCK SUBSCRIBED
SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ------
<S> <C> <C> <C> <C>
Issued upon incorporation to
Officers ($.003 per share) 560,001 $ 1,401 - $ -
Issued March 10, 1995 for the
acquisition of
subsequently abandoned oil and gas
properties (621,600 shares issued
and 310,800 shares canceled $.003
per share) 310,800 777 - -
Issued March 10, 1995 for the acquisition
of oil and gas properties
($1.82 per share) 3,875,957 7,072,914 - -
Issued June 1, 1995 for cash
($1.00 per share) 10,000 10,000 - -
Net Loss - - - -
--------- --------- ----- ----
BALANCES, June 30, 1995 4,756,758 7,085,092 - -
Issued July - December 1995 in
connection with notes payable
($1.49 per share) 107,258 160,008 - -
Repayment and conversion to equity
of notes payable, net of
amortized discount - (72,000) - -
Issued December 29, 1995 to officers
upon conversion of special shares
($.004 per share) 1,440,000 5,840 - -
Issued December 29, 1995 as advance
for stock offering costs
($1.49 per share) 340,000 506,409 - -
Issued December 29, 1995 to officers
for services ($1.49 per share) 300,000 446,950 - -
Sale of shares for cash during April - June
1996 ($1.64 per share) 1,272,500 2,089,872 - -
Issued June 14, 1996 upon conversion
of debentures ($1.48 per share) 288,529 426,474 - -
Issued June 14, 1996 to former Arjon
shareholders ($.21 per share) 686,551 146,300 - -
Share issuance costs - (915,785) - -
Net loss - - - -
--------- ---------- ---- ----
BALANCES, June 30, 1996 9,191,596 9,879,160 - -
- --Continued--
</TABLE>
<TABLE>
WARRANTS
AND
BENEFICAL
SPECIAL SHARES CONVERSION
SHARES AMOUNT DISCOUNT
------- ------ ----------
<S> <C> <C> <C>
Issued upon incorporation to officers
($.003 per share) 2,100,000 $ 8 $ -
Issued March 10, 1995 for the
acquisition of
subsequently abandoned oil and gas
properties (621,600 shares issued
and 310,800 shares canceled $.003
per share) - - -
Issued March 10, 1995 for the acquisition
of oil and gas properties
($1.82 per share) - - -
Issued June 1, 1995 for cash
($1.00 per share) - - -
Net Loss - - -
--------- --------- --------
BALANCES, June 30, 1995 2,100,000 8 -
Issued July - December 1995 in
connection with notes payable
($1.49 per share) - - -
Repayment and conversion to equity
of notes payable, net of
amortized discount - - -
Issued December 29, 1995 to officers
upon conversion of special shares
($.004 per share) (2,100,000) (8) -
Issued December 29, 1995 as advance
for stock offering costs
($1.49 per share) - - -
Issued December 29, 1995 to officers
for services ($1.49 per share) - - -
Sale of shares for cash during April - June
1996 ($1.64 per share) - - -
Issued June 14, 1996 upon conversion
of debentures ($1.48 per share) - - -
Issued June 14, 1996 to former Arjon
shareholders ($.21 per share) - - -
Share issuance costs - - -
Net loss - - -
--------- ---------- -----
BALANCES, June 30, 1996 - - -
- --Continued-
</TABLE>
<TABLE>
DEFICT
ACCUMULATED
IN DEVELOPMENT
STAGE TOTAL
-------------- -----------
<S> <C> <C>
Issued upon incorporation to officers
($.003 per share) - $ 1,409
Issued March 10, 1995 for the
acquisition of
subsequently abandoned oil and gas
properties (621,600 shares issued
and 310,800 shares canceled $.003
per share) - 777
Issued March 10, 1995 for the acquisition
of oil and gas properties
($1.82 per share) - 7,072,914
Issued June 1, 1995 for cash
($1.00 per share) - 10,000
Net Loss (49,917) (49,917)
------------- ------------
BALANCES, June 30, 1995 (49,917) 7,035,183
Issued July - December 1995 in
connection with notes payable
($1.49 per share) - 160,008
Repayment and conversion to equity
of notes payable, net of
amortized discount - (72,000)
Issued December 29, 1995 to officers
upon conversion of special shares
($.004 per share) - 5,832
Issued December 29, 1995 as advance
for stock offering costs
($1.49 per share) - 506,409
Issued December 29, 1995 to officers
for services ($1.49 per share) - 446,950
Sale of shares for cash during April - June
1996 ($1.64 per share) - 2,089,872
Issued June 14, 1996 upon conversion
of debentures ($1.48 per share) - 426,474
Issued June 14, 1996 to former Arjon
shareholders ($.21 per share) - 146,300
Share issuance costs - (915,785)
Net loss - (712,360)
------------- -------------
BALANCES, June 30, 1996 - 9,116,883
- --Continued--
</TABLE>
<PAGE> F-6
<TABLE>
COMMON STOCK
COMMON STOCK SUBSCRIBED
SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ------
<S> <C> <C> <C> <C>
- --Continued--
Issued August 13, 1996 for exercise
of warrants ($1.64 per share) 6,667 10,950 - -
Issued in August and November 1996 for
exercise of warrants ($.48 per share) 175,001 84,315 - -
Sales of shares for cash during November 1996
($.73 per share) 100,000 73,365 - -
Issued primarily in December 1996 for
services ($.78 per share) 86,888 67,432 - -
Issued in December 1996 to settle
liabilities ($.73 per share) 53,750 39,238 - -
Issued in December 1996 for investor relations
services ($.73 per share) 1,490,000 1,087,700 - -
Issued in December 1996 for investor relations
services ($.73 per share) 1,490,000 1,087,700 - -
Sale of shares for cash on January 7, 1997
($.82 per share), less commission of
$16,400 200,000 147,825 - -
Issued during January 1997 for exercise of
warrants ($.48 per share) 241,666 116,434 - -
Issued February 5, 1997 for exercise of
warrants ($2.00 per share) 11,239 22,562 - -
Issued February 5, 1997 for exercise of
warrants ($1.47 per share) 37,741 55,791 - -
Issued during March 1997 for exercise of
warrants ($1.64 per share) 31,667 52,014 - -
Sale of shares from December 1996 through
March 1997 for cash, including shares
subscribed but not issued
($.75 per share) 375,000 281,250 125,000 93,750
Sale of shares for cash during February -
June 1997 ($1.51 per share) 266,667 402,527 - -
- --Continued--
</TABLE>
<TABLE> WARRANTS
AND
BENEFICAL
SPECIAL SHARES CONVERSION
SHARES AMOUNT DISCOUNT
------- ------ ------------
<S> <C> <C> <C>
- --Continued--
Issued August 13, 1996 for exercise
of warrants ($1.64 per share) - - -
Issued in August and November 1996 for
exercise of warrants ($.48 per share) - - -
Sales of shares for cash during November 1996
($.73 per share) - - -
Issued primarily in December 1996 for
services ($.78 per share) - - -
Issued in December 1996 to settle
liabilities ($.73 per share) - - -
Issued in December 1996 for investor relations
services ($.73 per share) - - -
Sale of shares for cash on January 7, 1997
($.82 per share), less commission of
$16,400 - - -
Issued during January 1997 for exercise of
warrants ($.48 per share) - - -
Issued February 5, 1997 for exercise of
warrants ($2.00 per share) - - -
Issued February 5, 1997 for exercise of
warrants ($1.47 per share) - - -
Issued during March 1997 for exercise of
warrants ($1.64 per share) - - -
Sale of shares from December 1996 through
March 1997 for cash, including shares
subscribed but not issued
($.75 per share) - - -
Sale of shares for cash during February -
June 1997 ($1.51 per share) - - -
- --Continued-
</TABLE>
<TABLE>
DEFICT
ACCUMULATED
IN DEVELOPMENT
STAGE TOTAL
-------------- -----------
<S> <C> <C>
- --Continued--
Issued August 13, 1996 for exercise
of warrants ($1.64 per share) - 10,950
Issued in August and November 1996 for
exercise of warrants ($.48 per share) - 84,315
Sales of shares for cash during November 1996
($.73 per share) - 73,365
Issued primarily in December 1996 for
services ($.78 per share) - 67,432
Issued in December 1996 to settle
liabilities ($.73 per share) - 39,238
Issued in December 1996 for investor relations
services ($.73 per share) - 1,087,700
Sale of shares for cash on January 7, 1997
($.82 per share), less commission of
$16,400 - 147,825
Issued during January 1997 for exercise of
warrants ($.48 per share) - 116,434
Issued February 5, 1997 for exercise of
warrants ($2.00 per share) - 22,562
Issued February 5, 1997 for exercise of
warrants ($1.47 per share) - 55,791
Issued during March 1997 for exercise of
warrants ($1.64 per share) - 52,014
Sale of shares from December 1996 through
March 1997 for cash, including shares
subscribed but not issued
($.75 per share) - 375,000
Sale of shares for cash during February -
June 1997 ($1.51 per share) - 402,527
- --Continued-
</TABLE>
<PAGE> F-7
<TABLE>
COMMON STOCK
COMMON STOCK SUBSCRIBED
SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ------
<C> <C> <C> <C>
- --Continued--
Issuance of shares in May 1997 for
services (1.84 per share) 20,400 37,500 - -
Cash received in June 1997 as
prepayment for subsequent exercise of
warrants ($2.00 per share) - - 52,000 104,000
Issuance of shares in June 1997 for
conversion of notes payable
($1.16 per share) 302,191 349,000 - -
Estimated fair value of warrants issued for
services in November 1996 and as
discount on note payable in
June 1997 - - - -
Net loss - - - -
---------- ------- ------ --------
BALANCES, June 30, 1997 12,590,473 12,707,063 177,000 197,750
=========== ========== ======= ========
Issuance of shares in July for Aspen Energy
acquisition ($1.87 per share) 2,511,287 4,700,000 - -
WPM Group private placement
in August 1997 ($1.667 per share) 272,700 454,500 - -
Share issued in July 1997 against prior
subscription agreement 177,000 197,750 (177,000) (197,750)
Shares issued for employee bonuses
in August 1997 ($1.06 per share) 45,000 47,813 - -
Shares issued in September 1997 for
purchase of property
($3.70 per share) 9,447 35,000 - -
- --Continued-
Warrants issued in connection with
$125,000 note placement in September
1997 - - - -
Warrants exercised July-October
1997 ($1.87 per share) 1,610,674 3,017,812 - -
Exercise of warrants in December 1997
($1.22 per share) 66,667 81,419 - -
Discount for beneficial conversion feature of
$4,320,000 of convertible debentures
issued in December, 1997 - - - -
Issuance of shares in February 1998 for
conversion of convertible note 60,000 100,000 - -
Cancellation of shares in March 1998
for debt in Aspen acquisition (269,970) (425,000) - -
Issuance of shares for services in May 1998
($1.1875 per share) 150,000 178,125 - -
Issuance of shares for property option
($.50 per share) 50,000 25,000 - -
Net loss - - - -
----------- ----------- -------- -------
BALANCES, June 30, 1998 17,273,278 $21,119,482 - $ -
=========== =========== ======== ========
See accompanying notes to these financial statements.
</TABLE>
<TABLE>
WARRANTS
AND
BENEFICAL
SPECIAL SHARES CONVERSION
SHARES AMOUNT DISCOUNT
------- ------ ----------
<S> <C> <C> <C>
- --Continued--
Issuance of shares in May 1997 for
services (1.84 per share) - - -
Cash received in June 1997 as
prepayment for subsequent exercise of
warrants ($2.00 per share) - - -
Issuance of shares in June 1997 for
conversion of notes payable
($1.16 per share) - - -
Estimated fair value of warrants issued for
services in November 1996 and as
discount on note payable in
June 1997 - - 323,000
---------- ------- ---------
Net loss - - -
BALANCES, June 30, 1997 - - 323,000
=========== ========== ==========
Issuance of shares in July for Aspen Energy
acquisition ($1.87 per share)
- - -
WPM Group private placement
in August 1997 ($1.667 per share) - - -
Share issued in July 1997 against prior
subscription agreement - - -
Shares issued for employee bonuses
in August 1997 ($1.06 per share) - - -
Shares issued in September 1997 for
purchase of property
($3.70 per share) - - -
- --Continued-
Warrants issued in connection with
$125,000 note placement in September
1997 - - 21,533
Warrants exercised July-October
1997 ($1.87 per share) - - -
Exercise of warrants in December 1997
($1.22 per share) - - -
Discount for beneficial conversion feature of
$4,320,000 of convertible debentures
issued in December, 1997 - - 479,162
Issuance of shares in February 1998 for
conversion of convertible note - - -
Cancellation of shares in March 1998
for debt in Aspen acquisition - - -
Issuance of shares for services in May 1998
($1.1875 per share) - - -
Issuance of shares for property option
($.50 per share) - - -
Net loss - - -
---------- -------- ---------
BALANCES, June 30, 1998 - $ - $823,695
=========== ======== =========
See accompanying notes to these financial statements.
