<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1998
REGISTRATION NO. _________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer in its Charter)
-------------------------
<TABLE>
<S> <C> <C>
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
8350 N. CENTRAL EXPRESSWAY, SUITE M2030 CHIEF EXECUTIVE OFFICER
DALLAS, TEXAS 75206 8350 N. CENTRAL EXPRESSWAY, SUITE M2030
(214) 363-1968 DALLAS, TEXAS 75206
(Address and Telephone Number of Principal (214) 363-1968
Executive Offices and Principal Place of (Name, Address and Telephone Number
Business) of Agent for Service)
-------------------------
Copies to: WAYNE T. EGAN, ESQ.
RICHARD B. GOODNER, ESQ. WEIR AND FOULDS
JACKSON WALKER L.L.P. 2 FIRST CANADIAN PLACE, SUITE 1600
901 MAIN STREET, SUITE 6000 TORONTO, ONTARIO M5X 1J5
DALLAS, TEXAS 75202 CANADA
PHONE NO. (214) 953-6167 PHONE NO. (416) 365-1876
FAX NO. (214) 953-5822 FAX NO. (416) 365-1876
</TABLE>
-------------------------
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]
-------------------------
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value(2)(3) . . . $10,891,184 $1.63 $17,752,629 $6,035.90
- ------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,035.90
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 $1.63 as quoted on the American Stock Exchange on March
10, 1998.
(2) Includes 5,142,875 shares of Common Stock currently outstanding and being
offered for sale by the Selling Stockholders, 2,548,309 shares reserved for
issuance upon exercise of outstanding warrants held by certain Selling
stockholders, 2,560,000 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.
-------------------------
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> 2
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 MARCH 16, 1998
PROSPECTUS
COTTON VALLEY RESOURCES CORPORATION
10,891,184 SHARES OF COMMON STOCK
The 10,891,184 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 5,142,875 shares of Common Stock currently outstanding, 2,548,309
shares to be issued to various Selling Stockholders upon exercise of outstanding
warrants, up to 2,560,000 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
March 10, 1998, the closing sales price of the Common Stock was US$1.63 per
share on the AMEX. On January 30, 1998, the closing bid price was C$3.00 per
share on the CDN. There have been no trades in the Company's Common Stock on
the CDN since January 30, 1998.
--------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED
IN CONNECTION WITH AN INVESTMENT
IN THE SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is ,1998
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated
herein, the financial, business activities, management and other pertinent
information herein relates on a consolidated basis to the Company and its
wholly-owned subsidiaries. Each prospective investor is urged to read this
Prospectus in its entirety and to particularly consider the information set
forth under the heading "RISK FACTORS." Except as otherwise indicated,
financial data in this Prospectus is presented in accordance with generally
accepted accounting principles in the United States ("USGAAP") for all periods
presented. All dollar amounts set forth in this Prospectus are in United
States dollars, except where denoted "C$" 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 3,941,106 shares at prices ranging from $0.73 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 an 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.
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. The Company intends to
conduct most of its acquisition, exploration and development of oil and gas
properties through CV Energy, which currently owns properties in Texas and an
option to participate in an offshore California exploration project.
On June 14, 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 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 which was completed on July 31, 1997. The principal
asset of Old Aspen was its interest in the Means Unit in Andrews County, Texas.
On February 9, 1998, the Company continued into Canada's Yukon
Territory. Under the law of the Yukon Territory, the Company's board of
directors need not be comprised of a majority of Canadian residents as
previously required under Ontario law. Since the Company's principal offices,
management and properties are located in the United States, management believes
it is advantageous to have a majority of the Company's directors be residents
of the United States. The Company may in the future continue from the Yukon
Territory to the State of Wyoming.
-2-
<PAGE> 4
Management believes there are no significant differences in corporate law
concerning material stockholder rights between the Province of Ontario, the
Yukon Territory and the State of Wyoming. The Company, at its annual meeting
held December 10, 1996, obtained stockholder approval for the continuance into
the Yukon Territory.
MUSTANG SERVICE COMPANIES
In addition to CV Energy, CV Operating, CVEI and Aspen, 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"). Mustang Equipment, Mustang Horizontal, Mustang Well Servicing, CV
Operating, CV Energy, CVEI and Aspen are currently wholly-owned Company
subsidiaries. However, the Company has agreed to sell for nominal cost up to
15% of the common stock of Mustang Equipment, Mustang Horizontal and Mustang
Well Servicing to certain employees and officers of the Company, including
Eugene A. Soltero, Chairman of the Board, Chief Executive Officer, and James E.
Hogue, President and Chief Operating Officer. The total value of the 15%
interest to be received by these individuals is not expected to be significant
at the time of receipt based on the net book value of the companies.
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.
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 from
July 1, 1997 through February 28, 1998, the exercise of options and warrants to
purchase approximately 1,677,609 shares of Common Stock for proceeds of
$2,920,122. See "Business and Properties -- Recent Developments."
For the fiscal year ended June 30, 1997 and the six-month period ended
December 31, 1997, the Company recorded revenues of $276,230 and $1,157,985,
respectively, and had a net loss of $2,006,878 and a net profit of $54,403,
respectively. As of December 31, 1997, the Company had an accumulated deficit
of $2,714,752 and working capital of $2,619,225. 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 "Selected Historical Consolidated and Combined Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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.
See "Business and Properties."
-3-
<PAGE> 5
The following are key elements of the Company's strategy:
o 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.
o MANAGEMENT OF OPERATING COSTS. The Company emphasizes strict
cost controls in all aspects of its business and intends to
operate its properties wherever possible. By operating its
properties, the Company believes it will be able to control
direct operating and drilling costs as well as to manage the
timing of development and exploration activities.
o 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 having Proved Reserves with development
potential and operating control.
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.
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$0.73. 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."
The Company maintains its executive offices at 8350 N. Central
Expressway, Suite M2030, Dallas, Texas 75206, telephone number (214) 363-1968.
-4-
<PAGE> 6
THE OFFERING
SECURITIES OFFERED BY THE SELLING
STOCKHOLDERS(1) . . . . . . . . . 10,891,184 shares of Common Stock.
See "Description of Securities --
Common Stock," "Selling Stockholders,"
"Plan of Distribution" and "Agreements
with Selling Stockholders."
OUTSTANDING SECURITIES
Securities
Presently
Outstanding
-----------
Common Stock(2) . . . . . . 17,073,248
Warrants(3) . . . . . . . . 2,580,440
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 5,142,875 shares of Common Stock currently outstanding and being
offered for sale by the Selling Stockholders, 2,548,309 shares reserved
for issuance upon exercise of outstanding warrants held by certain Selling
Stockholders, 2,560,000 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 does not include
approximately 2,580,440 shares reserved for issuance upon exercise of
outstanding warrants ; 1,360,666 shares reserved for issuance upon
exercise of outstanding 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 22,821,557 outstanding shares of Common Stock. See
"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."
-5-
<PAGE> 7
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 its wholly-owned subsidiaries, including Aspen, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the pro
forma financial statements appearing elsewhere in this Prospectus. In
addition, unaudited pro forma financial information includes Aspen Energy
Corporation, which was acquired by the Company on July 31, 1997. In the
opinion of management, the pro forma financial information includes all
material adjustments necessary to present historical results of the Company and
Aspen as if it had been a single operating entity as of the first day of the
pro forma period. This financial information does not purport to be indicative
of the financial position or results of operations that may be obtained in the
future.
<TABLE>
<CAPTION>
Pro Forma(1) Six Months Six Months
------------- Year Ended Year Ended Ended Ended
Year Ended June 30 June 30, December 31, December 31,
June 30, 1997 1997 1996 1997 1996
------------- ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales . . . . . . . . . . . . . . . . $ 685,815 $ 272,243 $ -- $ 435,289 $ 41,365
Equipment sales . . . . . . . . . . . . . . . . . -0- -0- 713,622 -0-
Oil and gas production costs . . . . . . . . . . 642,258 252,272 -0- 225,925 -0-
Equipment purchase and rework . . . . . . . . . . -0- -0- 259,573 -0-
General and administrative expenses . . . . . . . 1,980,570 1,434,046 518,826 413,444 903,319
Compensation expense related to common
stock issuances at less than fair value . . . . 1,391,632 1,391,632 446,950 -0- -0-
Income/(loss) from operations . . . . . . . . . . (3,543,717) (2,925,878) (1,099,360) 72,537 (897,116)
Interest expense . . . . . . . . . . . . . . . . 108,171 97,158 138,970 129,888 35,162
Income tax benefit (expense) . . . . . . . . . . 1,169,087 919,000 387,000 (18,134) 295,000
Net income/(loss) . . . . . . . . . . . . . . . . (2,482,801) (2,006,878) (712,360) 54,403 (602,116)
Net loss per weighted-average share of
common stock outstanding
Basic and Diluted . . . . . . . . . . . . . . $ (0.21) $ (0.20) $ (0.06) -- $ (0.05)
Number of weighted-average shares of
common stock outstanding. . . . . . . . . . . . 12,142,000 9,901,000 11,430,000 15,457,000 13,390,524
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1997
------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 753,410 $ 3,942,023
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,821,346 19,721,091
Oil field equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,614,069
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,615,405 26,767,925
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,348,037 1,322,798
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,710 4,564,710
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,156,747 8,218,320
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,458,658 18,549,605
Working capital (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . (594,627) 2,619,225
</TABLE>
- --------------
(1) Includes Old Aspen which was acquired by the Company on July 31, 1997. See
"Business and Properties -- Recent Developments; Aspen Acquisition."
-6-
<PAGE> 8
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, 1997 for properties owned by the Company as
of July 31, 1997.
ESTIMATED PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-------------------
<S> <C>
Net Gas Reserves (Mcf):
Proved Developed Producing . . . . . . . . . . . . . . . . . . . . . . . . . . . 652,388
Proved Developed Non-Producing Reserves . . . . . . . . . . . . . . . . . . . . 1,134,420
Proved Undeveloped Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 16,744,015
-------------------
Total Proved Gas Reserves . . . . . . . . . . . . . . . . . . . . . . . . . 18,530,823
===================
Net Oil Reserves (Bbl):
Proved Developed Producing Reserves . . . . . . . . . . . . . . . . . . . . . . 128,545
Proved Developed Non-Producing Reserves . . . . . . . . . . . . . . . . . . . . 293,968
Proved Undeveloped Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 5,923,682
-------------------
Total Proved Oil Reserves . . . . . . . . . . . . . . . . . . . . . . . . 6,346,195
===================
Total Proved Reserves (BOE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,434,666
===================
Estimated SEC PV-10 of Proved Reserves
--------------------------------------
AT JUNE 30, 1997(1)
---------------------
Estimated PV-10(2):
Proved Developed Producing . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,653,427
Proved Developed Non-Producing Reserves . . . . . . . . . . . . . . . . . . 3,509,009
Proved Undeveloped Reserves . . . . . . . . . . . . . . . . . . . . . . . . 67,737,953
----------------------
Total PV-10 of Proved Reserves . . . . . . . . . . . . . . . . . . . . $ 72,900,389
======================
</TABLE>
- ---------------------------
(1) Prices based on $19.50 per Bbl of oil and $1.95 to $2.25 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.
-7-
<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 December 31, 1997, the Company had a working capital of approximately
$2,600,000. 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 stockholders 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
$4,320,000 of outstanding 7% Secured Convertible Debentures due December 31,
2001 (the "Convertible Debentures"), representing approximately 16.1% of the
Company's capitalization at December 31, 1997. The Convertible Debentures are
secured with approximately 25% 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 25% 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 operating losses of $712,360
and $2,006,878 for the fiscal years ended June 30, 1996, and 1997,
respectively, and had a net profit of $54,403 for the six-month period ended
December 31, 1997. The Company's accumulated deficit as of December 31, 1997
was $2,714,752. The
-8-
<PAGE> 10
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 the 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 stringent
costs controls at the corporate administrative office and in field 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."
SIGNIFICANT CAPITAL EXPENDITURES NECESSARY FOR UNDEVELOPED PROPERTIES.
Except for its recent acquisition of properties in Oklahoma and Texas, almost
all of the Company's Proved Reserves are classified as proved undeveloped,
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 $6 million
is expected to be incurred during calendar 1998. 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, 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 stockholders at that
time. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business and Properties."
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 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
-9-
<PAGE> 11
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 effect 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 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."
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
-10-
<PAGE> 12
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 SEC 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 Securities and Exchange Commission (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 SEC 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 a material adverse effect on the financial condition and operations of the
Company.
-11-
<PAGE> 13
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.
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."
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 14% of the Company's then
outstanding 22,821,557 shares of Common Stock. Two officers of the Company
have the right under certain Voting Agreements to vote an additional
approximately 2.5 million shares of Common Stock representing approximately 11%
of the outstanding shares of Common Stock. As a result, officers, directors
and their affiliates will have the ability to exert significant influence over
the business affairs of the Company, including the ability
-12-
<PAGE> 14
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."
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 17,073,248 shares of Common Stock outstanding, which amount
does not include 3,941,106 shares which underlie outstanding options and
warrants, including 2,548,309 shares reserved for issuance upon exercise of
outstanding warrants held by certain Selling Stockholders, or up to 3.2 million
shares offered hereby by the Convertible Debenture holders. Substantially all
of the Company's outstanding shares
-13-
<PAGE> 15
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 665,485 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, 596,638 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" 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.
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<PAGE> 16
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Common Stock began trading through the Canadian Dealing Network on
June 24, 1996, under the symbol "CVZC." From June 24, 1996, through February
28, 1998, 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 February 28, 1998 one Canadian dollar was worth
$0.72.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C>
1996
---------------------------------------
Second Quarter(1) C$2.80 C$2.50
Third Quarter C$2.60 C$1.20
Fourth Quarter C$1.90 C$0.75
1997
---------------------------------------
First Quarter C$3.45 C$1.45
Second Quarter C$2.55 C$1.50
Third Quarter C$6.50 C$1.95
Fourth Quarter C$4.17 C$3.91
1998
---------------------------------------
First Quarter(2) C$3.58 C$3.00
</TABLE>
- -------------------------
(1) From June 24 to June 30, 1996.
(2) Through February 28, 1998. There have been no trades in the Company's Common
Stock on the CDN since January 30, 1998.
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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C> <C>
1997
---------------------------------------
First Quarter $2.20 $1.00
Second Quarter $1.81 $1.12
Third Quarter $4.81 $1.38
Fourth Quarter $3.45 $3.12
</TABLE>
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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
---------------------------------------
Fourth Quarter $6.00 $2.12
1998
---------------------------------------
First Quarter (through March 6, 1998) $2.94 $1.38
</TABLE>
As of February 19, 1998, there were approximately 1,065 record holders
of the Company's Common Stock.
-15-
<PAGE> 17
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
December 31, 1997 and on a pro forma basis to reflect the exercise of certain
warrants, including the Debenture Warrants, held by Selling Stockholders,
conversion of the Convertible Debentures and cancellation of 270,000 shares of
Common Stock held in Treasury. 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.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------
Actual(1) Pro forma(2)
------------- ----------------
<S> <C>
Current maturities of long-term debt . . . . . . . . . . . . $ 150,250 $ 150,250
Long-term debt(3) . . . . . . . . . . . . . . . . . . . . . . 4,564,710 244,710
------------ ---------------
Total debt . . . . . . . . . . . . . . . . . . . . . . . 4,714,960 394,960
Common Stock, no par value; 17,343,248 shares and
22,821,557, respectively, issued and outstanding(2) . . . . 21,689,357 27,031,502
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (2,714,752) (2,714,752)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . (425,000) -0-
------------ ---------------
Total stockholders' equity . . . . . . . . . . . . . . . . 18,549,605 24,316,750
------------ ---------------
Total capitalization . . . . . . . . . . . . . . . . . . . $ 23,264,565 $ 24,711,710
============ ===============
</TABLE>
- --------------------
(1) Assumes no exercise of outstanding warrants and options and no conversion of
Convertible Debentures.
(2) Assumes that 2,548,309 shares of Common Stock are issued to various Selling
Stockholders upon exercise of outstanding warrants, including the Debenture
Warrants, resulting in proceeds to the Company of approximately $5,342,145;
2,560,000 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 $1.80 per share. Upon exercise of the
warrants, including the Debenture Warrants, held by Selling Stockholders,
and conversion of the Convertible Debentures, the Company will have
approximately 22,821,557 outstanding shares of Common Stock, after giving
effect to the cancellation of 270,000 shares of Common Stock held in
treasury. 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 -- Recent Developments; Sale of Convertible Debentures" and
"Description of Securities -- Convertible Debentures."
-16-
<PAGE> 18
SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The following 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 its
wholly-owned subsidiaries, including Aspen, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the pro forma
financial statements appearing elsewhere in this Prospectus. In addition,
unaudited pro forma financial information includes Aspen Energy Corporation,
which was acquired by the Company on July 31, 1997. In the opinion of
management, the pro forma financial information includes all material
adjustments necessary to present historical results of the Company and Aspen as
if they had been a single operating entity as of the first day of the pro forma
period. This financial information does not purport to be indicative of the
financial position or results of operations that may be obtained in the future.
<TABLE>
<CAPTION>
Pro Forma(1) Six Months Six Months
------------- Year Ended Year Ended Ended Ended
Year Ended June 30 June 30, December 31, December 31,
June 30, 1997 1997 1996 1997 1996
-------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales . . . . . . . . . . . . . . . . $ 685,815 $ 272,243 $ -- $ 435,289 $ 41,365
Equipment sales . . . . . . . . . . . . . . . . . -0- -0- 713,622 -0-
Oil and gas production costs . . . . . . . . . . 642,258 252,272 -0- 225,925 -0-
Equipment purchase and rework . . . . . . . . . . -0- -0- 259,573 -0-
General and administrative expenses . . . . . . . 1,980,570 1,434,046 518,826 413,444 903,319
Compensation expense related to common
stock issuances at less than fair value . . . . 1,391,632 1,391,632 446,950 -0- -0-
Income/(loss) from operations . . . . . . . . . . (3,543,717) (2,925,878) (1,099,360) 72,537 (897,116)
Interest expense . . . . . . . . . . . . . . . . 108,171 97,158 138,970 129,888 35,162
Income tax benefit (expense) . . . . . . . . . . 1,169,087 919,000 387,000 (18,134) 295,000
Net income/(loss) . . . . . . . . . . . . . . . . (2,482,801) (2,006,878) (712,360) 54,403 (602,116)
Net loss per weighted-average share of
common stock outstanding
Basic and Diluted . . . . . . . . . . . . . . $ (0.21) $ (0.20) $ (0.06) -- $ (0.05)
Number of weighted-average shares of
common stock outstanding . . . . . . . . . . . $12,142,000 9,901,000 11,430,000 15,457,000 13,390,524
</TABLE>
<TABLE>
<CAPTION>
-----------------
June 30, 1997 December 31, 1997
--------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 753,410 $ 3,942,023
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,821,346 19,721,091
Oil field equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,614,069
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,615,405 26,767,925
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,348,037 1,322,798
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,710 4,564,710
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,156,747 8,218,320
stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,458,658 18,549,605
Working capital (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . (594,627) 2,619,225
</TABLE>
- --------------
(1) Includes Old Aspen which was acquired by the Company on July 31, 1997. See
"Business and Properties -- Recent Development; Aspen Acquisition."
-17-
<PAGE> 19
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 year 1997 and during the six-month period ended December
31, 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, is
scheduled to close on May 31, 1998, subject to certain conditions. 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. To the
extent that such capitalized costs (net of accumulated depreciation, depletion
and amortization) less deferred taxes exceed the SEC PV-10 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 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, 1997 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
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.
-18-
<PAGE> 20
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 TO SIX MONTHS ENDED DECEMBER
31, 1996
During the six months ended December 31, 1997, the Company generated a
net profit after tax of $54,403 on revenue of $1,157,985 as compared with a net
loss of $602,116 on revenue of $41,365 for the six-month period ended December
31, 1996. The improvement results from the first used equipment sales by the
Company's subsidiary, Mustang Oilfield Equipment, 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.
Oil and gas sales increased 952% from $41,365 for the six months ended
December 31, 1996 to $435,289 for the six months ended December 31, 1997,
reflecting the addition of the Aspen, N.E. Alden and Sears Ranch acquisitions.
Oil and gas production costs increased to $225,925 for the six months ended
December 31, 1997, 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 six-month period
ended December 31, 1996.
Equipment sales for the six months ended December 31, 1997 were
$713,622 as compared to no sales for the six months ended December 31, 1996.
Equipment purchase and refurbishing expenses were $259,573 for the six-month
period ended December 31, 1997 as compared to zero expenses for the comparable
period ended December 31, 1996.
General and administrative costs were $413,444 for the six-month period
ended December 31, 1997, a decrease of $489,875 or 54% less than the $903,319
incurred for the six-month period ended December 31, 1996. A substantial
portion of the decrease was due to an administrative cost reduction program
instituted by management in mid-June 1997. In addition, the Company allocated
approximately $200,000 of general and administrative expenses that were directly
associated with oil and gas acquisition and development activities during the
six months ended December 31, 1997 to oil and gas properties. No such costs were
allocated during the six months ended December 31, 1996 because the Company was
primarily involved in fund raising activities during that time period.
The Company has provided for income taxes of $18,134 for the six-month
period ended December 31, 1997 as compared to recognition of an income tax
benefit of $295,000 for the six-month period ended December 31, 1996. 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 181%
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."
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
-19-
<PAGE> 21
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.
FISCAL YEAR 1996 AS COMPARED TO FISCAL PERIOD 1995
From February 15, 1995 (inception), to June 30, 1996, the Company
accumulated a deficit of $762,277 after an income tax benefit of $412,000.
During this period, the Company acquired certain oil and gas properties,
completed the amalgamation with Arjon, issued debentures and notes and sold
stock for cash. See "Prospectus Summary -- The Company" and "Business and
Properties -- General."
Legal, audit and accounting fees were $190,053, which represents 17%
of the net loss before tax through June 30, 1996.
Management fees of $82,840 and salaries of $163,309, for a total of
$246,149, represent 22% of the net loss before tax through June 30, 1996. The
Company paid management fees of $10,000 per month from its inception to July
31, 1995, and $20,000 per month from August 1, 1995 to March 31, 1996, for the
full-time services of Eugene A. Soltero, Chairman of the Board and Chief
Executive Officer, and James E. Hogue, President and Chief Operating Officer.
Effective April 1, 1996, each of these officers received a salary of $10,000
per month. A third officer earned $10,000 per month from August 1, 1995. A
fourth officer earned $10,000 per month from May 1, 1996. See "Management --
Executive Compensation" and "Certain Relationships and Related Transactions."
Management fees and salaries totaling $194, 951 from inception through
June 30, 1996, were capitalized into oil and gas properties and are not
included in the accumulated deficit as of that date. These costs represent the
estimated portion of the compensation directly attributable to acquisition of
the properties in the Cheneyboro Field and related development activities. See
"Business and Properties -- Description of Properties."
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended December 31, 1997, the Company generated
$187,000 in cash from operating activities, primarily from earnings before non
cash charges. Cash of $7,000,000 was used in investing activities in additions
to oil and gas properties, oilfield equipment and restricted cash. Cash of
approximately $6,600,000 was generated primarily from sale of stock and exercise
of warrants and from the issuance of the Convertible Debentures.
During the year ended June 30, 1997, the Company used cash in operating
activities of approximately $1,200,000, resulting from a net loss of $2,006,000
reduced primarily by non cash charges against earnings. The Company generated
cash from financing activities during the year ended June 30, 1997 of
approximately $2,000,000 from the sale of stock, exercise of warrants and
issuance of notes payable. Approximately $950,000 of cash was used in the year
ended June 30, 1997 in investing activities to acquire property and equipment.
During the year ended June 30, 1996, the Company used $270,000 cash in operating
activities, generated $1,861,000 cash in financing activities and used
approximately, $800,000 cash in investing activities. The sources and uses of
the cash were similar in 1996 as to that described above for 1997.
As of December 31, 1997, the Company had working capital of
$2,619,225, which includes $2,570,280 of restricted cash which may be used for
working capital, acquisition of oil and gas properties, oilfield equipment and
development of properties. The restricted cash represents the remaining and
unutilized proceeds from the sale of Convertible Debentures. Management
estimates that aggregate capital expenditures of approximately $6 million
-20-
<PAGE> 22
will be spent during the remainder of fiscal 1998 to acquire and develop oil and
gas reserves. The Company intends to finance acquisition and development of oil
and gas properties with the proceeds from private placements of debt and equity
securities, proceeds from the exercise of outstanding warrants, traditional bank
debt and institutional mezzanine reserves based financing. No assurance can be
given that the Company will be successful in these efforts. See "Description of
Securities -- Convertible Debentures."
Since July 1, 1997, the Company has raised $4,320,000 from the sale of
Convertible Debentures, approximately $454,500 through the sale of 272,700
shares of its Common Stock and warrants to purchase 322,700 shares, exercisable
at $2.08 per share until April 3, 2002, in a private placement and issued
$125,000 of 15% two-year notes. In addition, from July 1, 1997 through
February 28, 1998, warrants to purchase approximately 1,677,609 shares of
Common Stock had been exercised for proceeds of $2,920,122. 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 $2.70 per share or 90% 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 $1.80 per share, no more than 10% of the Debentures of
any holder may be converted in any 30-day period. The Company will record an
expense for the difference between the conversion price and the market price of
the Company's Common Stock at the time Debentures become eligible for
conversion.
The Company expects that its capital expenditure requirements will be
met 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; 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 stockholders.
INFLATION AND CHANGES IN PRICES
During recent years, the Company believes that there has been some
inflation in oil and gas prices with moderate increases 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 not engaged in any hedging activities.
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.
-21-
<PAGE> 23
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.
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.
-22-
<PAGE> 24
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.
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, which currently owns properties in
Texas and an option to participate in an offshore California exploration
project.
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 CV Operating to operate the
Company's oil and gas properties. The Company on February 25, 1997, organized
CVEI to acquire and operate the N.E. Alden Field properties in Caddo County,
Oklahoma. CVEI commenced operations on March 3, 1997. Aspen was an inactive
subsidiary of the Company formed on May 1, 1996, which was used to accommodate
the merger of Old Aspen into Aspen, a wholly-owned subsidiary of the Company,
which was completed on July 31, 1997. The principal asset of Old Aspen was its
interest in the Means Unit in Andrews County, Texas.
On February 9, 1998, the Company continued into Canada's Yukon
Territory. Under the law of the Yukon Territory, the Company's board of
directors need not be comprised of a majority of Canadian residents as
previously required under Ontario law. Since the Company's principal offices,
management and properties are located in the United States, management believes
it is advantageous to have a majority of the Company's directors be residents
of the United States. The Company may in the future continue from the Yukon
Territory to the State of Wyoming. Management believes there are no
significant differences in corporate law concerning material stockholder rights
between the Province of Ontario, the Yukon Territory and the State of Wyoming.
The Company, at its annual meeting held December 10, 1996, obtained stockholder
approval for the continuance into the Yukon Territory.
MUSTANG SERVICE COMPANIES
In addition to CV Energy, CV Operating, CVEI and Aspen, the Company
recently organized the Mustang Service Companies. The Mustang Service Companies,
CV Operating, CV Energy, CVEI and Aspen are currently wholly-owned Company
subsidiaries. However, the Company has agreed to sell for nominal cost up to
15% of the common stock of the Mustang Service Companies to certain employees
and officers of the Company, including Eugene A. Soltero, Chairman of the Board,
Chief Executive Officer, and James E. Hogue, President and Chief Operating
Officer. The total value of the 15% interest to be received by these individuals
is not expected to be significant at the time of receipt based on the net book
value of the companies.
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
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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.
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 from
July 1, 1997 through February 28, 1998, the exercise of options and warrants to
purchase approximately 1,677,609 shares of Common Stock for proceeds of
$2,920,122. See "Business and Properties -- Recent Developments."
For the fiscal year ended June 30, 1997 and the six-month period ended
December 31, 1997, the Company recorded revenues of $276,230 and $1,157,985,
respectively, and had a net loss of $2,006,878 and a net profit of $54,403,
respectively. As of December 31, 1997, the Company had an accumulated deficit
of $2,714,752 and working capital of $2,619,225. 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 "Selected Historical Consolidated and Combined Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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.
See "Business and Properties."
The following are key elements of the Company's strategy:
o 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.
o MANAGEMENT OF OPERATING COSTS. The Company emphasizes strict
cost controls in all aspects of its business and intends to
operate its properties wherever possible. By operating its
properties, the Company believes it will be able to control
direct operating and drilling costs as well as to manage the
timing of development and exploration activities.
o 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 having Proved Reserves with development
potential and operating control.
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
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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 270,000 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 6,200 acres in the Sears Ranch area of Nolan and Fisher Counties,
Texas (the "Sears Ranch Prospect") for $400,000 cash. 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.
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. 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.
Accordingly, the Company did not attribute any value to reserves in this
prospect in making this acquisition.
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"). As partial
consideration for the purchase, the Company issued warrants to purchase 60,000
shares of Common Stock (the "Mustang Warrants") to M&M. 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. 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.
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
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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 unutilized
proceeds from the sale of the Convertible Debentures (the "Restricted Cash").
At December 31, 1997, the Company had approximately $2.5 million of Restricted
Cash. The Convertible Debentures are 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 $1.80 per share (the "Floor Price"). The
conversion price is the lesser of $2.70 per share or 90% 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 of its Common Stock on AMEX for the 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."
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 $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 $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.
PURCHASE OF 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 is subject to CVEI obtaining financing for the
purchase price and is currently scheduled for May 31, 1998. The completion of
the transaction is further subject to title examinations and other conditions.
If CVEI meets all of the conditions to closing and is willing to waive any
conditions of closing applicable to Phillips which Phillips has not met, and
Phillips fails or refuses to close, CVEI will be entitled
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to liquidated damages in the amount of $1,000,000. Phillips owns a 23.358712%
working interest (18.358712% net revenue interest plus .020836% overriding
royalty interest) in the East Binger Unit.
The Company is currently negotiating with several financial
institutions and private investors for the financing for the East Binger Unit
purchase. Although the Company believes it will be able to obtain the
necessary financing within the required time schedule, there can be no
assurance that the Company will be able to timely obtain the necessary funds or
that such financing will be available on favorable terms to the Company.
Further, there is no assurance that all of the conditions necessary for closing
will be met by either Phillips or CVEI.
Management believes the East Binger Unit acquisition will provide
increased cash flow and allow the Company to economically utilize personnel and
equipment which are already in place for the operation of the Company's
existing Oklahoma and Texas properties. The East Binger Unit is an 80-well
enhanced oil recovery project which the Company's consulting engineers have
estimated contains reserves ranging from 1.0 million barrels oil equivalent
("BOE") of light sweet crude oil, natural gas and natural gas liquids to a
maximum of 2.5 million BOE. The Company estimates the present value of future
net revenues (discounted at 10%) could range from net $4 million to $10
million, depending upon production decline rates, future percentages recovery
rates and oil prices.
The East Binger Unit was the first commercially successful application
of nitrogen injection pressure maintenance for enhanced oil recovery and has
been operating since the early 1980s. With 56 producing wells and 25 injection
wells, a cryogenic air separation plan and 20 million cubic feet per day
compression capacity, the East Binger Unit currently produces approximately
2,000 BOE daily. The Company's interest in the East Binger Unit will be
approximately 23.4% working interest in the 13,000-acre unit and nitrogen
plant. The Company will also obtain all of Phillip's interest in the other
shallower zones in the approximately 3,000 net acres of oil and gas leases
contributed by Phillips to the East Binger Unit.
DESCRIPTION OF PROPERTIES
CHENEYBORO FIELD. The Company owns approximately 6,000 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.
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 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
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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 Means (Queen Sand) Unit is located in Northern
Andrews County, Texas (the "Means Unit") and consists of approximately 2,096
net acres on four separate leases with 16 producing wells and 52 infield proved
undeveloped locations. The Company's consulting engineers estimate proved
undeveloped reserves between 1.5 and 2.8 million Bbls of oil and between 0.5
and 1.0 MMcf of natural gas. The Means Unit was originally part of an
11,500-acre unit owned and operated by a major oil company. Initial production
begin in the 1950's and the waterflood program was initiated in the 1960's.