</TABLE>
<TABLE>
DEFICT
ACCUMULATED
IN DEVELOPMENT
STAGE TOTAL
-------------- -----------
<S> <C> <C>
- --Continued--
Issuance of shares in May 1997 for
services (1.84 per share) - 37,500
Cash received in June 1997 as
prepayment for subsequent exercise of
warrants ($2.00 per share) - 104,000
Issuance of shares in June 1997 for
conversion of notes payable
($1.16 per share) - 349,000
Estimated fair value of warrants issued for
services in November 1996 and as
discount on note payable in
June 1997 - 323,000
Net loss (2,006,878) (2,006,878)
--------------- ------------
BALANCES, June 30, 1997 (2,769,155) 10,458,658
=============== ============
Issuance of shares in July for Aspen Energy
acquisition ($1.87 per share) - 4,700,000
WPM Group private placement
in August 1997 ($1.667 per share) - 454,500
Share issued in July 1997 against prior
subscription agreement -
Shares issued for employee bonuses
in August 1997 ($1.06 per share) - 47,813
Shares issued in September 1997 for
purchase of property
($3.70 per share) - 35,000
- --Continued-
Warrants issued in connection with
$125,000 note placement in September
1997 - 21,533
Warrants exercised July-October
1997 ($1.87 per share) - 3,017,812
Exercise of warrants in December 1997
($1.22 per share) - 81,419
Discount for beneficial conversion feature of
$4,320,000 of convertible debentures
issued in December, 1997 - 479,162
Issuance of shares in February 1998 for
conversion of convertible note - 100,000
Cancellation of shares in March 1998
for debt in Aspen acquisition - (425,000)
Issuance of shares for services in May 1998
($1.1875 per share) - 178,125
Issuance of shares for property option
($.50 per share) - 25,000
Net loss (830,600) (830,600)
---------- -----------
BALANCES, June 30, 1998 $(3,599,755) $18,343,422
=========== ===========
See accompanying notes to these financial statements.
</TABLE>
<PAGE> F-9
<TABLE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
Year Ended June 30,
1998 1997
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (830,600) $ (2,006,878)
Adjustments to reconcile net loss
to net cash used by operating activities:
Deferred income tax benefit (467,678) (919,000)
Depreciation and depletion 378,920 40,128
Amortization 633,632 -
Common stock and warrants issued
for services 69,346 1,391,632
Change in accounts receivable
and prepaid expenses (341,430) (110,797)
Change in accounts payable and
accrued liabilities 878,770 406,348
Change in materials and supplies
inventory (891,359) -
Other (33,685) 2,189
------------- -------------
Net cash used by
operating activities (604,084) (1,196,378)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (6,600,175) (937,621)
Acquisition of office furniture
and equipment (61,673) (18,242)
------------ --------------
Net cash used by
investing activities (6,661,848) (955,863)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and exercise
of warrants 3,553,731 1,444,783
Issuance of convertible debentures 4,320,000 -
Issuance of note payable subsequently
converted into convertible debentures - -
Payment of liability related to
oil and gas property - -
Costs related to sale of stock
and notes (557,528) -
Issuance of notes payable 513,600 579,000
Repayment of notes payable
and long-term debt (1,104,000)
Advances from (repayments to)
related parties (16,721) (32,000)
------------- -------------
Net cash provided by
financing activities 6,709,082 1,991,783
NET INCREASE (DECREASE) IN CASH (556,850) (160,458)
CASH - Beginning of period 642,612 803,070
------------- -------------
CASH - End of period $ 85,762 $ 642,612
============= =============
SUPPLEMENT INFORMATION:
Cash paid for interest 169,973 38,059
Conversion of debt and other
liabilities to common stock 100,000 388,238
Liabilities incurred in acquisition
of oil and gas properties 300,000 -
Retirement of debenture upon merger
with Arjon - -
Oil and gas property option acquired
with payable - -
Oil and gas properties acquired with
common stock 4,335,000 -
Issuance of common stock for stock
offering costs - -
Transfer of accounts payable and
related property option - 230,000
Prepaid expenses acquired with
common stock 178,125 -
Beneficial conversion feature on
convertible debentures 479,162 -
See accompanying notes to these financial statements.
</TABLE>
<PAGE> F-10
<TABLE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
Period From
February 15, 1995
to
June 30, 1998
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) $(3,599,755)
Adjustments to reconcile net loss to net cash
used by operating activities:
Deferred income tax benefit (1,798,678)
Depreciation and depletion 420,731
Amortization 721,632
Common stock and warrants issued
for services 1,910,109
Change in accounts receivable
and prepaid expenses (452,227)
Change in accounts payable and
accrued liabilities 1,571,807
Change in materials and supplies
inventory (891,359)
Other (25,653)
-------------
Net cash used by
operating activities (2,143,393)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (8,289,555)
Acquisition of office furniture
and equipment (117,135)
------------
Net cash used by
investing activities (8,406,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and exercise
of warrants 7,098,386
Issuance of convertible debentures 4,746,474
Issuance of note payable subsequently
converted into convertible debentures 146,300
Payment of liability related to
oil and gas property (500,000)
Costs related to sale of stock
and notes (966,904)
Issuance of notes payable 1,342,600
Repayment of notes payable
and long-term debt (1,354,000)
Advances from (repayments to)
related parties 122,989
-------------
Net cash provided by
financing activities 10,635,845
NET INCREASE (DECREASE) IN CASH 85,762
CASH - Beginning of period -
-------------
CASH - End of period $ 85,762
=============
SUPPLEMENT INFORMATION:
Cash paid for interest 245,042
Conversion of debt and other
liabilities to common stock 914,712
Liabilities incurred in acquisition
of oil and gas properties 1,386,049
Retirement of debenture upon merger
with Arjon 146,300
Oil and gas property option acquired
with payable 230,000
Oil and gas properties acquired with
common stock 11,407,914
Issuance of common stock for stock
offering costs 506,409
Transfer of accounts payable and
related property option 230,000
Prepaid expenses acquired with
common stock 178,125
Beneficial conversion feature on
convertible debentures 479,162
See accompanying notes to these financial statements.
</TABLE>
<PAGE> F-10
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
1. NATURE OF OPERATIONS
The Company was incorporated under the laws of Ontario as Cotton
Valley Energy Limited (CVEL) on February 15, 1995. It acquired all of the
shares of Cotton Valley Energy Corporation (CVEC), a Nevada
corporation, on June 30, 1995 in a one-for-one share and warrant
exchange. CVEC was also incorporated in February 1995. CVEL had no
substantive activity, so the acquisition of CVEC was accounted for as
a recapitalization of CVEL with the net assets of CVEC. These
consolidated financial statements have been prepared as if the
Company had acquired CVEC at the Company's inception.
On June 14, 1996, the Company merged with Arjon Enterprises, Inc.
("Arjon"), an Ontario corporation and reporting issuer in Ontario.
As a result of that merger the Company's name was changed to Cotton
Valley Resources Corporation and a new capital structure was established.
Transactions in the accompanying financial statements are reflected
as if the resulting capital structure was in existence since inception.
Arjon had no business activities and its only asset consisted of
convertible debentures of the Company in the principal amount of
$146,300. The Company accounted for the transaction as an issuance
of stock for the net monetary assets of Arjon accompanied by a
recapitalization. Former Arjon shareholders received 686,551 common
shares (representing approximately 7.5% of the then outstanding
common shares) of the Company.
On April 30, 1996, the Company organized Cotton Valley Operating
Company, a Texas corporation ("CV Operating") to operate the
Company's oil and gas properties. The Company on February 25, 1997,
organized Cotton Valley Energy, Inc., an Oklahoma corporation ("CVEI") to
acquire and operate the N.E. Alden Field properties in Caddo County,
Oklahoma. CVEI commenced operations on March 3, 1997. Aspen Energy
Corporation, a Nevada corporation ("Aspen"), was an inactive subsidiary
of the Company, formed on May 1, 1996, which was used to accommodate the
merger of Aspen Energy Corporation, a New Mexico corporation ("Old
Aspen") into Aspen on July 31, 1997. The principal asset of Old
Aspen was its interest in the Means Unit in Andrews County, Texas (the
"Means Unit"). On May 27, 1998, Aspen organized Cotton Valley Means, Inc.
as a Texas corporation ("CV Means") and transferred all of its interest
in the Means Unit to CV Means to facilitate a $10 million financing
relating to the development of this property.
In addition to CV Energy, CV Operating, CVEI, Aspen and CV Means, the
Company recently organized Mustang Well Servicing Company, a Nevada
corporation ("Mustang Well Servicing"), Mustang Oilfield Equipment
Company, a Nevada corporation ("Mustang Equipment"), and Mustang
Horizontal Services, Inc., a Nevada corporation ("Mustang
Horizontal") (collectively, the "Mustang Service Companies"). All of the
Company's subsidiaries are wholly owned by the Company, except for CV Means
which is a wholly-owned subsidiary of Aspen.
The Company is in the development stage and has not had material
revenues from operations through June 30, 1997. Although it
commenced sales during the year ended June 30, 1998, the Company incurred
losses due to its efforts to raise capital for its development. The
Company's planned principal business activity is to acquire, explore, and
develop oil and gas properties, including trading in used oil field
equipment.
The recoverability of amounts capitalized for oil and gas properties
is dependent upon the identification of economically recoverable
reserves, together with obtaining the necessary financing to exploit such
reserves and the achievement of profitable operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and
gas properties. Accordingly, all costs associated with acquisition,
exploration and development of oil and gas reserves, including
<PAGE> F-11
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
directly related overhead costs, are capitalized into a "full-cost pool". A
separate full cost pool is established for U.S. and non-U.S.
properties.
All capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized on
the unit-of-production method using estimates of proved reserves. Costs
directly associated with the acquisition and evaluation of unproved
properties are excluded from the amortization base until the related
properties are evaluated. Such unproved properties are assessed
periodically and a provision for impairment is made to the full-cost
amortization base when appropriate. Sales of oil and gas properties
are credited to the full-cost pool unless the sale would have a
significant effect on the amortization rate. See Note 9.
Abandonments of properties are accounted for as adjustments to capitalized
costs with no loss recognized. Oil and gas drilling and workover equipment
used primarily on the Company's properties are included in the full
cost pool.
The net capitalized costs are subject to a "ceiling test" which
limits such costs to the aggregate of the estimated present value of future
net revenues from proved reserves discounted at ten percent based on
current economic and operating conditions.
Revenue Recognition
Revenue is accrued and recognized in the month the oil and gas is
produced and sold.
Office Furniture and Equipment
Office furniture and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from three to ten years.
Foreign Currency Translation
The Company's assets and principal activities are in the United
States and its functional currency is the U.S. dollar. The effects of
exchange rate changes on transactions denominated in Canadian dollars or
other currencies are charged to operations. Foreign exchange gains or
losses were insignificant for all periods presented.
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due, if
any, plus net deferred taxes related primarily to differences between the
bases of assets and liabilities for financial and income tax reporting.
Deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred tax assets include recognition of operating losses that are
available to offset future taxable income and tax credits that are
available to offset future income taxes. Valuation allowances are
recognized to limit recognition of deferred tax assets where
appropriate. Such allowances may be reversed when circumstances
provide evidence that the deferred tax assets will more likely than
not be realized.
Deferred Site Restoration
A provision is established for estimated future costs of site
restoration of oil and gas production interests, including the
removal of production facilities at the end of their useful life.
Costs are based on management's estimates of the anticipated method
and extent of site restoration. The annual charge is determined on
the same basis as the depletion and amortization of the underlying asset.
Net Loss Per Share
Per share information is based on the weighted average number of
common stock and common stock equivalent shares outstanding. As
required by the Securities and Exchange Commission rules, all warrants,
options, and shares issued within a year prior to the initial filing of a
registration statement are assumed to be outstanding for each year
presented for purposes of the loss per share calculation.
<PAGE> F-12
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Cash Flow Statement
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 - Accounting for
Stock-Based Compensation (SFAS 123), which was effective for the
Company beginning with its 1997 fiscal year, requires recognition of
compensation expense for grants of stock, stock options, and other
equity instruments based on fair value. If the grants are to
employees, companies may elect to disclose only the pro forma effect
of such grants on net income and earnings per share in the notes to
financial statements and continue to account for the grants pursuant
to APB Opinion No. 25, "Accounting for Stock Issued to Employees". The
Company has elected the pro forma disclosure alternative for employee
grants.
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes.
Actual results could differ from those estimates. Significant assumptions
are required in the valuation of proved oil and gas reserves, which as
described above may affect the amount at which oil and gas properties
are recorded. It is at least reasonably possible those estimates
could be revised in the near term and those revisions could be material.
Inventories
Inventories, which consist primarily of oilfield equipment and
supplies held for resale, are stated at the lower of cost or market
using the first-in, first-out (FIFO) method.
Debenture Financing Costs
Debenture financing costs are being amortized ratably over the life
of the related debenture.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions of consolidated subsidiaries have been
eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years financial
statements to conform to the current year presentation.
Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits
("SFAS 132"), and SFAS 133, Accounting for Derivative Instruments and
Hedging Activities." SFAS 132 is effective for fiscal years beginning
after December 15, 1997, and SFAS 133 is effective for fiscal years
beginning after June 15, 1999. Also in June 1997 the FASB issued
SFAS 130, Reporting Comprehensive Income effective for years beginning
after December 15, 1997. The Company does not anticipate a material
impact to its consolidated financial statements upon adoption
of these standards.
<PAGE> F-13
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
3. OIL AND GAS PROPERTIES
Cheneyboro Field
The Company acquired approximately 5,000 net acres of oil and gas
leases in the Cheneyboro Field of Navarro County, Texas during fiscal
years 1995 and 1996. The Company issued 3,252,533 common shares,
granted 406,567 Class A warrants (see Note 5), and paid $500,000 in
cash and a promissory note of $586,049 as consideration. The stock
was recorded at $5,935,281, based on the estimated fair value of the
properties. The Company determined fair value by reference to an
independent engineering firm's reserve report. Since inception, the
Company has invested approximately $9,512,000 on this property,
including the aforementioned acquisition costs.
Sword Unit, Offshore Santa Barbara, California
The Company has entered into option agreements to acquire a working
interest in the Sword Unit, Offshore Santa Barbara, California. The
Company paid $400,000 in fiscal year 1996 to acquire the option. In
addition, the Company paid an additional $125,000 in fiscal year 1997
to settle a contingent liability of up to $1,000,000 due upon closing
the acquisition. To complete the option and acquire the working
interest, the Company was initially required to pay $12,000,000 in
cash and marketable securities (including the $1,000,000 referred to
above) on closing sometime in 1997. In June 1997, in connection with the
transfer of one of the Company's properties, the requirement was
reduced to $8,000,000, of which $2,000,000 may be in the Company's
stock at the election of the other party. The Company is also
required to participate in a $4,000,000 letter of credit related to the
abandonment of two existing wells if it acquires the working
interest. Subsequent to June 30, 1998, the Company determined that it would be
unable to raise the necessary capital to exercise the option and
reassigned the option back to its original holder.
Alden Properties, Caddo County, Oklahoma
In fiscal year 1997, the Company acquired an interest in the Alden
properties for $390,000. In fiscal year 1998, the company acquired
additional interests in the Alden properties for cash and common
stock.
Aspen Energy Corporation
On July 31, 1997, effective June 30, 1997, the Company acquired 100%
of Aspen Energy Corporation, an oil and gas company, for $200,000 in
cash, a $300,000 promissory note which was paid in two installments through
January 1998 and 2,511,317 shares of the Company's common stock. The
transaction was accounted for as a purchase. The stock was recorded at
$4,700,000. In March 1998 the shareholders of Aspen delivered 269,970
of the shares they received in the transaction back to Aspen in
satisfaction of obligations owed by such shareholders to Aspen in the
amount of $425,000.
Well Servicing and Drilling Equipment
During fiscal year 1998, the Company purchased $2,756,296 of well
servicing and horizontal drilling equipment. Most of this equipment
was "tooled out" and put into service during January, February and March
1998, and has for the remainder of fiscal year 1998 worked only on
development of the Company's properties. All the costs associated
with purchase, tooling out and operations have been capitalized in the
full cost pool. Subsequent to June 30, 1998 some of the equipment has
been rented to third parties and the proceeds therefore have been treated
as a credit to the full cost pool. On June 30, 1998, the full cost pool
of $24,331,189 includes $3,197,877 of drilling and well service
equipment.
<PAGE> F-14
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
4. NOTES PAYABLE AND LONG-TERM DEBT
The Company had a $579,000 convertible 9% note payable at June 30, 1997
to a company that provided investor relations services to the Company
and owns stock in the Company. Warrants to purchase 161,351 shares at
$2.08 through April 30, 2002 were also granted in connection with this
transaction. The estimated fair value of the warrants at the time of
grant of $124,000 was accounted for as a discount to the note. During
November 1997, $100,000 of the note was converted into 60,000 shares
of common stock and the remaining principal and accrued interest was
paid.
The Company had a 12% promissory note payable totaling $200,000 at June
30, 1997, for the unpaid purchase price of the Cheneyboro oil and gas
properties (see Note 3). The note was paid in November 1997.
Sale of Convertible Debentures. On December 30, 1997, the Company
completed the private placement of the $4,320,000 Convertible Debentures
to a group of nine institutional investment firms. Approximately $1
million of the cash proceeds and $220,000 of Convertible Debentures were
used to purchase the Equipment. The remaining funds have been used for
the acquisition and development of oil and gas properties, purchase of
oil field equipment and working capital.
The Convertible Debentures are due December 31, 2001 and are secured
by the Equipment and other assets of the Company. Interest is payable
annually at 7%. The Convertible Debentures are convertible into shares
of the Company's Common Stock and Debenture Warrants, subject to
adjustment upon certain events. Under the terms of the Convertible
Debentures, the Company was obligated to obtain on or before May 30,
1998 an effective registration statement covering the shares of
Common Stock to be issued upon conversion of the Convertible
Debentures and exercise of the Debenture Warrants. The Company was
not successful in obtaining the effectiveness of the registration
statement which event, with notice, would have been an event of default
under the Convertible Debentures.
A beneficial conversion feature was recognized and measured by
allocating a portion of the proceeds equal to the intrinsic value of that
feature to stockholders' equity. The estimated fair value of $479,162
has been recorded as a discount to the note and is being amortized
from the issue date to the date the debenture first becomes convertible.
As of September 15, 1998, the Company and each Convertible
Debentureholder were in negotiation for certain amendments to the
Convertible Debentures and related documents, including a waiver of
the event of default. As consideration for the waiver, the Company has
agreed to issue a total of 400,000 shares (the "Waiver Shares") on a
pro rata basis to each Convertible Debentureholder. The Waiver
Shares will be valued by the board of directors at $0.425 per share when
issued to the Convertible Debentureholder. Additionally, the Company
expects to issue and deliver to the Convertible Debentureholders
approximately 700,000 shares of common stock in lieu of accrued
interest of approximately $302,000 on the Convertible Debentures
for December 30, 1997 through December 31, 1998.
Means Credit Facility.
On June 12, 1998, CV Means entered into a
credit agreement with Triassic Energy Partners, L.P. ("Triassic"),
an affiliate of Cambrian Capital Corporation whereby CV Means could
borrow up to $10,000,000 on a multiple-advance, non-revolving basis (the
"Means Credit Facility"). Repayment of amounts advanced under the
Means Credit Facility is guaranteed by the Company and all its
subsidiaries.
Under the Means Credit Facility, up to $1,000,000 may be advanced for
new project development working capital purposes. The remaining
$9,000,000 may be advanced for the development of the Company's Means
(Queen Sand) Unit in Andrews County, Texas (the "Means Unit"). As of
September 15, 1998, the Company had drawn down $350,000 for working
capital and $388,600 for Means Unit property development purposes. A
$10 million promissory note dated June 12, 1998 with interest payable
monthly at the prime rate of Citibank N.A., New York, New York plus
2% was issued to Triassic by CV Means in accordance with the terms of
the Means Credit Facility.
<PAGE> F-15
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Until the maturity date, May 31, 2002, the Company will deliver
to Triassic each month a percentage of the revenues from the Means
Unit to be applied to accrued interest and payment of principal of
the note. On the maturity date, the accrued interest and outstanding
principal balance of the note is due and payable. As security for
the Means Credit Facility, CV Means granted a security interest
in substantially all the assets of CV Means, including the Means
Unit and all income generated thereby. As further security for
the Means Credit Facility, Aspen, the sole shareholder of CV Means,
pledged all the outstanding shares of CV Means to Triassic.
As further consideration for the Means Credit Facility, CV Means
assigned a net profits overriding royalty interest in the Means Unit
to Cambrian Capital Partners, L.P. ("Cambrian") and also entered into a
crude oil commodities swap agreement with Triassic. The Company also
issued a Unit Purchase Option to Cambrian which allows Cambrian to
purchase up to 100,000 units of the Company for $1.75 per unit. Each
unit consists of 1.085 shares of the Company's Common Stock and one
warrant, which grants to the warrant holder the right to purchase two
shares of Common Stock at an exercise price of $2.02 per share. All shares
issuable under this Unit Purchase Option are subject to a registration
rights agreement that requires the Company to register such shares under
certain circumstances.
5. STOCKHOLDERS' EQUITY
The Company has an unlimited number of preferred shares authorized,
which may be issued in series and include such rights and preferences
as authorized by the board of directors. The board of directors has
authorized the issuance of up to 2,000,000 shares of 8% Cumulative
Convertible Preferred Stock. No such shares have been issued as of
June 30, 1998. If the shares were to be issued, holders of the
Preferred Stock would be entitled to two votes per share on all
matters submitted to a vote of the Company's shareholders.
In addition, such holders would be entitled to receive cumulative
dividends at the rate of 8% per annum, payable at the election of the
Company in cash or in shares of common stock. Holders of the
Preferred Stock would have a liquidation preference, limited to $6.00 per share
of Preferred Stock; and each outstanding share of Preferred Stock
would be convertible at any time by the holder into two shares of common
stock.
Shortly after incorporation, the Company issued 2,100,000 special
shares for total cash consideration of $8.00 to officers, which were
subsequently exchanged for 1,440,000 common shares of the Company.
The special shares were issued in exchange for preferred stock which had
been issued upon incorporation of CVEC and subsequently canceled.
In connection with the acquisition of oil and gas properties,
including a property abandoned following its acquisition, the Company granted
518,345 Class A warrants. In connection with the issuance of notes
payable and debentures, the Company granted 112,390 Class A warrants.
The Company also issued 636,250 Class A warrants in conjunction with
a private placement of common shares. Each Class A warrant is a right
to purchase one common share for $2.00 until December 31, 1997, which
was extended to June 30, 1998. During fiscal year 1998 all Class A
warrants, except for approximately 32,000 had been exercised. The remaining
32,000 Class A Warrants expired on June 30, 1998.
Effective January 31, 1996, each 2.5 outstanding shares of the
Company's common stock were consolidated into one share and the
previously authorized unlimited number of special shares were
canceled. The financial statements reflect the consolidation of common shares
as if it occurred on inception of the Company.
In December 1995, the Company issued a total of 300,000 shares of
common stock to three officers in exchange for services performed
from June 1995 through December 1995. The shares were recorded at
$446,950, which represented the estimated value of the services.