The waterflood project was abandoned before 50% of the designed water volume
was injected, when concentration was shifted to CO2 flooding of zones below the
Queen Sand formation. Currently there are 11 Queen Sand waterflood units near
the Company's Means Unit. The Company believes the Means Unit has better
reservoir properties than the average of the adjoining ten units, but only half
as much oil has been produced as compared with the original oil in place. This
is mostly due to the other units having been more densely and completely
developed. The Company has designed an increased density redevelopment program
consisting of reworking oil wells, drilling new wells and installing
high-volume water injection and oil producing equipment.
An engineering report, as of June 30, 1997, prepared by Ryder Scott
Company for the Company estimates that the Means Unit contains net proved
undeveloped reserves of 1.5 million Bbls of oil and 0.5 Bcf of gas. The
Company estimates that it will require a capital investment of approximately
$7.5 million to develop this property. 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 proved developed and
undeveloped net reserves of approximately 515,515 Bbl of oil and 5.2 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 1997, the Company 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 1998, 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. The Company's total investment in this property, including
acquisition costs and workover expenditures, has been approximately $800,000 as
of February 28, 1998.
OPTION TO ACQUIRE INTEREST IN SWORD UNIT. The Company has entered
into option agreements to acquire a 51.8% working interest in the Sword Unit,
Offshore Santa Barbara County, California (the "Sword Unit") for $8 million.
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 exercises the option.
The Sword Unit option expires on January 31, 1999. Although the Company
believes that it will be able to form a syndicate to fund the exercise of the
option prior to its expiration. There can be no assurance that the Company
will be able to successfully form such a syndicate or obtain the necessary
funds to exercise the option.
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The Sword Unit is located 10 miles off Point Conception, Santa Barbara
County, California, 800 to 1,800 feet underwater, at the juncture of the Santa
Barbara Channel and the offshore Santa Maria Basin. Two successful wells have
been drilled and tested on the unit. Both of these wells tested Monterey zones
at high rates. A 3-D seismic survey has been shot, delineating a large
anticline. The Upper Miocene fractured Monterey pay is 800 feet thick at the
crest and 1,200 feet thick on the flanks and is encountered at approximately
7,000 feet. Proved recoverable reserves in the Sword Unit are estimated to be
314 million Bbls of oil and 397 million Mcf of gas.
The regulatory framework within which the Company will develop the
Sword Field consists of: (i) Federal Offshore Lease and Administration,
including approvals of the development plan of the property; (ii) a Federally-
mandated environmental impact statement; (iii) State of California regulations
with respect of transport of oil and gas through state waters and the air
emissions from offshore and onshore facilities; and (iv) Santa Barbara County
regulations with respect to the construction and operation of onshore
facilities. Permits and approvals from all three government levels will be
required to complete the development of the field and bring it into operation.
The first three miles off the shore of the coastline are administered
by respective state agencies and are known as "State Waters". Within State
Waters offshore Santa Barbara County, the State of California regulates oil and
gas leases, drilling, and the installation of permanent and temporary
production facilities. Because the Sword Unit is located outside and beyond
the State Waters in the Outer Continental Shelf ("OCS"), leasing and drilling
at the Sword Unit are not regulated by the State of California. However, to
the extent that the production from the Sword Unit would be transported to a
shore side facility from the field through the State Waters, the Company's
pipeline (or other transportation facilities) would be subject to California
State regulations. Construction and operation of the pipeline would require
permits from the State. State regulations also govern the construction and
operations of shore side facilities such as terminals, pumping stations, water
separation facilities, and water disposal, all of which require a comprehensive
permitting process.
Santa Barbara County, through its Board of Supervisors, also has a
significant impact on the method and timing of any offshore field development
through its concurrent regulation of the construction and operation of shore
side facilities.
Due to political opposition, the Federal Government has not issued new
OCS leases in the Santa Barbara area within the past ten years and is unlikely
to do so in the near future. This means that any infrastructure for common use
by the different operators of existing leases in the Santa Barbara OCS will
have to rely solely on what is already in place and what would be built to
accommodate a limited number of now known, but undeveloped, properties and
cannot take into account the future growth of infrastructure from new
discoveries and a high level of exploratory activity. For these reasons, the
development of any existing property in the OCS, including the Sword Unit,
would be much more expensive and take longer than similar projects located in a
mature and still growing offshore province such as the U.S. Gulf Coast.
Thus, the value of the proved undeveloped reserves, if acquired by the
Company upon exercise of the option, will be significantly lower than if the
same reserves were located onshore in a less environmentally sensitive area of
the United States that could be developed sooner. Although oil sale prices are
not currently regulated, they have been in the past and could be regulated in
the future. The rate of production could be affected by Minerals Management
Service regulations, which could also lower the value of the property.
The Company currently does not have the capital, personnel or
technical resources to exploit the Sword Unit leases successfully, assuming
exercise of the option. In order to effectively develop the Sword Unit leases
at the 51.8% working interest level, the Company would require substantial
capital. The Company's current strategy for development of the Sword Unit is
to retain only that portion of the 51.8% it believes it will be able to
financially and technically support over the next five years (currently
estimated at 11.8%) and seek joint venture partners to participate in and
operate the remainder. Due to regulation and environmental compliance, many
large independent oil and gas producers have avoided the Sword Unit area, and
the task of locating appropriate joint venture partners will be difficult.
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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 $6 million for exploitation and development
activities for 1998. The Company has identified over 100 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 $3 million in 1998 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. 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.
MARKETING OF PRODUCTION
The Company markets all of its gas production as well as gas it
purchases from third parties to gas marketing firms or end users either on the
spot market on a month-to-month basis at prevailing spot market prices or at
negotiated prices under long-term contracts. Marketing gas for its own account
exposes the Company to the attendant commodities risk. During 1997, 54% of the
Company's gas sales were to HS Energy Services, an Oklahoma gas marketing firm.
Another 28% and 11% of sales were to two gas pipeline companies, Transok, Inc.
and Wasatch Energy, respectively. During 1998, the Company anticipates that
the majority of its gas sales will go to HS Energy Services and Transok, Inc.
The Company does not believe that the loss of any one of its gas purchasers
will have any material adverse effect on the Company or its business.
The Company normally sells its own oil under month-to-month contracts
with a variety of purchasers. During 1997, the Company made 57% of its oil
sales to National Cooperative Refinery Association. Another 15% of its oil
sales were to Phillips 66 Company. During 1998, the Company anticipates the
majority of its oil sales
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<PAGE> 32
will be to these two purchasers. While the Company has historically been able
to sell oil above posted prices, it is also exposed to the commodities risk
inherent in short-term contracts. The Company does not believe that the loss
of any one of its oil purchasers will have any material adverse effect on the
Company or its business.
The market for oil and gas produced by the Company depends on factors
beyond its control, including the extent of domestic production and imports of
oil and gas, the proximity and capacity of gas pipelines and other
transportation facilities, weather, demand for oil and gas, the marketing of
competitive fuels and the effects of state and federal regulation. The oil and
gas industry also competes with other industries in supplying the energy and
fuel requirements of industrial, commercial and individual consumers.
OIL AND GAS RESERVES
GENERAL. All information set forth in this Prospectus regarding
estimated proved reserves, related estimated future net cash flows and SEC
PV-10 of the Company's oil and gas interests is taken from reports prepared (i)
by K&A Energy Consultants, Inc. with respect to the Company's interests in the
Cheneyboro Field and N.E. Alden Field and (ii) by Ryder Scott Company with
respect to the Means Unit at June 30, 1997. 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. There are minor additional interests related to the Old Aspen
acquisition located in Louisiana, Oklahoma and Texas which have not been
included in the following tables. The following tables also do not include
1,500 net acres of additional leasehold interests in the Cheneyboro Field nor
do such tables reflect any reserve information for the Zama Lake Property,
Sears Ranch Prospect or East Binger Unit.
In accordance with Commission guidelines, the estimates of future net
cash flows from Proved Reserves and their SEC 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 SEC PV-10 were estimated based on $19.50
per Bbl of oil and $1.95 to $2.25 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 SEC 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.
Proved Reserves are estimates of oil and gas to be recovered in the
future. Reservoir engineering is a subjective process of estimating the sizes
of underground accumulations of oil and gas that cannot be measured in an exact
way. The accuracy of any reserve estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Reserve reports of other engineers might differ from the reports contained
herein. Results of drilling, testing, and production subsequent to the date of
the estimate may justify revision of such estimate. Future prices received for
the sale of oil and gas may be different from those used in preparing these
reports. The amounts and timing of future operating and development costs may
also differ from those used. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.
See "Risk Factors -- Uncertainty of Estimates of Reserves and Future Net Cash
Flows."
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, 1997.
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).
-31-
<PAGE> 33
COMPANY RESERVES. The following tables set forth the estimated Proved
Reserves of oil and gas of the Company and the PV-10 thereof as of June 30, 1997
for properties owned by the Company as of July 31, 1997.
ESTIMATED PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------
<S> <C>
Net Gas Reserves (Mcf):
Proved Developed Producing . . . . . . . . . . . . . . . . . . . . . . . . . . . 652,388
Proved Developed Non-Producing Reserves . . . . . . . . . . . . . . . . . . . . 1,134,420
Proved Undeveloped Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 16,744,015
------------------
Total Proved Gas Reserves . . . . . . . . . . . . . . . . . . . . . . . . . 18,530,823
==================
Net Oil Reserves (Bbl):
Proved Developed Producing Reserves . . . . . . . . . . . . . . . . . . . . . . 128,545
Proved Developed Non-Producing Reserves . . . . . . . . . . . . . . . . . . . . 293,968
Proved Undeveloped Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 5,923,682
------------------
Total Proved Oil Reserves . . . . . . . . . . . . . . . . . . . . . . . . 6,346,195
==================
Total Proved Reserves (BOE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,434,666
==================
</TABLE>
ESTIMATED PV-10 OF PROVED RESERVES
<TABLE>
<CAPTION>
AT JUNE 30, 1997(1)
----------------------
<S> <C>
Estimated PV-10(2):
Proved Developed Producing . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,653,427
Proved Developed Non-Producing Reserves . . . . . . . . . . . . . . . . . . . 3,509,009
Proved Undeveloped Reserves . . . . . . . . . . . . . . . . . . . . . . . . . 67,737,953
----------------------
Total SEC PV-10 of Proved Reserves . . . . . . . . . . . . . . . . . . . $ 72,900,389
======================
</TABLE>
- ----------------
(1) Prices based on $19.50 per Bbl of oil and $1.95 to $2.25 per Mcf of gas.
(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.
-32-
<PAGE> 34
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.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
-------------------- -------------------
1996 1997 1996 1997
----------- ------ --------- -------
<S> <C> <C> <C>
Oil and Gas Production:
Oil (Bbls) . . . . . . . . . . . . . . . -- 8,891 1,094 14,491
Gas (Mcf) . . . . . . . . . . . . . . . -- 43,301 8,291 85,551
Oil Equivalents (BOE) . . . . . . . . . -- 16,198 2,476 28,751
Average Sales Price(1):
Oil (per Bbl) . . . . . . . . . . . . . -- $19.22 $20.00 $18.23
Gas (per Mcf) . . . . . . . . . . . . . -- $ 2.21 $ 2.35 $ 2.00
Oil Equivalents (per BOE) . . . . . . . -- $16.81 $16.71 $15.14
Oil and gas production expenses (per BOE)(2). -- $15.57 $15.50 $ 7.86
</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 six-month period ended December 31, 1997, the
Company participated for a 12.5% working interest in a single exploratory well
which was a dry hole.
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 December 31, 1997.
<TABLE>
<CAPTION>
Productive Wells
-------------------------------------------------
Gross(1) Net(2)
------------------------ -----------------------
Location Oil Gas Total Oil Gas Total
- ------------------------ ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Texas . . . . . . . . . 34 1 35 34 1 35
Oklahoma . . . . . . . 10 4 14 9 3 12
--- --- --- ---- --- ---
Total . . . . . . 44 5 49 43 4 47
=== === === === === ===
</TABLE>
- -------------------
(1) The number of gross wells is the total number of wells in which a working
interest is owned.
(2) The number of net wells is the sum of fractional working interests owned in
gross wells expressed as whole numbers and fractions thereof.
-33-
<PAGE> 35
OIL AND GAS ACREAGE
The following table summarizes the Company's developed and undeveloped
leasehold acreage at December 31, 1997.
<TABLE>
<CAPTION>
Developed Undeveloped
---------------------- --------------------
Location Gross(1) Net(2) Gross(1) Net(2)
- ------------------------------ ---------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Texas . . . . . . . . . . . . 3,629 3,629 12,656 12,656
Oklahoma . . . . . . . . . . 1,350 1,181 -0- -0-
----- ----- ------ ------
Total . . . . . . . . . 4,979 4,810 12,656 12,656
===== ===== ====== ======
</TABLE>
- -------------
(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
-34-
<PAGE> 36
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 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
-35-
<PAGE> 37
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.
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 March 4, 1998, the Company had 31 full-time employees of which six
were management, six were administrative and 19 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 4,500 square feet of office space
at 8350 N. Central Expressway, Suite M2030, Dallas, Texas on a month-to-month
basis at a rent of $4,600 per month. 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.
-36-
<PAGE> 38
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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eugene A. Soltero 54 Director, Chairman of the Board and Chief Executive Officer
James E. Hogue 60 Director, President and Chief Operating Officer
Leon A. Romero 49 Director, Senior Vice President and Chief Financial Officer
Patricia A. Dickerson 52 Vice President, Corporate Affairs/Investor Relations and
Secretary
Wayne T. Egan(1) 35 Director
Richard J. Lachcik(2) 40 Director
</TABLE>
-----------------
(1) Member, Audit Committee
(2) Member, Compensation Committee
EUGENE A. SOLTERO has served as a director of the Company since
February 1995. He was President from February 1995 to July 1996 and has been
Chairman and Chief Executive Officer since January 1996. From March 1994 to
February 1995, he 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 filed a bankruptcy proceeding
under Chapter 11 of the Federal Bankruptcy Act. Mr. Soltero has served as
Chief Operating Officer and/or Chief Executive Officer for private and public
oil and gas companies for more than 20 years, including directing the formation
and growth of start-up companies. Early in his career, he was trained at
Sinclair Oil Corporation in exploration and production management, served as
Manager of Planning for Texas International Petroleum Corporation, and
Petroleum Economist for DeGolyer and MacNaughton, petroleum exploration and
production consultants. Mr. Soltero is a member of the Society of Petroleum
Engineers, a member and former director of the Independent Petroleum
Association of America and the Texas Independent Producers and Royalty Owners.
He has also served, on two separate terms, as a director of the Independent
Petroleum Refiners Association of America. He is a master's graduate of the
Massachusetts Institute of Technology in business (where he was awarded the
Sinclair Fellowship in Petroleum Economics) with an undergraduate engineering
degree from The Cooper Union. Mr. Soltero is a registered professional
engineer in the State of Texas.
JAMES E. HOGUE became President, Chief Operating Officer and a
director of the Company in July 1996. Since 1988, Mr. Hogue has served as a
director, President and major stockholder of Third Coast Capital, Inc., a
venture capital company. 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 stockholder 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 became a director, Senior Vice President and Chief
Financial Officer of the Company in 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 the Director of the Independent Petroleum Association of New Mexico,
and a member of both the New Mexico Oil and Gas Association and the Independent
Petroleum Association of America. Mr. Romero received his Bachelor of Science
in Accounting from the University of Albuquerque. He also holds a Master's
degree in Entrepreneurial Development from the University of California at Los
Angeles.
-37-
<PAGE> 39
PATRICIA A. DICKERSON joined the Company in 1997 as Director of
Investor Relations and serves as Corporate Secretary of the Company and each of
its subsidiaries. She was elected as a Vice President, Corporate
Affairs/Investors Relations in February 1998. She was formerly employed with
Box Energy Corporation in Dallas, a Nasdaq company, for over 20 years. She was
Senior Assistant to the Chairman of the Board of that independent oil and gas
exploration company and from 1985 to 1997 she was Director of Investor
Relations. 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 has served as a director of the Company since June 1996.
He is a partner in the Toronto, Canada law firm of Weir and Foulds. Mr. Egan
has practiced law in Canada since 1988. He holds an L.L.B. degree 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 the
Company's Canadian counsel.
RICHARD J. LACHCIK has served as a director of the Company since
November 1996. He is a partner in the Toronto, Canada law firm of Weir and
Foulds. Mr. Lachcik is a graduate of Queen's University with an L.L.B. degree,
holds a B.A. from the University of Toronto, and is a member of the Ontario
Bar. Weir & Foulds serves as the Company's Canadian counsel. Mr. Lachcik has
practiced law in Toronto, Canada since 1983.
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, 1997. 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, 1997. Mr. Lachcik is the sole member of
the Compensation Committee.
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, 1997, the Board of Directors
held one meeting and acted by unanimous consent on 10 occasions.
FAMILY RELATIONSHIPS
There are no family relationships among the Company's directors or
executive officers.
-38-
<PAGE> 40
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or to be paid to
the Company's executive officers, directly or indirectly, for services rendered
in all capacities for the referenced periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------ -------------
OTHER ANNUAL RESTRICTED
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION STOCK AWARDS
------------------------------------- ---- ------ ------------ ------------
<S> <C> <C> <C> <C>
Eugene A. Soltero, Chairman of the 1997 $120,000 $0 $0
Board and Chief Executive Officer 1996 $115,000 $0
1995 $25,000 $0
James E. Hogue, President and 1997 $120,000 $0 $0
Chief Operating Officer 1996 $115,000 $0
1995 $25,000 $0
Peter Lucas, Senior Vice President(2) 1997 $110,000 $0 $0
1996 $101,500 $0
1995 $0 $0
</TABLE>
- ----------------------
(1) Certain of the Company'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) Mr. Lucas resigned as an officer of the Company in October 1997.
EMPLOYMENT AGREEMENTS
The Company does not have employment contracts with any of its
executive officers.
OPTIONS
The following table sets forth information regarding options granted
to executive officers and directors of the Company during fiscal 1997:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF
SECURITIES(1) PERCENT OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE OR EXPIRATION
NAME GRANTED EMPLOYEES IN FISCAL YEAR BASE PRICE DATE
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eugene A. Soltero 83,333 10.7% $0.72 December 31, 1999
James E. Hogue 83,333 10.7% $0.72 December 31, 1999
Wayne Egan 50,000 6.4% $1.83 July 1, 2000
Richard J. Lachcik 50,000 6.4% $1.83 July 1, 2000
Patricia A. Dickerson 25,000 3.2% $1.83 July 1, 2000
Michael Kamis(2) 200,000 25.6% $1.83 July 1, 2000
</TABLE>
- ---------------
(1) Shares of Common Stock.
(2) Mr. Kamis is a former director of the Company.
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<PAGE> 41
The following table sets forth information regarding the value of
unexercised options held by executive officers and directors of the Company
as of June 30, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING-UNEXERCISED IN-THE-MONEY-OPTIONS AT
OPTIONS AT FY-END FY-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Eugene A. Soltero 283,333/0 $0/$0
James E. Hogue 283,333/0 $0/$0
Wayne T. Egan 50,000/0 $0/$0
Richard J. Lachcik 50,000/0 $0/$0
Patricia A. Dickerson 25,000/0 $0/$0
Peter Lucas 200,000/0 $0/$0
Michael Kamis 200,000/0 $0/$0
</TABLE>
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 February 28, 1998, approximately 2.5 million shares of
Common Stock were subject to the Voting Agreement. See "Principal
Stockholders."
Liviakis Financial Communications, Inc., ("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 2,000,000 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 are 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 2,240,000 shares are
currently subject to this voting covenant. See "Business and Properties --
Recent Developments; Aspen Acquisition" and "Principal Stockholders."
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.
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<PAGE> 42
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 594,000 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.
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
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<PAGE> 43
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.
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,
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<PAGE> 44
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 $5,832. 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 the year ended 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 and Wayne Egan, directors of the Company, who are 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.
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 $1,087,800 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 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 February 28, 1998, approximately 2,000,000 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."
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<PAGE> 45
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 10,891,184 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.
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<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of March 9, 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.
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING(11)
--------------------------- --------------------------
AMOUNT AND AMOUNT AND
NATURE OF PERCENTAGE NATURE OF PERCENTAGE
BENEFICIAL OF BENEFICIAL OF
NAME OWNERSHIP OWNERSHIP OWNERSHIP OWNERSHIP
- ------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Eugene A. Soltero (1) 4,699,333(5) 26.62 2,726,562 11.65
James E. Hogue (1) 4,924,333(6) 27.89 2,951,562 12.61
Leon A. Romero(1) (2) 977,771 5.73 -0- 0(12)
Wayne T. Egan (3) 29,000(7) * 29,000 *
Richard J. Lachcik (3) -0- 0 -0- 0
Patricia A. Dickerson (4) 50,000(8) * 50,000 *
Liviakis Financial Communications, Inc. 3,041,851(9) 17.20 505,500 2.22
All directors and executive officers
as a group (six persons) 9,702,666(10) 54.82 5,757,124(13) 24.53
</TABLE>
- ------------------
*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 8350 North Central Expressway, Suite M2030, Dallas, Texas 75206. See
"Management."
(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) Messrs. Egan and Lachcik are directors 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 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 3,370,000 shares, which represents 50% of the 6,740,000
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 3,370,000 shares, which represents 50% of the 6,740,000
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 6,740,000 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 22,821,557 outstanding shares of Common Stock which
includes 2,548,309 shares to be issued upon exercise of outstanding
warrants held by certain Selling Stockholders, 2,560,000 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 2.5 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."
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<PAGE> 47
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 17,073,248 shares were issued
and outstanding at March 9, 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 March 9, 1998, there are
reserved for issuance (i) 2,580,440 shares of Common Stock issuable upon
exercise of various outstanding warrants; (ii) 1,360,666 shares of Common Stock
issuable upon exercise of options 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 "-- 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
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<PAGE> 48
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 February 28, 1998,
1,297,354 Class A Warrants have been exercised for total proceeds to the Company
of approximately $2,600,000. At February 28, 1998, 32,131 Class A Warrants were
outstanding.
ARJON WARRANTS. In conjunction with the Arjon amalgamation, 431,755
shares of Common Stock were issuable to former Arjon shareholders for Arjon
warrants ("Arjon 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
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<PAGE> 49
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 $454,500. 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. See "Agreement with Selling Shareholders -- WPM
Financing."
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. 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.
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 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 unutilized
proceeds from the sale of the Convertible Debentures (the "Restricted Cash").
At December 31, 1997, the Company had approximately $2.5 million of Restricted
Cash. 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 conversion 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 $1.80 per share (the "Floor Price"). The
conversion price is the lesser of $2.70 per share or 90% 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
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<PAGE> 50
million shares of its Common Stock on AMEX for the 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 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 "Business and Properties -- Recent Developments; Sale of
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 17,073,248 shares of Common Stock outstanding, which amount does
not include 3,941,106 shares which underlie outstanding options and warrants,
including 2,548,309 shares reserved for issuance upon exercise of outstanding
warrants held by certain Selling Stockholders, or up to 3.2 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 665,485 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, 596,638 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.
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<PAGE> 51
SELLING STOCKHOLDERS
The 10,891,184 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 March 9, 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."
<TABLE>
<CAPTION>
Beneficial Percent of Class
Ownership Ownership ----------------------
Prior to Shares To After Before After
Selling Stockholder(1) Offering Be Sold Offering Offering Offering(2)
------------------------------------------- --------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Convertible Debenture Holders . . . . . . . 3,200,000(3) 3,200,000 -0- 15.78 0.00
Liviakis Financial Communications, Inc. . . 3,041,851(4) 2,536,351 505,500 17.20 2.22
Robert B. Prag . . . . . . . . . . . . . . 275,000(5) 275,000 -0- 1.59 0.00
M&M Directional Drilling Consultants . . . 60,000(6) 60,000 -0- * 0.00
Leon A. Romero . . . . . . . . . . . . . . 977,771(7)(8) 977,771 -0- 5.73 0.00
George W. Peel . . . . . . . . . . . . . . 956,134(8) 956,134 -0- 5.60 0.00
Albert Sena . . . . . . . . . . . . . . . . 232,072(8) 232,072 -0- 1.36 0.00
Dorothy Carter . . . . . . . . . . . . . . 75,340(8) 75,340 -0- * 0.00
Steven Sinken . . . . . . . . . . . . . . . 26,000(9) 26,000 -0- * 0.00
Rick Blanyer . . . . . . . . . . . . . . . 60,000(10) 60,000 -0- * 0.00
Fred B. Dulock . . . . . . . . . . . . . . 83,400(11) 83,400 -0- * 0.00
Bill J. Kemp . . . . . . . . . . . . . . . 60,000(12) 60,000 -0- * 0.00
Jack D. Mabery and Darlene M. Mabery . . . 10,000(13) 10,000 -0- * 0.00
Jim Phillips . . . . . . . . . . . . . . . 230,000(14) 230,000 -0- 1.34 0.00
Dan Malone . . . . . . . . . . . . . . . . 20,000(15) 20,000 -0- * 0.00
WPM Group . . . . . . . . . . . . . . . . . 32,500(16) 32,500 -0- * 0.00
John Malone, P.C. . . . . . . . . . . . . . 116,900(17) 116,900 -0- * 0.00
Hibernia Securities Trust . . . . . . . . . 733,334(18) 733,334 -0- 4.18 0.00
Hibernia Management Company . . . . . . . . 212,086(19) 212,086 -0- 1.23 0.00
Euro Coach America Corporation . . . . . . 431,148(20) 296,148 135,000 2.50 *
NPCS, Inc. . . . . . . . . . . . . . . . . 431,148(21) 296,148 135,000 2.50 *
Bill Watson . . . . . . . . . . . . . . . . 5,000(22) 5,000 -0- * 0.00
Paul Page, Jr. . . . . . . . . . . . . . . 5,000(23) 5,000 -0- * 0.00
Newport Capital Consultants . . . . . . . . 225,000(24) 225,000 -0- 1.30 0.00
National Capital Merchant Group, LLC . . . 25,000(25) 25,000 -0- * 0.00
Susan Silva . . . . . . . . . . . . . . . . 10,000(26) 10,000 -0- * 0.00
John Malone . . . . . . . . . . . . . . . . 132,000(27) 132,000 -0- * 0.00
----------
Total Shares Offered . . . . . . . 10,891,184
==========
</TABLE>
- --------------
* Less than 1%.
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<PAGE> 52
(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 22,821,557 outstanding shares of the Company's Common Stock which
includes (i) up to 3.2 million shares to be issued to the Convertible
Debenture Holders upon conversion of the Convertible Debentures and
subsequent exercise of the Debenture Warrants and (ii) 2,548,309 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, and the 142,900 Malone 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 375,000 LFC
Warrants, the 163,351 Liviakis Warrants and 75,000 LFC Mustang Warrants.
See "Certain Relationships and Related Transactions," "Principal
Stockholders," "Description of Securities -- Warrants."
(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) Includes 60,000 shares to be issued to M&M upon exercise of 60,000
Mustang Warrants. See "Description of Securities -- Warrants; Mustang
Warrants."
(7) Mr. Romero is an executive officer and a director of the Company. See
"Management."
(8) Includes shares which are subject to a lock-up agreement. See "Agreement
with Selling Stockholders -- Aspen Acquisition."
(9) Includes 26,000 shares to be issued to Mr. Sinken upon exercise of 26,000
Malone Warrants. See "Description of Securities -- Warrants; Malone
Warrants."
(10) 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."
(11) 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."
(12) Includes 30,000 shares to be issued to Mr. Kemp upon exercise of 30,000
WPM Warrants. See "Description of Securities -- Warrants" and
"Agreements with Selling Stockholders -- WPM Financing."
(13) 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."
(14) Includes 125,000 shares to be issued to Mr. Phillips upon exercise of
125,000 WPM Warrants. See "Description of Securities -- Warrants" and
"Agreements with Selling Stockholders -- WPM Financing."
(15) 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."
(16) 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."
(17) 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."
(18) Includes 466,667 shares to be issued to Hibernia Securities Trust upon
exercise of 200,000 Hibernia Warrants and 266,667 HST Warrants. See
"Description of Securities -- Warrants; Hibernia Warrants" "-- HST
Warrants" and "Agreements with Selling Stockholders -- Hibernia
Securities Trust Agreement."
(19) 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."
(20) 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" and "Agreements with Selling
Stockholders -- Cheneyboro Note Conversion."
(21) 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."
(22) Includes 5,000 shares to be issued to Bill Watson upon exercise of 5,000
Newport Warrants. See "Description of Securities -- Warrants; Newport
Warrants."
(23) 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."
(24) 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."
(25) 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."
(26) A former employee of the Company.
(27) Includes 66,000 shares to be issued to John Malone upon exercise of 66,000
WPM Warrants. See "Description of Securities- Warrants; WPM Warrants."
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<PAGE> 53
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 be 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 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.
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 discounts 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.
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<PAGE> 54
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 270,000 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
by the Company, two wells in Latimer County, Oklahoma, one well in Harrison
County, Texas and several shallow wells in Gregg County, Texas.
Under the terms of the Aspen Agreement, the Aspen Shareholders agreed not
to sell or otherwise transfer the Aspen Shares except in compliance with the
Aspen Agreement. This restriction terminates (i) as to 60,000 Aspen Shares
each month beginning on September 1, 1997 and continuing the first day of each
month thereafter through July 1, 1998, and (ii) as to any remaining shares on
August 1, 1998. As of March 9, 1998, 1,821,317 Aspen Shares remain subject to
this restriction.
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, P.C., and R.J. Blanyer. WPM
Group, an affiliate of John Malone, 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.
At February 28, 1998, $125,000 of the WPM Notes were outstanding.
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
("Hibernia"). 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
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<PAGE> 55
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 300,000 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."
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:
<TABLE>
<CAPTION>
Amount of Number of Shares
Name of Holder Convertible Debentures Offered Hereby
------------------------------------------- ---------------------- ----------------
<S> <C> <C>
Westover Investments L.P. . . . . . . . . . $1,000,000 740,740
Montrose Investments L.P. . . . . . . . . . 1,500,000 1,111,110
Lakeshore International . . . . . . . . . . 1,000,000 740,740
JMG Capital Partners, L.P. . . . . . . . . 250,000 185,185
Triton Capital Investments, Ltd. . . . . . 250,000 185,185
Lionhart Global Appreciation Fund, Ltd. . . 136,000 100,740
Global Perspective International, Ltd. . . 56,000 41,483
Global Emerging Markets, Ltd. . . . . . . . 28,000 20,742
Palisades Holdings, Inc. . . . . . . . . . 100,000 74,075
---------- ------------
Total . . . . . . . . . . . . . . . . $4,320,000 3,200,000(1)
========== ============
</TABLE>
- ---------------
(1) Includes up to 2,560,000 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 1.6
million shares of the Company's Common Stock and a minimum of 400,000 warrants
("Debenture Warrants") to purchase 400,000 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 3.2
million 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 3.2 million 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
-54-
<PAGE> 56
Warrants. See "Business and Properties -- Recent Developments; Sale of
Convertible Debentures" and "Description of Securities -- Convertible
Debentures."
CERTAIN INCOME TAX CONSIDERATIONS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR UNITED STATES RESIDENTS
The following is a summary of certain of the Canadian federal income
tax considerations which will generally be applicable to holders of common
stock ("U.S. residents") who are residents of the United States for the
purposes of the Canada-United States Income Tax Convention (1980) ("the
Convention") and are not residents of Canada for the purposes of the Income Tax
Act (Canada) ("the Canadian Tax Act"), who deal at arm's length with 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.
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
-55-
<PAGE> 57
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.
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
-56-
<PAGE> 58
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.
EXPERTS
The financial statements of the Company as of June 30, 1997 and 1996
and for the year then ended and of Aspen Energy Corporation as of December 31,
1996 and for the year then ended have been audited by Hein + Associates LLP,
independent certified public accountants, as stated in their reports which are
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 Ryder Scott Co., independent petroleum
consultants, contained herein estimating the Proved Reserves, future net cash
flows from such Proved Reserves and the SEC PV-10 of such estimated future net
cash flows for the Means Unit as of June 30, 1997 is made in reliance upon the
authority of such firm as an expert with respect to such matters.