<PAGE> F-16
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
During the year ended June 30, 1996, the Company granted to senior
employees options that enable the employees to purchase 800,000
shares of the Company's common stock for $1.83 per share until July 1, 2000.
In fiscal year 1997, options to purchase an additional 330,000 shares
were granted directors and employees under substantially the same
terms. The Company 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 the aggregate hold options exceeding 10% of the outstanding
shares. 280,000 of the director and employee options were exercised
during fiscal year 1998.
The Company has granted to the placement agent of the debenture and
private placement offerings that occurred in fiscal year 1996 three-
year options to purchase up to 10% of the common shares issued upon
conversion of the debentures at a price equal to the conversion
price. As a result, the agent has the right to buy 37,741 common shares at
$1.48 per share until August 31, 1998; 73,739 common shares at $2.00
per share until December 31, 1997; and 125,000 common shares at $1.64
per share until April 30, 1998. Certain of these options were
exercised in fiscal year 1997, and the remainder during fiscal year
1998.
In conjunction with the merger with Arjon, a total of 431,755 common
shares are issuable to former Arjon shareholders for Arjon warrants
in existence prior to the merger. These shares are issuable as follows:
333,334 common shares until December 31, 1998 at an exercise price of
$0.48 per share and 98,421 common shares at an exercise price of
$1.64 per share until December 31, 1997. Certain of these warrants were
exercised in fiscal year 1997, and the remainder during fiscal year
1998.
In November 1996, the Company entered into an agreement to obtain
certain investor relations services. The other party was granted
1,490,000 shares of the Company's common stock as non-forfeitable
compensation. The stock was recorded at $1,087,700, based on the
Company's stock price at the date of the agreement. The other party
was required to acquire 500,000 units, with each unit consisting of
one share of the Company's common stock and a warrant to purchase one
share for $0.80 through November 2001, for $375,000. As of June 30, 1997,
the Company had received payment for the units, but 140,000 of the
shares remained unissued. This has been recorded as common stock
subscribed in the June 30, 1997 financial statement. The shares were
issued in October 1997. None of the warrants had been exercised as
of June 30, 1998. The estimated fair value of the warrants at the time
of grant of $199,000 was recorded in fiscal year 1997 as general and
administrative expense.
In fiscal year 1998, additional warrants were granted as set forth
below. None of these warrants had been exercised as of June 30,
1998.
X Warrants to acquire 160,000 shares for $3.50 per share through
December 31, 2000 were granted in connection with an acquisition;
X Warrants to acquire 260,000 shares for $1.75 per share through July
7, 2000 were granted as compensation for assisting in exercise of
the Company's Class A Warrants outstanding;
X Warrants to acquire 355,200 shares for $2.08 per share through
April 3, 2002 were issued in connection with a private placement;
In fiscal year 1997, additional warrants were granted as set forth below.
X Warrants to acquire 266,667 shares for $1.68 per share through
January 2002 were granted in connection with a private placement;
X Warrants to acquire 200,000 shares at $.73 per share through
December 31, 1999 were granted in connection with another private
placement;
X Warrants to acquire 302,191 shares at $1.28 through June 30, 2002
were granted in connection with conversion of a note payable to
common stock as described in Note 4;
<PAGE> F-17
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
X Warrants to acquire 161,351 shares as described in Note 4;
X Warrants to acquire 166,666 shares at $.73 per share through
December 31, 1999 were granted officers.
The following table summarizes the option and warrant activity for
the years ended June 30, 1998 and 1997:
<TABLE>
June 30, 1998 June 30, 1997
---------------- ----------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding,
beginning of year 4,248,114 $ 1.83 2,735,220 $1.73
Granted to:
Employees, officers
and directors 674,000 1.65 496,666 1.46
Others 775,200 2.26 1,430,209 1.20
Expired (177,665) 1.75 -
Exercised (1,610,674) 1.87 (413,981) .70
----------- ----------
Outstanding, end of year 3,908,975 1.87 4,248,114 1.83
=========== ==========
</TABLE>
All outstanding warrants and options were exercisable at June 30, 1998.
If not previously exercised, warrants and options outstanding at June 30, 1998,
will expire as follows:
<TABLE>
Weighted
Average
Number Exercise
Year Ending June 30, of Shares Price
-------------------- --------- --------
<S> <C> <C>
2000 566,666 .76
2001 1,014,000 2.03
2002 1,728,309 1.48
2003 600,000 1.65
---------
Total 3,908,975
=========
</TABLE>
Presented below is a comparison of the weighted average exercise
prices and market price of the Company's common stock on the measurement
date for all warrants and stock options granted during fiscal years 1998
and 1997:
1998 1997
--------------------------- --------------------------
Number Exercise Market Number Exercise Market
of Shares Price Price of Shares Price Price
Fair value equal to
exercise price 934,000 $1.69 $1.69 935,524 $1.18 $1.18
Fair value greater
than exercise price - $ - $ - - $ - $ -
Exercise price greater
than fair value 515,200 $2.52 $2.10 991,351 $1.35 $1.02
<PAGE> F-18
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Fair value of warrants granted in connection with short term debt
transactions during the year ended June 30, 1998 was determined using
the Black-Scholes option pricing model. Significant assumptions
included a risk-free interest rate of 5.5%, expected volatility of
87%, and that no dividends would be declared during the expected term of
the options. The weighted average contractual term of the warrants was
approximately 4.5 years compared to a weighted average expected term
of 2 years. The estimated fair value of warrants described above
amounted to $21,533 which is recorded as an expense in the statement of
operations.
Fair value of warrants granted to non-employees for services or in connection
with debt transactions during the year ended June 30, 1997 was determined
using the Black-Scholes option pricing model. Significant assumptions
included a risk-free interest rate of 5.9%, expected volatility of 102%, and
that no dividends would be declared during the expected term of the options.
The weighted average contractual term of the warrants was approximately 5.0
years compared to a weighted average expected term of 2.0 years. The
estimated fair value of warrants described above amounted to $323,000 of
which $124,000 was recorded as debt issuance cost in the June 30, 1997 balance
sheet and $199,000 was recorded as general and administrative expense in 1997
the statement of operations.
Pro Forma Stock-Based Compensation Disclosures - The Company applies
APB Opinion 25 and related interpretations in accounting for its
stock options and warrants which are granted to employees. Accordingly,
compensation cost has not been recognized for grants of options and
warrants to employees and directors unless the exercise prices were
less than the fair value of the Company's common stock on the grant
dates. Had compensation cost been determined based on the fair value
at the grant dates for awards under those plans consistent with the
method of FASB 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below.
Year Ended June 30,
------------------------------
1998 1997
----------- -------------
Net loss applicable to common stockholders:
As reported $ (830,600) $ (2,006,878)
Pro forma $ (1,337,440) $ (2,408,000)
Net loss per common share:
As reported $ (.05) $ (.18)
Pro forma $ (.08) $ (.21)
The fair value of each employee option and warrant granted in 1998
and 1997 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Year ended June 30,
------------------------------
1998 1997
------------ ------------
Expected volatility 87% 102%
Risk-free interest rate 5.5% 5.9%
Expected dividends - -
Expected terms (in years) 5.0 4.5
6. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1996 and the period from February 15,
1995 to June 30, 1995, the Company paid management fees in lieu of
salaries to two corporations controlled by senior officers of the
Company, aggregating $160,000 and $50,000, respectively. In
addition, the Company has received advances from these two companies,
net of repayments, totaling. The advances are unsecured, without
interest and are due after June 30, 1999. See Note 5 for other
transactions with related parties.
<PAGE> F-19
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
7. INCOME TAXES
The Company's deferred tax assets (liabilities), as of June 30, 1998,
consist of the following:
<TABLE>
-----------
<S> <C>
Deferred tax liabilities:
Difference in bases of oil and
gas properties acquired $ (3,643,000)
Costs capitalized for books and
deducted for tax (397,000)
-------------
Total deferred tax liabilities (4,040,000)
-------------
Deferred tax asset (net operating
loss carryforwards) 2,195,000
-------------
Net deferred tax liability $ (1,845,000)
=============
</TABLE>
The difference from the expected income tax benefit for the year
ended June 30, 1998 at the statutory federal tax rate of 34% and the
actual income tax benefit is primarily the result of payroll tax penalties
and entertainment expenses, which are not deductible for income tax
purposes.
At June 30, 1998, the Company has available net operating loss
carryforwards of approximately $6,455,000 to reduce future taxable
income. These carryforwards expire from 2002 to 2013.
8. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations
of credit risk consists principally of cash and accounts receivable. The
Company maintains its cash with banks primarily in Dallas, Texas. The term
of these deposits are on demand to minimize risk. The Company has not
experienced any losses related to these cash deposits and believes it is not
exposed to any significant credit risk.
Accounts receivable consist of uncollateralized receivables from domestic and
international customers primarily in the oil and gas industry. To minimize
risk associated with international transactions, all sales are denominated in
U.S. currency. The Company routinely assesses the financial strength of it
customers. The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
Fair value of financial instruments are estimated to approximate the related
book value, unless otherwise indicated, based on market information available
to the Company.
9. ZAMA LAKE PROPERTY SALE.
In January 1998, the Company completed the purchase of
substantially all of the oil and gas interests in the Zama Lake area in Alberta,
Canada (the "Zama Property") owned by two Canadian independent oil
and gas producers. The purchase price was approximately $6.9 million.
Shortly after the purchase of the Zama Property, the Company sold all
of its interests to Phillips Petroleum Resources, Ltd. and certain of its
affiliates for approximately $7.5 million. The Zama property was the only
property in the non-U.S. full cost pool. Proceeds of the sale exceeding
the basis in the full cost pool were $629,660 and were accounted for as
a gain on sale of assets.
<PAGE> F-20
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
10. SUBSEQUENT EVENTS (UNAUDITED)
In September 1998, the Company initiated a private placement of its
common stock, with warrants attached. Through September 15, 1998, the
Company had sold 285,000 shares and 285,000 warrants exercisable for
$0.60 per share until December 31, 2001 for net proceeds of $142,500.
A subscription agreement for 860,000 shares and 860,000 warrants has
been executed by one of the Company's significant shareholders. The
net proceeds of approximately $430,000 is expected to be received by the
Company during October, November and December 1998.
11. COMMITMENTS AND CONTINGENCIES
Leases. The Company leases office space that requires monthly
payments aggregating $95,160, $89,160, $90,050, $95,392, and $83,210
for fiscal years ending June 30, 1999, 2000, 2001,2002 and 2003,
respectively. Rent expense for fiscal 1998 for office space was
approximately $54,000. One facility lease contains an option to
allow the Company to purchase the facility for $115,900.
The Company also leases equipment. Rent expense for equipment for
fiscal 1998 was approximately $52,000. Future commitments for
equipment leases run through fiscal 1999 and aggregate approximately
$24,000.
Potential Securities Act Violation. On March 16, 1998, the Company
filed with the Commission a Registration Statement on Form SB-2 (the
"March 1998 Registration Statement") for the purpose of registering
up to 10,891,184 shares of the Company's Common Stock for sale by
certain shareholders of the Company, including approximately 5.7 million
shares to be issued upon exercise of outstanding warrants and conversion of
the Convertible Debentures. On May 1, 1998, the Company received a
letter of comments from the Staff of the Commission (the "May 1998
Staff Comment Letter") relating to the March 1998 Registration Statement.
In the May 1998 Staff Comment Letter, the Staff advised the Company that
it should have registered the Yukon Continuance under the Securities
Act. The Yukon Continuance was not registered under the Securities
Act.
The Company in its supplemental response on May 26, 1998 to the
Staff's May 1998 Comment Letter contended, with the concurrence of, the
Company's U.S. securities counsel, that the Yukon
Continuance was a transaction not subject to the registration
requirements of Section 5 of the Securities Act. The Staff has
advised the Company that is does not agree with the Company and its U.S.
securities counsel's conclusion regarding the Yukon Continuance.
The Company, therefore, may have a contingent liability to certain of
its shareholders, who may sue the Company to recover the
consideration paid, if any, for shares of the Company's Common Stock, with
interest thereon, from the date of the Yukon Continuance to the date of
repayment by the Company less the amount of any income received
thereon, upon tender of such securities, or for damages if the
shareholder no longer owns such securities. The Company intends to
vigorously defend any such shareholder lawsuit and believes that it
may have valid defenses, including the running of applicable statutes of
limitations, against claims by some or all of its shareholders.