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 SEC PV-10 of
such estimated future net cash flows for the Company's Cheneyboro Field and N.E.
Alden Field as of June 30, 1997 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.
-57-
<PAGE> 59
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 8350 N.
Central Expressway, Suite M2030, Dallas, Texas 75206; its telephone number is
(214) 363-1968.
-58-
<PAGE> 60
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.
BBL/D. One barrel of oil or other liquid hydrocarbons per day.
BCF. One billion cubic feet of gas.
BCF/D. One billion cubic feet of gas per day.
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.
MBBL. One thousand barrels of oil or other liquid hydrocarbons.
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.
MCFE/D. Mcfe per day.
MMBBL. One million barrels of oil or other liquid hydrocarbons.
MMBTU. One million Btu.
-59-
<PAGE> 61
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.
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 nonoperating interests.
PRODUCTIVE WELL. A well that is producing oil or gas or that is capable of
production in paying quantities.
NON-PRODUCING RESERVES. Proved Developed Reserves that consist of (i) proved
reserves from wells which have been completed and tested but are not producing
due to lack of market or minor completion problems which are expected to be
corrected and (ii) proved reserves currently behind the pipe in existing wells
and which are expected to be productive due to both the well log
characteristics and analogous production in the immediate vicinity of the
wells.
PRODUCING RESERVES. Proved Developed Reserves that can be expected to be
recovered from currently producing zones under the continuation of present
operating methods.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of oil, 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.
PROVED UNDEVELOPED RESERVES. Proved 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.
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.
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.
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.
SEC 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, 1997,
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
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<PAGE> 62
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, 1997, or as otherwise
indicated.
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.
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.
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<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COTTON VALLEY RESOURCES CORPORATION
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets - June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations - Years ended June 30, 1997 and 1996,
period from February 15, 1995 to June 30, 1995 and period from February 15 , 1995
to June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Changes in Stockholders' Equity - For the period from
February 15, 1995 to June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows - Years ended June 30, 1997 and 1996,
period from February 15, 1995 to June 30, 1995 and period from February 15 , 1995
to June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Condensed Consolidated Balance Sheet (Unaudited) - December 31, 1997 and 1996 . . . . . . . . . . . . . . F-20
Condensed Consolidated Statements of Operations (Unaudited) - Six months ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
Condensed Consolidated Statements of Cash Flows (Unaudited) - Six months ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
COTTON VALLEY RESOURCES CORPORATION AND ASPEN ENERGY CORPORATION
Unaudited Pro Forma Combined Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . F-26
Notes to Unaudited Pro Forma Combined Statement of Operations . . . . . . . . . . . . . . . . . . . . . . F-28
ASPEN ENERGY CORPORATION
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-29
Balance Sheets - June 30, 1997 (unaudited) and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . F-30
Statements of Operations and Retained Earnings - Six months ended June 30, 1997
and 1996 (unaudited) and year ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . F-31
Statements of Cash Flows - Six months ended June 30, 1997 and 1996 (unaudited) and
year ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-33
</TABLE>
<PAGE> 64
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Cotton Valley Resources Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Cotton Valley
Resources Corporation and subsidiaries (a development stage company) as of June
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended June 30, 1997 and 1996,
and the period from February 15, 1995 (date of incorporation) to June 30, 1995
and the period from February 15, 1995 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1997 and 1996, and the results of its operations and its cash flows
for the years ended June 30, 1997 and 1996, 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
F-1
<PAGE> 65
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED BALANCE SHEETS
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
ASSETS
AS OF JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 642,612 $ 803,070
Accrued oil and gas sales 85,602 --
Prepaid expenses 25,196 --
------------ ------------
Total current assets 753,410 803,070
PROVED OIL AND GAS PROPERTIES (full cost method)
net of accumulated depletion of $27,000 and $0 11,821,346 11,140,724
OFFICE FURNITURE AND EQUIPMENT, net of
accumulated depreciation of $14,813 and $1,684 40,649 35,536
------------ ------------
Total assets $ 12,615,405 $ 11,979,330
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 200,000 $ --
Note payable, net of discount of $124,000 455,000 --
Accrued payroll taxes 197,006 --
Accounts payable 384,433 516,689
Accrued expenses 31,598 --
Other liability 80,000 --
------------ ------------
Total current liabilities 1,348,037 516,689
LONG-TERM DEBT -- 586,049
ADVANCES FROM RELATED PARTIES 139,710 171,709
DEFERRED INCOME TAXES 669,000 1,588,000
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized-unlimited, issued - none -- --
Common stock, no par value, authorized-unlimited:
issued - 12,590,473 and 9,191,596 shares, respectively 12,707,063 9,879,160
subscribed - 177,000 shares 197,750 --
Warrants 323,000 --
Deficit accumulated in development stage (2,769,155) (762,277)
------------ ------------
Total stockholders' equity 10,458,658 9,116,883
------------ ------------
Total liabilities and stockholders' equity $ 12,615,405 $ 11,979,330
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-2
<PAGE> 66
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 30, FEBRUARY 15, 1995 FEBRUARY 15,1995
------------------------------ TO TO
1997 1996 JUNE 30, 1995 JUNE 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas sales $ 272,243 $ -- $ -- $ 272,243
Interest income 3,987 5,386 -- 9,373
------------ ------------ ------------ ------------
Total revenues 276,230 5,386 -- 281,616
EXPENSES:
Oil and gas production costs 252,272 -- -- 252,272
Depletion 27,000 -- -- 27,000
General and administrative 2,825,678 965,776 74,917 3,866,371
Interest 97,158 138,970 -- 236,128
------------ ------------ ------------ ------------
Total expenses 3,202,108 1,104,746 74,917 4,381,771
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,925,878) (1,099,360) (74,917) (4,100,155)
INCOME TAX BENEFIT 919,000 387,000 25,000 1,331,000
------------ ------------ ------------ ------------
NET LOSS $ (2,006,878) $ (712,360) $ (49,917) $ (2,769,155)
============ ============ ============ ============
NET LOSS PER SHARE $ (.20) $ (.06) $ --
============ ============ ============
WEIGHTED AVERAGE SHARES 9,901,000 11,403,000 10,655,000
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-3
<PAGE> 67
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, 1997
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK SUBSCRIBED SPECIAL SHARES
------------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Issued upon incorporation to officers
($.003 per share) 560,001 $ 1,401 -- -- 2,100,000 $ 8
Issued March 10, 1995 for the potential
acquisition of subsequently abandoned
oil and gas properties (621,600 shares
issued and 310,800 shares canceled
$.003 per share) 310,800 777 -- -- -- --
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 -- -- 2,100,000 8
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 -- -- (2,100,000) (8)
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 -- -- -- --
<CAPTION>
DEFICIT
ACCUMULATED
IN DEVELOPMENT
WARRANTS STAGE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Issued upon incorporation to officers
($.003 per share) -- $ -- $ 1,409
Issued March 10, 1995 for the potential
acquisition of subsequently abandoned
oil and gas properties (621,600 shares
issued and 310,800 shares canceled
$.003 per share) -- -- 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) (712,360)
----------- ----------- -----------
BALANCES, June 30, 1996 -- (762,277) 9,116,883
</TABLE>
Continued
F-4
<PAGE> 68
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY, continued
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1997
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK SUBSCRIBED SPECIAL SHARES
-------------------- -------------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- -- --
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 -- -- -- --
<CAPTION>
DEFICIT
ACCUMULATED
IN DEVELOPMENT
WARRANTS STAGE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
Continued
F-5
<PAGE> 69
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY, continued
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1997
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK SUBSCRIBED SPECIAL SHARES
-------------------------- -------------------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 -- $ --
============ ============ ============ ============ ====== ======
DEFICIT
ACCUMULATED
IN DEVELOPMENT
WARRANTS STAGE TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
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 -- 323,000
Net loss -- (2,006,878) (2,006,878)
------------ ------------ ------------
BALANCES, June 30, 1997 $ 323,000 (2,769,155) $ 10,458,658
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-6
<PAGE> 70
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U. S. Dollars)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 30, FEBRUARY 15, 1995 FEBRUARY 15, 1995
------------------------- TO TO
1997 1996 JUNE 30, 1995 JUNE 30, 1997
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,006,878) $ (712,360) $ (49,917) $(2,769,155)
Adjustments to reconcile net loss to net cash used by
operating activities:
Deferred income tax benefit (919,000) (387,000) (25,000) (1,331,000)
Amortization of debt discount -- 88,000 -- 88,000
Depletion and depreciation 40,128 1,683 -- 41,811
Common stock and warrants issued for services 1,391,632 446,950 2,181 1,840,763
Change in accrued oil and gas sales and prepaid expenses (110,797) -- -- (110,797)
Change in accrued and other liabilities 308,604 -- -- 308,604
Change in accounts payable 97,744 286,689 -- 384,433
Other 2,189 5,843 -- 8,032
----------- ----------- ----------- -----------
Net cash used by operating activities (1,196,378) (270,195) (72,736) (1,539,309)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from (repayments of) related parties (32,000) 107,974 63,736 139,710
Sales and subscription of common stock and exercise of
warrants 1,444,783 2,089,872 10,000 3,544,655
Issuance of convertible debentures -- 426,474 -- 426,474
Issuance of note payable subsequently converted into
convertible debentures -- 146,300 -- 146,300
Payment of liability related to oil and gas property -- (500,000) -- (500,000)
Costs related to sale of stock and debentures -- (409,376) -- (409,376)
Issuance of note payable 579,000 250,000 -- 829,000
Repayment of note payable -- (250,000) -- (250,000)
----------- ----------- ----------- -----------
Net cash provided by financing activities 1,991,783 1,861,244 73,736 3,926,763
</TABLE>
Continued
F-7
<PAGE> 71
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 30, FEBRUARY 15, 1995 FEBRUARY 15, 1995
------------------------- TO TO
1997 1996 JUNE 30, 1995 JUNE 30, 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (937,621) (751,759) -- (1,689,380)
Acquisition of office equipment (18,242) (37,220) -- (55,462)
----------- ----------- ----------- -----------
Net cash used by investing activities (955,863) (788,979) -- (1,744,842)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (160,458) 802,070 1,000 642,612
CASH - beginning of period 803,070 1,000 -- --
----------- ----------- ----------- -----------
CASH - end of year period $ 642,612 $ 803,070 $ 1,000 $ 642,612
=========== =========== =========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 38,059 $ 37,010 $ -- $ 75,069
Conversion of debt and other liabilities to common stock 388,238 426,474 -- 814,712
Liabilities incurred in acquisition of oil and gas properties -- 586,049 500,000 1,086,049
Retirement of debenture upon merger with Arjon -- 146,300 -- 146,300
Oil and gas property option acquired with payable -- -- 230,000 230,000
Oil and gas properties acquired with common stock -- -- 7,072,914 7,072,914
Issuance of common stock for stock offering costs -- 506,409 -- 506,409
Transfer of account payable and related property option 230,000 -- -- 230,000
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-8
<PAGE> 72
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
1. NATURE OF OPERATIONS
The Company was incorporated under the laws of Ontario as Cotton Valley
Energy Limited (CVEL) on February 15, 1995. It acquired all of the shares
of Cotton Valley Energy Corporation (CVEC), a Nevada corporation, on June
30, 1995 in a one-for-one share and warrant exchange. CVEC was also
incorporated in February 1995. CVEL had no substantive activity, so the
acquisition of CVEC was accounted for as a recapitalization of CVEL with
the net assets of CVEC. These consolidated financial statements have been
prepared as if the Company had acquired CVEC at the Company's inception.
The Company also owns 100% of the outstanding shares of Mustang Oil Field
Equipment Co., a Nevada corporation that was formed to conduct used oil
field equipment refurbishing and trading activities, and Cotton Valley
Operating Company, a Texas corporation formed to operate oil and gas wells.
Neither of the subsidiaries had commenced operations as of June 30, 1997.
In addition, the Company owns 100% of Cotton Valley Energy, Inc., which was
formed in 1997 to complete the Alden acquisition (see Note 3).
Intercompany accounts and transactions are eliminated in consolidation.
On June 14, 1996, the Company merged with Arjon Enterprises, Inc. (Arjon),
an Ontario corporation and reporting issuer in Ontario. As a result of
that merger the Company's name was changed to Cotton Valley Resources
Corporation and a new capital structure was established. Transactions in
the accompanying financial statements are reflected as if the resulting
capital structure was in existence since inception. Arjon had no business
activities and its only asset consisted of convertible debentures of the
Company in the principal amount of $146,300. The Company accounted for the
transaction as an issuance of stock for the net monetary assets of Arjon
accompanied by a recapitalization. Former Arjon shareholders received
686,551 common shares (representing approximately 7.5% of the then
outstanding common shares) of the Company.
The Company is in the development stage and has not had material revenues
from operations through June 30, 1997. The Company's planned principal
business activity is to acquire, explore, and develop oil and gas
properties. The Company also intends to refurbish and trade 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 directly
related overhead costs, are capitalized into a "full-cost pool."
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the
unit-of-production method using estimates of proved reserves. Costs
directly associated
F-9
<PAGE> 73
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
with the acquisition and evaluation of unproved properties are excluded
from the amortization base until the related properties are evaluated.
Such unproved properties are assessed periodically and a provision for
impairment is made to the full-cost amortization base when appropriate.
Sales of oil and gas properties are credited to the full-cost pool unless
the sale would have a significant effect on the amortization rate.
Abandonments of properties are accounted for as adjustments to capitalized
costs with no loss recognized.
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 Equipment
Office equipment is recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from three
to five years.
Foreign Currency Translation
The Company's assets and principal activities are in the 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,
F-10
<PAGE> 74
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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.
Cash Flow Statement
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Stock-Based Compensation
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.
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. In
fiscal year 1997, an additional 1,500 net acres were acquired. During the
year ended June 30, 1996, the Company capitalized management fees and
salaries of $195,476 directly related to the acquisition and proposed
development of the property. No such costs were capitalized in the year
ended June 30, 1997.
Movico Field, Mobile County, Alabama
The Company acquired an option to acquire an interest in oil and gas leases
in the Movico Field of Mobile County, Alabama in fiscal year 1995.
Consideration included 77,928 Class A warrants and 623,424 common shares,
which were recorded at $1,137,635, based on the estimated fair value of the
properties. The Company determined fair value by reference to an
independent engineering firm's reserve report. In June 1997, the Company
transferred the option to the company from which the Sword Unit option (see
below) was acquired in exchange for a reduction in that option price.
F-11
<PAGE> 75
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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 agreed to pay 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
the Movico property described above, 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.
Alden Properties, Caddo County, Oklahoma
In fiscal year 1997, the Company acquired an interest in the Alden
properties for $390,000.
Aspen Energy Corporation
Subsequent to June 30, 1997, the Company acquired Aspen Energy Corporation
as described in Note 9.
4. NOTES PAYABLE AND LONG-TERM DEBT
The Company has a $579,000 note payable at June 30, 1997 to a company that
provided investor relations services to the Company and owns stock in the
Company. The note bears interest at 9% and is due October 24, 1997. The
note is collateralized by the Company's rights to certain oil and gas
properties and is convertible into the Company's common stock at $1.67 per
share. 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 has been accounted
for as a discount to the note.
The Company has promissory notes payable totaling $200,000 and $586,049 at
June 30, 1997 and 1996, respectively, for the unpaid purchase price of the
Cheneyboro oil and gas properties (see Note 3). The notes are
collateralized by the properties and are due July 17, 1997. Interest is
payable quarterly at 12%. In June 1997, the creditor converted $349,000 of
the balance to common stock. In connection with the conversion, the
creditor was granted warrants to purchase 302,191 shares as described in
Note 5.
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, 1997. 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.
F-12
<PAGE> 76
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Shortly after incorporation, the Company issued 2,100,000 special shares
for total cash consideration of $2.00 to officers, which were subsequently
exchanged for 1,440,000 common shares of the Company. The special shares
were issued in exchange for preferred stock which had been issued upon
incorporation of CVEC and subsequently canceled.
In 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. None of the Class A warrants had
been exercised as of June 30, 1997.
Effective January 31, 1996, each 2.5 outstanding shares of the Company's
common stock were consolidated into one share and the previously authorized
unlimited number of special shares were canceled. The financial statements
reflect the consolidation of common shares as if it occurred on inception
of the Company.
In December 1995, the Company issued a total of 300,000 shares of common
stock to two officers in exchange for services performed from June 1995
through December 1995. The shares were recorded at $446,950, which
represented the estimated value of the shares.
During the year ended June 30, 1996, the Company granted to senior
employees options that enable the employees to purchase 800,000 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. None of the director and
employee options had been exercised as of June 30, 1997.
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 warrants were exercised in fiscal year 1997.
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.
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.
F-13
<PAGE> 77
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
The stock was recorded at $1,087,800, 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 accompanying financial statements. None
of the warrants had been exercised as of June 30, 1997. The estimated fair
value of the warrants at the time of grant of $199,000 has been recorded as
general and administrative expense.
In fiscal year 1997, additional warrants were granted as set forth below.
None of these warrants had been exercised as of June 30, 1997.
o Warrants to acquire 266,667 shares for $1.68 per share through
January 2002 were granted in connection with a private placement;
o Warrants to acquire 200,000 shares at $.91 per share through December
31, 1999 were granted in connection with another private placement;
o 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;
o Warrants to acquire 161,351 shares as described in Note 4;
o 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, 1997 and 1996:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------------ -----------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 2,735,220 $ 1.73 630,735 $2.00
Granted to:
Employees, officers and directors 496,666 1.46 800,000 1.83
Others 1,430,209 1.20 1,304,485 1.53
Expired -- --
Exercised (413,981) .70 --
----------- -------------
Outstanding, end of year 4,248,114 1.83 2,735,220 1.73
=========== =============
</TABLE>
All outstanding warrants and options were exercisable at June 30, 1997. If
not previously exercised, warrants and options outstanding at June 30,
1997, will expire as follows:
F-14
<PAGE> 78
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
Year Ending June 30, of Shares Price
------------------------ --------------- -----------
<S> <C> <C>
1998 191,754 $ 1.64
1998 1,329,485 2.00
2000 366,666 .73
2001 1,130,000 1.83
2002 500,000 .83
2002 302,191 1.28
2002 266,667 1.68
2002 161,351 2.08
--------------
Total 4,248,114
==============
</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 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- --------------------------------------
Number Exercise Market Number Exercise Market
of Shares Price Price of Shares Price Price
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fair value equal to
exercise price 935,524 $1.18 $1.18 925,000 $1.64 $1.64
Fair value greater than
exercise price -- -- -- 469,496 $ .80 $1.97
Exercise price greater
than fair value 991,351 $1.35 $1.02 709,989 $2.00 $1.60
</TABLE>
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 is recorded as a debt issuance cost in the
balance sheet and $199,000 is recorded as general and administrative
expense in 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.
F-15
<PAGE> 79
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported $ (2,006,878) $ (712,360)
Pro forma $ (2,408,000) $ (1,800,000)
Net loss per common share:
As reported $ (.20) $ (.06)
Pro forma $ (.23) $ (.16)
</TABLE>
The fair value of each employee option and warrant granted in 1997 and 1996
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Expected volatility 102% 102%
Risk-free interest rate 5.9% 6.1%
Expected dividends -- --
Expected terms (in years) 4.5 5.0
</TABLE>
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 $139,710
and $171,709 at June 30, 1997 and 1996, respectively. The advances are
unsecured, without interest and are due after June 30, 1998.
7. INCOME TAXES
The Company's deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Difference in bases of oil and gas properties acquired $(2,000,000) $(2,000,000)
Costs capitalized for books and deducted for tax (84,000) (65,000)
----------- -----------
Total deferred tax liabilities (2,084,000) (2,065,000)
----------- -----------
Deferred tax asset (net operating loss carryforwards) 1,415,000 477,000
----------- -----------
Net deferred tax liability $ (669,000) $(1,588,000)
=========== ===========
</TABLE>
The difference from the expected income tax benefit for the year ended June
30, 1997 at the statutory federal tax rated of 34% and the actual income
tax benefit is primarily the result of amounts related to the estimated
value of warrants that were expensed for purposes of the financial
statements, but are not deductible for
F-16
<PAGE> 80
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
income tax purposes. At June 30, 1997, the Company has available net
operating loss carryforwards of approximately $4,000,000 to reduce future
taxable income. These carryforwards expire from 2002 to 2004.
8. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1997 and 1996, the Company had deposits in one financial
institution that were approximately $543,000 and $700,000, respectively in
excess of FDIC insurance limits.
The Company's financial instruments at June 30, 1997 and 1996 are cash,
accrued oil and gas sales, accounts payable, long-term debt and advances
from related parties. Management believes the fair market values of cash,
accrued oil and gas sales and accounts payable approximate carrying values
due to the short-term nature of these instruments. Management has
estimated the fair values of long-term debt and advances from related
parties based on expected discounted cash flows and believes the fair
values are not materially different than carrying values.
9. SUBSEQUENT EVENTS
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 payable in two installments through January 1998
and 2,511,317 shares of the Company's common stock. In addition, the
shareholders of Aspen agreed to deliver 270,000 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.
In July 1997, the Company entered into a letter agreement with an
investment banking firm to arrange a sale of part or all of the Company or
a strategic alliance with a larger company. The investment banking firm
was granted exclusive representation rights for a period of nine months and
will receive a fee, if the transaction is completed, varying from 3% to 10%
of the transaction size.
In July 1997, the Company initiated a private placement of its common stock
and of 15% two-year notes. Through September 15, 1997, the Company had
sold 272,700 shares for net proceeds of $454,500 in the stock placement and
raised $125,000 in the note offering. In addition, warrants to purchase
approximately 433,000 shares of stock had been exercised for proceeds of
$866,000 from July 1, 1997 through September 15, 1997.
10. SUPPLEMENTAL INFORMATION (UNAUDITED)
Costs incurred by the Company with respect to its oil and gas producing
activities are set forth below. No significant costs were incurred in
exploration activities or in the acquisition of unproved properties.
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED
JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Proved property acquisition cost $ 515,000 $1,110,054
Development costs 422,621 227,754
---------- ----------
Total $ 937,621 $1,337,808
========== ==========
</TABLE>
F-17
<PAGE> 81
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
11. OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are reserves that can be expected to
be recovered through existing wells with existing equipment and operating
methods. The following estimated net interests in proved reserves are
based upon subjective engineering judgments and may be affected by the
limitations inherent in such estimation. The process of estimating
reserves is subject to continual revision as additional information becomes
available as a result of drilling, testing, reservoir studies and
production history. There can be no assurance that such estimates will not
be materially revised in subsequent periods.
The Company emphasizes that reserve estimates of new discoveries or
undeveloped properties are more imprecise than those of producing oil and
gas properties. The Company's reserves are substantially from undeveloped
properties. Accordingly, these estimates are expected to change materially
as future information becomes available. The Company's reserves were
estimated by independent petroleum engineers. All of the Company's
reserves are located onshore in the continental United States. The
recoverability of the proved undeveloped reserves is dependent upon
obtaining financing to exploit the reserves.
The following table sets forth proved oil and gas reserves at June 30,
1997, 1996 and 1995 together with changes therein:
<TABLE>
<CAPTION>
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
=========== ===========
Proved developed reserves at June 30:
1995 -- --
=========== ===========
1996 93,000 280,000
=========== ===========
1997 423,000 1,787,000
=========== ===========
</TABLE>
The standardized measure of discounted future net cash flows at June 30,
1997, 1996 and 1995 relating to proved oil and gas reserves is set forth
below. The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and as such, do not
necessarily reflect the Company's expectations of actual revenues to be
derived from those reserves nor their present worth. The limitations
inherent in the reserve quantity estimation process described above are
equally applicable to the standardized measure computations since these
estimates are the basis for the valuation process.
F-18
<PAGE> 82
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Standardized measure of discounted future net cash flows relating to proved
reserves:
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Future cash inflows $ 129,610,000 $ 118,003,000 $ 98,023,000
Future production costs (18,826,000) (15,013,000) (13,249,000)
Future development costs (13,915,000) (12,446,000) (12,361,000)
------------- ------------- -------------
Future net cash flows, before income tax 96,869,000 90,544,000 72,413,000
Future income tax expenses (31,526,000) (30,785,000) (24,723,000)
------------- ------------- -------------
Future net cash flows 65,343,000 59,759,000 47,690,000
10% discount to reflect timing of net
cash flows (22,543,000) (19,315,000) (17,890,000)
------------- ------------- -------------
Standardized measure of discounted future net
cash flows $ 42,800,000 $ 40,444,000 $ 29,800,000
============= ============= =============
</TABLE>
Changes in standardized measure of discounted future net cash flows
relating to proved reserves:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED JUNE 30,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Standardized measure, beginning of period $ 40,444,000 $ 29,800,000 $ --
Net change in sales price, net of
production costs (5,288,000) 11,762,000 --
Accretion of discount 4,044,000 2,980,000 --
Purchases of reserves in-place 6,687,000 -- 45,249,000
Production (21,000) -- --
Change in timing of production and other (2,581,000) -- --
Net changes in income taxes (485,000) (4,098,000) (15,449,000)
------------ ------------ ------------
Standardized measure, end of period $ 42,800,000 $ 40,444,000 $ 29,800,000
============ ============ ============
</TABLE>
F-19
<PAGE> 83
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
December 31. 1997
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 405,430
Accounts receivable 542,425
Prepaid expenses 94,138
Cash deposits 329,750
Restricted cash 2,570,280
------------
Total current assets 3,942,023
OIL AND GAS PROPERTIES 19,721,091
OILFIELD EQUIPMENT INVENTORY 2,614,069
OTHER ASSETS 490,742
------------
Total assets $ 26,767,925
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,172,548
Notes payable 150,250
------------
Total current liabilities 1,322,798
LONG TERM DEBT 4,564,710
DEFERRED INCOME TAXES 2,330,812
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized-unlimited, none issued --
Common stock, no par value, authorized-unlimited, 17,343,248 shares issued 21,689,357
Deficit accumulated in development stage (2,769,155)
Accumulated earnings 54,403
Treasury stock (270,000 shares) (425,000)
------------
Total stockholders' equity 18,549,605
------------
Total liabilities and stockholders' equity $ 26,767,925
============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-20
<PAGE> 84
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 435,289 $ 41,365
Equipment sales 713,622 --
Interest income 8,140 --
Other income 934 --
------------ ------------
Total revenue 1,157,985 41,365
EXPENSES:
Oil and gas production 225,925 --
Equipment purchase and rework 259,573 --
General and administrative 413,444 903,319
Interest 129,888 35,162
Depreciation and depletion 56,618 --
------------ ------------
Total expenses 1,085,448 938,481
PROFIT (LOSS) BEFORE INCOME TAXES 72,537 (897,116)
INCOME TAX BENEFIT (PROVISION) (18,134) 295,000
------------ ------------
NET PROFIT (LOSS) $ 54,403 $ (602,116)
============ ============
NET PROFIT (LOSS) PER SHARE
(Basic and diluted) $ 0.00 $ (0.05)
------------ ------------
WEIGHTED AVERAGE SHARES 15,457,000 13,390,524
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-21
<PAGE> 85
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) $ 54,403 $ (602,116)
Adjustments to reconcile to net cash used by operating activities:
Deferred income tax provision (benefit) 18,134 (295,000)
Depreciation and depletion 56,618 5,572
Amortization of debt discount 102,500 --
Common stock issued for services -- 322,932
Change in accounts payable and other liabilities 479,511 (85,674)
Change in accounts receivable (456,823) --
Other (67,317) (3,263)
----------- -----------
Net cash used by operating activities 187,026 (657,549)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (1,485,363) (303,134)
Addition to oilfield equipment inventory (2,614,069) --
Increase in deposits (329,750) --
Increase in restricted cash (2,570,820) --
Purchase of other assets -- (43,831)
----------- -----------
Net cash used by investing activities (7,002,000) (346,965)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and exercise of warrants 3,398,544 455,949
Increase in long-term debt 4,445,000 --
Costs related to sale of stock and notes (419,000) (14,600)
Repayment of notes payable and long-term debt (848,750) --
----------- -----------
Net cash provided by financing activities 6,575,794 441,349
----------- -----------
DECREASE IN CASH (237,182) (563,165)
CASH - Beginning of period 642,612 803,070
----------- -----------
CASH - End of period $ 405,430 $ 239,905
=========== ===========
SUPPLEMENTAL INFORMATION
Debt incurred in acquisition of oil and gas properties $ 300,000 $ 355,000
Oil and gas properties acquired with common stock 4,530,000 --
Conversion of note payable to common stock 100,000 --
Issuance of common stock for stock offering costs -- 12,409
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-22
<PAGE> 86
COTTON VALLEY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PREPARATION AND PRESENTATION
Cotton Valley Resources Corporation (the Company) has its primary business
focus in the acquisition of ownership interests in, and the production of
oil and gas from, existing oil and gas fields that indicate a potential for
increased production through rehabilitation. The Company also purchases,
repairs, rehabilitates and sells used oilfield production equipment. Also,
beginning in February, 1998, the Company provides well servicing and
horizontal drilling services on its own properties and for other operators.
The Company was considered to be in the development stage until August 1,
1997.
The condensed consolidated financial statements of Cotton Valley Resources
Corporation and subsidiaries (collectively Cotton Valley) included herein
have been prepared by management of Cotton Valley without audit. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, since management believes that
the disclosures included are adequate to make the information presented not
misleading. In the opinion of management, the condensed consolidated
financial statements include all adjustments consisting of normal recurring
adjustments necessary to present fairly the financial position, results of
operations, and cash flows as of the dates and for the periods presented.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included for the fiscal year ended June 30, 1997.
Restricted Cash
Restricted cash at December 31, 1997 represents the unused funding of the
Convertible Debenture (see Note 7). This cash may be used for working
capital and other purposes upon submission of collateral under the terms of
the agreement.
Net Profit Per Share
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.
2. COMMON STOCK
During the six months ended December 31, 1997, Cotton Valley issued shares
of common stock to four individuals to purchase Aspen Energy Corporation
(Aspen) (see Note 3), issued 272,700 shares of common
F-23
<PAGE> 87
COTTON VALLEY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
stock in a private placement for proceeds of approximately $455,000, issued
approximately 1,677,000 shares of common stock on exercise of options and
warrants for approximately $2,920,000, and issued additional shares for the
acquisition of an oil and gas well and for the conversion of $100,000 of a
note payable to common stock.
3. ACQUISITION OF ASPEN ENERGY CORPORATION
On July 31, 1997, Cotton Valley acquired Aspen for $4,995,000, consisting
of $500,000 cash and notes and 2,511,317 shares of common stock, of which
270,000 shares were returned to Cotton Valley by two Aspen shareholders in
settlement of notes payable to Aspen in the amount of $425,000. The
acquisition was accounted for as a purchase and the operations of Aspen are
consolidated with the Company beginning on August 1, 1997. The following
unaudited pro forma information for the six month period ended December 31,
1996 has been prepared as if Aspen had been acquired on July 1, 1996:
<TABLE>
<S> <C>
Revenues $ 235,000
Net loss $ (872,000)
Net loss per share $ (0.06)
</TABLE>
4. ACQUISITION OF SEARS RANCH PROSPECT
During the six month period ended December 31, 1997, Cotton Valley acquired
the 6,600 acre Sears Ranch Prospect in Nolan and Fisher Counties, Texas,
for $400,000.
5. ACQUISITION OF HORIZONTAL DRILLING EQUIPMENT
During the six month period ended December 31, 1997, Cotton Valley acquired
substantially all the business and equipment of M&M Directional Services
Consultants for $550,000, through a newly formed subsidiary, Mustang
Horizontal Services, Inc.
6. ACQUISITION OF WELL SERVICE RIGS AND EQUIPMENT
During the six month period ended December 31, 1997, Cotton Valley acquired
two well service rigs and related well service equipment for $1,220,000,
and formed Mustang Well Servicing Company to operate the rigs and provide
well servicing.