However, to the extent that any of the Company's shareholders obtain
a judgment for damages against the Company, the Company's net assets
and net worth will be reduced, which in turn could reduce the Company's
ability to obtain financing for its exploration and drilling
operations and cause the Company to curtail operations. The Company is unable
to quantify the amount of such contingent liability.
Litigation. The Company, in the normal course of business, is a party to a
number of lawsuits and other proceedings. The Company's management does not
expect that the results in these lawsuits and proceedings will have a
material adverse effect on the financial position or results of operations of
the Company.
<PAGE> F-21
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Liquidity and Capital Resources. The statement of operations presented in
the financial statements reflect net losses for 1998 and 1997. However, the
Company has been able to improve its financial position through stock
offerings and has obtained financing for development of its oil and gas
properties.
Successful development of the Company's oil and gas properties and,
ultimately, the attainment of profitable operations is dependent upon future
events, including adequate financing to fulfill its development activities
and achieving a level of revenue adequate to support the Company's cost
structure. Management believes that the Company's future success will be
achieved by the development of its oil and gas properties. While management
believes the Company is well positioned for future profitability, there can
be no assurance of future success. Management is aware of the need for
additional cash resources to be obtained for the continuance of operations
and anticipates such financial resources will primarily come the financing
described in Note 4, placements of the Company's stock and revenues generated
from its oil and gas properties. Management believes that the cash provided
by operations and financing activities will be sufficient for its needs.
Potential Convertible Debenture Default.
The Company did not obtain effectiveness of a registration statement by May 31,
1998 for the securities underlying the Convertible Debentures, which event
would, with notice, be an event of default under the relevant financing
agreements. No notice has been given. As of September 15, 1998, the Company
and each Convertible Debentureholder were in negotiation for certain amendments
to the Convertible Debentures and related documents, including a waiver of the
prospective event of default. As consideration for the waiver, the Company has
agreed to issue a total of 400,000 shares (the "Waiver Shares") on a pro rata
basis to each Convertible Debentureholder. The Waiver Shares will be valued by
the board of directors at $0.425 per share when issued to the Convertible
Debentureholder. Additionally, the Company expects to issue and deliver to
the Convertible Debentureholders approximately 720,000 shares of common stock
in lieu of accrued interest of approximately $302,000 on the Convertible
Debentures for December 30, 1997 through December 31, 1998. If the
amendments are not completed, and the Debentureholders give notice of
default, the Company's liquidity and activities could be severely adversely
affected.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) Plan to which both the
Company and eligible employees may contribute. Company contributions are
voluntary and at the discretion of the board of directors. There were no
Company contributions for the periods presented.
13. SUPPLEMENTAL INFORMATION (UNAUDITED)
Costs incurred by the Company with respect to its oil and gas
producing activities are set forth below.
<TABLE>
FOR THE PERIODS ENDED
JUNE 30,
1998 1997
------------- --------------
<S> <C> <C>
Exploration Activities $ 85,000 $ -
Proved property acquisition cost 8,093,083 515,000
Development costs 1,012,012 422,621
Drilling & Well Service Equipment
Acquisition Cost 2,756,296 -
Drilling & Well Service Equipment
Tooling Out Cost 441,581 -
------------ ---------------
Total $12,387,972 $ 937,621
------------ ---------------
</TABLE>
<PAGE> F-22
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
14. OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Proved oil and gas reserves are the estimated quantities of crude
oil, condensate and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions. Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with existing
equipment and operating methods. The following estimated net interests in
proved reserves are based upon subjective engineering judgments and may be
affected by the limitations inherent in such estimation. The process
of estimating reserves is subject to continual revision as additional
information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance
that such estimates will not be materially revised in subsequent periods.
The Company emphasizes that reserve estimates of new discoveries or
undeveloped properties are more imprecise than those of producing oil
and gas properties. The Company's reserves are substantially from
undeveloped properties. Accordingly, these estimates are expected to
change materially as future information becomes available. The
Company's reserves were estimated by independent petroleum engineers.
All of the Company's reserves are located onshore in the continental
United States. The recoverability of the proved undeveloped reserves
is dependent upon obtaining financing to exploit the reserves.
Proved undeveloped oil and gas 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 shall
be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
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 reserve.
The following table sets forth proved oil and gas reserves at June
30, 1998, 1997, 1996 and 1995 together with changes therein:
<TABLE>
OIL AND NATURAL
CONDENSATE GAS
(BBLS) (MCF)
------------ -------------
<S> <C> <C>
Balance at February 15, 1995 - -
Purchase of minerals in place 4,294,000 12,882,000
Balance at June 30, 1995 4,294,000 12,882,000
Balance at June 30, 1996 4,294,000 12,882,000
Purchase of minerals in place 523,000 5,222,000
Production (12,000) (34,000)
Revision of prior estimates (19,000) (8,000)
------------- -------------
Balance at June 30, 1997 4,786,000 18,062,000
------------- -------------
Purchase of minerals in place 1,560,000 468,000
Production (28,000) (181,000)
Revision of prior estimates (548,000) (5,588,000)
------------- -------------
Balance at June 30, 1998 5,770,000 12,761,000
============= =============
Proved developed reserves at June 30:
1995 - -
============= =============
1996 93,000 280,000
============= =============
1997 423,000 1,787,000
============= =============
1998 355,000 998,000
============= =============
</TABLE>
<PAGE> F-23
COTTON VALLEY RESOURCES CORPORATION
(a development state company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
The standardized measure of discounted future net cash flows at June
30, 1998, 1997 and 1996 relating to proved oil and gas reserves is
set forth below. The assumptions used to compute the standardized
measure are those prescribed by the Financial Accounting Standards Board and
as such, do not necessarily reflect the Company's expectations of actual
revenues to be derived from those reserves nor their present worth.
The limitations inherent in the reserve quantity estimation process
described above are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation
process.
Standardized measure of discounted future net cash flows relating to
proved reserves:
<TABLE>
AT JUNE 30,
1998 1997 1996
------------- -------------- ------------
<S> <C> <C> <C>
Future cash inflows $ 101,128,000 $ 129,610,000 $ 118,003,000
Future production costs (19,923,000) (18,826,000) (15,013,000)
Future development costs (26,064,000) (13,915,000) (12,446,000)
------------- ------------- -------------
Future net cash flows,
before income tax 55,141,000 96,869,000 90,544,000
Future income tax expenses (16,542,000) (31,526,000) (30,785,000)
------------- ------------- -------------
Future net cash flows 38,599,000 65,343,000 59,759,000
10% discount to reflect timing of net
cash flows (12,866,000) (22,543,000) (19,315,000)
------------- ------------- -------------
Standardized measure of
discounted future
net cash flows $ 25,733,000 $ 42,800,000 $ 40,444,000
============ ============ ==============
</TABLE>
Changes in standardized measure of discounted future net cash flows
relating to proved reserves:
<TABLE>
FOR THE PERIOD ENDED JUNE 30,
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Standardized measure,
beginning of period $ 42,800,000 $ 40,444,000 $ 29,800,000
Net change in sales price,
net of production costs (17,591,000) (5,288,000) 11,762,000
Accretion of discount ( 9,677,000) 4,044,000 2,980,000
Purchases of reserves in-place 432,000 6,687,000 -
Production (221,000) (21,000) -
Change in timing of
production and other - (2,581,000) -
Net changes in income taxes 9,990,000 (485,000) (4,098,000)
------------- ------------- --------------
Standardized measure, end of
period $ 25,733,000 $42,800,000 $ 40,444,000
============ ============= ==============
</TABLE>
<PAGE> F-24
No dealer, salesperson, or other person has been
authorized to give any information or to make any
representation in connection with this Offering other than
those contained in this Prospectus and, if given or made,
such information or representation must not be relied upon
as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the Securities to which
it relates in any state to any person whom it is unlawful to
make such offer or solicitation in such state. Neither the
delivery of this Prospectus nor any sale hereunder shall,
under any circumstances, create any implication that there
has not been any change in the affairs of the Company since
the date hereof or that the information contained herein is
correct as of any time subsequent to its date.
TABLE OF CONTENTS
Page
Prospectus Summary 2
Yukon Continuance 8
Risk Factors 10
Common Stock Price Ranges and Dividends 16
Dividend Policy 17
Capitalization 17
Selected Historical Consolidated and Combined
Financial Information 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Business and Properties 23
Management 37
Certain Relationships and Related Transactions 43
Principal Stockholders 45
Description of Securities 46
Shares Eligible for Future Sale 49
Selling Stockholders 50
Plan of Distribution 52
Agreement with Selling Stockholders 52
Certain Income Tax Considerations 54
Limitations on Director Liability 56
Legal Matters 56
Experts 57
Available Information 57
Glossary 58
Index to Consolidated Financial Statements F-1
COTTON VALLEY RESOURCES CORPORATION
12,742,984 Shares of Common Stock
P R O S P E C T U S
____________________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
A director of the Company is subject to potential liability under the
Business Corporations Act "Yukon" ("YBCA"). The YBCA 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 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.
The Company has no contract or arrangement that insures or indemnifies a
controlling person, director or officer of the Company which affects his or her
liability in that capacity. The Company's bylaws provide for such
indemnification, subject to applicable law.
If available at a reasonable cost, the Company 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.
The Company will pay the expenses in connection with the public offering of
Securities by the Selling Stockholders pursuant to this prospectus. Such
expenses are as follows:
Securities and Exchange Commission Filing Fee $ 6,035.90
American Stock Exchange Fee for Listing Additional Securities 15,000.00
Accounting Fees and Expenses 10,000.00
Legal Fees and Expenses 60,000.00
Printing and Engraving 20,000.00
Fees of Transfer Agent and Registrar 2,000.00
Blue Sky Fees and Expenses 1,500.00
Miscellaneous 464.10
-------------
Total $115,000.00*
=============
______________________________
*Estimated
Item 26. Recent Sales of Unregistered Securities.
Effective June 14, 1996, the Company, as consideration for the amalgamation
between Cotton Valley Energy Limited and Arjon Enterprises, Inc. ("Arjon"),
issued an aggregate of 686,551 shares of Common Stock to the
shareholders of Arjon. Pursuant to the amalgamation agreement between the
Company, Arjon and its shareholders, the Company acquired the only asset of
Arjon, a Cotton Valley Energy Limited debenture in the amount of $146,300, in
exchange for 686,551 shares of Common Stock. As a result of the Arjon
amalgamation, the Company's name was changed to Cotton Valley Resources
Corporation and its shares of Common Stock began trading through the Canadian
Dealing Network. Additionally, 431,755 shares of Common Stock were issued to
Arjon shareholders upon exercise of Arjon Warrants in existence prior to the
amalgamation. Arjon was a public Canadian company formed more than 50 years
ago to operate a gold mine. At the time of the amalgamation, Arjon had not
engaged in any business activity for more than 25 years.
<PAGE> II-1
The Arjon/Cotton Valley amalgamation was consummated in accordance with the
laws of the Province of Ontario, Canada. Documents, as required, were filed
with the Ontario Securities Commission. A Registration Statement
on Form 20-F as filed with the Securities and Exchange Commission in November
1996 was declared effective by the Commission in January 1997, registering all
the then outstanding shares of Common Stock of the Company.
The Company has sold and issued unregistered securities in the following
transactions since the date of the amalgamation:
a. The Liviakis Transactions.
In November 1996, the Company entered into a consulting agreement (the "LFC
Consulting Agreement") with Liviakis Financial Communications, Inc. ("LFC").
Pursuant to the terms of the LFC Consulting Agreement, the
Company sold to LFC and one of its officers, Robert B. Prag, for $0.75 per unit,
500,000 units, each unit consisting of one share of Common Stock and one stock
purchase warrant (a "Warrant, "collectively with one share of Common
Stock, a "Unit ") entitling the holder thereof to purchase a share of Common
Stock at an exercise price of $0.80 through November 7, 2001 (a "LFC Warrant").
The Company issued to LFC 375,000 Units, for which the Company received
a promissory note in the amount of $281,250, and the Company issued to Robert B.