7. SECURED CONVERTIBLE DEBENTURES
During the six month period ended December 31, 1997, Cotton Valley sold
$4,320,000 of 7% Secured Convertible Debentures to a group of private
investors. Portions of the proceeds were used to complete the acquisition
of the well service rigs and related equipment discussed in Note 6. The
debentures are due December 31, 2001 and are collateralized by the well
service rigs and related equipment and by restricted cash with a balance of
$2,570,820 at December 31, 1997. The debentures are convertible into
shares of common stock and warrants to purchase common stock. The
debentures are convertible at the lesser of $2.70
F-24
<PAGE> 88
COTTON VALLEY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
per share or 90% 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 $1.80 per share, no more than 10% of the
debentures may be tendered for conversion during a thirty day period. The
warrants are exercisable at prices related to the market price at the time
of conversion. Costs of approximately $419,000 related to the debenture
offering have been capitalized and will be amortized over the life of the
notes.
8. SUBSEQUENT EVENTS
In January 1998, the Company completed the purchase of certain oil and gas
interests in the Zama Lake area in Alberta, Canada (the "Zama Property").
The purchase price was approximately $6,900,000. Immediately following the
purchase of the Zama Property, the Company sold all of its interests to a
third party for approximately $7,500,000.
Also in January 1998, the Company and Phillips Petroleum Company
("Phillips") entered into an agreement for the purchase by the Company 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 for $4,000,000. Closing of
the transaction is subject to the Company obtaining financing for the
purchase price and is currently scheduled for May 31, 1998. The completion
of the transaction is further subject to title examinations and other
conditions.
In February 1998 the stockholders of the Company approved the 1997 Stock
Compensation Plan (the "1997 Plan") and reserved 1,400,000 shares of Common
Stock for issuance under the plan. Eligible participants in the 1997 Plan
include full-time employees, directors (other than Non-Employee Directors)
and advisors of the Company and its subsidiaries.
Also in February 1998, the stockholders of the Company approved the
Non-Employee Directors Stock Option Plan (the "Directors Plan") and
reserved for issuance 200,000 shares of Common Stock for issuance under the
plan. Eligible participants in the Directors Plan are non-employee
directors of the Company and its subsidiaries.
F-25
<PAGE> 89
COTTON VALLEY RESOURCES CORPORATION AND ASPEN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations is derived
from the financial statements of Cotton Valley Resources Corporation (the
Company) and Aspen Energy Corporation. In July 1997, the Company acquired 100%
of the common stock of Aspen for a purchase price consisting of $200,000 in
cash, $300,000 non-interest bearing six month notes and 2,241,000 shares of the
Company's common stock (net of 270,000 shares transferred back to the Company
to retire $425,000 of loans from Aspen to the Aspen stockholders). The
Unaudited Pro Forma Income Statement for the year ended June 30, 1997 has been
prepared assuming the acquisition had been consummated as of the beginning of
the fiscal year.
The unaudited combined pro forma financial statements should be read in
conjunction with the notes thereto and with the financial statements of the
Company as included in its Form 10-KSB and the financial statements of Aspen
included herein.
The unaudited combined pro forma financial statements are not indicative of the
financial position or results of operations of the Company which would actually
have occurred if the acquisition of Aspen had occurred at the date presented or
which may be obtained in the future. In addition, future results may vary
significantly from the results reflected in such statements due to normal oil
and gas production declines, changes in prices paid for oil and gas, future
acquisitions, drilling activity and other factors.
F-26
<PAGE> 90
COTTON VALLEY RESOURCES CORPORATION AND ASPEN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended June 30, 1997
<TABLE>
<CAPTION>
COTTON VALLEY ASPEN
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
JUNE 30, 1997 DECEMBER 31, 1996 ADJUSTMENTS COMBINED
------------- ----------------- ----------- --------
<S> <C> <C> <C> <C>
OIL AND GAS SALES $ 272,243 $ 368,054 $ 46,518 (1) $ 686,815
COSTS AND EXPENSES:
Oil and gas production costs 252,272 369,147 20,839 (1) 642,258
Depletion 27,000 190,068 (1,000) (2) 216,068
General and administrative 2,825,678 498,151 48,377 (1) 3,372,206
Interest 93,171 15,000 (3) 108,171
------------ ------------ ------------ ------------
Total costs and expenses 3,198,121 1,057,366 83,216 4,338,703
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,925,878) (689,312) (36,698) (3,651,888)
INCOME TAX BENEFIT 919,000 237,143 12,944 (4) 1,169,087
------------ ------------ ------------ ------------
NET LOSS $ (2,006,878) $ (452,169) $ (23,754) $ (2,482,801)
============ ============ ============ ============
NET LOSS PER SHARE:
Basic and diluted $ (0.20) $ (0.01) $ (0.21)
============ ============ ============
WEIGHTED AVERAGE SHARES 9,901,000 2,241,000 (5) 12,142,000
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
F-27
<PAGE> 91
COTTON VALLEY RESOURCES CORPORATION AND ASPEN ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1997
(1) Adjustments to add Aspen's operations for the six months ended June 30,
1997, and deduct Aspen's operations for the six months ended June 30,
1996, to its operations for the year ended December 31, 1996. The
adjustment is necessary to record Aspen's operations for the year ended
June 30, 1997 as if Aspen had been acquired by Cotton Valley at the
beginning of that fiscal year.
(2) Adjustment to depletion expense to record the depletion expense as if
Aspen had been acquired on July 1, 1996.
(3) To record imputed interest expense on the $300,000 six month note
payable issued the sellers of Aspen.
(4) To record the effect of the pro forma adjustments on the income tax
benefit.
(5) To record the net shares issued in the acquisition as if they had been
issued on July 1, 1996.
F-28
<PAGE> 92
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Aspen Energy Corporation
Dallas, Texas
We have audited the accompanying balance sheets of Aspen Energy Corporation as
of December 31, 1996, and the related statements of operations and retained
earnings and cash flows for the year then ended. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Aspen Energy Corporation as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Hein + Associates LLP
Dallas, Texas
January 30, 1998
F-29
<PAGE> 93
ASPEN ENERGY CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
JUNE 30, December 31,
----------- -----------
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (including $376,677 in interest-bearing accounts at
December 31, 1996) $ 22,990 $ 407,566
Accounts receivable 42,330 40,680
----------- -----------
Total current assets 65,320 448,246
PROVED OIL AND GAS PROPERTIES (full cost method) 1,300,419 1,216,032
Less accumulated depletion (337,765) (242,765)
----------- -----------
Net oil and gas property 962,654 973,267
OTHER ASSETS 52,853 52,003
----------- -----------
Total assets $ 1,080,827 $ 1,473,516
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 54,708 $ 56,490
Income tax payable 237,000 314,000
----------- -----------
Total current liabilities 291,708 370,490
DEFERRED INCOME TAX LIABILITY 289,014 320,514
PRODUCTION PAYMENT LIABILITY 62,791 65,800
STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000 shares authorized;
50,000 shares issued and outstanding 1,000 1,000
Loans receivable from related parties (425,000) (345,000)
Retained earnings 861,314 1,060,712
----------- -----------
Total stockholders' equity 437,314 716,712
----------- -----------
Total liabilities and stockholders' equity $ 1,080,827 $ 1,473,516
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESES FINANCIAL STATEMETNS.
F-30
<PAGE> 94
ASPEN ENERGY CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
(Unaudited)
----------- Year Ended
Six Months Ended June 30, December 31,
---------------------------- -----------
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE -Oil and gas sales $ 221,408 $ 174,890 $ 368,054
COSTS AND EXPENSES:
Production expenses 158,975 138,136 369,147
Depletion and depreciation 95,000 89,800 190,068
General and administrative 276,545 237,610 506,700
----------- ----------- -----------
Total costs and expenses 530,520 465,546 1,065,915
OTHER INCOME (EXPENSE) -
Interest income (expense), net 1,214 10,656 8,549
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (307,898) (280,000) (689,312)
INCOME TAX BENEFIT 108,500 98,000 237,143
----------- ----------- -----------
NET LOSS (199,398) (182,000) (452,169)
RETAINED EARNINGS, beginning of year 1,060,712 1,512,881 1,512,881
----------- ----------- -----------
RETAINED EARNINGS, end of period $ 861,314 $ 1,330,881 $ 1,060,712
=========== =========== ===========
NET LOSS PER SHARE $ (3.99) $ (3.64) $ (9.04)
=========== =========== ===========
WEIGHTED AVERAGE SHARES 50,000 50,000 50,000
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-31
<PAGE> 95
ASPEN ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
----------- Year Ended
Six Months Ended June 30, December 31,
------------------------- ------------
1997 1996 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(199,398) $(182,000) $(452,169)
Adjustments to reconcile to net cash used by operating
activities:
Depletion and depreciation 95,000 89,800 190,068
Deferred tax benefit (31,500) (98,000) (237,143)
Changes in current assets and liabilities:
Accounts receivable (1,650) (11,522) 2,390
Other assets (850) (12,750) (18,321)
Accounts payable and accrued liabilities (1,782) -- (34,103)
Income tax payable (77,000) -- --
Other 7,000 (11,803) (39,187)
--------- --------- ---------
Net cash used by operating activities (210,180) (226,275) (588,465)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of oil and gas properties -- -- 490,828
Collection of notes receivable -- 103,500 140,000
Loans to related parties (80,000) -- --
Additions to oil and gas properties (84,387) (180,670) (406,689)
--------- --------- ---------
Net cash provided (used) by investing activities (164,387) (77,170) 224,139
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of production payment liability (3,009) (4,700) (5,766)
--------- --------- ---------
NET DECREASE IN CASH (377,576) (308,145) (370,092)
CASH, BEGINNING OF THE PERIOD 407,566 777,658 777,658
--------- --------- ---------
CASH, END OF THE PERIOD $ 29,990 $ 469,513 $ 407,566
========= ========= =========
SUPPLEMENTAL INFORMATION -
Cash paid during the period for interest $ 2,600 $ 2,840 $ 5,800
========= ========= =========
Property financed with production payment liability $ -- $ 71,566 $ 71,566
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-32
<PAGE> 96
ASPEN ENERGY CORPORATION.
NOTES TO FINANCIAL STATEMENTS
(The period subsequent to December 31, 1996 is unaudited.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Aspen Energy Corporation (the "Company") is engaged in the acquisition,
operation and development of oil and gas properties, which are located
primarily in Texas, Oklahoma and Utah as of December 31, 1996.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Revenue Recognition
The Company recognizes revenue as oil or gas is produced and sold.
Oil and Gas Producing Operations
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition,
exploration, and development of oil and gas reserves, including directly
related overhead costs, are capitalized in the full cost pool. All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production
method using estimates of proved reserves.
In addition, capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the estimated present
value, discounted at a 10% interest rate, of future net revenues from
proved reserves, based on current economic and operating conditions, plus
the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and
proved reserves of oil and gas, in which case the gain or loss is
recognized in income. Abondonments of properties are accounted for as
adjustments of capitalized costs with no loss recognized.
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.
Financial Investments
The Company's financial instruments are cash, accounts receivable and
payable and loans receivable from related parties. Management estimates
that the fair values of these financial instruments approximate their
carrying values due to their short-term nature.
F-33
<PAGE> 97
ASPEN ENERGY CORPORATION.
NOTES TO FINANCIAL STATEMENTS
(The period subsequent to December 31, 1996 is unaudited.)
Loss Per Share
Loss per share is computed based on the weighted average number of shares
outstanding during the period.
Use of Estimates and Certain Significant Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
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.
Unaudited Information
The balance sheet as of June 30, 1997 and the statements of operations for
the six month periods ended June 30, 1997 and 1996 were taken from the
Company's books and records without audit. However, in the opinion of
management, such information includes all adjustments which are necessary
to properly reflect the financial position of the Company as of June 30,
1997 and the results of its operations for the six months ended June 30,
1997 and 1996.
2. LOANS RECEIVABLE FROM RELATED PARTIES
The Company had loans receivable from stockholders for cash advances that
totaled $425,000 and $345,000 at June 30, 1997 and December 31, 1996,
respectively. The loans were unsecured, non-interest bearing and contained
no specific repayment terms. The loans were subsequently retired as
described in Note 6, and have been classified as a reduction of
stockholders' equity in the accompanying balance sheets.
3. PRODUCTION PAYMENT LIABILITY
The Company has a liability associated with the purchase of an oil and gas
property that requires payment to the creditor of 25% of the net revenue
earned from the property each month. The liability does not have a stated
interest rate. Therefore, interest was imputed at 10%. The balance at June
30, 1997 and December 31, 1996 is $62,791 and $65,800, respectively.
4. CONCENTRATION OF CREDIT RISK AND SALES REVENUE
The Company had the following concentrations in volume of oil and gas sales
revenue in 1996:
<TABLE>
<CAPTION>
Customer
--------
<S> <C>
A 43%
B 29%
C 22%
</TABLE>
Additionally, the three customers above accounted for a substantial
majority of accrued oil and gas sales as of December 31, 1996.
The Company periodically maintains balances in financial institutions in
excess of FDIC insurance limits. The Company had a balance in one
institution at December 31, 1996 that was $276,677 in excess of such limit.
F-34
<PAGE> 98
ASPEN ENERGY CORPORATION.
NOTES TO FINANCIAL STATEMENTS
(The period subsequent to December 31, 1996 is unaudited.)
5. INCOME TAXES
The Company's income tax benefit of $237,143 for the year ended December
31, 1996 was composed entirely of deferred taxes.
The Company's deferred tax liability of $320,514 at December 31, 1996 was
the result of different bases for book and tax purposes of the Company's
oil and gas properties.
6. SUBSEQUENT EVENT
In 1997, 100% of the Company's stock was sold to Cotton Valley Resources
Corporation. In connection with that transaction, the loans receivable
from related parties (Note 2) were retired.
7. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following table sets forth certain information with respect to the oil
and gas producing activities of the Company:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996
---------------
<S> <C>
Costs incurred in oil and gas producing activities:
Acquisition of proved properties $ 252,236
Development costs 226,019
---------------
Total costs incurred $ 478,255
---------------
</TABLE>
The following table, based on information prepared by independent petroleum
engineers, summarizes changes in the estimates of the Company's net
interest in total proved reserves of crude oil and condensate and natural
gas, all of which are domestic reserves:
<TABLE>
<CAPTION>
Oil Gas
--- ---
(Barrels) (MCF)
---------- ----------
<S> <C> <C>
Balance, January 1, 1996 1,569,690 598,476
Production (9,690) (130,476)
---------- ----------
Balance, December 31, 1996 1,560,000 468,000
========== ==========
</TABLE>
All of the above reserves were classified as proved undeveloped and are
located in the continental United States. The Company has production on
the property, but intends to convert the property to a waterflood project,
which would entail conversion of the producing wells to injection wells.
The Company also has other, relatively minor, producing properties for
which reserve reports were not prepared. To develop the Company's reserves
will require a substantial investment of capital, which is currently not
available. Therefore, the Company will either have to raise additional
capital or sell interests in its property, which would reduce the Company's
net interest in its reserves.
F-35
<PAGE> 99
ASPEN ENERGY CORPORATION.
NOTES TO FINANCIAL STATEMENTS
(The period subsequent to December 31, 1996 is 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 above 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, especially in connection with the Company as all the
reserves are proved undeveloped. There can be no assurance that such
estimates will not be materially revised in subsequent periods.
8. STANDARDIZED MEASURE OF CHANGES IN FUTURE NET REVENUES (UNAUDITED)
The standardized measure of discounted future net cash flows at December
31, 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 are equally applicable
to the standardized measure computations since these estimates are the
basis for the valuation process.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1996
------------
<S> <C>
Future cash inflows $ 31,473,000
Future development and production costs (12,972,000)
------------
Future net cash flows, before income tax 18,501,000
Future income taxes (6,475,000)
------------
Future net cash flows 12,026,000
10% annual discount (4,089,000)
------------
Standardized measure of discounted future net cash flows $ 7,937,000
============
</TABLE>
Future net cash flows were computed using year-end prices and costs, and
year-end statutory tax rates (adjusted for permanent differences) that
relate to existing proved oil and gas reserves at year end. The following
are the principal sources of change in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Sale of oil and gas produced, net of production costs $ 1,000
Net changes in prices and production costs 2,317,000
Accretion of discount 603,000
Net change in income taxes (810,000)
Other changes (205,000)
------------
Net change 1,906,000
Balance, beginning of year 6,031,000
------------
Balance, end of year $ 7,937,000
============
</TABLE>
F-36
<PAGE> 100
================================================================================
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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . 8
Common Stock Price Ranges and Dividends . . . . . 15
Dividend Policy . . . . . . . . . . . . . . . . . 16
Capitalization . . . . . . . . . . . . . . . . . 16
Selected Historical Consolidated and Combined
Financial Information . . . . . . . . . . . . . 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations . 18
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 . . . . . . . 53
Certain Income Tax Considerations . . . . . . . . 55
Limitations on Director Liability . . . . . . . . 56
Legal Matters . . . . . . . . . . . . . . . . . . 57
Experts . . . . . . . . . . . . . . . . . . . . . 57
Available Information . . . . . . . . . . . . . . 57
Glossary . . . . . . . . . . . . . . . . . . . . 59
Index to Consolidated Financial Statements . . . ___
</TABLE>
----------------------------
----------------------------
COTTON VALLEY RESOURCES
CORPORATION
10,891,184 SHARES OF COMMON STOCK
----------------------------
P R O S P E C T U S
----------------------------
____________________, 1998
================================================================================
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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.
Expenses in connection with the public offering of Securities by the
Selling Stockholders pursuant to this prospectus are as follows:
<TABLE>
<S> <C>
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*
=============
</TABLE>
--------------------
*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.
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.
II-1
<PAGE> 102
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.
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
II-2
<PAGE> 103
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 270,000 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 270,000 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
II-3
<PAGE> 104
transferred other than pursuant to an effective registration statement under
the Securities Act or an exemption from such registration requirements.
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 unutilized
proceeds from the sale of the Convertible Debentures (the "Restricted Cash").
At December 31, 1997, the Company had approximately $2.5 million of Restricted
Cash. 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 conversion 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 $1.80 per share (the "Floor Price"). The
conversion price is the lesser of $2.70 per share or 90% 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
II-4
<PAGE> 105
refusal for future financing of the Company under certain conditions. The
Company has listed an additional 3.2 million shares of its Common Stock on AMEX
for the shares underlying the Convertible Debentures and shares to be issued
upon exercise of the Debenture Warrants. Although the Company's Registration
Statement 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 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:
<TABLE>
<CAPTION>
Amount of
Name of Holder Convertible Debentures
------------------------------------- ----------------------
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
No. of Price for Shares
Shares Issued to Purchased
------- -------------------- ----------------
<S> <C> <C>
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
</TABLE>
II-5
<PAGE> 106
Information concerning the issuance of the WPM Warrants is as follows:
<TABLE>
<CAPTION>
Exercise
No. of Warrants Issued to Price Expiration Date
--------------- --------- -------- ---------------
<S> <C> <C> <C>
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
</TABLE>
Information concerning the sale of such notes is as follows:
<TABLE>
<CAPTION>
Purchaser Amount of 15% Notes
--------------------- -------------------
<S> <C>
Jim Phillips $50,000
Jack & Darlene Mabery $25,000
Dan Malone $50,000
</TABLE>
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.
g. ISSUANCES FOR SERVICES AND DEBT.
Since the Arjon amalgamation in June 1996, the Company has issued
165,485 shares of Common Stock to 12 individuals and entities for services
and/or debt with an aggregate value of $159,768.
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.
II-6
<PAGE> 107
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.)
3.1** Articles of Amalgamation
3.2** Bylaws
3.3 Certificate of Continuance into Yukon Territory
3.4 Articles of Continuance into Yukon Territory
4.1*** Description of Common Stock
4.2 Form of Cotton Valley Resources Corporation 7% Convertible Debenture, due
December 31, 2001. See also Exhibits 10.3 through 10.6 hereof
5.1 Opinion of Jackson Walker L.L.P. regarding the legality of the securities
being registered
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
9.2* Voting Agreement, dated January 30, 1997, among Eugene A. Soltero, Leon
A. Romero, George W. Peel, Alberta Sena and Dorothy Carter
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.)
10.2 Letter Agreement, dated November 5, 1997, by and between M&M Directional
Drilling Consultants, Mike Burton, Mark Milam and the Company
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.)
10.4 Security Agreement, dated December 30, 1997, by and among the parties
identified in Exhibit 10.3 hereof
10.5 Cash Collateral Agreement, dated December 30, 1997, by and among the
parties identified in Exhibit 10.3 hereof
10.6 Registration Rights Agreement, dated December 30, 1997, by and among the
parties identified in Exhibit 10.3 hereof
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.)
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
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.)
II-7
<PAGE> 108
Exhibit
Number Description
- ------- -----------
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.)
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.)
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.)
10.13 Loan Agreement (and related exhibits), dated July 18, 1997, by and among
the individuals identified in Exhibit "A" thereto and Cotton Valley
Energy Corporation
10.14 Consulting Agreement, dated November 7, 1996, by and between Liviakis
Financial Communications, Inc. and the Company
10.15 $1,000,000 Convertible Secured Promissory Note, dated June 24, 1997,
executed by the Company and payable to Liviakis Financial Communications,
Inc.
10.16 Security Agreement, dated June 24, 1997, by and between Liviakis
Financial Communications, Inc. and the Company
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.
11 Statement regarding computation of per share earnings
21 Subsidiaries of the Company
23.1 Consent of K&A Energy Consultants, Inc.
23.2 Consent of Ryder Scott Company
23.3+ Consent of Jackson Walker L.L.P. (incorporated by reference into Exhibit
5.1).
23.4 Consent of Hein + Associates, LLP.
27 Financial Data Schedule
- ----------------
+ To be filed by amendment.
* Previously filed as an exhibit to the Company's Current Report on Form
8-KSB dated February 26, 1998.
** Previously filed as an exhibit to the Company's Registration Statement on
Form 20-F, as amended (SEC File No. 0-28814).
*** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997.
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
II-8
<PAGE> 109
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.
II-9
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on March 13, 1998.
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
<TABLE>
<S> <C>
By: /s/ Eugene A. Soltero By: /s/ Leon A. Romero
--------------------------------------- ---------------------------------------
Eugene A. Soltero Leon A. Romero
Chairman of the Board, Chief Executive Senior Vice President, Chief Financial
Officer and Director Officer and Director
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
</TABLE>
POWER OF ATTORNEY
We, the below signed directors and officers of Cotton Valley Resources
Corporation, do hereby constitute and appoint Eugene A. Soltero, with full
power of substitution our true and lawful attorney and agent, to do any and all
acts and things in our names in the capacities indicated which Eugene A.
Soltero may deem necessary or advisable to enable the Company to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with this
Registration Statement, including specifically, but not limited to, the power
and authority to sign for us, or any of us in our names in the capacities
indicated and any and all amendments (including post-effective amendments) to
this Registration Statement; and we do hereby ratify and confirm all that
Eugene A. Soltero shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933,
this 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eugene A. Soltero Chairman of the Board, Chief Executive
-------------------------------------- Officer and Director March 13, 1998
Eugene A. Soltero
/s/ James E. Hogue President, Chief Operating Officer and
-------------------------------------- Director March 13, 1998
James E. Hogue
/s/ Leon A. Romero Senior Vice President, Chief Financial
-------------------------------------- Officer and Director March 13, 1998
Leon A. Romero
/s/ Wayne T. Egan
--------------------------------------
Wayne T. Egan Director March 13, 1998
/s/ Richard J. Lachcik
--------------------------------------
Richard J. Lachcik Director March 13, 1998
</TABLE>
II-10
<PAGE> 111
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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.)
3.1** Articles of Amalgamation
3.2** Bylaws
3.3 Certificate of Continuance into Yukon Territory
3.4 Articles of Continuance into Yukon Territory
4.1*** Description of Common Stock
4.2 Form of Cotton Valley Resources Corporation 7% Convertible Debenture, due
December 31, 2001. See also Exhibits 10.3 through 10.6 hereof
5.1 Opinion of Jackson Walker L.L.P. regarding the legality of the securities
being registered
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
9.2* Voting Agreement, dated January 30, 1997, among Eugene A. Soltero, Leon
A. Romero, George W. Peel, Alberta Sena and Dorothy Carter
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.)
10.2 Letter Agreement, dated November 5, 1997, by and between M&M Directional
Drilling Consultants, Mike Burton, Mark Milam and the Company
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.)
10.4 Security Agreement, dated December 30, 1997, by and among the parties
identified in Exhibit 10.3 hereof
10.5 Cash Collateral Agreement, dated December 30, 1997, by and among the
parties identified in Exhibit 10.3 hereof
10.6 Registration Rights Agreement, dated December 30, 1997, by and among the
parties identified in Exhibit 10.3 hereof
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.)
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
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.)
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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.)
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.)
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.)
10.13 Loan Agreement (and related exhibits), dated July 18, 1997, by and among
the individuals identified in Exhibit "A" thereto and Cotton Valley
Energy Corporation
10.14 Consulting Agreement, dated November 7, 1996, by and between Liviakis
Financial Communications, Inc. and the Company
10.15 $1,000,000 Convertible Secured Promissory Note, dated June 24, 1997,
executed by the Company and payable to Liviakis Financial Communications,
Inc.
10.16 Security Agreement, dated June 24, 1997, by and between Liviakis
Financial Communications, Inc. and the Company
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.
11 Statement regarding computation of per share earnings
21 Subsidiaries of the Company
23.1 Consent of K&A Energy Consultants, Inc.
23.2 Consent of Ryder Scott Company
23.3+ Consent of Jackson Walker L.L.P. (incorporated by reference into Exhibit
5.1).
23.4 Consent of Hein + Associates, LLP.
27 Financial Data Schedule
</TABLE>
- ----------------
+ To be filed by amendment.
* Previously filed as an exhibit to the Company's Current Report on Form
8-KSB dated February 26, 1998.
** Previously filed as an exhibit to the Company's Registration Statement on
Form 20-F, as amended (SEC File No. 0-28814).
*** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997.
<PAGE> 1
EXHIBIT 3.3
[YUKON JUSTICE LOGO] BUSINESS CORPORATIONS ACT
FORM 3
CERTIFICATE OF CONTINUANCE
COTTON VALLEY RESOURCES CORPORATION
I hereby certify that the above-mentioned corporation was continued into Yukon,
as set out in the attached Articles of Continuance, under section 190 of the
Business Corporation Act.
[SEAL]
Corporate Access Number: 26343 /s/ M. RICHARD ROBERTS
Date of Continuance: 1998-02-09 -------------------------
M. Richard Roberts
Registrar of Corporations
<PAGE> 1
EXHIBIT 3.4
BUSINESS CORPORATIONS ACT
(SECTION 195)
FORM 2-01
ARTICLES OF CONTINUANCE
- --------------------------------------------------------------------------------
1. Name of Corporation:
Cotton Valley Resources Corporation
- --------------------------------------------------------------------------------
2. The classes and any unredeemed number of shares that the corporation is
authorized to issue:
See Schedule "A"
- --------------------------------------------------------------------------------
3. Restrictions if any on share transfers:
None
- --------------------------------------------------------------------------------
4. Number (or minimum or maximum number) of Directors:
Minimum - Three (3)
Maximum - Nine (9)
- --------------------------------------------------------------------------------
5. Restrictions if any on businesses the corporation may carry on:
None
- --------------------------------------------------------------------------------
6. If change of name effected, previous name:
N/A
- --------------------------------------------------------------------------------
7. Details of incorporation:
Cotton Valley Resources Corporation was formed under the Ontario Business
Corporations Act by Articles of Amalgamation effective June 17, 1996.
- --------------------------------------------------------------------------------
8. Other provisions if any:
See Schedule "B".
- --------------------------------------------------------------------------------
9. Date Signature Title
February 5, 1998 /s/ WAYNE EGAN Director
- --------------------------------------------------------------------------------
<PAGE> 2
SCHEDULE "A"
The authorized capital of the Corporation shall consist of:
(a) an unlimited number of Common Shares; and
(b) an unlimited number of Preference Shares issuable in series.
(A) The Common Shares of the Corporation shall have attached thereto the
following rights, privileges, restrictions and conditions:
1. DIVIDENDS
1.1 Subject to the prior rights of the holders of the Preference Shares and to
any other shares ranking senior to the Common Shares with respect to priority in
the payment of dividends, the holders of the Common Shares shall be entitled to
receive dividends and the Corporation shall pay dividends thereon, as and when
declared by the board of directors of the Corporation, out of moneys properly
applicable to the payment of dividends, in such amount and in such form as the
board of directors may from time to time determine and all dividends which the
directors may declare on the Common Shares shall be declared and paid in equal
amounts per share on all Common Shares at the time outstanding.
2. DISSOLUTION
2.1 In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Preference Shares
and to any other shares ranking senior to the Common Shares with respect to
priority in the distribution of assets upon dissolution, liquidation or
winding-up, the holders of the Common Shares shall be entitled to receive the
remaining property and assets of the Corporation.
3. VOTING RIGHTS
3.1 The holders of the Common Shares shall be entitled to receive notice of
and to attend all meetings of the shareholders of the Corporation and shall
have one (1) vote for each Common Share held at all meetings of the
shareholders of the Corporation, except for meetings at which only holders of
another specified class or series of shares of the Corporation are entitled to
vote separately as a class or series.
<PAGE> 3
- 2 -
(B) The rights, privileges, restrictions and conditions attaching to the
Preference Shares, as a class, are as follows:
1. DIRECTORS' AUTHORITY TO ISSUE ONE OR MORE SERIES
1.1 The board of directors of the Corporation may issue the Preference Shares
at any time and from time to time in one or more series. Before the first shares
of a particular series are issued, the board of directors of the Corporation
shall fix the number of shares in such series and shall determine, subject to
the limitations set out in the articles, the designation, rights, privileges,
restrictions and conditions to attach to the shares of such series including,
without limiting the generality of the foregoing, the rate or rates, amount or
method or methods of calculation of preferential dividends, whether cumulative
or noncumulative or partially cumulative, and whether such rate(s), amount or
method(s) of calculation shall be subject to change or adjustment in the future,
the currency or currencies of payment, the date or dates and place or places of
payment thereof and the date or dates from which such preferential dividends
shall accrue, the redemption price and terms and conditions of redemption (if
any), the rights of retraction (if any), and the prices and other terms and
conditions of any rights of retraction and whether any additional rights of
retraction may be vested in such holders in the future, voting rights and
conversion or exchange rights (if any) and any sinking fund, purchase fund or
other provisions attaching thereto. Before the issue of the first shares of a
series, the board of directors of the Corporation shall send to the Director (as
defined in the Ontario Business Corporations Act) articles of amendment in the
prescribed form containing a description of such series including the
designation, rights, privileges, restrictions and conditions determined by the
directors.
2. RANKING OF PREFERENCE SHARES
2.1 No rights, privileges, restrictions or conditions attaching to a series of
Preference Shares shall confer upon a series a priority in respect of dividends
or return of capital in the event of the liquidation, dissolution or
winding-up of the Corporation over any other series of Preference Shares. The
Preference Shares of each series shall rank on a parity with the Preference
Shares of every other series with respect to priority in the payment of
dividends and the return of capital and the distribution of assets of the
Corporation in the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of the
assets of the Corporation among its shareholders for the purpose of winding up
its affairs.
2.2 The Preference Shares shall be entitled to priority over the Common Shares
and over any other shares of any other class of the Corporation ranking junior
to the Preference Shares with respect to priority in the payment of dividends
and the return of capital and the distribution of assets in the event of the
liquidation, dissolution or winding-up of the
<PAGE> 4
-3-
Corporation, whether voluntary or involuntary, or any other distribution of the
assets of the Corporation among its shareholders for the purpose of winding up
its affairs.
2.3 If any amount of cumulative dividends, whether or not declared, or
declared non-cumulative dividends or amount payable on a return of capital in
the event of the liquidation, dissolution or winding-up of the Corporation in
respect of a series of Preference Shares is not paid in full, the Preference
Shares of all series shall participate rateably in respect of all accumulated
cumulative dividends, whether or not declared, and all declared non-cumulative
dividends in accordance with the sums that would be payable on such shares if
all such dividends were declared and paid in full, and in respect of amounts
payable on return of capital in the event of the liquidation, dissolution or
winding-up of the Corporation in accordance with the sums that would be payable
on such repayment of capital if all sums so payable were paid in full; provided,
however, that in the event of there being insufficient assets to satisfy in full
all such claims as aforesaid, the claims of the holders of the Preference Shares
with respect to amounts payable on return of capital shall first be paid and
satisfied and any assets remaining thereafter shall be applied towards the
payment and satisfaction of claims in respect of dividends.
2.4 The Preference Shares of any series may also be given such other
preferences not inconsistent with the provisions hereof over the Common Shares
and over any other shares ranking junior to the Preference Shares as may be
determined in the case of such series of Preference Shares.
2.5 In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of the
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, the holders of each series of Preference Shares shall, before any
amount shall be paid to or any property or assets of the Corporation distributed
among the holders of the Common Shares or any other shares of the Corporation
ranking junior to the Preference Shares, be entitled to receive (i) an amount
equal to the stated capital attributed to each series of Preference Shares,
respectively, together with, in the case of a series of Preference Shares
entitled to cumulative dividends thereon, all unpaid accumulated cumulative
dividends, whether or not declared (which for such purpose shall be calculated
as if such cumulative dividends were accruing from day to day for the period
from the expiration of the last period for which such cumulative dividends were
paid up to but excluding the date of distribution) and, in the case of a series
of Preference Shares entitled to non-cumulative dividends, all declared and
unpaid non-cumulative dividends thereon, and (ii) if such liquidation,
dissolution, winding-up or distribution shall be voluntary, an additional
amount, if any, equal to any premium which would have been payable on the
redemption of any series of Preference Shares had they been called for
redemption by the Corporation effective the date of distribution and, if any
series of Preference Shares could not be redeemed on such date,
<PAGE> 5
-4-
then an additional amount equal to the greatest premium, if any, which would
have been payable on the redemption of any other series of Preference Shares.
3. RESTRICTIONS ON DIVIDENDS AND REDEMPTIONS, ETC.
3.1 Except with the approval of all the holders of the Preference Shares,
no dividends shall at any time be declared or paid or set apart for payment on
the Common Shares or any other shares of the Corporation ranking junior to the
Preference Shares unless all dividends up to and including the dividend payable
for the last completed period for which such dividends shall be payable on each
series of Preference Shares then issued and outstanding shall have been
declared and paid or set apart for payment at the date of such declaration or
payment or setting apart for payment on the Common Shares or such other shares
of the Corporation ranking junior to the Preference Shares; nor shall the
Corporation call for redemption, redeem, purchase for cancellation, acquire for
value or reduce or otherwise pay off any of the Preference Shares (less than
the total amount then outstanding) or any Common Shares or any other shares of
the Corporation ranking junior to the Preference Shares unless and until all
dividends up to and including the dividends payable for the last completed
period for which such dividends shall be payable on each series of Preference
Shares then issued and outstanding shall have been declared and paid or set
apart for payment at the date of such call for redemption, purchase,
acquisition, reduction or other payment.
4. VOTING RIGHTS
4.1 Except as hereinafter referred to or as otherwise provided by law or
in accordance with any voting rights which may from time to time be attached to
any series of Preference Shares, the holders of the Preference Shares as a
class shall not be entitled as such to receive notice of, to attend or to vote
at any meeting of the shareholders of the Corporation.
5. SPECIFIC MATTERS REQUIRING APPROVAL
5.1 The approval of the holders of the Preference Shares, given in the
manner described in section 6.1 below, shall be required for the creation of
any new shares ranking prior to or on a parity with the Preference Shares, and
if, but only so long as, any cumulative dividends are in arrears or any
declared non-cumulative dividends are unpaid on any outstanding series of
Preference Shares, for the issuance of any additional series of Preference
Shares or of any shares ranking prior to or on a parity with the Preference
Shares.
5.2 The provisions of clauses 1.1 to 6.1 inclusive may be deleted,
amended, modified or varied in whole or in part by a certificate of amendment
issued by the Director appointed
<PAGE> 6
-5-
under the Ontario Business Corporations Act, but only with the prior approval of
the holders of the Preference Shares given as hereinafter specified in addition
to any other approval required by the Ontario Business Corporations Act or any
other statutory provisions of like or similar affect, from time to time in
force.
6. APPROVAL OF THE HOLDERS OF THE PREFERENCE SHARES
6.1 The approval of the holders of the Preference Shares with respect to any
and all matters hereinbefore referred to may be given by at least two thirds
of the votes cast at a meeting of the holders of the Preference Shares duly
called for that purpose and held upon at least 21 days' notice at which the
holders of a majority of the outstanding Preference Shares are present or
represented by proxy. If at any such meeting the holders of a majority of the
outstanding Preference Shares are not present or represented by proxy within
one half-hour after the time appointed for such meeting, then the meeting shall
be adjourned to such date being not less than 30 days later and to such time and
place as may be appointed by the chairman and not less than 21 days' notice
shall be given of such adjourned meeting. At such adjourned meeting the holders
of the Preference Shares present or represented by proxy may transact the
business for which the meeting was originally called and a resolution passed
thereat by not less than two-thirds of the votes cast at such adjourned meeting
shall constitute the approval of the holders of the Preference Shares referred
to above. The formalities to be observed with respect to the giving of notice
of any such meeting or adjourned meeting and the conduct thereof shall be those
from time to time prescribed by the Ontario Business Corporations Act and the
by-laws of the Corporation with respect to meetings of shareholders. On every
poll taken at every such meeting or adjourned meeting every holder of
Preference Shares shall be entitled to one (1) vote in respect of each
Preference Share held.
<PAGE> 7
SCHEDULE "B"
8. The directors of the Corporation may, between actual general meetings of
the Corporation, appoint one or more additional directors to serve until
the next annual general meeting but the number of additional directors
shall not at any time exceed one-third (1/3) of the number of directors who
held office at the expiration of the last annual general meeting, and in no
event shall the total number of directors exceed the maximum number of
directors fixed pursuant to paragraph 4 of the Articles of Continuance.
Meetings of shareholders may be held at Dallas, Texas or Toronto, Ontario
or New York, New York, or such other place or places as the directors in
their absolute discretion may determine from time to time.
<PAGE> 1
EXHIBIT 4.2
EXHIBIT A
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON CONVERSION SET
FORTH IN SECTION 3.8 OF A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS OF
DECEMBER 30, 1997, AMONG COTTON VALLEY RESOURCES CORPORATION (THE "COMPANY")
AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
No. -l U.S. $
-----------
COTTON VALLEY RESOURCES CORPORATION
7% CONVERTIBLE DEBENTURE DUE DECEMBER 31, 2001
THIS DEBENTURE is one of a series of duly authorized issued debentures
of Cotton Valley Resources Corporation, a corporation organized under the laws
of Ontario, Canada and having a principal place of business at 8350 N. Central
Expressway, Suite M2030, Dallas, Texas 75206 (the "Company"), designated as its
7% Convertible Debentures, due December 31, 2001 (the "Debentures"), in an
aggregate principal amount of $4,320,000.
FOR VALUE RECEIVED, the Company promises to pay to ___________, or
registered assigns (the "Holder"), the principal sum of _________($______), on
or prior to December 31, 2001 or such earlier date as the Debentures are
required to be repaid as provided hereunder (the "Maturity Date") and to pay
interest to the Holder on the principal sum at the rate of 7% per annum, payable
annually on December 31 of each year, commencing December 31, 1997, and on each
Conversion Date (as defined in Section 4(a)(i) of this Debenture). Interest
shall accrue daily commencing on the Original Issue Date (as defined in Section
6 of this Debenture) until payment in full of the principal sum, together with
all accrued and unpaid interest and other amounts which may become due
hereunder, has been made. Interest shall be calculated on the basis of a 360-day
year and for the actual number of days elapsed. Interest hereunder will be paid
to the Person (as defined in Section 6 of this Debenture) in whose name this
Debenture is registered on the records of the Company regarding registration and
transfers of the Debentures (the "Debenture Register"). All overdue, accrued
<PAGE> 2
and unpaid interest and other amounts due hereunder shall bear interest at the
rate of 18% per annum and accrue daily from the date such interest is due
hereunder through and including the date of payment. The principal of, and
interest on, this Debenture are payable in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts, at the address of the Holder last appearing on the
Debenture Register, except that interest due on the principal amount (but not
overdue interest) may, at the Company's option, be paid in shares of Common
Stock (as defined in Section 6 of this Debenture) valued at the Conversion Price
(as defined below) at the time such interest becomes due. All amounts due
hereunder other than interest shall be paid in cash. Notwithstanding anything
to the contrary contained herein, the Company may not issue shares of the Common
Stock in payment of interest on the principal amount if: (i) the number of
shares of Common Stock at the time authorized, unissued and unreserved for all
purposes, or held as treasury stock, is insufficient to pay interest hereunder
in shares of Common Stock; (ii) such shares are not either registered for resale
pursuant to an Underlying Securities Registration Statement (as defined in
Section 6 of this Debenture) or freely transferable without volume restrictions
pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), as determined by counsel to the Company pursuant to a
written opinion letter, addressed to and in form and substance acceptable to the
Company's transfer agent or other person or entity performing similar functions
thereto; (iii) such shares are not listed on the American Stock Exchange
("AMEX") (or the Toronto Stock Exchange, Nasdaq National Market, Nasdaq SmallCap
Market, New York Stock Exchange or OTC Bulletin Board) and any other exchange,
market and trading facility on which the Common Stock is then listed for
trading; or (iv) the issuance of such shares would result in the recipient
thereof beneficially owning more than 4.999% of the issued and outstanding
shares of Common Stock as determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended. Payment of interest on the
principal amount in shares of Common Stock is further subject to the provisions
of Section 4(a)(ii) of this Debenture.
This Debenture is subject to the following additional provisions:
Section 1. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same but shall not be issuable in
denominations of less than integral multiplies of Fifty Thousand Dollars
($50,000) unless such amount represents the full principal balance of Debentures
outstanding to such Holder. No service charge will be made for such registration
of transfer or exchange.
Section 2. This Debenture has been issued subject to
certain investment representations of the original Holder set forth in the
Purchase Agreement and may be transferred or exchanged only in compliance with
the Purchase Agreement. Prior to due presentment to the Company for transfer of
this Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Debenture Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary
-2-
<PAGE> 3
Section 3.
(a) "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative
or governmental body):
(i) any default in the payment of the principal of,
interest on or liquidated damages in respect of, this Debenture, free
of any claim of subordination, as and when the same shall become due
and payable (whether on the applicable interest payment date, the
Conversion Date, the Maturity Date, by acceleration or otherwise);
(ii) failure to deliver conversion shares within three
Trading Days of the related Conversion Date or failure to otherwise
comply with the provisions of Section 4(b) of this Debenture;
(iii) the Company shall fail to observe or perform any
other covenant, agreement or warranty contained in, or otherwise
commit any breach of, this Debenture, the Purchase Agreement, the
Security Agreement or the Registration Rights Agreement, and such
failure or breach shall not have been remedied within 10 days, after
the date on which written notice of such failure or breach shall have
been given;
(iv) the Company or any of its subsidiaries shall commence
a case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof; or there is
commenced against the Company or any subsidiary thereof any such
bankruptcy, insolvency or other proceeding which remains undismissed
for a period of 60 days; or the Company or any subsidiary thereof is
adjudicated insolvent or bankruptcy; or any order of relief or other
order approving any such case or proceeding is entered; or the Company
or any subsidiary thereof suffers any appointment of any custodian or
the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company or any
subsidiary thereof makes a general assignment for the benefit of
creditors; or the Company shall fail to pay, or shall state that it is
unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition or
adjustment of its debts; or the Company or any subsidiary thereof shall
by any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing; or any corporate or other action
is taken by the Company or any subsidiary thereof for the purpose of
effective any of the foregoing;
(v) the Company shall default in any of its obligations
or an event shall occur, or shall fail to occur, which gives (or would
give after the passage of time or giving of notice or both) the
payee of any such obligation the right to accelerate the payment
-3-
<PAGE> 4
thereof under any mortgage, credit agreement or other facility,
indenture agreement, promissory note or other instrument under which
there may be issued, or by which there may be secured or evidenced any
indebtedness of the Company in an amount exceeding one hundred
thousand dollars ($100,000), whether such indebtedness now exists or
shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise become due and payable;
(vi) the Common Stock shall be delisted from the AMEX or
any other national securities exchange or market on which such Common
Stock is then listed for trading or suspended from trading thereon
without being relisted or having such suspension lifted, as the case
may be, within three (3) Trading Days (if after the Original Issue
Date the Common Stock shall be listed for trading or quoted on the
Toronto Stock Exchange, Nasdaq SmallCap Market, Nasdaq National Market
or any other national securities exchange or market, this provision
shall apply to any delistings or suspensions therefrom);
(vii) the Company shall be a party to any merger or
consolidation pursuant to which the Company shall not be the surviving
entity or shall sell, transfer or otherwise dispose of all or
substantially all of its assets in one or more transactions, or shall
redeem more than a de minimis number of shares of Common Stock (other
than redemptions of Underlying Shares);
(viii) an Underlying Securities Registration Statement shall
not have been declared effective by the Securities and Exchange
Commission (the "Commission") on or prior to the 150th day after the
Original Issue Date; or
(ix) an Event (as hereinafter defined) shall not have been
cured prior to the expiration of thirty (30) days from the Event Date
(as hereinafter defined) relating thereto (other than an Event
resulting from a failure of an Underlying Securities Registration
Statement to be declared effective by the Commission on or prior to
the 150th day after the Original Issue Date).
(b) If any Event of Default occurs and is continuing, the
Holder may, by written notice to the Company, declare the full principal amount
of this Debenture (and, at such Holder's option, all other Debentures then held
by such Holder), together with interest and other amounts owing in respect
thereof, to the date of acceleration, to be, whereupon the same shall become,
immediately due and payable in cash. The aggregate amount payable in respect of
the Debentures shall be equal to the sum of (i) the Mandatory Repayment Amount
(as defined in Section 6 of this Debenture) plus (ii) the product of (A) the
number of Underlying Shares issued in respect of conversions hereunder and then
held by the demanding Holder and (B) the Per Share Market Value on the date
prepayment is demanded or the date the full prepayment price is paid, whichever
is greater. The demanding Holder need not provide and the Company hereby waives
any presentment, demand, protest or other notice of any kind, and the Holder
may immediately and without expiration of any grace period enforce any and all
of its rights and remedies hereunder and all other remedies available to it
under applicable law. Such declaration
-4-
<PAGE> 5
may be rescinded and annulled by Holder at any time prior to payment hereunder.
No such rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon.
Section 4.
(a)(i) This Debenture shall be convertible into shares of Common
Stock at the option of the Holder in whole or in part at any time and from time
to time after the original Issue Date and prior to the close of business on the
Maturity Date. The number of shares of Common Stock as shall be issuable upon a
conversion hereunder shall be determined by dividing the outstanding principal
amount of this Debenture to be converted, plus all accrued but unpaid interest
thereon (which the Company does not elect to pay in cash), by the Conversion
Price (as defined below), each as subject to adjustment as provided hereunder.
The Holder shall effect conversions by surrendering the Debentures (or such
portions thereof) to be converted, together with the form of conversion notice
attached hereto as Exhibit A (the "Conversion Notice") to the Company. Each
Conversion Notice shall specify the principal amount of Debentures to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date such Conversion Notice is deemed to have been
delivered hereunder (the "Conversion Date"). If no Conversion Date is specified
in a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed delivered hereunder. Subject to Sections 4(a)(ii)
and 4(b) of this Debenture and Section 3.8 of the Purchase Agreement, each
Conversion Notice, once given, shall be irrevocable. If the Holder is
converting less than all of the principal amount represented by the
Debenture(s) tendered by the Holder with the Conversion Notice, or if a
conversion hereunder cannot be effected in full for any reason, the Company
shall honor such conversion to the extent permissible hereunder and shall
promptly deliver to such Holder (in the manner and within the time set forth in
Section 5(b) of this Debenture) a new Debenture for such principal amount as
has not been converted.
(ii) Certain Regulatory Approval. If on any Conversion
Date (A) the Common Stock is listed for trading on the Nasdaq National Market,
Nasdaq SmallCap Market, New York Stock Exchange or AMEX, (B) the Conversion
Price then in effect is such that the aggregate number of shares of the Common
Stock that would then be issuable upon conversion of the entire outstanding
principal amount of Debentures, together with any shares of the Common Stock
previously issued upon conversion of Debentures and as payment of interest
thereunder would equal or exceed 20% of the number of shares of the Common
Stock outstanding on the Original Issue Date (such number of shares as would
not equal or exceed such 20% limit, the "Issuable Maximum"), and (C) the
Company has not previously obtained the vote of shareholders, if any, as may be
required by the rules and regulations of The Nasdaq Stock Market, the New York
Stock Exchange, the AMEX or any other securities market or exchange on which
the Common Stock is then listed or quoted for trading (as applicable) to
approve the issuance of Common Stock in excess of the Issuable Maximum in a
private placement for less than the greater of book or fair market value of the
Common Stock, then the Company shall issue to any Holder so requesting
conversion of Debentures its pro rata portion of the Issuable Maximum in the
same ratio that the aggregate principal amount of Debentures then outstanding
and held by such Holder bears to the aggregate principal amount of Debentures
then outstanding and, with respect to the remainder of the aggregate principal
amount of Debentures then held
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<PAGE> 6
by such Holder for which a conversion in accordance with the Conversion Price
would result in an issuance of Common Stock in excess of such Holder's pro rata
portion of the Issuable Maximum, the Holder shall have the option to require
the Company to either (1) prepay the balance of the aggregate principal amount
of the Debentures then outstanding and held by such Holder at a price equal to
the sum of the Mandatory Prepayment Amount or (2) issue and deliver to such
Holder (i) a number of shares of Common Stock as equals (x) the principal
amount of Debentures (or such portions thereof) tendered for conversion in
respect of the Conversion Notice at issue but for which a conversion in
accordance with the other terms hereof would result in an issuance of Common
Stock in excess of such Holder's pro rata portion of the Issuable Maximum
divided by (y) the Average Price on the Closing Date, and (ii) cash in an
amount equal to the difference between (A) the product of (x) the Per Share
Market Value on the Conversion Date and (y) the number of shares of Common
Stock in excess of such Holder's pro rata portion of the Issuable Maximum that
would have otherwise been issuable to the Holder in respect of such conversion
but for the provisions of this Section and (B) the value of the shares of
Common Stock issued under Section 4(a)(ii)(2)(i) above (such amount of cash
being hereinafter referred to as the "Discount Equivalent"). In the event of
any failure by the Company to pay the full Discount Equivalent or prepayment
price for the Debentures, as the case may be, pursuant to this Section 4(a)(ii)
within seven days after the date payable, the Company will pay interest thereon
at a rate of 18% per annum, which will accrue daily, to the converting Holder,
accruing from the Conversion Date until such amount, plus all such interest
thereon, is paid in full. Any failure to pay the prepayment price or Discount
Equivalent under this Section 4(a)(ii) prior to the date that interest thereon
commences shall constitute a default under Section 3(a)(i). The entire
prepayment price or Discount Equivalent, as the case may be, including interest
thereon, shall be paid in cash.
(b) Not later than three Trading Days after the Conversion Date,
the Company will deliver to the Holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number
of shares of the Common Stock being acquired upon the conversion of Debentures
(subject to reduction pursuant to Section 4(a)(ii) hereof and Section 3.8 of
the Purchase Agreement), (ii) Debentures in a principal amount equal to the
principal amount of Debentures not converted; (iii) a bank check in the amount
of all accrued and unpaid interest (if the Company has elected to pay accrued
interest in cash), together with all other amounts then due and payable in
accordance with the terms hereof, in respect of Debentures tendered for
conversion, (iv) if the Company has elected to pay accrued interest in shares
of the Common Stock, certificates, which shall be free of restrictive legends
and trading restrictions (other than those required by Section 3.1(b) of the
Purchase Agreement), representing such number of shares of the Common Stock as
equals such interest divided by the Conversion Price calculated on the
Conversion Date, and (v) if the Conversion Price used in such Conversion is
the Ceiling Price (as defined in (c) below), Warrants that will (A) expire on
December 31, 2001, (B) have an exercise price equal to the Average Price on the
Closing Date, (C) be exercisable into an amount of shares of Common Stock equal
to the product of (a) the face value of the Debentures converted divided by the
Conversion Price used in connection with such conversion and (b) 25%, and (D)
be subject to the terms set forth in the Warrants; provided, however, that the
Company shall not be obligated to issue certificates evidencing the shares of
the Common Stock or the Warrants, if any, issuable upon conversion of the
principal amount of Debentures until
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<PAGE> 7
Debentures are delivered for conversion to the Company or the Holder notifies
the Company that such Debenture has been mutilated, lost, stolen or destroyed
and complies with Section 9 hereof. The Company shall, upon request of the
Holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates, including for purposes hereof, any
shares of the Common Stock to be issued on the Conversion Date on account of
accrued but unpaid interest hereunder, are not delivered to or as directed by
the applicable Holder by the third Trading Day after the Conversion Date, the
Holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
Debentures tendered for conversion.
(c) (i) The conversion price (the "Conversion Price") in
effect on any Conversion Date shall be the lesser of (A) 90% of the average of
the three lowest closing bid prices of the Common Stock in the ten Trading Day
period prior to the date of submission of a Conversion Notice and (B) 120% of
the Average Price on the Closing Date (the "Ceiling Price") provided that within
each successive 30-day period following the Closing Date, a Holder may not
convert Debentures having a face value greater than 10% of the aggregate face
value of all Debentures held by such Holder on the Closing Date at a Conversion
Price below the Floor Price (as defined in Section 6 of this Debenture),
provided, that if a Holder has converted Debentures up to such 10% limit in such
30-day period and the then Conversion Price is below the Floor Price such Holder
may continue to convert its Debentures for the balance of such period using a
Conversion Price equal to the Floor Price. Notwithstanding anything herein to
the contrary, (a) if an Underlying Securities Registration Statement is not
filed on or prior to the Filing Date (as such term is defined in the
Registration Rights Agreement), or (b) if the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2 promulgated
under the Securities Exchange Act of 1934, as amended, within five (5) days of
the date that the Company is notified (orally or in writing, whichever is
earlier) by the Commission that an Underlying Securities Registration Statement
will not be "reviewed" or is not subject to further review or comment by the
Commission, or (c) if the Underlying Securities Registration Statement is not
filed with the Commission on or prior to the Filing Date (as such term is
defined in the Registration Rights Agreement) or declared effective by the
Commission on or prior to the Effective Date (as such term is defined in the
Registration Rights Agreement), or (d) if such Underlying Securities
Registration Statement is filed with and declared effective by the Commission
but thereafter ceases to be effective as to all Registrable Securities (as such
term is defined in the Registration Rights Agreement) at any time prior to the
expiration of the "Effectiveness Period" (as such term is defined in the
Registration Rights Agreement), without being succeeded by a subsequent
Underlying Securities Registration Statement filed with and declared effective
by the Commission within ten (10) days, or (e) if trading in the Common Stock
shall be suspended, or if the Common Stock shall be delisted from trading, on
the AMEX or any other national securities market or exchange on which the Common
Stock is then listed or quoted for trading for any reason for more than three
(3) Trading Days, or (f) if the conversion rights of the Holders of Debentures
are suspended for any reason or if the Holder is not permitted to resell
Registrable Securities under the Underlying Securities Registration Statement
(any such failure being referred to as an "Event," and for purposes of clauses
(a), (c)
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<PAGE> 8
and (f) the date on which such Event occurs, or for purposes of clause (b) the
date on which such five (5) days period is exceeded, or for purposes of clause
(d) the date which such ten (10) day period is exceeded, or for purposes of
clause (e) the date on which such three (3) Trading Day period is exceeded,
being referred to as "Event Date"), then on the Business Day following an Event
Date the Company shall pay to the holders of the Debentures 1% of the aggregate
principal amount of Debentures then outstanding (each holder being entitled to
receive such portion of such amount as equals its pro rata portion of the
Debentures then outstanding) in cash as liquidated damages, and not as a
penalty, and the Company shall pay to the holders of the Debentures an
additional 1% of the aggregate principal amount of Debentures then outstanding
(each holder being entitled to receive such portion of such amount as equals
its pro rata portion of the Debentures then outstanding) in cash as liquidated
damages, and not as a penalty, on the first day of each monthly anniversary of
such Event Date until such time as the applicable Event is cured. The
provisions of this Section are not exclusive and shall in no way limit the
Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of the Common Stock, (b) subdivide
outstanding shares of the Common Stock into a larger number of shares, (c)
combine outstanding shares of the Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, the Ceiling Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding before such event and of
which the denominator shall be the number of shares of the Common Stock
outstanding after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of the Common Stock
(and not to Holders of Debentures) entitling them to subscribe for or purchase
shares of the Common Stock at a price per share less than the Per Share Market
Value of the Common Stock at the record date mentioned below, the Ceiling Price
shall be multiplied by a fraction, of which the denominator shall be the number
of shares of the Common Stock (excluding treasury shares, if any) outstanding
on the date of issuance of such rights or warrants plus the number of
additional shares of the Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at such Per Share
Market Value. Such adjustment shall be made whenever such rights or warrants
are issued, and shall become effective immediately after the record date for
the determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Ceiling
Price pursuant to this Section, if any such right or warrant shall expire and
shall not have been exercised, the Ceiling Price shall immediately upon such
expiration be
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<PAGE> 9
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Ceiling Price made pursuant to the provisions of this Section 4 after the
issuance of such rights or warrants) had the adjustment of the Ceiling Price
made upon the issuance of such rights or warrants been made on the basis of
offering for subscription or purchase only that number of shares of the Common
Stock actually purchased upon the exercise of such rights or warrants actually
exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of the Common Stock (and not to
Holders of Debentures) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security, then in each such case the
Ceiling Price at which Debentures shall thereafter be convertible shall be
determined by multiplying the Ceiling Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of the Common Stock determined as of the record date mentioned
above, and of which the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market value at such record
date of the portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as determined by the
Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the holders of a majority in interest of Debentures then
outstanding; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the holders of
Debentures of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one share of the Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock
or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holder of this Debenture
shall have the right thereafter to, at its option, (A) convert the then
outstanding principal amount, together with all accrued but unpaid interest and
any other amounts then owing hereunder in respect of this Debenture only into
the shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of the Common Stock following such
reclassification or share exchange, and the Holders of the Debentures shall be
entitled upon such event to receive such amount of securities, cash or property
as the shares of the Common Stock of the Company into which the then
outstanding principal amount, together with all accrued but unpaid interest and
any other amounts then owing hereunder in respect of this Debenture could have
been converted immediately prior to such reclassification or share exchange
would have been entitled or (B) require the Company to prepay, from funds
legally available therefor at the time of such prepayment, the aggregate of its
outstanding principal amount of Debentures, plus all interest
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<PAGE> 10
and other amounts due and payable thereon, at a price determined in accordance
with Section 3(b). The entire prepayment price shall be paid in cash. This
provision shall similarly apply to successive reclassifications or share
exchanges.
(vi) All calculations under this Section 4 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Ceiling Price is adjusted pursuant to
any of Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder
of Debentures a notice setting forth the Ceiling Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, of any compulsory
share of exchange whereby the Common Stock is
converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of the Debentures, and shall cause to be mailed
to the Holders of Debentures at their last addresses as they shall appear upon
the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
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<PAGE> 11
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however,
that the failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required to be
specified in such notice. Holders are entitled to convert Debentures, without
restriction under Section 4(c)(i) of this Debenture, during the 30-day period
commencing the date of such notice to the effective date of the event
triggering such notice.
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued shares of the Common Stock
solely for the purpose of issuance upon conversion of the Debentures and
payment of interest on the Debentures, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of shares of the Common Stock
as shall be required by the Purchase Agreement (taking into account the
adjustments and restrictions of Section 4(c) of this Debenture).
(e) Upon a conversion hereunder, the Company shall not be required
to issue stock certificates representing fractions of shares of the Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of the Common Stock or
Warrants, if any on conversion of the Debentures shall be made without charge
to the Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate, provided that
the Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate
upon conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries to
be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the Company, at 8350 N. Central Expressway, Suite M2030, Dallas, Texas 75206
(facsimile number (214) 363-4294), attention Chief Financial Officer, or such
other address or facsimile number as the Company may specify for such purposes
by notice to the Holders delivered in accordance with this Section. Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to each Holder of the Debentures at
the facsimile
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<PAGE> 12
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
7:00 p.m. (New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 7:00 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) four days after deposit in the United States mail, (iv) the Business Day
following the date of mailing, if send by nationally recognized overnight
courier service, or (v) upon actual receipt by the party to whom such notice is
required to be given. For purposes of Section 4(c)(i), if a Conversion Notice is
delivered by facsimile prior to 7:00 p.m. (New York City time) on any date, then
the day prior to such date shall be the last Trading Day calculated to determine
the Conversion Price applicable to such Conversion Notice, and the date of such
delivery shall commence the counting of days for purposes of Section 4(b).
Section 5.
(a) The Company shall have the right, exercisable at any time upon
twenty (20) Trading Days prior written notice to the Holders of the Debentures
to be prepaid (the "Optional Prepayment Notice"), to prepay, from funds legally
available therefor at the time of such prepayment, all or any portion of the
outstanding principal amount of the Debentures which have not previously been
repaid or for which Conversion Notices have not previously been delivered
hereunder, at a price equal to the Optional Prepayment Price (as defined below).
Any such prepayment by the Company shall be in cash and shall be free of any
claim of subordination. The Holders shall have the right to tender, and the
Company shall honor Conversion Notices, without restriction under Section
4(c)(i) of this Debenture, delivered prior to the expiration of the twentieth
(20th) Trading Day after receipt by the Holders of an Optional Prepayment Notice
for such Debentures (such date, the "Optional Prepayment Date").
(b) If any portion of the Optional Prepayment Price shall not be
paid by the Company by the Optional Prepayment Date, the Optional Prepayment
Price shall be increased by 18% per annum (to accrue daily) until paid (which
amount shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of the optional Prepayment Price remains unpaid through the
expiration of the Optional Prepayment Date, the Holder subject to such
prepayment may elect by written notice to the Company to either (i) demand
conversion in accordance with the formula and the time period therefor set forth
in Section 4, without restriction under Section 4(c)(i) of this Debenture, of
any portion of the principal amount of Debentures for which the Optional
Prepayment Price, plus accrued liquidated damages thereof, has not been paid in
full (the "Unpaid Prepayment Principal Amount"), in which event the applicable
Per Share Market Value shall be the lower of the Per Share Market Value
calculated on the Optional Prepayment Date and the Per Share Market Value as of
the Holder's written demand for conversion, or (ii) invalidate ab initio such
optional redemption, notwithstanding anything herein contained to the contrary.
If the Holder elects option (i) above, the Company shall within three (3)
Trading Days after such election is deemed delivered hereunder, issue and
deliver to the Holder the shares of Common Stock issuable upon conversion of the
Unpaid
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<PAGE> 13
Prepayment Principal Amount and otherwise perform its obligations hereunder
with respect thereto; or, if the Holder elects option (ii) above, the Company
shall promptly, and in any event not later than three Trading Days from receipt
of notice of such election, return to the Holder new Debentures for the full
Unpaid Prepayment Principal Amount.
(c) The "Optional Prepayment Price" for any Debentures shall equal
the sum of (i) the quotient of (A) the face amount of such Debentures plus all
accrued but unpaid interest and (B) 75%, and (ii) all other amounts and
liquidated damages due in respect of such principal amount.
(d) The Company shall also have the option to prepay any or all of
the aggregate amount of Debentures that have been tendered for conversion at a
Conversion Price below the Floor Price in each successive 30-day period
following the Closing Date for an amount of cash equal to the sum of (i) the
quotient of (A) the face amount of the Debentures tendered for conversion at a
Conversion Price below the Floor Price plus all accrued but unpaid interest and
(B) 90% and (ii) all other amounts and liquidated damages due in respect of
such principal amount. In order to exercise such option in any such 30-day
period, the Company must notify the Holders of the Company's election not less
than ten Trading Days prior the commencement of such 30-day period.