Prag 125,000 Units, for which the Company received a promissory note in the
amount of $93,750. Both promissory notes were paid off within 90 days of
issue. As further consideration for services performed by LFC pursuant to the
terms of the LFC Consulting Agreement, the Company issued 1,490,000 shares of
Common Stock to LFC. The stock issuance was recorded at $1,087,800 based
on the Company's stock price on the Canadian Dealing Network ("CDN").
Additionally, in February 1998, the Company issued to LFC warrants to purchase
100,000 shares of Common Stock exercisable at $3.50 per share until December 31,
2000 (the "LFC Mustang Warrants "), as additional compensation for LFC's
assistance to the Company in completing acquisitions and other financings during
calendar 1997. LFC directed the Company to issue to Robert B. Prag 25,000
of the LFC Mustang Warrants.
Effective June 24, 1997, the Company executed a convertible secured
promissory note (the "LFC Note ") to LFC whereby the Company promised to pay to
LFC on or before the Maturity Date of the LFC Note, the sum of
$1,000,000 or so much thereof as may have been advanced, whichever is less, plus
interest of 9% per annum. Pursuant to the terms of the LFC Note, LFC
immediately advanced to the Company $579,000 and the Company issued to LFC
161,351 Common Stock purchase warrants at an exercise price of $2.08 per share
until April 3, 2002 (the "Liviakis Warrants "). The outstanding principal
amount of the LFC Note together with accrued but unpaid interest were
convertible by LFC into shares of Common Stock at a conversion price of $1.67
per share. On December 3, 1997, the Company repaid $479,000 of the principal
amount of the LFC Note and all interest accrued on the LFC Note, and LFC
converted the remaining $100,000 principal amount of the LFC Note into 60,000
shares of Common Stock.
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide exemptions for transactions not involving a public
offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their total investment, acquired them for their own account
and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
b. The Hibernia Transactions.
In a Canadian private placement completed in November 1996 the Company sold
to Hibernia Securities Trust ("HST") 100,000 units (the "Hibernia Units") for
$0.73 per Unit. Each Hibernia Unit consisted of one share of Common
Stock and two stock purchase warrants (the "Hibernia Warrants"), enabling the
holder thereof to purchase one share of Common Stock at an exercise price of
$0.73 per share through December 31, 1999. None of the Hibernia Warrants have
been exercised.
<PAGE> II-2
In a private placement of securities completed in January 1996, the
Company issued 200,000 shares of Common Stock and 200,000 warrants to Hibernia
Management Company ("HMC") for total consideration of $164,425. Each
warrant (the "HMC Warrant") enables the holder thereof to purchase one share of
Common Stock at an exercise price of $0.91 per share through December 31, 1999.
None of the HMC Warrants have been exercised.
In June 1997, the Company issued 266,667 shares of Common Stock and issued
266,667 warrants (the "HST Warrants") to HST for total consideration of
$438,000. The HST Warrants are exercisable at $1.68 per share until June
2002. None of the HST Warrants have been exercised.
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide exemptions for transactions not involving a public
offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their total investment, acquired them for their own account
and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
c. The Aspen Acquisition.
On June 30, 1997, the Company acquired all of the issued and outstanding
shares of Aspen Energy Corporation ("Old Aspen") by merger with an inactive
wholly-owned subsidiary corporation of the Company, which was renamed
Aspen Energy Corporation ("Aspen"). As partial consideration for the merger,
the Company issued an aggregate of 2,511,317 shares of Common Stock to the four
shareholders of Old Aspen. Pursuant to the merger agreement, Aspen
acquired substantially all the assets and interests of Old Aspen in exchange for
$200,000 cash and $300,000 of short-term notes, 2,511,317 shares of the
Company's Common Stock, of which 269,970 shares were returned to the Company by
the Old Aspen shareholders in settlement of notes payable to Old Aspen in the
amount of $425,000. Prior to returning the 269,970 shares referenced above,
Leon A. Romero received 1,117,536 restricted shares, George W. Peel received
1,067,310 restricted shares, Albert Sena received 251,131 restricted shares and
Dorothy Carter received 75,340 restricted shares as consideration for the
merger.
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide exemptions for transactions not involving a public
offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their total investment, acquired them for their own account
and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
d. The Cheneyboro Acquisition.
During fiscal years 1995 and 1996, the Company acquired interests and
options to acquire further interests in approximately 6,700 net acres of
producing and non-producing oil and gas leases in the Cheneyboro Field of
Navarro County, Texas (the "Cheneyboro Field"). As partial consideration for
the purchase, the Company issued, in fiscal year 1996, a promissory note dated
July 17, 1997 in the amount of $586,047 to a limited partnership consisting of
HMC, Euro Coach America Corporation and NPCS, Inc. The outstanding balance of
$549,000 was paid to the partnership with $200,000 cash and the issue of 302,191
shares of Common Stock. In connection with this conversion, the Company
issued warrants to acquire up to 302,191 shares of Common Stock at an exercise
price of $1.28 per share through June 30, 2002 (the "Cheneyboro Warrants").
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide exemptions for transactions not involving a public
offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their total investment, acquired them for their own account
and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
<PAGE> II-3
e. The M&M Directional Drilling Consultants Acquisition.
Effective November 5, 1997, the Company acquired certain technology and
equipment of M&M Directional Drilling Consultants ("M&M") through its
subsidiary, Mustang Horizontal Services, Inc. As partial consideration for
the purchase, the Company issued warrants to purchase an aggregate of 60,000
shares of the Company's Common Stock (the "Mustang Warrants") to M&M. Pursuant
to the purchase agreement between the Company and M&M, the
Company acquired certain technology and equipment of M&M, in exchange for
$550,000 and the Mustang Warrants. Each Mustang Warrant enables the holder to
purchase one share of Common Stock at an exercise price of $3.50 per share
until December 31, 2000.
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide an exemption for transactions not involving a
public offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their total investment, acquired them for their own account
and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
f. Private Offerings.
1. Private Offering of Convertible Debentures Completed on December 30, 1997.
On December 30, 1997, the Company completed the private placement of
$4,320,000 of its 7% Secured Convertible Debentures ("Convertible Debentures")
to a group of nine institutional investment firms. Approximately
$1 million of the cash proceeds and $220,000 of Convertible Debentures were used
to purchase the Equipment. The remaining funds will be used for the acquisition
and development of oil and gas properties and purchase of oil field
equipment.
The Convertible Debentures are due December 31, 2001 and are secured by the
Equipment and other assets of the Company, including the Company's properties at
N. E. Alden and Sears Ranch as well as a portion of the Cheneyboro Field.
The Convertible Debentures are convertible into a minimum of 1.6 million shares
of the Company's Common Stock and a minimum of 400,000 warrants ("Debenture
Warrants"), subject to adjustment upon certain events, exercisable at prices
related to the market price at the time of conversion, with limits on rights to
convert if the conversion price of the Company's Common Stock falls below a
floor price of $1.25 per share (the "Floor Price "). The conversion price is
the lesser of $1.50 per share or 85% of the average of the three lowest closing
bid prices during the ten trading days prior to the notice of conversion.
During any thirty-day period, any investor may not tender for conversion more
than 10% of his originally purchased Convertible Debentures at a conversion
price less than the Floor Price. The Company may elect to redeem (for a 10%
premium) any Convertible Debentures tendered for conversion at any price below
the Floor Price.
In addition to the usual and customary covenants contained in convertible
debenture agreements of this nature, the Company is required to reserve shares
of Common Stock in an amount not less than 200% of the number of
shares of Common Stock that would be issuable upon conversion in full of the
Convertible Debentures and full exercise of the Debenture Warrants granted
thereunder. In furtherance of this covenant, the Company is required to seek
stockholder approval of an increase in the Company's authorized shares if
necessary to maintain such reserves. Furthermore, any holder of Convertible
Debentures shall not be permitted to convert its Convertible Debentures or
exercise its Debenture Warrants to the extent that such conversion or exercise
would result in a beneficial ownership in the Company in excess of 4.999%. The
Convertible Debenture holders have a right of first refusal for future financing
of the Company under certain conditions. The Company has listed an additional
3.2 million shares on AMEX and has prepared an application for listing of an
additional 1.12 million shares of its Common Stock on AMEX. The 4.32 million
shares include the Waiver Shares, the Interest Shares, the shares to be issued
upon conversion of the Convertible Debentures and shares to be issued
upon exercise of the Debenture Warrants. Although the Company's Registration
Statement includes 4.32 million shares, which the Company currently believes
will provide sufficient shares upon the conversion of the Convertible Debentures
and upon exercise of all the Debenture Warrants, the Company has reserved for
<PAGE> II-4
issuance up to 4.8 million shares of its Common Stock to be issued, if
necessary, upon conversion of the Convertible Debentures and up to 1.2 million
shares to be issued, if necessary, upon exercise of the Debenture Warrants.
Information concerning the sale of such debentures is as follows:
Name of Holder Amount of
Convertible Debentures
Westover Investments L.P. $1,000,000
Montrose Investments L.P. 1,500,000
Lakeshore International 1,000,000
JMG Capital Partners, L.P. 250,000
Triton Capital Investments, Ltd. 250,000
Lionhart Global Appreciation Fund, Ltd. 136,000
Global Perspective International, Ltd. 56,000
Global Emerging Markets, Ltd. 28,000
Palisades Holdings, Inc. 100,000
The sale of securities above were made in reliance upon Section 4(2) of
the Securities Act, which provide an exemption for transactions not involving a
public offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their total investment, acquired them for their own account
and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
2. Private Offering Completed in September 1997.
In September 1997, the Company completed a private placement arranged by
the WPM Group in which the Company issued promissory notes aggregating $125,000
and issued 272,700 shares of Common Stock and 322,700 warrants (the "WPM
Warrants") to eight investors (the "WPM Investors") for a total consideration
of $579,500. The Company also issued to the WPM Group, an affiliate of John
Malone, P.C., 32,500 WPM Warrants. The WPM Warrants are exercisable at $2.08
per share until April 3, 2002. None of the WPM Warrants have been exercised.
Information concerning the sale of such shares is as follows:
No. of Issued to Price for Shares
Shares Purchased
30,000 R.J. Blanyer $50,000
66,000 John Malone $110,000
105,000 Jim Phillips $175,000
41,700 Fred B. Dulock $69,500
30,000 Bill J. Kemp $50,000
Information concerning the issuance of the WPM Warrants is as follows:
No. of Warrants Issued to Exercise Price Expiration Date
32,500 WPM Group $2.08 04/03/02
30,000 R.J. Blanyer $2.08 04/03/02
66,000 John Malone $2.08 04/03/02
125,000 Jim Phillips $2.08 04/03/02
10,000 Jack & Darlene Mabery $2.08 04/03/02
41,700 Fred B. Dulock $2.08 04/03/02
20,000 Dan Malone $2.08 04/03/02
30,000 Bill J. Kemp $2.08 04/03/02
Information concerning the sale of such notes is as follows:
Purchaser Amount of 15% Notes
Jim Phillips $50,000
Jack & Darlene Mabery $25,000
Dan Malone $50,000
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide an exemption for transactions not involving a
public offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability
to assume the risk of their investment in the Company's securities,
acquired such securities for their own account and not with a view to any
distribution thereof to the public. The certificates evidencing the
securities bear legends stating that the securities are not to be offered,
sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
3. WH Warrants and Related Issuances of Common Stock
In September 1998, the Company sold 285,000 shares of Common Stock and
285,000 warrants exercisable for $0.60 per share until December 31, 2001 (the
"WH Warrants") for net proceeds of $142,500.
<PAGE> II-5
Information concerning the issuances of the WH Warrants is as follows:
No. of Warrants Issued to Exercise Price Expiration Date
140,000 Hibernia Securities Trust $0.60 12/31/01
45,000 Bill J. Kemp $0.60 12/31/01
50,000 Jim Phillips $0.60 12/31/01
50,000 John Malone $0.60 12/31/01
Information covering the issuance of Common Stock is as follows:
No. of Shares Issued to Price for Shares Purchased
140,000 Hibernia Securities Trust $70,000
45,000 Bill J. Kemp $22,500
50,000 Jim Phillips $25,000
50,000 John Malone $25,000
<PAGE> II-6
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide an exemption for transactions not involving a
public offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their total investment, acquired them for their own account
and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
g. Other Issuances
1. Issuances For Services And Debt
Since the Arjon amalgamation in June 1996, through June 30, 1998, the
Company has issued 161,038 shares of Common Stock to 12 individuals and
entities for services and/or debt with an aggregate value of $144,163.