Section 6. For the purposes hereof, the following terms shall have the
following meanings:
"Average Price" on any date means the average Per Share Market Value
for the five (5) Trading Days immediately preceding such date.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government action to close.
"Common Stock" means the Company's common stock, no par value per
share, of the Company and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"Floor Price" means 80% of the Average Price on the Closing Date.
"Mandatory Repayment Amount" for any Debentures shall equal the sum of
(i) the principal amount of Debentures to be prepaid, plus all accrued and
unpaid interest thereon, divided by the Conversion Price on (x) the date the
Mandatory Prepayment Amount is demanded or (y) the date the Mandatory
Prepayment Amount is paid in full, whichever is less, multiplied by the Per
Share Market Value on (x) the date the Mandatory Prepayment Amount is demanded
or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is
greater, and (ii) all other amounts, costs, expenses and liquidated damages due
in respect of such Debentures.
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<PAGE> 14
"Original Issue Date" shall mean the date of the first issuance of any
Debentures regardless of the number of transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence such
Debenture.
"Per Share Market Value" on any particular date means (a) the closing
bid price per share of the Common Stock on such date on the American Stock
Exchange, Nasdaq SmallCap Market or other stock exchange or quotation system on
which the Common Stock is listed for trading, or (b) if the Common Stock is not
listed on the AMEX, Nasdaq SmallCap Market or any other stock exchange or
market, the closing bid price per share of the Common Stock on such date on the
over-the-counter market, as reported by the AMEX, or (c) if the Common Stock
is not quoted on the AMEX, the closing bid price per share of Common Stock on
such date on the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding its
functions of reporting prices), or (d) if the Common Stock is no longer traded
on the over-the-counter market and reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices), such closing bid price shall be determined by reference to
"Pink Sheet" quotes for the relevant conversion period as determined in good
faith by the Holder or (e) if the Common Stock is not then publicly traded, the
fair market value of a share of Common Stock as determined by an appraiser
selected in good faith by the Holders of a majority in interest of the
Debentures (the Company, after receipt of the determination by such appraiser,
shall have the right to select an additional appraiser, in which case, the fair
market value shall be equal to the average of the determinations by each such
appraiser); provided, however, that all determinations of the Per Share Market
Value shall be appropriately adjusted for any stock dividends, stock splits or
other similar transactions during such period.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Debenture Purchase
Agreement, dated as of the Original Issue Date, among the Company and the
original Holders of Debentures, as amended, modified or supplemented from time
to time in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, among the Company and the
original Holders of Debentures, as amended, modified or supplemented from time
to time in accordance with its terms.
"Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq Stock Market or other stock exchange or market on which the Common
Stock has been listed, or (b) if the Common Stock is not then listed on the
Nasdaq Stock Market or any stock exchange or market, a day on which the Common
Stock is traded on the over-the-counter market, as reported by the AMEX, or (c)
if the Common Stock is not quoted on the AMEX, a day on which the Common Stock
is quoted on the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding its
functions of reporting prices).
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<PAGE> 15
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of the Debentures and as payment of interest in respect thereof, and
upon exercise of the Warrants.
"Underlying Securities Registration Statement" means a registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holders as a "selling stockholders" thereunder.
Section 7. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks pari passu with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof
Section 8. This Debenture shall not entitle the Holder to any of the
rights of a stockholder of the Company, including without limitation, the right
to vote, to receive dividends and other distributions, or to receive any notice
of, or to attend, meetings of stockholders or any other proceedings of the
Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 9. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 10. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or that such suit, action or proceeding is
improper. The Company hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
receiving a copy thereof sent to the Company at the address in effect for
notices to it under this instrument and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.
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<PAGE> 16
Section 11. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision
of this Debenture. The failure of the Company or the Holder to insist upon
strict adherence to any term of this Debenture on one or more occasions shall
not be considered a waiver or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Debenture.
Any waiver must be in writing.
Section 12. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
Section 13. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day (or, if such next succeeding Business Day falls in
the next calendar month, the preceding Business Day in the appropriate calendar
month).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 17
IN WITNESS WHEREOF, the Company has caused this Debenture to
be duly executed by a duly authorized officer as of the date first above
indicated.
COTTON VALLEY RESOURCES CORPORATION
By:
--------------------------------------
Name:
Title:
Attest:
By:
-----------------------------------
Name:
Title:
<PAGE> 18
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. ___-1 into shares of
Common Stock, no par value per share (the "Common Stock"), of Cotton Valley
Resources Corporation (the "Company") according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and opinions
as reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
----------------------------------------------
Date to Effect Conversion
----------------------------------------------
Principal Amount of Debentures to be Converted
----------------------------------------------
Number of shares of Common Stock to be Issued
----------------------------------------------
Applicable Conversion Price
----------------------------------------------
Signature
----------------------------------------------
Name
----------------------------------------------
Address
<PAGE> 1
EXHIBIT 10.1
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT ("Agreement") is made and entered
into this 22nd of October, 1997, by and between FEAGAN ENERGY, INC., a Texas
corporation ("Seller") and COTTON VALLEY ENERGY CORP., a Nevada corporation
("Buyer").
WHEREAS, Buyer desires to purchase and Seller desires to sell
all of Seller's right, title and interest in and to the oil, gas and mineral
leases, royalty and overriding royalty interests, and associated assets and
contract rights located in the South Neill Field, Nolan and Fisher Counties,
Texas; and
WHEREAS, Seller and Buyer desire to set forth herein the terms and
provisions of their agreements and understandings;
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
GENERAL TERMS AND CONDITIONS
1.01 Sale of Subject Properties.
1.01.01 Subject to the terms and conditions herein
contained, Seller covenants and agrees to sell to Buyer, and Buyer
covenants and agrees to buy from Seller all of Seller's right,
title and interest in and to the Leases, Pooling Rights, Contracts
and other rights and interests identified hereinbelow, (all of
such interests being collectively referred to herein as the
"Subject Properties"):
(A) The oil, gas and mineral leases and all lands
covered thereby, pooled, unitized or communitized therewith
(the "Leases") and wells located thereon (the "Wells") as
set forth on Exhibits A attached hereto together and all
overriding royalty interests or any other rights to proceeds
from the production of oil, gas or minerals thereunder.
(B) All presently existing and valid oil gas or mineral
unitization, pooling, operating and communitization
agreements, declarations and orders, and the units
created thereby including, without limitation, all units
voluntarily formed or formed under orders, regulations,
rules or other official acts of any federal state or
other governmental authority having jurisdiction, insofar and
only insofar as they relate to the Leases (herein the
"Pooling Rights").
PURCHASE AND SALE AGREEMENT, PAGE 1
<PAGE> 2
(C) All presently existing and valid oil and gas sales,
purchase, transportation, gathering, exchange and processing
contracts, casinghead gas contracts, operating agreements,
joint venture agreements and other agreements and instruments
(including without limitation, future interests, reversionary
rights and deferred interests and also including rights to
recoup underproduced volumes of gas), insofar and only insofar
as they relate to the Subject Properties (the "Contracts") and
to the extent the transfer thereof is not prohibited by
existing contractual arrangements, together with all
franchises, licenses, permits, approvals, consents,
certificates and other authorizations and other rights granted
by governmental authorities and all certificates of convenience
or necessity, immunities, privileges, grants and other rights,
that relate to the Leases or the ownership or operation of any
thereof (the "Permits"), insofar and only insofar as any of
them relate to such properties and are assignable by Seller.
Notwithstanding the foregoing all existing agreements between
Seller and any affiliate of Seller shall not be considered as
"Contracts" and shall not be assigned to or assumed by Buyer.
(D) All personal property, improvements, lease and well
equipment, easements, permits, servitudes and rights-of-way
(including as applicable, but not limited to, any wells, tanks,
boilers, buildings, platforms, flowlines, fixtures, machinery,
injection facilities, saltwater disposal facilities,
compression facilities and other equipment, gathering systems,
power lines, telephone and telegraph lines, roads and other
appurtenances and easements) owned by Seller and which are now
located on the Subject Properties or if not located on the
Subject Properties which are being used in connection with the
exploration, development, operation, transportation or
marketing of production or maintenance of the Subject
Properties, or any unit or units in which part or parts of the
Subject Properties may be included, or being used in connection
with the production, treating, storing, transportation or
marketing of oil, gas and the minerals, produced from or
allocated to the Subject Properties or such unit or units.
(E) All lease files, land files, well files, gas and oil
sales contract files, gas processing files, division order
files, geological maps and interpretations, abstracts, title
opinions and all other books, files and records, information,
seismic and other geophysical data and other data and all
rights thereto of Seller insofar as the same are directly
related to and necessary to the realization of any value by
Buyer of the Leases and the Wells, to the extent the transfer
thereof is not prohibited by existing contractual obligations
with third parties and subject to the rights, if any, of third
parties.
1.01.02 The Subject Properties shall not include any of the
following (referred to herein as the "Excluded Assets"), except as
otherwise provided herein: (A) those assets described on Exhibit B; (B)
all trade credits and all accounts, instruments and general intangibles
(as such terms are defined in the Texas Uniform Commercial Code)
attributable
PURCHASE AND SALE AGREEMENT, PAGE 2
<PAGE> 3
to the Subject Properties with respect to any period of time prior to
the Effective Date; (C) all claims and causes of action of Seller (i)
arising from acts, omissions or events, or damage to or destruction of
property, occurring prior to the Effective Date, (ii) arising under or
with respect to any contract related to the Subject Properties that are
attributable to periods of time prior to the Effective Date (including
claims for adjustments or refunds), or (iii) with respect to any of the
Excluded Assets; (D) all rights and interests of Seller (i) under any
policy or agreement of insurance or indemnity, (ii) under any bond, or
(iii) to any insurance or condemnation proceeds or awards arising, in
each case, from acts, omissions or events, or damage to or destruction
of property, occurring prior to the Effective Date; (E) all oil, gas or
other hydrocarbons produced and sold from the Leases or stored in tanks
with respect to all periods prior to the Effective Date, together with
all proceeds from or of such substances; (F) claims of Seller for
refunds of or loss carry forwards with respect to (i) production or any
other taxes attributable to any period prior to the Effective Date,
(ii) income or franchise taxes, or (iii) any taxes attributable to the
Excluded Assets; (G) all amounts due or payable to Seller as
adjustments to insurance premiums related to the Subject Properties
with respect to any period prior to the Effective Date; (H) all
proceeds, income or revenues (and any security or other deposits)
attributable to (i) the Subject Properties for any period prior to the
Effective Date, or (ii) any Excluded Assets; (1) all of Seller's
proprietary computer software, patents, trade secrets, copyrights,
names, trademarks, logos and other intellectual property; (J) all
documents and instruments of Seller that may be protected by an
attorney-client privilege; and (K) all audit rights with respect to any
period prior to the Effective Date.
1.01.03 The conveyance of the Subject Properties shall be
evidenced by an Assignment of Oil, Gas and Mineral Leases, Contract
Rights and Bill of Sale ("Assignment") in the form attached hereto as
Exhibit C-1, and shall be effective as of October 1, 1997, at 7:00 a.m.
Central Time (the "Effective Date"), which shall convey Seller's
interest in the Subject Properties to Buyer subject to all royalties,
overriding royalties, burdens and encumbrances and without warranty of
title, express or implied.
1.02 Consideration. The purchase price to be paid by Buyer for the Subject
Properties shall be: four hundred thousand dollars ($400,000.00, (US) in cash
(herein called the "Base Purchase Price").
The Base Purchase Price shall be payable by wire transfer in immediately
available funds and actually received in Seller's bank account on or before 3:00
p.m., Central Time, on the date on which the closing occurs (the "Closing
Date"). The Base Purchase Price shall be reduced or increased based upon the
adjustments to be made pursuant to Section 1.03 as otherwise provided for in
this Agreement.
1.03 Adjustments to the Base Purchase Price.
1.03.01 Income and Expense Adjustments. Appropriate
adjustments shall be made between Buyer and Seller so that (A) all
expenses (including, without limitation, all drilling costs, all
capital expenditures, and all overhead charges under applicable
operating
PURCHASE AND SALE AGREEMENT, PAGE 3
<PAGE> 4
agreements, and all other overhead charges actually charged by third
parties) which are incurred in the operation of the Subject Properties
before the Effective Date will be borne by Seller and all proceeds (net
of applicable production, severance, and similar taxes) from sale of
oil, gas and/or other minerals produced therefrom and all other items
income related to the Subject Properties before the Effective Date will
be received by Seller, and (B) all expenses (including, without
limitation, all capital expenditures, all drilling costs, and all
overhead charges under applicable operating agreements, and all other
overhead charges actually charged by third parties) which are incurred
in the operation of the Subject Properties after the Effective Date
will be borne by Buyer and all proceeds (net of applicable production,
severance, and similar taxes) from the sale of oil, gas and/or other
minerals produced therefrom and all other items income related to the
Subject Properties after the Effective Date will be received by Buyer.
1.03.02 Oil In Tanks. No adjustment will be made for oil
which was produced from the Subject Properties and which was, on the
Effective Date, stored in tanks located on the Subject Properties
(or located elsewhere but used by Seller to store oil produced from
the Subject Properties prior to delivery to oil buyer).
1.03.03 Ad Valorem Taxes. Ad valorem taxes assessed with
respect to a period which the Effective Date splits shall be
prorated based on the number of days in such period which fall on
each side of the Effective Date (with the day on which the
Effective Date falls being counted in the period after the Effective
Date).
1.03.04 Additional Adjustments. Notwithstanding the
provisions of this Section 1.03, there may be additional adjustments
as required pursuant to Article VI or as otherwise provided for in
this Agreement.
1.03.05 Closing Statement. Seller shall deliver to Buyer
not less than three (3) business days before the Closing Date a
statement (the "Closing Statement") setting forth Seller's estimate
of the accrued adjustments (excluding, however, any adjustments
proposed to be made pursuant to Article VI hereof) to the Base
Purchase Price provided for in this Section 1.03 and other provisions
of this Agreement. Seller and Buyer shall cooperate in an attempt to
agree to the adjustments to be made to the Base Purchase Price at
Closing; provided that if the parties are unable to agree,
Buyer's estimate shall be used to make the adjustment to the Base
Purchase Price at Closing. On or before 90 days after Closing, Buyer
and Seller shall determine the final amounts of such adjustments,
and Seller shall make such final adjustments by appropriate
payments from Seller to Buyer or by appropriate payments from
Buyer to Seller.
1.04 Equipment Condition. All equipment and other personal property
appurtenant to the Subject Properties shall be transferred subject to normal
wear and tear and without warranties of any kind, whether expressed or implied,
and are sold "AS IS WITH ALL FAULTS AND DEFECTS" and "WITH NO WARRANTY AS TO
MERCHANTABILITY, FITNESS OR SUITABILITY FOR
PURCHASE AND SALE AGREEMENT, PAGE 4
<PAGE> 5
ANY PARTICULAR PURPOSE". THIS SALE SHALL BE MADE (a) WITHOUT ANY WARRANTY OR
REPRESENTATION OF TITLE, EITHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE,
EXCEPT AS EXPRESSLY PROVIDED HEREIN, (b) WITHOUT ANY EXPRESS, IMPLIED,
STATUTORY OR OTHER WARRANTY AS TO FITNESS FOR A PARTICULAR PURPOSE,
CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY OF THE
ASSETS OR THEIR FITNESS FOR ANY PURPOSE; AND (c) WITHOUT ANY OTHER EXPRESS,
IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER.
1.05 Closing. The completion of the purchase and sale of the Subject
Properties as contemplated by this Agreement, as well as the physical act or
acts of execution and delivery of the documents contemplated hereby and delivery
of consideration as provided above (the "Closing") shall occur at the offices of
Seller in Midland, Texas, at a time and date mutually acceptable to Seller and
Buyer on or before November 1, 1997. Also, at Closing, Seller shall deliver
transfer orders or letters in lieu thereof, evidencing the purchase and sale of
the Subject Properties, in a form reasonably acceptable to Buyer. Immediately
following Closing, Buyer shall furnish to purchasers of production from the
Subject Properties a copy of the transfer orders or letters in lieu thereof
delivered by Seller at Closing, together with a copy of the Assignment, and
shall direct such purchasers to make payments to Buyer of proceeds attributable
to production from the Subject Properties after the Effective Date.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.01 Seller represents and warrants to Buyer as follows:
2.01.01 Organization Standing and Power. Seller is a
corporation duly organized, validly existing and in good standing
under the laws of the state of Texas, having all requisite power
and authority to own, lease and operate its properties and to
carry on its business as now being conducted.
2.01.02 Authority and Enforceability. The execution and
delivery by Seller of this Agreement, and the consummation of
the transactions contemplated hereby, have been duly and validly
authorized by all necessary corporate action on the part of Seller.
This Agreement is the valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, limited,
however, by the effects of bankruptcy, insolvency, reorganization,
moratorium and similar laws from time to time in effect relating to
the rights and remedies of creditors, as well as to general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law). Neither the execution and delivery by
Seller of this Agreement nor the consummation of the transactions
contemplated hereby, nor compliance by Seller with any of the
provisions hereof, will
(i) conflict with or result in a breach of any provision
of Seller's articles of incorporation, or bylaws,
PURCHASE AND SALE AGREEMENT, PAGE 5
<PAGE> 6
(ii) except with respect to third-party consents,
releases or waivers required in connection with agreements and
properties to be assigned pursuant to this Agreement (it being
understood that Seller will attempt to obtain such required
consents, releases or waivers) result in a material default
(with due notice or lapse or time or both) or give rise to any
right of termination, cancellation or acceleration under any
of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license or agreement to which Seller is a
party or by which Seller or any of Seller's properties or
assets may be bound or,
(iii) violate any order, writ, injunction, judgment,
decree, statute, rule or regulation applicable to Seller, or
Seller's properties or assets, assuming receipt of all routine
governmental consents normally acquired after the consummation
of transactions such as transactions of the nature
contemplated by this Agreement.
2.01.03 Suits and Litigation. Except as disclosed on Schedule
2.01.03, there are no actions, suits, claims, proceedings, agency
enforcement actions or investigations pending or, to the best knowledge
of Seller, threatened against or affecting the Subject Properties, or
against Seller which has affected or could affect Seller's ability to
consummate the transactions contemplated by this Agreement.
2.01.04 Liability for Brokers' Fees. Buyer will not
directly or indirectly incur any liability or expense as a result of
any undertakings or agreements of Seller for brokerage fees, finder's
fees, agent's commissions or other similar forms of compensation in
connection with this Agreement or any agreement or transaction
contemplated hereby.
2.01.05 Royalties. During the period of Seller's ownership
of the Subject Properties, all royalties, overriding royalties,
compensatory royalties and other payments due from or in respect of
production with respect to the Subject Properties for the period prior
to the Closing Date have been or will be properly and correctly paid or
provided for. Seller has not received any unresolved written notice
from any lessor of the Leases which demands compensation or
reimbursement or release as a result of any alleged mispayment by
Seller of any royalties due with respect to the Leases.
2.01.06 Payments. All payments required to be made by
Seller to third parties for labor performed, materials furnished or
other services rendered on the Subject Properties during the ownership
thereof by Seller have been or will be properly and timely paid or
provided for.
2.01.07 No Demands. Seller has received no actual notice of
any claimed defaults, offsets or cancellations from any lessors with
respect to the Leases, and Seller has no actual knowledge of the
existence of any material default existing with respect to any of the
Leases.
PURCHASE AND SALE AGREEMENT, PAGE 6
<PAGE> 7
2.01.08 Taxes. All ad valorem, real property, personal
property, production, severance, excise and other taxes applicable
to Seller's ownership and operation of the Subject Properties prior to
the Closing Date and that have become due and payable have been or
will be duly and timely paid.
2.01.09 Governmental Rules. To the best of Seller's
knowledge, Seller is not in default under or in violation of any
law, order, writ, injunction, rule, regulation or degree of any
governmental body, agency or court or of any commission or other
administrative agency, except to the extent of any noncompliance that
is not reasonably expected to result in an adverse effect on the
Subject Properties, taken as a whole.
2.01.10 Environmental Matters. NOTWITHSTANDING ANYTHING
CONTAINED IN THIS AGREEMENT TO THE CONTRARY, IT IS SPECIFICALLY
UNDERSTOOD THAT SELLER HAS NOT MADE AND DOES NOT MAKE ANY
REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE
ENVIRONMENTAL CONDITION OF THE SUBJECT PROPERTIES OR COMPLIANCE
WITH ENVIRONMENTAL LAWS AND THAT BUYER HAS NOT RELIED UPON THE
ACCURACY OR COMPLETENESS OF ANY STATEMENTS, SAMPLES, MATERIALS, TEST
RESULTS, OR OTHER INFORMATION SUPPLIED BY, OR RECEIVED FROM, SELLER
IN EVALUATING THE ENVIRONMENTAL CONDITION OF THE SUBJECT PROPERTIES
AND ANY POTENTIAL LIABILITY ARISING FROM OR RELATING TO THE
ASSETS. IT IS FURTHER SPECIFICALLY UNDERSTOOD THAT BUYER'S
ASSESSMENT OF THE ENVIRONMENTAL CONDITION AND ANY POTENTIAL
LIABILITY ARISING FROM OR RELATED TO THE SUBJECT PROPERTIES HAS BEEN
BASED UPON BUYER'S OWN INDEPENDENT EXAMINATION.
2.01.11 Federal Lease. None of the Leases are federal oil and
gas leases.
2.01.12 Non-Foreign Representation. Seller is not a
non-resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate (as those terms are defined in Internal
Revenue Code and Income Tax Regulations).
2.01.13 Survivability. All representations and warranties
contained in this Section 2 shall survive Closing.
2.02 Buyer represents and warrants to Seller as follows:
2.02.01 Organization Standing and Power. Buyer is a
corporation duly organized, validly existing and in good standing
under the laws of the state of Nevada, having all requisite power
and authority to own, lease and operate its properties and to
carry on its business as now being conducted. Buyer is duly
qualified to carry on its business in the State of Texas.
PURCHASE AND SALE AGREEMENT, PAGE 7
<PAGE> 8
2.02.02. Authority and Enforceability. The execution and
delivery by Buyer of this Agreement, and the consummation of the
transactions contemplated hereby, have been duly and validly
authorized by all necessary corporate action on the part of Buyer.
This Agreement is the valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, limited,
however, by the effects of bankruptcy, insolvency, reorganization,
moratorium and similar laws from time to time in effect relating to
the rights and remedies of creditors, as well as to general principles
of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law). Neither the execution and delivery
by Buyer of this Agreement nor the consummation of the transactions
contemplated hereby, nor compliance by Buyer with any of the
provisions hereof, will
(i) conflict with or result in a breach of any provision
of Buyer's certificate of incorporation or bylaws.
(ii) result in a material default (with due notice or
lapse or time or both) or give rise to any right of
termination, cancellation or acceleration under any of the
terms, conditions or provisions of any note, bond, mortgage,
indenture, license or agreement to which Buyer is a party or
by which Buyer or any of Buyer's properties or assets may be
bound or,
(iii) violate any order, writ, injunction, judgment, decree,
statute, rule or regulation applicable to Buyer, or Buyer's
properties or assets, assuming receipt of all routine
governmental consents normally acquired after the consummation
of transactions such as transactions of the nature contemplated
by this Agreement.
2.02.03 Suits. There is no suit, action, claim, investigation
or inquiry by any person or entity or by any administrative agency or
governmental body and no legal, administrative or arbitration
proceeding pending, or to Buyer's best knowledge, threatened against
Buyer which has affected or could affect Buyer's ability to consummate
the transactions contemplated by this Agreement.
2.02.04 Liability for Brokers' Fees. Seller will not directly
or indirectly incur any liability or expense as a result of any
undertakings or agreements of Buyer for brokerage fees, finder's fees,
agent's commissions or other similar forms of compensation in
connection with this Agreement or any agreement or transaction
contemplated hereby.
2.02.05 Buyer Resources. Buyer has sufficient cash or other
sources of immediately available funds to enable it to make the payment
to Seller contemplated by this Agreement.
2.02.06 Buyer Qualification. Buyer is an experienced and
knowledgeable investor in oil and gas properties and has the
financial and business expertise to evaluate the merits and risks of
the transactions contemplated by this Agreement. In entering into
this Agreement, Buyer has relied solely on the express
representations and covenants of Seller in this Agreement,
its independent investigation of, and judgment with respect to, the
Subject
PURCHASE AND SALE AGREEMENT, PAGE 8
<PAGE> 9
Properties and the advice of its own legal, tax, economic,
environmental, engineering, geological and geophysical advisors and not
on any continents or statements of any representatives of, or
consultants or advisors engaged by Seller.
ARTICLE III
ALLOCATION OF INCOME AND EXPENSES
3.01 Allocation. On the Closing Date, ownership of all production
attributable to the Subject Properties conveyed to Buyer shall pass as of the
Effective Date. All costs and expenses incurred by Seller in accordance with the
terms of this Agreement for normal and necessary operation of the Subject
Properties after the Effective Date, shall be borne by Buyer.
ARTICLE IV
COVENANTS PENDING CLOSING
4.01 Access. Seller will give or use its best efforts to cause Buyer and its
attorneys and other representatives, at Buyer's expense, to be given access to
the Subject Properties and, at Seller's office, to any records, documents or
information of Seller pertaining to the ownership and/or operation of the
Subject Properties to the extent in each case that Seller may do so without
violating legal constraints or any legal obligation. Such access shall be at
reasonable times on prior notice. Buyer recognizes and agrees that all materials
made available to it (whether pursuant to this Section or otherwise) in
connection with the transaction contemplated hereby are made available to it as
an accommodation, and without representation or warranty of any kind as to the
accuracy and completeness of such materials. Buyer HEREBY AGREES TO DEFEND,
INDEMNIFY, RELEASE, PROTECT, SAVE AND HOLD HARMLESS SELLER FROM AND AGAINST ANY
AND ALL LOSSES ARISING OUT OF OR RELATING TO ANY CLAIMS RELATING TO ANY PLANT OR
FIELD VISIT, OR OTHER DUE DILIGENCE ACTIVITY, CONDUCTED BY BUYER OR ANY OF ITS
AGENTS, REPRESENTATIVES, AFFILIATES, SUCCESSORS, ASSIGNS, OFFICERS,
REPRESENTATIVES OR DIRECTORS INCLUDING WITHOUT LIMITATION ANY LOSSES RESULTING,
IN WHOLE OR IN PART, FROM THE CONCURRENT OR JOINT NEGLIGENCE OR STRICT LIABILITY
OF SELLER:
4.02 Interim Operations. Seller covenants that from the date hereof to the
Closing Date, except (A) as provided herein, (B) as required by any existing
Contract or (C) otherwise consented to in writing by Buyer, Seller will:
4.02.01 Not (A) operate or in any manner deal with, incur
obligations with respect to, or undertake any transactions relating to,
the Subject Properties other than transactions (i) in the normal usual
and customary manner, (ii) of a nature and in an amount consistent with
prior practice, (iii) in the ordinary and regular course of business of
owning and operating the Subject Properties, and (iv) subject to the
terms and conditions of this Agreement; (B) dispose of, encumber or
relinquish any of the Subject Properties (other than relinquishments
resulting from the expiration of leases that Seller has no right or
option to renew); (C) waive, compromise or settle any right or claim
that would have a material
PURCHASE AND SALE AGREEMENT, PAGE 9
<PAGE> 10
adverse effect on the ownership, operation or value of any of the
Subject Properties alter the Effective Date; or (D) commit to any
expenditure in excess of $10,000.00 net to the interest of Seller for
capital expenditures on any property.
4.02.02 Promptly notify Buyer of any suit, lessor demand
action, or other proceeding before any court, arbitrator, or
governmental agency and any cause of action which relates to the
Subject Properties or which might result in impairment or loss of any
portion of the Subject Properties or which might hinder or impede the
operation of the Subject Properties.
4.02.03 Make or give all notifications, filings, consents or
approvals from, to or with all governmental authorities, and will
cooperate with Buyer in obtaining the issuance, assignment or transfer,
as the case may be, by each such authority of such Permits as may be
necessary for Buyer to own and operate the Subject Properties following
the consummation of the transactions contemplated in this Agreement;
provided that Seller shall not be required to incur any expense in
connection therewith.
4.02.04 Maintain in effect insurance providing the same type
coverage, in the same amounts with the same deductibles as the
insurance maintained in effect by Seller or its affiliates on the
Effective Date.
4.03 Notice of Breach of Representations or Warranties. Buyer and Seller
will immediately notify the other upon the discovery that any representation or
warranty of either party is, becomes or will be untrue on the Closing Date.
ARTICLE V
CONDITIONS TO CLOSING
5.01 Conditions to Obligations of Seller. The obligations of Seller under
this Agreement are subject to the satisfaction at or prior to Closing, of the
following conditions
5.01.01 All representations and warranties of Buyer contained
in this Agreement shall be true in all material respects at and as of
Closing as if such representations and warranties were made at and as
of Closing.
5.01.02 Buyer will have performed and complied with, or caused
the performance of and compliance with, in all material respects, all
the obligations, terms, conditions, and agreements required by this
Agreement to be performed or complied with by it on or prior to
Closing.
5.01.03 Buyer shall make payment of the Base Purchase Price as
adjusted at the Closing.
5.01.04 As of the Closing, no suit, action or other proceeding
shall be pending or threatened before any court or governmental agency
seeking to restrain Seller or prohibit the
PURCHASE AND SALE AGREEMENT, PAGE 10
<PAGE> 11
Closing or seeking damages against Seller as a result of the
consummation of this Agreement.
5.01.05 Buyer shall have delivered to Seller a
certified copy of the resolutions of Buyer's Board of
Directors authorizing the consummation of the transactions
contemplated in this Agreement by Buyer.
5.01.06 Buyer shall have extended to Charles Cup
("Cup") an offer of employment for a minimum of one (1) year
from November 1, 1997, at a minimum salary of $4,000.00 per
month; provided, however, if Cup elects not to accept such
offer of employment, then this condition precedent shall be of
no force and effect and the parties shall proceed as provided
in this Agreement.
5.02 Conditions to Obligations of Buyer. The
obligations of Buyer under this Agreement are subject to the
satisfaction, at or prior to Closing, of the following
conditions:
5.02.01 All representations and warranties of Seller
contained in this Agreement shall be true in all material
respects at and as of Closing as if such representations and
warranties were made at and as of Closing.
5.02.02 Seller will have performed and complied with,
or caused the performance and compliance with, in all material
respects, all the obligations, terms, conditions, and
agreements required by this Agreement to be performed or
complied with by Seller on or prior to Closing, and Seller
shall have delivered to Buyer at Closing the Assignment and all
of the other documents and instruments to be delivered by
Seller pursuant hereto.
5.02.03 As of the Closing, no suit, action or other
proceeding shall be pending or threatened before any court or
governmental agency seeking to restrain Buyer or prohibit the
Closing or seeking damages against Buyer as a result of the
consummation of this Agreement.
5.02.04 Seller shall have delivered to Buyer a
certified copy of the resolutions of Seller's Board of
Directors and Shareholders authorizing the consummation of the
transactions contemplated in this Agreement by Seller.
ARTICLE VI
TITLE, ENVIRONMENTAL DEFECTS AND CASUALTY
LOSS
6.01 Definitions. As used in this Article VI, the
following terms shall have the meanings ascribed to them:
PURCHASE AND SALE AGREEMENT, PAGE 11
<PAGE> 12
6.01.01 Defensible Title. For purposes hereof, "Defensible Title" means
with respect to the Subject Properties such title as (A) will enable
Buyer, as Seller's successor in title, to receive payment for production
from a particular Lease in an amount not less than the "Net Revenue
Interest" for the property as set forth on Exhibit A, without reduction,
suspension or termination throughout the productive fife of wells
located on the property, (except for any reduction, suspension or
termination (i) caused by Buyer, (ii) that arises as a result of
Permitted Encumbrances or (iii) is set forth in the Exhibit A); (B) will
obligate Buyer, as Seller's successor in title, to bear no greater
"Working Interest" than the Working Interest for each of the Leases
identified on the Exhibit A without increase throughout the productive
life of such well (except for any increase (i) caused by Buyer, (ii)
that arises as result of Permitted Encumbrances or (iii) is set forth in
the Exhibit A); and (C) is free and clear of all liens, encumbrances or
security interests except for Permitted Encumbrances.