Information concerning the issuance of common stock for services and
debt is as follows:
No. of Shares Issued to Approximate Value of Shares
50,000 61645 Ontario, Inc. $38,800
4,388 6 Individuals $ 3,405
7,500 Strain Consultants, Inc. $ 5,820
25,000 William McGuire $19,400
20,000 Ridgewood Capital Ltd. $14,600
33,750 S. D'Souza $24,638
20,400 Oxford Capital Ltd. $37,500
The sale of securities above were made in reliance upon section 4(2) of the
Securities Act, which provide an exemption for the transactions not involving a
public offering. The company determined that the purchases of
securities described above were sophisticated investors who had the financial
ability to assume the risk of their investment in the company's securities,
acquired such securities for their own account and not with a view to any
distribution there of to the public. The certificates evidencing the securities
bear legends stating that the securities are not to be offered,
sold or transferred other then pursuant to an effective registration statement
under the Securities Act or and exemption from such registration requirements.
2. Employee Bonuses.
In August 1997, the Company issued 45,000 shares as bonuses to three
employees at a value of $47,813. In September 1998, the Company issued 200,000
shares as bonuses to three employees at a value of $100,000.
The sale of securities above were made in reliance upon section 4(2) of the
Securities Act, which provide an exemption for the transactions not involving a
public offering. The company determined that the purchases of
securities described above were sophisticated investors who had the financial
ability to assume the risk of their investment in the Company's securities,
acquired such securities for their own account and not with a view to any
distribution there of to the public. The certificates evidencing the securities
bear legends stating that the securities are not to be offered,
sold or transferred other then pursuant to an effective registration statement
under the Securities Act or and exemption from such registration requirements.
3. Property Purchases.
During September 1997, 9,447 shares (Recorded at $35,000) were issued to
Bruce Galbierz in connection with a property acquisitions and in June 1998,
50,000 shares (Recorded at $25,000) were issued to Cypress Energy, et al
in connection with an option to purchase property.
<PAGE> II-7
The sale of securities above were made in reliance upon section 4(2) of
the Securities Act, which provide an exemption for the transactions not
involving a public offering. The company determined that the purchases of
securities described above were sophisticated investors who had the financial
ability to assume the risk of their investment in the company's securities,
acquired such securities for their own account and not with a view to any
distribution there of to the public. The certificates evidencing the securities
bear legends stating that the securities are not to be offered, sold or
transferred other then pursuant to an effective registration statement under the
Securities Act or and exemption from such registration requirements.
4. Van Kasper & Co.
During July, 1997, the Company entered into a representation agreement with
the investment banking firm of Van Kasper & Co., of San Francisco, California
(the "Banker"), whereby the Banker would seek to arrange a sale of
part or all of the Company or a strategic alliance with a larger company. As
consideration for services provided, the Company issued, in August, 1998, to the
Banker 12,000 shares of Common Stock, valued at $6,000. The Banker was
unsuccessful in its efforts and the agreement expired during April of 1998.
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide an exemption for transactions not involving a
public offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their investment in the Company's securities, acquired such
securities for their own account and not with a view to any distribution thereof
to the public. The certificates evidencing the securities bear legends stating
that the securities are not to be offered, sol or transferred other than
pursuant to an effective registration statement under the Securities Act or an
exemption from such registration requirements.
5. Consulting Agreements.
During fiscal years 1998 and 1999 the Company entered into consulting
agreements with Salzwedel Financial Services, Inc. ("Salzwedel"), VFS, Inc.
("VFS"), Pangea Energy Ltd., ("Pangea") and HST (collectively, the
"Consultants") whereby the Company engaged the Consultants to assist and consult
with the Company in matters concerning acquisitions, investor communications,
public relations and other related matters. As compensation for their services,
the Company issued to Salzwedel 75,000 shares recorded at $89,063, VFS 75,000
shares recorded at $89,063, HST 70,000 shares and 70,000 WH Warrants recorded at
$85,000 and Pangea 100,000 shares recorded at $75,000.
The sale of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide an exemption for transactions not involving a
public offering. The Company determined that the purchasers of securities
described above were sophisticated investors who had the financial ability to
assume the risk of their investment in the Company's securities, acquired such
securities for their own account and not with a view to any distribution thereof
to the public. The certificates evidencing the securities bear legends stating
that the securities are not to be offered, sol or transferred other than
pursuant to an effective registration statement under the Securities Act or an
exemption from such registration requirements.
Item 27. Exhibits
The following documents are filed as exhibits to this registration statement:
Exhibit
Number Description
2.1 Agreement and Plan of Merger, dated June 30, 1997, among Cotton
Valley Resources Corporation, Cotton Valley Operating, Inc.,
Aspen Energy Corporation, Leon A. Romero, George W. Peel,
Albert Sena and Dorothy Carter (Exhibits and schedules
have been omitted, but are available upon request.) (2)
3.1 Articles of Amalgamation (3)
<PAGE> II-8
Exhibit
Number Description
3.2 Bylaws (3)
3.3 Certificate of Continuance into Yukon Territory (1)
3.4 Articles of Continuance into Yukon Territory (1)
4.1 Description of Common Stock (4)
4.2 Form of Cotton Valley Resources Corporation 7% Convertible
Debenture, due December 31, 2001. (1)
4.3 Form of Amended and Restated Cotton Valley Resources Corporation
7% Convertible Debenture, due December 31, 2001. (5)
4.4 Form of Warrant issued in connection with the agreement identified
in Exhibit 10.3 hereof. (5)
4.5 Form of Amended and Restated Warrant issued in connection with the
amended and restated agreement identified in Exhibit 10.18 hereof.
(5)
4.6 Form of Warrant. (5)
4.7 Unit Purchase Option, dated June 12, 1998, from the Company to
Cambrian Capital Partners, L.P. (5)
5.1 Opinion of Jackson Walker L.L.P. regarding the legality of the
securities being registered. (5)
9.1 Amended and Restated Voting Trust Agreement, dated June 17, 1996,
by and between Eugene A. Soltero, James E. Hogue, Wiltex, Hibernia
Securities Trust, Hibernia Management, Albertson Family Limited
Partnership, Wilkerstead Thrush Company, Brownstowe Partners, Ltd.
and Haley Management Company.(3)
9.2 Voting Agreement, dated January 30, 1997, among Eugene A. Soltero,
Leon A. Romero, George W. Peel, Alberta Sena and Dorothy Carter.(2)
10.1 Purchase and Sale Agreement, dated October 22, 1997, by and between
Feagan Energy, Inc. and Cotton Valley Energy Corp. (Exhibits and
schedules have been omitted, but are available upon request.) (1)
10.2 Letter Agreement, dated November 5, 1997, by and between M&M
Directional Drilling Consultants, Mike Burton, Mark Milam and
the Company. (1)
10.3 Convertible Debenture Purchase Agreement, dated December 30, 1997,
by and among Westover Investments, L.P., Montrose Investments, L.P.
Lakeshore International, JMG Capital Partners, L.P., Triton
Capital Investments, Ltd., Lionhart Global Appreciation Fund, Ltd.,
Global Perspectives International, Ltd., Global Emerging Markets,
Ltd., Palisades Holdings, Inc. and the Company (Certain exhibits
and schedules have been omitted, but are available upon request.)
(1)
10.4 Security Agreement, dated December 30, 1997, by and among the
parties identified in Exhibit 10.3 hereof. (1)
10.5 Cash Collateral Agreement, dated December 30, 1997, by and among
the parties identified in Exhibit 10.3 hereof. (1)
10.6 Registration Rights Agreement, dated December 30, 1997, by
and among the parties identified in Exhibit 10.3 hereof.(1)
10.7 Agreement of Purchase and Sale, dated October 1, 1997, by and
between Paramount Resources LTD, J. Aron Resources Company and
the Company (Exhibits and schedules have been omitted, but are
available upon request.) (1)
10.8 Agreement of Purchase and Sale, dated January 14, 1998, by and
between Phillips Petroleum Resources, LTD, Phillips Petroleum
Company Western Hemisphere, Phillips Petroleum Canada, LTD and
the Company. (5)
10.9 Agreement of Purchase and Sale, dated January 14, 1998, by
and between Phillips Petroleum Company and the Company (Exhibits
and schedules have been omitted, but are available upon request.)
(1)
10.10 Property Option Agreement, dated March 1, 1995, by and between
East Texas Limestone Limited Partnership and Cotton Valley
Energy Corporation (Exhibits and schedules have been omitted,
but are available upon request.) (1)
<PAGE> II-9
Exhibit
Number Description
10.11 Purchase and Sale Agreement, dated August 29, 1997, by and
between Crown Partners L.L.C. Minerals Division and the
Company (Exhibits and schedules have been omitted, but are
available upon request.) (1)
10.12 Exclusive Option Agreement to Acquire the Interest of Conoco
Inc. in the Sword Unit Santa Maria Basin Offshore California,
dated March 1, 1995, by and between Pacific Limited Partnership,
L.P. and Cotton Valley Energy Corporation (Exhibits and
schedules have been omitted, but are available upon request.) (1)
10.13 Loan Agreement (and related exhibits), dated July 18, 1997, by
and among the individuals identified in Exhibit AA "thereto and
Cotton Valley Energy Corporation. (1)
10.14 Consulting Agreement, dated November 7, 1996, by and between
Liviakis Financial Communications, Inc. and the Company. (1)
10.15 $1,000,000 Convertible Secured Promissory Note, dated June 24,
1997, executed by the Company and payable to Liviakis Financial
Communications, Inc. (1)
10.16 Security Agreement, dated June 24, 1997, by and between Liviakis
Financial Communications, Inc. and the Company. (1)
10.17 Certificate for Common Stock Purchase Warrants, dated June 24,
1997, to acquire 161,351 shares of Common Stock granted to
Liviakis Financial Communications, Inc. (1)
10.18 First Amendment to the Convertible Debenture Purchase Agreement by
and among Westover Investments, L.P., Montrose Investments, L.P.,
Lakeshore International, JMG Capital Partners, L.P., Triton
Capital Investments, Ltd., Lionhart Global Appreciation Fund,
Ltd., Global Perspectives International, Ltd., Global
Emerging Markets, Ltd., Palisades Holdings, Inc. and the
Company. (Certain exhibits and schedules have been omitted,
but are available upon request.) (5)
10.19 Credit Agreement between Cotton Valley means, Inc. and Triassic
Energy Partners, L.P., dates as of June 12, 1998. (Exhibits
and schedules have been omitted, but are available upon
request.) (5)
10.20 Form of Term Note in the principal amount of U.S. $10,000,000
executed by cotton Valley means, Inc. in favor of Triassic
Energy partners, L.P. dated as of June 12, 1998. (5)
10.21 Net Profits Overriding Royalty Interest Conveyance from Cotton
Valley means, Inc. to Cambrian Capital Partners, L.P. dated
as of June 12, 1998. (Exhibits and schedules have been
omitted, but are available upon request.) (5)
10.22 ISDA Master Agreement between Triassic Energy Partners, L.P.
and Cotton Valley Means, Inc. dated as of June 12, 1998.
(Exhibits and schedules have been omitted, but are available
upon request.) (5)
10.23 Deed of Trust, Mortgage, Assignment of Production, Security
Agreement and Financing Statement from Cotton Valley Means,
Inc. to Brian B. Hughes, Trustee for the benefit of
Triassic Energy Partners, L.P., dated June 12, 1998.