6.01.02 Title Defect, For purposes hereof a "Title Defect" shall be any
lien, encumbrance, security interest, claim or burden, other than
Permitted Encumbrances, which causes Buyer to receive less than
Defensible Title in the Subject Properties including, without
limitation, the failure of Seller to obtain at or before Closing the
necessary consents to assign interests in the Subject Properties. Such
customary liens, charges, encumbrances, defects and irregularities that
may exist, including, but not limited to, defects in the early
chain of title such as failure to recite marital status in document,
omission of succession or heirship proceedings, lack of survey, defects
that have been cured by possession and failure to record releases of
liens, production payments, leases or mortgages that have expired by
their terms, to the extent such matters are not reasonably expected to
result in claims that will materially and adversely affect Buyer's title
to the Subject Properties, shall not constitute "Title Defects"
hereunder.
6.01.03 Permitted Encumbrances, For purposes hereof "Permitted
Encumbrances" shall mean (A) liens securing payments to mechanics and
materialmen, payments of taxes or claims arising by statute to secure or
protect any other payment obligation that are, in each case, not yet
delinquent or, if delinquent, are being contested in good faith in the
normal course of business and which, if contested, have been disclosed
to Buyer, (B) any obligations or duties to any municipality or public
authority with respect to any franchise, grant, certificate, license or
permit, and all applicable law; (C) Title Defects that Buyer fails to
assert in accordance with the provisions of this Article VI prior to the
Notice Date; (D) consents to assignment by a third party or governmental
authority that are obtained by the Closing Date, or that are
customarily obtained after the consummation of transactions of the
nature contemplated in this Agreement, (E) any easements, right-of-way,
servitudes, permits and other rights in respect of surface operations,
pipelines or the like, and easements for pipelines, power lines and
other similar rights-of-way, and encroachments, on, over or in respect
of any of the Leases that do not unreasonably or materially interfere
with the operation of the Leases for exploration and production of
hydrocarbons or related operations; (F) all royalties, overriding
royalties, net profits interests, production payments, carried
interests, reversionary interests, calls on production and other burdens
on or deductions from the proceeds of production that do not operate to
(i) reduce the Net Revenue Interest ("NRI")
PURCHASE AND SALE AGREEMENT, PAGE 12
<PAGE> 13
in a Lease below that set forth in Exhibit A for such Lease or (ii)
increase the Working Interest ("WI") in a Lease above that set forth
in Exhibit A for such Lease without a proportionate increase in the
NRI for such Well; (G) the terms and conditions of the Leases; (H) the
terms and conditions of all production sales contracts, transportation
agreements, pooling agreements, unitization agreements, operating
agreements, processing agreements, and all other contracts, agreements
and instruments related to or utilized in connection with the Subject
Properties, or the production, storage, treatment, transportation,
sale or disposal of oil, gas or other hydrocarbons, mineral or
substances therefrom, to the extent such contracts (i) do not reduce
the NRI in a Lease below that set forth in Exhibit A for such
property, (ii) do not increase the WI in a Lease above that set forth
in Exhibit A for such Lease without a proportionate increase in the
NRI for such Lease or (iii) are of the type normally entered into in
the normal course of business by a reasonable, prudent owner of
similar properties; (I) conventional rights of reassignment prior to
abandonment; (J) any required third party consents to assignment and
similar agreements and obligations with respect to which prior to
Closing (i) waivers or consents have been obtained from the
appropriate person or (H) the applicable period of time for asserting
such rights has expired without any exercise of such rights or (iii)
arrangements have been made by the parties to allow Buyer to receive
substantially the same economic benefits as if all such waivers and
consents had been obtained; and (K) any other liens, charges,
encumbrances, contracts, agreements, instruments, obligations, defects
or irregularities of any kind whatsoever affecting the Subject
Properties that individually or in the aggregate are not such as would
materially adversely affect the ownership, operation, value or use of
the Subject Properties.
6.01.04 Environmental Defect. "Environmental Defect" means the
existence of any hazardous materials; the threatened release of
hazardous materials; the violation, threatened violation of any
Federal State or local statute, rule, regulation or ordinance relating
to protection of the environment; or an environmental condition which
may have a material adverse effect on Buyer's future operation of the
Subject Properties.
6.02 Notice of Title, or Environmental Defects. Buyer shall conduct
such title and environmental investigations and inspections of the
physical premises of the Subject Properties as Buyer in its sole
discretion may deem advisable and at Buyer's expense. Buyer shall, as soon as
possible, but in no event later than seven (7) days prior to Closing (the
"Notice Date"), give written notice to Seller specifying all Title Defects
and Environmental Defects (herein, individually a "Defect" or
collectively, "Defects") and shall describe each alleged Defect with
reasonable particularity. Buyer shall be entitled to a reduction in the Base
Purchase Price in an amount (the "Defect Amount") which Buyer has
determined to be applicable to each such Defect. Failure by Buyer to timely
assert a Title Defect, or Environmental Defect shall be deemed an election
by Buyer to waive such Defect.
6.03 Seller's Election to Cure. Seller shall have the right, but not the
obligation, at any time prior to Closing, to cure any asserted Title Defect,
or Environmental Defect; provided, however, any curing of a Defect shall
be to the reasonable satisfaction of Buyer. The cost of curing any such
Defect shall be at the sole cost of Seller.
PURCHASE AND SALE AGREEMENT, PAGE 13
<PAGE> 14
6.04 Casualty Loss. Notwithstanding anything contained herein to the
contrary, if prior to the Closing, a Casualty Loss occurs, Seller may elect (i)
terminate this Agreement; or (ii) proceed with the sale of the Subject
Properties without reduction of the Base Purchase Price, notwithstanding any
such destruction or taking, in which case at Closing, Seller shall pay to Buyer
all sums paid to Seller by third parties by reason of the destruction or taking
of that portion of the Subject Properties that is subject to Casualty Loss and
shall assign, transfer and set over unto Buyer all of the right, title and
interest of Seller in and to any claims, causes of action, unpaid proceeds or
other payments from third parties arising out of such destruction or taking.
Seller shall not voluntarily compromise, settle or adjust any amounts payable by
reason of any Casualty Loss without first obtaining the written consent of Buyer
for the purposes thereof the term "Casualty Loss" means the destruction of all
or any portion of the Subject Properties by fire or other casualty or taking
thereof by condemnation or under the right of eminent domain.
6.05 Threshold Amounts. Notwithstanding anything to the contrary
herein, the parties agree that no adjustments shall be made to the Base
Purchase Price under the terms of this Agreement unless and until the
aggregate Defect Amount is equal to or greater than $4,000.
ARTICLE VII
ASSUMPTION OF LIABILITIES AND INDEMNIFICATION
7.01 Indemnification by Seller. Seller shall assume all liability for and
indemnify Buyer, its directors, officers, employees and representatives, against
all losses, costs, expenses, claims and causes of action ("Claims"), (i) arising
from Seller's breach of any of its representations or warranties; or (ii)
otherwise arising in connection with or relating to the Subject Properties for
all time periods prior to the Effective Date, excluding, however, any claims
associated with, arising out of or attributable to Environmental Defects.
7.02 Assumption of Seller's Obligations by Buyer. Except to the extent
that Seller indemnifies Buyer hereunder, at Closing, Buyer shall assume all
obligations and liabilities of Seller attributable to, relating to or arising in
connection in any way with the Subject Properties, for all periods of time after
the Effective Date (the "Assumed Obligations") including, but without
limitation, the following: (A) the obligation to (i) plug and abandon or remove
and dispose of all wells, platforms, structures, flow lines, pipelines, and the
other equipment now or hereafter located on the Leases, (ii) cap and bury all
flow lines and other pipelines now or hereafter located on the Leases; and (iii)
dispose of naturally occurring radioactive material and all other pollutants,
wastes, contaminates, or hazardous, extremely hazardous, or toxic materials,
substances, chemicals or wastes now or hereafter located on the Subject
Properties;(B) obligations and liabilities arising from or in connection with
any gas production, pipeline, storage, processing or other imbalance
attributable to oil, gas or other hydrocarbon produced from the Subject
Properties both before and after the Effective Date; (C) Seller's obligations
under all permits or contracts affecting the Subject Properties; (D)obligations
arising under any law, rule or regulation which provides with respect to
protection of the environment or the handling, use, disposal or transportation
of hazardous materials applicable to the Subject Properties; and (E) other
costs, obligations and liabilities that arise with respect to or otherwise
relate to the Subject Properties. All such plugging, replugging,
abandonment,
PURCHASE AND SALE AGREEMENT, PAGE 14
<PAGE> 15
removal, disposal, and restoration operations shall be in compliance with
applicable laws and regulations and contracts, and shall be conducted in a
good and workmanlike manner.
7.03 Indemnification by Buyer. Buyer shall assume all liability for and
indemnify Seller, its directors, officers, employees and representatives,
against all losses, costs, expenses, claims and causes of action ("Claims"),
(i) arising from Buyer's breach of any of its representations or warranties;
(ii) arising under the Assumed Obligations, or (iii) otherwise arising in
connection with or relating to the Subject Properties for all time periods prior
to, on or after the Effective Date.
7.04 NORM. It is expressly recognized that the land or water bottoms covered
by the Leases listed in Exhibit A with surface facilities and production
equipment located thereon, having been used in connection with oil and gas
production activities, may contain naturally occurring radioactive materials
("NORM") as a result of these operations. Accordingly, lands, water bottoms,
surface facilities, and production equipment transferred herein are transferred
with the restriction that they will be used only in connection with oil and gas
producing activities associated with these properties, and will not be
subsequently transferred for unrestricted use unless and until the
concentrations of NORM associated therewith are below the levels specified as
allowable for unrestricted transfer as set forth in any regulations, and
subsequent amendments thereto. Additionally, Buyer agrees to comply with all
laws and regulations applicable to said water bottoms, surface facilities, and
production equipment relating to NORM and to indemnify and hold harmless Seller
from and against any and all liability, cost or expense arising from the
existence or rededication of NORM.
7.05 Indemnification Procedures.
7.05.01 Within ten (10) business days after Seller or Buyer
becomes aware of facts giving rise to a Claim by it for indemnification
pursuant to this Article VII, and prior to the expenditure or approval
of the expenditure of any funds, Seller or Buyer will provide notice
thereof in writing to the other party (a "Claim Notice") specifying the
nature and specific basis for such Claim and a copy of all papers
served with respect to such Claim (if any). For purpose of this
Section, receipt of written notice of any demand, assertion, claim,
action or proceeding (judicial, administrative or otherwise) by or from
any person or entity other than a party to this Agreement or any
affiliate thereof which gives rise to a Claim on behalf of such party
shall constitute the discovery of facts giving rise to a Claim by it
and shall require prompt notice of the receipt of such matter as
provided in the first sentence of this Section. Each Claim Notice shall
set forth a reasonable description of the Claim as the party claiming
indemnification shall then have and shall contain a statement to the
effect that the party is making a Claim pursuant to and formal demand
for indemnification under, this Article VII. The Claim Notice must set
forth the particular provision in this Article VII and any related
provision in this Agreement pursuant to which such indemnification
Claim is made.
7.05.02 The indemnifications provided by this Agreement are
expressly subject to the following:
PURCHASE AND SALE AGREEMENT, PAGE 15
<PAGE> 16
(A) In case any legal proceeding or claim including any
investigatory proceeding, is brought or made against a party in
a manner for which indemnification may be provided under This
Article VII, the party claiming indemnification shall promptly
notify the other party with the delivery of the Claim Notice.
The party receiving such notice shall have the right to control
and assume the defense of any such legal proceeding or claim,
including the employment of counsel satisfactory to the
indemnifying party. If the party to whom notice was given
controls and assumes the defense of any proceeding or claim,
other party shall have the right to employ separate counsel but
the fees and expenses of such counsel shall be at the expense
of the other party unless the representation of both parties by
the same counsel would be inappropriate due to any actual or
potential conflicts of interest. The indemnifying party shall
not be liable for the fees and expenses of more than one
separate firm of attorneys at any one time in connection with
any one legal proceeding or claim or substantially similar
related proceedings and claims.
(B) Notwithstanding anything of the contrary in Section A
above, the indemnified party shall be entitled to reasonable
compensation for costs of defense, including reasonable
attorneys fees, in the event that (i) the employment of
separate counsel has been authorized by indemnifying party,
(ii) indemnifying party has failed to defend diligently any
Claims, or (iii) the parties to such action (including any
impleaded parties) include Seller and Buyer, and indemnified
party has been advised by legal counsel that there may be legal
defenses available to it which are different from, in addition
to or inconsistent with, the legal defenses available to the
indemnifying party, or that the indemnified party's interest
may be adverse in whole or in part to the interest of
indemnifying party. The indemnifying party shall not, in the
defense of any such Claims, except with the prior written
consent of the indemnified party, consent to the entry of any
judgment or enter into any settlement which does not include as
an unconditional term, the release by the claimant or the
plaintiff of the indemnified party from all further liability
in respect to any such Claims.
7.05.03 The indemnification obligations under this Article VII (or
otherwise under this Agreement) shall not apply to any settlements
effected without the consent of an indemnifying party. The
indemnification obligations under this Article VII (or otherwise under
this Agreement) shall not be deemed to create any rights of subrogation
or other rights in any insurer or third party.
7.06 WAIVER OF REPRESENTATIONS. SELLER EXPRESSLY DISCLAIMS AND NEGATES AND
BUYER HEREBY WAIVES, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO (A) THE
QUALITY, QUANTITY OR VOLUME OF THE RESERVES, IF ANY, OF OIL, GAS OR OTHER
HYDROCARBONS IN OR UNDER THE SUBJECT PROPERTIES; (B) THE WORKING INTEREST AND
NET REVENUE INTEREST PERCENTAGES SET FORTH IN EXHIBIT A HERETO; AND (C) THE
SAMPLES, OR
PURCHASE AND SALE AGREEMENT, PAGE 16
<PAGE> 17
CONDITION OF ANY OF THE SUBJECT PROPERTIES OR ANY PART THERETO. THE ITEMS OF
PERSONAL PROPERTY, EQUIPMENT, IMPROVEMENTS, FIXTURES AND APPURTENANCES CONVEYED
AS PART OF THE PROPERTIES ARE SOLD, AND BUYER ACCEPTS SUCH ITEMS "AS IS, WITH
ALL FAULTS". THERE ARE NO WARRANTIES THAT EXTEND BEYOND THE FACE OF THIS
AGREEMENT. BUYER ACKNOWLEDGES THAT THIS WAIVER IS CONSPICUOUS.
7.07 Liabilities Retained by Seller. Seller shall remain liable for (i)
damages arising from personal injury or death, (ii) the nonpayment of royalties
which were the responsibility of Seller to pay (not to include, however,
royalties payable out of suspended funds to be transferred to Buyer pursuant to
Section 10.03 hereof) or the incorrect payment of royalties, to the extent and
only to the extent such payment was not made in accordance with terms of the
leases and (iii) any and all actions, claims and causes of action, lease
operating expenses and capital costs to the extent, and only to the extent any
of such damages, expenses or costs arise from acts, circumstances or events
occurring with respect to the ownership of the Subject Properties prior to the
Effective Date.
ARTICLE VIII
LIMITATIONS OF LIABILITY
8.01 Exclusive Remedy. If the Closing occurs, the sole and exclusive remedy
of the Buyer and the Seller with respect to the purchase and sale of the Subject
Properties shall be pursuant to the express provisions of this Agreement. Buyer
and Seller shall be deemed to have waived, to the fullest extent permitted under
applicable law, any rights of contribution and any and all rights, claims and
causes of action which may exist against Seller or Buyer, respectively, arising
under or based on any federal, state or local statute, law, ordinance, rule or
regulation or common law or otherwise, except as specifically set forth in this
Agreement.
8.02 Waiver of Right to Rescind. Seller and Buyer acknowledge that if this
Agreement is not terminated and the transaction contemplated hereby is
closed, the payment of money, as limited by the terms of this Agreement,
shall be adequate compensation for breach of any representation, warranty,
covenant or agreement contained herein or for any other claim arising in
connection with or with respect to the transactions contemplated in this
Agreement. As the payment of money shall be adequate compensation, Buyer
and Seller waive any right to rescind the transactions contemplated by this
Agreement.
8.03 Time Limitation. Notwithstanding any provision hereof to the
contrary, it is understood and agreed that any and all liabilities of Seller
under this Agreement, if any, shall expire and terminate and no longer be
enforceable for all periods on and after two (2) years from the Closing
except as to Liabilities Retained by Seller provided in Section 7.07 above,
for which such period of time shall be three (3) years from the Closing. On
and after two (2) years from the Closing, except as to Liabilities Retained
by Seller provided for in Section 7.07 which time shall be three (3) years
from the Closing, Buyer shall not be entitled to make any claim against
Seller for any cause attributable to any time period under this Agreement
or otherwise, including without limitation, rights of contribution arising
under or based on any federal, state or local statute, law, ordinance, rule
or
PURCHASE AND SALE AGREEMENT, PAGE 17
<PAGE> 18
regulation or common law or otherwise. In the event any law, rule or regulation
requires a longer time period before Seller will be exempted from all liability
under this provision, this provision shall be deemed amended, to the extent and
only to the extent required by law and only as to that portion of the Subject
Properties as so required, to extend the limitation period as so required.
8.04 Liability Cap. Seller's liability, if any, under this Agreement
shall never exceed, and Seller shall have no obligation for the payment of any
amount in excess of the Base Purchase Price.
8.05 Damage Limitation. Notwithstanding anything to the contrary
herein, in no event shall any party hereunder be liable to the other for
any exemplary, punitive, special, indirect, consequential, remote or
speculative damages; provided, however, that if Seller is held liable to
a third party for any of such damages and the Buyer is obligated to
indemnity Seller for the matter that gave rise to such damages pursuant to
this Agreement, then the Buyer shall be liable for, and obligated to reimburse
Seller for, such damages.
ARTICLE IX
TERMINATION
9.01 Termination of Agreement. This Agreement and the transactions
contemplated hereby may be terminated upon written notice from the party
electing to terminate this Agreement, in the following instances:
(A) By Seller if the conditions set forth in Section 5.01 are
not satisfied in all material respects or waived as of the Closing.
(B) By Seller or Buyer, if at or before Closing, for any reason
under this Agreement, properties are excluded from the sale and/or
other adjustments to the Base Purchase Price are made or proposed to
be made, which have a cumulative value, in excess of four percent(4%)
of the Base Purchase Price.
(C) By Buyer if the conditions set forth in Section 5.02 are not
satisfied in all material respects or waived as of Closing.
(F) At any time by the mutual written agreement of Buyer and
Seller.
9.02 Liabilities Upon Termination. If this Agreement is terminated prior
to Closing for any reason other than those set forth in Section 9.01 or is
breached (it shall be deemed a breach of this Agreement if the conditions set
forth in Section 5.02 are not satisfied through the fault, neglect or failure to
act of Buyer, or if the conditions set forth in Section 5.01 are not satisfied
through the fault, neglect or failure to act of Seller) nothing contained herein
shall be construed to limit Seller's or Buyer's legal or equitable remedies
including, without limitations damages for the breach or failure of any
representation, warranty, covenant or agreement contained herein and the right
to enforce specific performance of this Agreement.
PURCHASE AND SALE AGREEMENT, PAGE 18
<PAGE> 19
ARTICLE X
MISCELLANEOUS
10.01 Files and Records. As soon as practicable, but not more than ten
(10) days after Closing, or such other time frame as is agreed to by the
Parties, Seller shall deliver or cause to be delivered to Buyer all original
records and files, including, without limitation, regulatory files, joint
interest billings, revenue files, division orders, division order files,
Buyer's statements, payout calculations, well logs, well files, land records,
contracts, maps and seismic information (to the extent the same are in
Seller's possession and capable of being legally transferred by Seller
without unreasonable cost or consent) relating to the Subject Properties. In
the event Seller wishes to keep copies of such files and records, Seller may
make and retain copies thereof at its sole expense. The expense of copying
such files shall be borne by Seller. Buyer shall retain all of such files
for four (4) years from Closing and shall make such files available to
Seller for its review at any time during normal business hours.
10.02 Survival of Representation, Warranties and Covenants. Unless
otherwise specified herein, the obligations and liabilities of the
Parties under each of their representations, warranties and covenants
contained in this Agreement shall survive the Closing and the execution and
delivery of the documents to be delivered at Closing and remain in full force
and effect.
10.03 Suspended Funds. All third party funds held by Seller in suspense
will be transferred to Buyer at Closing. Buyer shall indemnity and hold
harmless Seller from and against any claims, loss, cost or expense
whatsoever arising from improper, untimely or other mispayment of such
suspended funds after Closing when caused by Buyer. In the event interest
is owed on suspended funds attributable to periods prior to the Effective
Date, Seller will bear the liability for the payment of such interest and
will indemnify Buyer in the same manner as Buyer indemnifies Seller under
Section 7.05 from and against the payment of such interest.
10.04 Notices. All communication or notices required or permitted to be
given under this Agreement shall be in writing, and any communication or
notice shall be deemed to have been duly made if actually delivered,
including delivery by facsimile transmission, receipt of which has been duly
acknowledged, or if mailed by registered or certified mail, postage prepaid,
and addressed to:
(A) Buyer: Cotton Valley Energy Corp.
8350 N. Central Expressway
Suite M-2030
Dallas, Texas 75206
Attn: Mr. Jim Hogue
Telephone: (214) 363-1968
Facsimile: (214) 363-4294
PURCHASE AND SALE AGREEMENT, PAGE 19
<PAGE> 20
with a copy to:
C. B. Harrison, Jr.
13101 Preston Rd., Suite 400
Dallas, Texas 75240
Telephone: (972) 934-0147
Facsimile: (972) 386-5705
Seller: FEAGAN ENERGY, INC.
Midland, Texas
Attention: Mr. Mike Feagan, Vice President
Telephone: (915) 683-8442
Facsimile: (915) 683-5442
with a copy to:
Lynch, Chappell & Alsup
300 N. Marienfeld, Suite 700
Midland, Texas 79701
Attn: David W. Childress
Telephone: (915) 683-3351
Facsimile: (915) 683-8346
A party may, by written notice so delivered to the other party, change the
address to which communications or written notices shall be made under this
Agreement.
10.05 Further Assurances. Seller and Buyer agree that they will, upon
request, deliver, or will cause to be executed, acknowledged and delivered,
all such documents of further assurance as may be reasonably required for
the assigning, leasing, transferring, granting, conveying and confirming
to Buyer, or reducing to possession by Buyer of, any of the Subject
Properties and do, perform and take such further actions, as may be
necessary or appropriate to carry out the intent of the transactions provided
for in this Agreement. Each party shall bear its own costs in connection with
the preparation or filing of any such documents of further assurance.
10.06 CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO
ANY PRINCIPLES OF CONFLICTS OF LAWS. THE VALIDITY OF THE VARIOUS
CONVEYANCES AFFECTING THE TITLE TO REAL PROPERTY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE JURISDICTION IN WHICH SUCH
PROPERTY IS SITUATED. THE REPRESENTATIONS AND WARRANTIES CONTAINED IN SUCH
CONVEYANCES AND THE REMEDIES AVAILABLE BECAUSE OF A BREACH OF SUCH
REPRESENTATIONS AND WARRANTIES
PURCHASE AND SALE AGREEMENT, PAGE 20
<PAGE> 21
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF TEXAS WITHOUT GIVING EFFECT TO THE PRINCIPLES OR CONFLICTS OF LAWS.
10.07 Assignment. This Agreement shall not be assignable by either party
without the prior written consent of the other party, which consent shall not be
unreasonably withheld.
10.08 Binding Effect. This Agreement contains the entire agreement and
understanding between the parties hereto with respect to the purchase and sale
of the Subject Properties or other transactions contemplated herein. This
Agreement may not be amended or terminated except in writing, signed by the
parties hereto. In the event any term or provision of this Agreement is
determined to be invalid or unenforceable, such invalidity or unenforceability
thereof shall not affect the remaining terms and provisions of this Agreement.
10.09 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall be deemed to be an original instrument,
but all such counterparts shall constitute but one instrument.
10.10 Expenses and Fees. Whether or not the transactions contemplated by this
Agreement are consummated, each of the parties hereto shall be obligated to pay
the fees and expense of its counsel, accountants and other experts incident to
the negotiation and preparation of this Agreement and consummation of the
transactions contemplated hereby. All sales, use or other taxes (other than
taxes on gross income, net income or gross receipts) and duties, levies or other
governmental charges incurred by or imposed with respect to the property
transfers undertaken pursuant to this Agreement and all costs of recording the
Assignment and any other recordable document shall be the responsibility of, and
shall be paid by, Buyer. All other costs shall be borne by the party incurring
such costs. In the event that sales taxes are due on this transaction which must
be remitted by Seller under the laws of the governing jurisdiction, the Buyer
shall provide for the payment of such amounts to Seller by adjustment to the
Base Purchase Price at Closing.
10.11 Confidentiality. Prior to Closing, unless otherwise required by law,
neither party will, without the consent of the other, disclose to any third
party (not including the officers, directors, advisors, agents and
representatives of the parties, on a "need-to-know" basis), or issue a press
release with respect to this Agreement and the transaction contemplated by its
terms and provisions and all notices to third parties and all other publicity
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by and between Buyer and Seller, provided that both
Seller and Buyer shall have final approval authority for its press releases and
securities filings and is hereby authorized to issue such press releases
concerning this Agreement and to make such filings as Seller or Buyer and its
counsel may deem necessary or appropriate under applicable securities laws.
Except as provided in the preceding sentence, neither of the parties shall act
unilaterally in this regard without the prior written approval of the other
party, however, this approval shall not be unreasonably withheld.
PURCHASE AND SALE AGREEMENT, PAGE 21
<PAGE> 22
10.12 Exhibits. The Exhibits referred to in this Agreement are hereby
incorporated in this Agreement by this reference and constitute a part of this
Agreement. All references to Exhibit A herein shall be deemed to include
Exhibits A-1, A-2 and A-3 unless the context clearly indicates a contrary
meaning is intended. Each party has received a complete set of Exhibits as of
the execution of this Agreement. If any Exhibit inadvertently fails to list any
information which had been listed on another Exhibit, such information will be
deemed to be included on the appropriate Exhibit. Seller may, from time to time
prior to or at the Closing, with the agreement of Buyer, which shall not be
unreasonably withheld, supplement or amend any such Exhibit in order to correct
any matter which would constitute a breach of any representation, warranty or
covenant contained herein, except that the Seller may not amend Exhibit A by
changing the working or net revenue interests reflected thereon and thereby cure
an asserted Title Defect without making an adjustment to the Base Purchase Price
attributable to such change. All references to any Exhibit hereto which is
supplemented or amended as provided in this section shall for all purposes after
the Closing be deemed to be a reference to such Exhibit as so supplemented or
amended.
10.13 Exchange. Seller or Buyer may desire to structure the conveyance of the
Subject Properties as part of an exchange under Section 1031 of the Internal
Revenue Code. Seller and Buyer agree to execute all documents, conveyances or
other instruments necessary to effectuate an exchange. In order to structure
such a transaction, Seller and Buyer will agree upon an allocation of the
purchase price between real and personal property.
10.14 DTPA Waiver. To the extent applicable to the transactions contemplated
hereby or any port thereof, Buyer waives the provisions of the Texas Deceptive
Trade Practices Act, Chapter 17, Subchapter E, Sections 17.41 through 17.63,
inclusive (other than Section 17.555 which is not waived), Texas Business and
Commerce Code. In connection with such waiver, Buyer hereby represents and
warrants to Seller that Buyer (a) is in the business of seeking or acquiring by
purchase or lease, goods, or services, for commercial or business use; (b) has
assets of $5,000,000 or more, (c) has knowledge and experience in financial and
business matters that enable it to evaluate the merits and risks of the
transaction contemplated hereby and (d) is not in a significantly disparate
bargaining position.
10.15 No Third Party Beneficiary. This Agreement is not intended to create, nor
shall it be construed to create, any rights in any third party under doctrines
concerning third party beneficiaries.
IN WITNESS THEREOF, Buyer and Seller have duly executed this Agreement, as
of the day and year first above written.
SELLER:
FEAGAN ENERGY INC.
/s/ JOE FEAGAN
----------------------------------
Joe Feagan, President
PURCHASE AND SALE AGREEMENT, PAGE 22
<PAGE> 23
Buyer:
COTTON VALLEY ENERGY CORP.
/s/ JAMES E. HOGUE
---------------------------------
James E. Hogue, President
PURCHASE AND SALE AGREEMENT, PAGE 23
<PAGE> 24
LIST OF EXHIBITS
Exhibit A Leases (including overriding royalties)
Exhibit B Excluded Assets
Exhibit C Form of Assignment and Bill of Sale Exhibit
PURCHASE AND SALE AGREEMENT, PAGE 24
<PAGE> 1
EXHIBIT 10.2
[COTTON VALLEY RESOURCES CORPORATION LETTERHEAD]
LETTER AGREEMENT
This Letter Agreement is made and entered into this 5th day of
November, 1997, by and among M & M Directional Services, ("M & M"), Mike
Burton, ("Burton"), Mark Milam, ("Milam") and Cotton Valley Resources
Corporation, an Ontario corporation, ("CVR").
1. CVR will cause Mustang Horizontal Services, Inc., ("MHS") to
be formed as a Nevada corporation. The business of MHS will be primarily to
provide integrated horizontal drilling services to the petroleum industry. MHS
will initially be capitalized at 6,000,000 shares at $0.05 per share. CVR will
subscribe for 5,000,000 shares by delivering $250,000 cash into an MHS bank
account in two tranches of $125,000 each. The first deposit will be made upon
formation and the second deposit will be 30-60 days later.
2. CVR will establish a line of credit of $700,000 to be used by
MHS for the acquisition and building of its tools and equipment which would be
secured by all of the assets of MHS until repaid.
3. 1,000,000 shares of MHS will be deposited into a modified
employee stock ownership plan (MESOP) to be administered by CVR. On behalf of
the officers, directors and employees of MHS, as well as the employees of CVR
working on MHS matters, CVR will subscribe for 1,000,000 shares by delivering
$50,000 cash into an MHS bank account in two tranches of $25,000 each. The
first deposit will be upon formation and the second deposit will be 30-60 days
later.
4. 320,000 of the MESOP shares will be allocated to Burton and
Milam (as divided between the two in amounts provided in written notice to CVR
within thirty days of the date hereof). 200,000 of the MESOP shares will be
reserved for allocation by MHS for new MHS employees as they are hired. 320,000
of the MESOP shares will be allocated to Jim Hogue and Gene Soltero in equal
amounts and 160,000 shares will be reserved for allocation by Gene Soltero and
Jim Hogue to CVR employees. Each awardee will receive 4% of his stock award on
the date he starts work. At the end of each month, each awardee will receive a
stock certificate representing another 4%. At the end of two years of
employment, the awardee will be fully vested in his MESOP shares. Any employee
who ceases to be employed, or any reason, will not receive any shares following
the shares delivered at the end of the month preceding the month in which
employment ceases. Non-vested shares previously awarded will be returned to the
MHS or CVR pool (as appropriate) for new awards upon the cessation of
employment of the person who loses rights to those shares.
<PAGE> 2
5. A non-qualified stock option plan will be established consisting of a
maximum of 4,000,000 options (the "Options") where each Option will be the right
for a period of five years to purchase one share of MHS for $0.05 per share.