(Exhibits and schedules have been omitted, but are available
upon request) (5)
10.24 Security Agreement covering accounts, equipment, general
intangibles and inventory, dated June 12, 1998,
by and between Cotton Valley Means, Inc. and Triassic
Energy Partners, L.P. (5)
10.25 Security Agreement covering stcok and other securities,
dated June 12, 1998, by and between Cotton
Valley Means, Inc. and Triassic Energy Partners, L.P. (5)
21 Subsidiaries of the Company.
23.1 Consent of K&A Energy Consultants, Inc.
23.2 Consent of Jackson Walker L.L.P. (incorporated by reference
into Exhibit 5.1). (5)
23.3 Consent of Hein + Associates, LLP.
23.4 Consent of Lane Gorman Trubitt, L.L.P
24.1 Power of Attorney(1)
27 Financial Data Schedule
<PAGE> II-10
______________________________
(1) Previously filed as an exhibit on March 16, 1998
(2) Previously filed as an exhibit to the Company's
Current Report on Form 8-KSB, Dated February 26, 1998.
(3) Previously filed as an exhibit to the Company's Registration
Statement on Form 20-F, as amended (SEC File No 0-28814)
(4) Previously filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1997.
(5) To be filed by amendment.
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 Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) To provide to the Placement Agent(s) at each closing specified in
the Selling Agreement certificates in such denominations and
registered in such names as required by the Placement Agents
to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that,
in the opinion of the Commission, 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 Commission 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.
<PAGE> II-11
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 Amendment No. 1 to
its registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on October 5,
1998.
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
By: /s/ Eugene A. Soltero
Eugene A. Soltero
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933, this
Amendment #1 to the Registration Statement on Form SB-2 has been signed by the
following persons on behalf of the Company and in the capacities and
on the dates indicated.
Signature Title Date
/s/ Eugene A. Soltero
Eugene A. Soltero Chairman of the Board, Chief Executive
Officer and Director October 5, 1998
/s/ James E. Hogue *
James E. Hogue President, Chief Operating Officer
and Director October 5, 1998
/s/ Leon A. Romero *
Leon A. Romero Senior Vice President, Chief Financial
Officer and Director October 5, 1998
/s/ Wayne T. Egan *
Wayne T. Egan Director October 5, 1998
* By: /s/ Eugene A. Soltero
Eugene A. Soltero, Attorney-in-Fact October 5, 1998
<PAGE> II-12
EXHIBIT INDEX
The following documents are filed as exhibits to this registration
statement.
2.1 Agreement and Plan of Merger, dated June 30, 1997, among Cotton
Valley Resources Corporation, Cotton Valley Operating, Inc.,
Aspen Energy Corporation, Leon A. Romero, George W. Peel,
Albert Sena and Dorothy Carter (Exhibits and schedules
have been omitted, but are available upon request.) (2)
3.1 Articles of Amalgamation (3)
3.2 Bylaws (3)
3.3 Certificate of Continuance into Yukon Territory (1)
3.4 Articles of Continuance into Yukon Territory (1)
4.1 Description of Common Stock (4)
4.2 Form of Cotton Valley Resources Corporation 7% Convertible
Debenture, due December 31, 2001. (1)
4.3 Form of Amended and Restated Cotton Valley Resources Corporation
7% Convertible Debenture, due December 31, 2001. (5)
4.4 Form of Warrant issued in connection with the agreement identified
in Exhibit 10.3 hereof. (5)
4.5 Form of Amended and Restated Warrant issued in connection with the
amended and restated agreement identified in Exhibit 10.18 hereof.
(5)
4.6 Form of Warrant. (5)
4.7 Unit Purchase Option, dated June 12, 1998, from the Company to
Cambrian Capital Partners, L.P. (5)
5.1 Opinion of Jackson Walker L.L.P. regarding the legality of the
securities being registered. (5)
9.1 Amended and Restated Voting Trust Agreement, dated June 17, 1996,
by and between Eugene A. Soltero, James E. Hogue, Wiltex, Hibernia
Securities Trust, Hibernia Management, Albertson Family Limited
Exhibit
Number Description
Partnership, Wilkerstead Thrush Company, Brownstowe Partners, Ltd.
and Haley Management Company.(3)
9.2 Voting Agreement, dated January 30, 1997, among Eugene A. Soltero,
Leon A. Romero, George W. Peel, Alberta Sena and Dorothy Carter.(2)
10.1 Purchase and Sale Agreement, dated October 22, 1997, by and between
Feagan Energy, Inc. and Cotton Valley Energy Corp. (Exhibits and
schedules have been omitted, but are available upon request.) (1)
10.2 Letter Agreement, dated November 5, 1997, by and between M&M
Directional Drilling Consultants, Mike Burton, Mark Milam and
the Company. (1)
10.3 Convertible Debenture Purchase Agreement, dated December 30, 1997,
by and among Westover Investments, L.P., Montrose Investments, L.P.
Lakeshore International, JMG Capital Partners, L.P., Triton
Capital Investments, Ltd., Lionhart Global Appreciation Fund, Ltd.,
Global Perspectives International, Ltd., Global Emerging Markets,
Ltd., Palisades Holdings, Inc. and the Company (Certain exhibits
and schedules have been omitted, but are available upon request.)
(1)
10.4 Security Agreement, dated December 30, 1997, by and among the
parties identified in Exhibit 10.3 hereof. (1)
10.5 Cash Collateral Agreement, dated December 30, 1997, by and among
the parties identified in Exhibit 10.3 hereof. (1)
10.6 Registration Rights Agreement, dated December 30, 1997, by
and among the parties identified in Exhibit 10.3 hereof.(1)
10.7 Agreement of Purchase and Sale, dated October 1, 1997, by and
between Paramount Resources LTD, J. Aron Resources Company and
the Company (Exhibits and schedules have been omitted, but are
available upon request.) (1)
10.8 Agreement of Purchase and Sale, dated January 14, 1998, by and
between Phillips Petroleum Resources, LTD, Phillips Petroleum
Company Western Hemisphere, Phillips Petroleum Canada, LTD and
the Company. (5)
10.9 Agreement of Purchase and Sale, dated January 14, 1998, by
and between Phillips Petroleum Company and the Company (Exhibits
and schedules have been omitted, but are available upon request.)
(1)
10.10 Property Option Agreement, dated March 1, 1995, by and between
East Texas Limestone Limited Partnership and Cotton Valley
Energy Corporation (Exhibits and schedules have been omitted,
but are available upon request.) (1)
10.11 Purchase and Sale Agreement, dated August 29, 1997, by and
between Crown Partners L.L.C. Minerals Division and the
Company (Exhibits and schedules have been omitted, but are
available upon request.) (1)
10.12 Exclusive Option Agreement to Acquire the Interest of Conoco
Inc. in the Sword Unit Santa Maria Basin Offshore California,
dated March 1, 1995, by and between Pacific Limited Partnership,
L.P. and Cotton Valley Energy Corporation (Exhibits and
schedules have been omitted, but are available upon request.) (1)
10.13 Loan Agreement (and related exhibits), dated July 18, 1997, by
and among the individuals identified in Exhibit AA "thereto and
Cotton Valley Energy Corporation. (1)
10.14 Consulting Agreement, dated November 7, 1996, by and between
Liviakis Financial Communications, Inc. and the Company. (1)
10.15 $1,000,000 Convertible Secured Promissory Note, dated June 24,
1997, executed by the Company and payable to Liviakis Financial
Communications, Inc. (1)
10.16 Security Agreement, dated June 24, 1997, by and between Liviakis
Financial Communications, Inc. and the Company. (1)
10.17 Certificate for Common Stock Purchase Warrants, dated June 24,
1997, to acquire 161,351 shares of Common Stock granted to
Liviakis Financial Communications, Inc. (1)
Exhibit
Number Description
10.18 First Amendment to the Convertible Debenture Purchase Agreement by
and among Westover Investments, L.P., Montrose Investments, L.P.,
Lakeshore International, JMG Capital Partners, L.P., Triton
Capital Investments, Ltd., Lionhart Global Appreciation Fund,
Ltd., Global Perspectives International, Ltd., Global
Emerging Markets, Ltd., Palisades Holdings, Inc. and the
Company. (Certain exhibits and schedules have been omitted,
but are available upon request.) (5)
10.19 Credit Agreement between Cotton Valley means, Inc. and Triassic
Energy Partners, L.P., dates as of June 12, 1998. (Exhibits
and schedules have been omitted, but are available upon
request.) (5)
10.20 Form of Term Note in the principal amount of U.S. $10,000,000
executed by cotton Valley means, Inc. in favor of Triassic
Energy partners, L.P. dated as of June 12, 1998. (5)
10.21 Net Profits Overriding Royalty Interest Conveyance from Cotton
Valley means, Inc. to Cambrian Capital Partners, L.P. dated
as of June 12, 1998. (Exhibits and schedules have been
omitted, but are available upon request.) (5)
10.22 ISDA Master Agreement between Triassic Energy Partners, L.P.
and Cotton Valley Means, Inc. dated as of June 12, 1998.
(Exhibits and schedules have been omitted, but are available
upon request.) (5)
10.23 Deed of Trust, Mortgage, Assignment of Production, Security
Agreement and Financing Statement from Cotton Valley Means,
Inc. to Brian B. Hughes, Trustee for the benefit of
Triassic Energy Partners, L.P., dated June 12, 1998.
(Exhibits and schedules have been omitted, but are available
upon request) (5)
10.24 Security Agreement covering accounts, equipment, general
intangibles and inventory, dated June 12, 1998,
by and between Cotton Valley Means, Inc. and Triassic
Energy Partners, L.P. (5)
10.25 Security Agreement covering stcok and other securities,
dated June 12, 1998, by and between Cotton
Valley Means, Inc. and Triassic Energy Partners, L.P. (5)
21 Subsidiaries of the Company.
23.1 Consent of K&A Energy Consultants, Inc.
23.2 Consent of Jackson Walker L.L.P. (incorporated by reference
into Exhibit 5.1). (5)
23.3 Consent of Hein + Associates, LLP.
23.4 Consent of Lane Gorman Trubitt, L.L.P
24.1 Power of Attorney(1)
27 Financial Data Schedule
______________________________
(1) Previously filed as an exhibit on March 16, 1998
(2) Previously filed as an exhibit to the Company's
Current Report on Form 8-KSB, Dated February 26, 1998.
(3) Previously filed as an exhibit to the Company's Registration
Statement on Form 20-F, as amended (SEC File No 0-28814)
(4) Previously filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1997.
(5) To be filed by amendment.
<PAGE>
Exhibit 23.1
K&A ENERGY CONSULTANTS, INC.
October 5, 1998
Cotton Valley Resources Corporation
ATTN: Mr. James E. Hogue
6510 Abrams Road
Suite 300
Dallas, TX 75231
RE: Consent of Independent Petroleum
Engineers Annual Report of Cotton Valley
Resources, Inc. on For Registration Statement on SB-2
October, 1998
Dear Mr. Hogue:
Enclosed is our consent authorizing Cotton Valley Resources, Corporation to
reference our company as providing certain reserves report information
as experts included in their Amendment #1 to Form SB-2 Registration
Statement of Cotton Valley Resources Corporation.
Please advise if we may be of additional assistance to you.
Yours very truly,
K&A ENERGY CONSULTANTS, INC.
/s/. LeRoy England
LeRoy England
EXHIBIT 23.3
CONSENT OF HEIN + ASSOCIATES LLP
We consent to the use in Amendment No. 1 to the Form SB-2 Registration Statement
and Prospectus of Cotton Valley Resources Corporation ("The Company") of our
reports dated September 15, 1997 and January 30, 1998 accompanying the
consolidated financial statements of The Company and the financial statements of
Aspen Energy Corporation, respectively contained in such Registration Statement,
and to the use of our name and the statements with respect to us, as appearing
under the heading "experts" in the Prospectus.
HEIN + ASSOCIATES LLP
Certified Public Accountants
October 5, 1998
Dallas, Texas
EXHIBIT 23.4
CONSENT OF LANE GORMAN TRUBITT, L.L.P.
We consent to the reference to our firm under the caption *Experts* and to
the use of our report dated September 11, 1998, with respect to the financial
statements of Cotton Valley Resources Corporation included Amendment No. 1 to
the Registration Statement (Form SB-2 No. 333-48027) and the related
Prospectus of Cotton Valley Resources Corporation for the registration of its
common stock.
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
October 5, 1998
9810 East 42nd Street, Suite 135
Tulsa, Oklahoma 74146 USA
Tel 918-610-7132 Fax 918-610-7138
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 85,762
<SECURITIES> 0
<RECEIVABLES> 396,390
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