1,280,000 Options will be awarded to Burton and Milam (as divided between the
two as provided by written notice to CVR within thirty days of the date hereof)
and 800,000 Options will be reserved for award to MHS employees. 1,440,000
Options will be awarded to Jim Hogue and Gene Soltero in equal amounts and
480,000 Options will be reserved for award to CVR employees by Jim Hogue and
Gene Soltero. Each awardee will vest in the rights to exercise the Options at
the rate of one-third of each award at the end of each of the first three years
following the date of award. Any employee who ceases to be employed will lose
all rights to Options that have not vested and such Options will be returned to
the MHS or CVR pool (as appropriate) for reissuance by either the management of
MHS or the management of CVR.
6. If, within three years following initial formation of MHS, CVR has not
filed a registration statement with the United States Securities and Exchange
Commission ("SEC") providing for the spin-off of MHS into the public markets,
all holders of MHS shares and Options shall have the right to convert their MHS
shares and Options into CVR shares and Options according to a formula based on
the then market capitalization of CVR and the relative contribution of MHS to
that market capitalization. The calculations of the relative contributions
shall be based on the average of three published valuations by independent oil
and gas stock analysts. MHS and CVR shall each choose an analyst and those two
analysts shall chose the third.
7. M & M will sell certain technology and equipment as listed on Exhibit A,
attached and made a part hereof, at a purchase price of $550,000 and will
provide the services of Burton and Milam to act as unpaid full-time consultants
for November, 1997 and December, 1997. M & M will continue to provide certain
additional services to MHS for a retainer of $29,700 per month less the salaries
and benefits paid to Burton and Milam by MHS. The parties acknowledge that M &
M, Burton and/or Milam have oil and gas property interests in Illinois. Burton
and Milam agree that they will contribute 100% of normal business hours,
services, technology, licensing, patents and expertise solely for the benefit of
MHS. M & M, Milam and Burton will be reimbursed by MHS for any out of pocket
expenses incurred on behalf of MHS. Effective January 1, 1998, Milam and Burton
will become full-time employees of MHS at salaries and benefits designated by M
& M, but which shall be less than $29,700 per month. To the extent that M & M
currently has existing administrative and support personnel which augment and
facilitate the services or activities of Burton and Milam, such personnel or
their replacements may continue to provide such administrative and support
services; however, it is specifically understood that any of the technical or
management responsibilities of MHS that are provided by M & M will be solely
performed by Burton and Milam.
8. Milam and Burton will decide among themselves the titles they have
within MHS. Gene Soltero, Jim Hogue and William McGuire will be the directors
of MHS. Burton & Milam will be awarded 60,000 CVR options at the closing AMEX
market price on the date hereof, which will vest over three years. The amount
allocated to each Burton & Milam will be reported to CVR within thirty days
after the date of signing of this agreement.
<PAGE> 3
9. MHS will provide horizontal drilling services for CVR and its
subsidiaries at 85% of the then current market rate. CVR will provide executive
management and administrative services for MHS at cost plus 20%.
10. CVR will use its best efforts to acquire drilling and/or workover
rigs in a wholly-owned subsidiary to be named Mustang Drilling Company ("MDC").
CVR will cause MDC to cooperate with MHS and provide the vertical services
whenever MHS obtains contracts that require a combination of vertical and
horizontal services.
ACCEPTED AND AGREED:
COTTON VALLEY RESOURCES CORPORATION
/s/ JAMES E. HOGUE 11-6-97
- ---------------------------------------------------- ----------------
James E. Hogue, President and Chief Operating Officer Date
/s/ GENE A. SOLTERO 11-6-97
- ---------------------------------------------------- ----------------
Gene A. Soltero, Chairman of the Board and Chief Executive Officer
M & M DIRECTIONAL SERVICES
BY:
----------------------
/s/ MARK E. MILAM 11-6-97
- ------------------------- ---------------
Mark Milam Date
/s/ MIKE BURTON 01-16-98
- ------------------------- ---------------
Mike Burton Date
<PAGE> 1
EXHIBIT 10.3
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
Among
COTTON VALLEY RESOURCES CORPORATION,
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.,
and
PALISADES HOLDINGS, INC.
December 30, 1997
------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of December 30,
1997 (this "Agreement"), among Cotton Valley Resources Corporation, a
corporation organized under the laws of Ontario, Canada (the "Company"),
Westover Investments L.P. a Delaware limited partnership ("Westover"), Montrose
Investments L.P., a Cayman Islands exempt limited partnership ("Montrose"),
Lakeshore International, a Bermuda corporation ("LI"), JMG Capital Partners,
L.P., a California limited partnership ("JMG"), Triton Capital Investments,
Ltd., a Caracao corporation ("Triton"), Lionhart Global Appreciation Fund,
Ltd., a British Virgin Islands international business corporation ("LGAF"),
Global Perspectives International, Ltd., a British Virgin Islands international
business corporation ("Global Perspectives"), Global Emerging Markets, Ltd., a
Guernsey corporation ("Global Emerging Markets"), and Palisades Holdings, Inc.,
a California corporation ("Palisades"). Each of Westover, Montrose, LI, JMG,
Triton, LGAF, Global Perspectives, Global Emerging Markets and Palisades is
referred to herein as a "Purchaser" and they are collectively referred to
herein as the "Purchasers."
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchasers and the
Purchasers, severally and not jointly, desire to purchase from the Company up
to an aggregate principal amount of $4,320,000 of the Company's 7% Convertible
Debentures, due December 31, 2001, (the "Debentures"), which are convertible
into shares of the Company's common stock, no par value per share (the "Common
Stock").
IN CONSIDERATION of the mutual covenants and agreements set forth
herein and for good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF DEBENTURES; CLOSING
1.1 The Closing.
(a) The Closing. (i) Subject to the terms and conditions
set forth in this Agreement, the Company shall issue and sell to the Purchasers
and each Purchaser shall, severally and not jointly, purchase from the Company
the principal amount of Debentures set forth on Schedule 1 attached hereto for
an aggregate purchase price of $4,320,000 (the "Purchase Price"). The closing
of the purchase and sale of the Debentures (the "Closing") shall take place at
the offices of Robinson Silverman Pearce Aronsohn & Berman LLP, 1290 Avenue of
the Americas, New York, New York 10104, immediately following the execution
hereof or such later date as the parties hereto shall agree. The date of the
Closing is hereinafter referred to as the "Closing Date."
<PAGE> 3
(ii) At the Closing the parties hereto shall deliver, in
accordance with and subject to the terms and conditions of this Agreement, the
following: (i) the Company shall deliver or cause to be delivered (A)
Debentures in the aggregate principal amount equal to the Purchase Price,
registered in the names of the Purchasers as set forth on Schedule 1 attached
hereto, (B) the Security Agreement, (C) the Registration Rights Agreement, (D)
the United States Opinion addressed to each Purchaser, and (E) the Canadian
Opinion addressed to each Purchaser; (ii) each Purchaser shall deliver or cause
to be delivered its portion of the Purchase Price set forth on Schedule 1 in
United States dollars; and (iii) each party hereto shall deliver or cause to be
delivered all other executed instruments, agreements and certificates as are
required to be delivered by or on their behalf at the Closing.
1.2 Form of Debentures. The Debentures shall be in the form of
Exhibit A.
1.3 Certain Definitions. For purposes of this Agreement the
following terms shall have the following meanings:
"Canadian Opinion" means the legal opinion of Weir and Foulds,
Toronto, Ontario, substantially in the form of Exhibit E-2.
"Cash Collateral Agreement" means the Cash Collateral Agreement
substantially in the form of Exhibit C-2.
"Closing Date" has the meaning set forth in Section 1.1(a) of this
Agreement.
"Closing" has the meaning set forth in Section 1.1(a) of this
Agreement.
"Commission" means the Securities and Exchange Commission.
"Conversion Date" has the meaning assigned to such term in Exhibit A.
"Conversion Price" has the meaning assigned to such term in Exhibit A.
"Disclosure Materials" has the meaning set forth in Section 2.1(j) of
this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Governmental Entity" means any court, administrative agency or
commission or other governmental authority or agency, domestic or foreign,
including local authorities.
"Guaranty" means the Guaranty substantially in the form of Exhibit G.
"Initial Reserve" has the meaning set forth in Section 2.1(d) of this
Agreement.
-2-
<PAGE> 4
"Intellectual Property Rights" has the meaning set forth in Section
2.1(q) of this Agreement.
"Liens" means all liens, encumbrances and rights of first refusals of
any kind.
"Market Price" as at any date shall mean the average Per Share Market
Value for the five (5) Trading Days immediately preceding such date.
"Material Adverse Effect" has the meaning set forth in Section 2.1(a)
of this Agreement.
"Original Issue Date" has the meaning assigned to such term in Exhibit
A.
"Palisades" means Palisades Capital, Inc.
"Per Share Market Value" has the meaning assigned to such term in
Exhibit A.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind
"Purchase Price" has the meaning set forth in Section 1.1(a) of this
Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement substantially in the form of Exhibit D.
"Required Approvals" has the meaning set forth in Section 2.1(f) of
this Agreement.
"RSPA&B" means Robinson, Silverman, Pearce, Aronsohn & Berman, LLP.
"SEC Documents" has the meaning set forth in Section 2.1(j) of this
Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities" means the Debentures, Warrants and Underlying Shares.
"Security Agreement" means the Security Agreement substantially in the
form of Exhibit C-1.
"Subsequent Financing" has the meaning set forth in Section 3.14 of
this Agreement.
-3-
<PAGE> 5
"Subsequent Financing Notice" has the meaning set forth in Section
3.15 of this Agreement.
"Subsidiaries" has the meaning set forth in Section 2.1(a) of this
Agreement.
"Trading Day" has the meaning assigned to such term in Exhibit A.
"Transaction Documents" means this Agreement, the Debentures, the
Warrants, the Security Agreement, the Cash Collateral Agreement, the Guaranty
and the Registration Rights Agreement.
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of the Debentures and as payment of interest in respect thereof, and
upon exercise of the Warrants.
"Underlying Securities Registration Statement" has the meaning set
forth in Section 2.1(f) of this Agreement.
"United States Opinion" means the legal opinion of Jackson Walker
L.L.P., Dallas, Texas, substantially in the form of Exhibit E-1.
"Warrants" means the Warrants substantially in the form of Exhibit B.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties to the
Purchasers:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, with the requisite corporate
power and authority to own and use its properties and assets and to carry on
its business as currently conducted. The Company has no subsidiaries other than
as set forth in Schedule 2.1(a) attached hereto (collectively, the
"Subsidiaries"). Each of the Subsidiaries is a corporation, duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, with the full corporate power and authority to own and use its
properties and assets and to carry on its business as currently conducted. Each
of the Company and the Subsidiaries is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not, individually or in the aggregate, (x) adversely
affect the legality, validity or enforceability of the Transaction
-4-
<PAGE> 6
Documents, (y) have a material adverse effect on the results of operations,
assets, prospects, or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability
to perform fully on a timely basis its obligations under any Transaction
Document (any of the foregoing, a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to carry
out its obligations thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company. Each of the Transaction Documents has been
duly executed by the Company and when delivered in accordance with the terms
hereof shall constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective articles
of amalgamation, certificate of incorporation, by-laws or other charter
documents.
(c) Capitalization. The authorized, issued and
outstanding capital stock of the Company is set forth in Schedule 2.1(c). No
shares of Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as disclosed in Schedule 2.1(c), there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result of
the purchase and sale of the Debentures and Warrants hereunder, securities,
rights or obligations convertible into or exchangeable for, or giving any
person any right to subscribe for or acquire any shares of Common Stock, or
contracts, commitments, understandings, or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of Common
Stock. To the knowledge of the Company, except as specifically disclosed in the
SEC Documents or Schedule 2.1(c), no Person beneficially owns (as determined
pursuant to Rule 13d-3 promulgated under the Exchange Act) or has the right to
acquire by agreement with or by obligation binding upon the Company, beneficial
ownership of in excess of 5% of the Common Stock.
(d) Issuance of Debentures and Warrants. The Debentures
and the Warrants are duly authorized, and, when issued in accordance with the
terms hereof, shall be validly issued, fully paid and nonassessable, free and
clear of all Liens. The Company has and at all times while the Debentures and
the Warrants are outstanding will maintain an adequate reserve of duly
authorized shares of Common Stock to enable it to perform its conversion,
exercise and other obligations under this Agreement, the Debentures and the
Warrants, and in no circumstances shall such reserved and available shares of
Common Stock be less than the sum
-5-
<PAGE> 7
of (i) 200% of the sum of (A) the number of shares of Common Stock as would be
issuable upon conversion in full of the Debentures, assuming such conversion
were effected on the Original Issue Date or the Filing Date (as defined in the
Registration Rights Agreement), whichever yields a lower Conversion Price and
(B) the number of shares of Common Stock as are issuable as payment of interest
on the Debentures, and (ii) the number of Underlying Shares as are issuable
upon exercise in full of the maximum number of Warrants which could be issued
upon conversion of the Debentures outstanding on either the Closing Date or the
Filing Date, whichever yields a higher number of Underlying Shares (the
"Initial Reserve"). If at any time the sum of the number of shares of Common
Stock issuable (a) upon conversion in full of the then outstanding Debentures,
(b) as the payment of interest on the Debentures (assuming all such interest is
to be paid in Common Stock) and (c) upon exercise in full of the Warrants
exceeds 85% of the Initial Reserve, the Company shall duly reserve 200% of the
number of shares of Common Stock equal to such excess to fulfill such
obligations. The obligation shall similarly apply to successive excesses. When
issued in accordance with the terms of the Debentures and the Warrants, the
Underlying Shares will be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance
of the Transaction Documents by the Company and the consummation by the Company
of the transactions contemplated thereby do not and will not (i) conflict with
or violate any provision of its articles of amalgamation, bylaws or other
charter documents (each as amended through the date hereof) or (ii) subject to
obtaining the consents referred to in Section 2.1(f), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument (evidencing a Company debt or otherwise) to which the Company is a
party or by which any property or asset of the Company is bound or affected, or
(iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or Governmental Entity to
which the Company is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company is bound or
affected, except in the case of each of clauses (ii) and (iii), as could not,
individually or in the aggregate, have or result in a Material Adverse Effect.
The business of the Company is not being conducted in violation of any law,
ordinance or regulation of any Governmental Entity, except for violations
which, individually and in the aggregate, could not have or result in a
Material Adverse Effect.
(f) Consents and Approvals. Except as specifically set
forth in Schedule 2.1(f), neither the Company nor any Subsidiary is required to
obtain any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other federal, state, local or other
Governmental Entity or other Person in connection with the execution, delivery
and performance by the Company of the Transaction Documents other than (i) the
filing of a registration statement covering the resale of the Underlying Shares
by the Purchasers (the "Underlying Securities Registration Statement") with the
Commission, (ii) the application for the listing of the Underlying Shares on
the American Stock Exchange ("AMEX") (and with any other national securities
exchange, market or trading facility on which the Common Stock is then
-6-
<PAGE> 8
listed), and (iii) other than, in all other cases, where the failure to obtain
such consent, waiver, authorization or order, or to give or make such notice or
filing, could not have or result in, individually or in the aggregate, a
Material Adverse Effect (together with the consents, waivers, authorizations,
orders, notices and filings referred to in Schedule 2.1(f), the "Required
Approvals").
(g) Litigation; Proceedings. Except as specifically
disclosed in the Disclosure Materials (as hereinafter defined), there is no
action, suit, notice of violation, proceeding or investigation pending or, to
the best knowledge of the Company, threatened against or affecting the Company
or any of its Subsidiaries or any of their respective properties before or by
any court, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) could, individually or in the aggregate,
have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or in violation of (or has received notice
of a claim that it is in default under or that it is in violation of) its
articles of amalgamation, certificate of incorporation, by-laws or other
charter documents, any indenture, promissory note, loan or credit agreement or
any other agreement or instrument to which it is a party or by which it or any
of its properties is bound, (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is in violation of any statute, rule
or regulation of any Governmental Entity, except as could not individually or
in the aggregate, have or result in, individually or in the aggregate, a
Material Adverse Effect.
(i) Private Offering. Subject in part to the truth and
accuracy of the Purchasers' representations set forth in Section 2.2, the
offer, sale and issuance of the Securities as contemplated by this Agreement
are exempt from the registration requirement of the Securities Act, and neither
the Company nor any Person acting on its behalf has taken or will take any
action which might subject the offering, issuance or sale of the Securities to
the registration requirements of Section 5 of the Securities Act.
(j) SEC Documents. The Company has, with the exception of
a Form 8-K to be filed in connection with the Aspen Acquisition (the "Aspen
8-K"), which the Company shall file as soon as possible but in any event within
twenty (20) Trading Days of the date hereof, filed all reports required to be
filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the three years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC Documents" and,
together with the Schedules to this Agreement and other documents and
information furnished by or on behalf of the Company at any time prior to the
Closing, as the "Disclosure Materials") on a timely basis or has received a
valid extension of such time of filing and has filed any such SEC Documents
prior to the expiration of any such extension. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of
the Securities Act and the Exchange Act and
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the rules and regulations of the Commission promulgated thereunder, and none of
the SEC Documents, when filed, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply in all material
respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved, except as may be otherwise
specified in such financial statements or the notes thereto, and fairly present
in all material respects the financial position of the Company as of and for
the dates thereof and the results of operations and cash flows for the periods
then ended, subject, in the case of unaudited statements, to normal year-end
audit adjustments. Since June 30, 1997, there has been no event, occurrence or
development that has had or that could have or result in a Material Adverse
Effect.
(k) Investment Company. The Company is not, and is not an
"Affiliate person" of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(l) Certain Fees. Except for fees payable to Palisades
and Liviakis Financial ("Liviakis"), no fees or commissions will be payable by
the Company to any broker, financial advisor, finder, investment banker,
placement agent, or bank with respect to the transactions contemplated hereby.
The Purchasers shall have no obligation with respect to such fees or with
respect to any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the
transactions contemplated hereby. The Company shall indemnify and hold harmless
each Purchaser, its respective employees, officers, directors, agents, and
partners, and their respective Affiliates (as such term is defined under Rule
405 promulgated under the Securities Act), from and against all claims, losses,
damages, costs (including the costs of preparation and attorney's fees) and
expenses suffered in respect of any such claimed or existing fees, as and when
incurred.
(m) Solicitation Materials. The Company has not (i)
distributed any offering materials in connection with the offering and sale of
the Securities other than the Disclosure Materials and any amendments and
supplements thereto or (ii) solicited any offer to buy or sell the Securities
by means of any form of general solicitation or advertising.
(n) Form SB-2 Eligibility. Upon the filing of the Aspen
8-K, the Company will be, eligible to register securities for resale with the
Commission under Form SB-2 promulgated under the Securities Act.
(o) Exclusivity. The Company shall not issue and sell
Debentures to any Person other than the Purchasers.
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(p) Listing and Maintenance Requirements Compliance. The
Company has not in the two years preceding the date hereof received written
notice from any stock exchange, market or trading facility on which the Common
Stock is or has been listed (or on which it has been quoted) to the effect that
the Company is not in compliance with the listing or maintenance requirements
of such exchange, market or trading facility. The Company has no reason to
believe that it does not now or will not in the future meet any such
maintenance requirements.
(q) Patents and Trademarks. The Company has, or has the
rights to use all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and rights which
are necessary for use in connection with its business and which the failure to
so have would have a Material Adverse Effect (collectively, the "Intellectual
Property Rights"). To the best knowledge of the Company, there is no existing
infringement on any of the Intellectual Property Rights.
(r) Disclosure. All information relating to or concerning
the Company set forth in the Transaction Documents or provided to the
Purchasers or their respective representatives, agents and counsel in
connection with the transactions contemplated hereby is true and correct in all
material respects and does not fail to state any material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading. The Company confirms that it has
not provided to any of the Purchasers or any of their representatives or agents
any information that constitutes or might constitute material non-public
information other than information that has specifically been identified to the
recipient as material non-public information in writing. The Company
understands and confirms that the Purchasers shall be relying on the foregoing
representation in effecting transactions in securities of the Company.
(s) Registration Rights. Except as provided in the
Registration Rights Agreement and as disclosed on Schedule 2.l(s) hereto, the
Company has not granted or agreed to grant any registration rights, including
piggyback registration rights, to any Person.
(t) Environmental Matters.
(i) As used in this Section 2.1(t):
(A) "Contaminated Site List" means any
list, registry, or other compilation established by any Governmental Entity of
sites that require or potentially require investigation, removal actions,
remedial actions, or any other response under any Environmental Laws or treaty
covering environmental matters, as the result of the Release or threatened
Release of any Hazardous Materials.
(B) "Environmental Laws" means all laws,
rules, regulations, statutes, ordinances or orders of any Governmental Entity
relating to (1) the control of any potential pollutant or protection of the
air, water or land, (2) solid, gaseous or liquid waste generation, handling,
treatment, storage, disposal or transportation, and (3) exposure to
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hazardous, toxic or other substances alleged to be harmful, and includes
without limitation, (x) the terms and conditions of any license, permit,
approval, or other authorization by any Governmental Entity, and (y) judicial,
administrative, or other regulatory decrees, judgments, and orders of any
Governmental Entity. The term "Environmental Laws" shall include, but not be
limited to, the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water
Act, 33 U.S.C. Section 1251 et seq., the Resource Conservation Recovery Act
("RCRA"), 42 U.S.C. Section 6901 et seq., the Superfund Amendments and
Reauthorization Act, 42 U.S.C. Section 11011 et seq., the Toxic Substances
Control Act, 15 U.S.C. Section 201 et seq., the Water Pollution Act, 33 U.S.C.
Section 1251, et seq., the Oil Pollution Act of 1990, 33 U.S.C. Section 2701,
et. seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., and the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), 42 U.S. C. Section 9601 et seq., Subtitle B of the Texas Health and
Safety Code, V.T.C.A., Health & Safety Code Section 361, et seq., and Subtitle
D of the Texas Water Code, V.T.C.A., Water Code Section 26, et seq.
(C) "Environmental Liabilities" shall mean any and all
liabilities, responsibilities, claims, suits, losses, costs (including
remediation, removal, response, abatement, clean-up, investigative, and/or
monitoring costs and any other related costs and expenses), other causes of
action recognized now or at any later time, damages, settlements, expenses,
charges, assessments, liens, penalties, fines, prejudgment and post-judgment
interest, expert fees, attorney fees and other legal fees (1) pursuant to any
agreement, order, notice, or responsibility, directive (including directives
embodied in Environmental Laws), injunction, judgment, or similar documents
(including settlements), or (2) pursuant to any claim by a Governmental Entity
or other person for personal injury, property damage, damage to natural
resources, remediation, or similar costs or expenses incurred by such
Governmental Entity or person pursuant to common law or statute.
(D) "Environmental Remediation Costs" means all costs and
expenses of actions or activities to (1) cleanup or remove Hazardous Materials
from the environment, (2) to prevent or minimize the further movement, leaching,
or migration of Hazardous Materials in the environment, (3) prevent, minimize or
mitigate the Release or threatened Release of Hazardous Materials into the
environment, or injury or damage from such Release, and (4) comply with the
requirements of any Environmental Laws. Environmental Remediation Costs include,
without limitation, costs and expenses payable in connection with the foregoing
for legal, engineering or other consultant services, for investigation, testing,
sampling, and monitoring, for boring, excavation, and construction, for removal,
modification or replacement of equipment or facilities, for labor and material,
and for proper storage, treatment, and disposal of Hazardous Materials.
(E) "Hazardous Materials" means any toxic or hazardous
materials or substance, or solid wastes, including asbestos, buried
contaminants, chemicals, flammable or explosive materials, radioactive
materials, petroleum and petroleum products, and any other chemical, pollutant,
contaminant, substance, product or waste that is regulated by any Governmental
Entity under any Environmental Law.
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<PAGE> 12
(F) "Release" means any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping, or disposing into the environment of any Hazardous Materials.
(ii) Except as disclosed in Schedule 2.1(t):
(A) With respect to permits and licenses, (1) all
licenses, permits, consents, or other approvals required under Environmental
Laws that are necessary to the operations of the Company or any of its
Subsidiaries have been obtained and are in full force and effect and the
Company is unaware of any basis for revocation or suspension of any such
licenses, permits, consents or other approvals, (2) no permit will expire
before, nor within sixty days after, the Closing Date, for which an application
for extension or renewal has not been filed, (3) no declaration, environmental
impact statement, or other filing or notice to any Governmental Entity is
required under Environmental Laws as a condition to or in connection with the
transactions contemplated by this Agreement, and (4) no Environmental Laws
impose any obligation upon the Company or any of its Subsidiaries, as a result
of any transaction contemplated hereby, requiring prior notification to any
Governmental Entity of the transfer of any permit, license, consent, or other
approval.
(B) No Governmental Entity has given notice to the
Company or any of its Subsidiaries of any intent to encumber or place a lien
under any Environmental Law upon any property owned or operated by the Company
or any of its Subsidiaries. No notice or restriction has been, or is required
to be placed in any deed or other public real property record pursuant to any
Environmental Laws with respect to any properties owned or operated by the
Company or any of its Subsidiaries.
(C) Except as would not have a Material Adverse Effect,
(1) no oral or written notification of any Release of any Hazardous Materials
has been given to any Governmental Entity by or on behalf of the Company or any
of its Subsidiaries, (2) to the Company's best knowledge, no property currently
or previously owned or operated by the Company or any of its Subsidiaries, (or
their respective predecessors with respect to property owned or operated during
or prior to the Company's or the Subsidiary's ownership or operation thereof)
is listed on (nor has the Company or any of its Subsidiaries received any
notice from any Governmental Entity that such property is being considered or
proposed for listing on) any Contaminated Site List, (3) to the Company's best
knowledge, no property currently owned or operated by the Company, nor
previously owned or operated by the Company or any of its Subsidiaries (or
their respective predecessors with respect to property owned or operated during
or prior to the Company's or the Subsidiary's ownership or operation thereof)
is the subject of any judgment, decree or order of any Governmental Entity
requiring any investigation, removal, remediation or similar action, or other
response under any Environmental Laws, (4) neither the Company nor any of its
Subsidiaries has received any notice that it is liable or responsible, or
potentially liable or responsible, in any respect for any removal, remedial, or
other similar type action under any Environmental Laws as the result of the
Release or threatened Release of Hazardous Materials at any location and (5) no
notice of claim, complaint, investigation,
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<PAGE> 13
litigation, or administrative proceeding has been received or to the Company's
best knowledge, threatened before any Governmental Entity (and to the best of
their knowledge, neither the Company nor any of its Subsidiaries know of any
threatened claim, complaint, investigation, litigation, or administrative
proceeding) in which it is asserted by any Governmental Entity or any other
person that the Company or any of its Subsidiaries (x) has violated or is not
in compliance with any Environmental Laws, (y) is liable for or should be
ordered or compelled to undertake any removal, remediation, or other response
action as the result of the Release or threatened Release of any Hazardous
Materials at any location or (z) is liable for damages (including without
limitation, damages to natural resources), fines, penalties, or other relief as
the result of the violation or noncompliance of any Environmental Laws or as
the result of the Release or threatened Release of any Hazardous Materials at
or from any property currently or previously owned or operated by the Company
or any of its Subsidiaries, or at any other location.
(D) With respect to any Environmental Remediation Costs,
the Company has reserved funds for all material Environmental Remediation Costs
of which it is aware or has notice in connection with which the Company and any
of its Subsidiaries reasonably anticipates payment or accrual.
(E) Except where the failure to have such permits and
authorizations would not have a Material Adverse Effect, to the best of the
Company's knowledge, all Hazardous Materials, garbage, refuse, and similar
waste materials have been transported by the Company and each of its
Subsidiaries (and their respective predecessors during or prior to the
Company's or the Subsidiary's ownership thereof) only to sites which have
proper permits or other authorization from Governmental Entities for the
disposal of such materials. The Company has received no notice that any site to
which Hazardous Materials, garbage, refuse, or similar waste materials have
been transported for disposal by the Company or any Subsidiary (or their
respective predecessors during or prior to the Company's or the Subsidiary's
ownership thereof) is on any Contaminated Site List or requires the expenditure
of any Environmental Remediation Costs nor, has been placed on such a list or
the requirement that such costs be incurred been threatened.
(F) Except as would not have a Material Adverse Effect,
all operations of the Company and its Subsidiaries, and the properties owned or
operated by the Company or any of its Subsidiaries, are in compliance with all
permits and Environmental Laws, including without limitation compliance with
Subtitle D of RCRA and all regulations promulgated thereunder as if it were in
effect on the date hereof.
(G) Except as would not have a Material Adverse Effect,
to the best of the Company's knowledge, no facts or circumstances exist which
could reasonably be expected to result in any Environmental Liabilities to the
Company, or any of the Company's Subsidiaries or any of their directors,
officers, stockholders or controlling persons, following the Closing, which
have not been otherwise disclosed herein or in Schedule 2.1(t) or in the SEC
Documents, with respect to (1) any properties currently or previously owned or
operated by the
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<PAGE> 14
Company or any Subsidiary (or their respective predecessors with respect to
property owned or operated during or prior to the Company's or the Subsidiary's
ownership or operation thereof) thereof, or (2) the current or past business or
operations of the Company or any of its Subsidiaries.
(iii) The Company and its Subsidiaries do not own,
lease or otherwise operate any disposal sites, except for water disposal wells
customary in oil and gas operations.
(u) Title to Properties.
(i) Except as set forth on Schedule 2.1(u)(i),
each of the Company and each of its Subsidiaries has good and indefeasible title
to, or valid leasehold interests in, all its properties and assets except for
such as are no longer used or useful in the conduct of its businesses or as have
been disposed of in the ordinary course of business and except for minor defects
in title, easements, restrictive covenants and similar encumbrances or
impediments that, in the aggregate, do not and will not have a Material Adverse
Effect or interfere with its ability to conduct its business as currently
conducted or as reasonably expected to be conducted. All such assets and
properties, other than assets and properties in which the Company or any of the
Subsidiaries has leasehold interests, are free and clear of all Liens, other
than those set forth in Schedule 2.1(u)(i) and except for minor liens, that, in
the aggregate, do not and will not have a Material Adverse Effect interfere with
the ability of the Company or any of its Subsidiaries to conduct business as
currently conducted or as reasonably expected to be conducted.
(ii) Except as set forth in Schedule 2.1(u)(ii),
each of the Company and each of its Subsidiaries has complied in all material
respects with the terms of all real estate leases to which it is a party and
under which it is in occupancy, and all such real estate leases are in full
force and effect. Each of the Company and each of its Subsidiaries enjoys
peaceful and undisturbed possession under all such leases.
2.2 Representations and Warranties of the Purchasers. Each
Purchaser hereby, severally and not jointly, makes the following
representations and warranties to the Company.
(a) Organization; Authority. Such Purchaser is an entity
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and to carry out its obligations thereunder. The acquisition of the
Securities to be acquired hereunder by such Purchaser has been duly authorized
by all necessary action on the part of such Purchaser. Each of this Agreement,
the Security Agreement, and the Registration Rights Agreement has been duly
executed by such Purchaser and, when delivered by such Purchaser in accordance
with the terms hereof and thereof constitutes the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity.
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<PAGE> 15
(b) Investment Intent. Such Purchaser is acquiring the
Securities to be acquired hereunder by such Purchaser for its own account for
investment purposes only and not with a view to or for distributing or
reselling such Securities or any part thereof or interest therein, without
prejudice, however, to such Purchaser's right, subject to the provisions of
this Agreement and the Registration Rights Agreement, at all times to sell or
otherwise dispose of all or any part of such Securities pursuant to an
effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) Purchaser Status. At the time such Purchaser was
offered the Securities to be acquired hereunder by such Purchaser, it was, at
the date hereof, it is, and at the Closing Date, it will be, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. Such Purchaser either alone
or together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has
so evaluated the merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. Such
Purchaser acknowledges that an investment in the Securities is speculative and
involves a high degree of risk. Such Purchaser is able to bear the economic
risk of an investment in the Securities to be acquired hereunder by such
Purchaser, and, at the present time, is able to afford a complete loss of such
investment.
(f) Access to Information. Such Purchaser acknowledges
receipt of the Disclosure Materials and further acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning the
terms and conditions of the offering of the Securities, and the merits and
risks of investing in the Securities, (ii) access to information about the
Company and the Company's financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to evaluate its
investment and (iii) the opportunity to obtain such additional information
which the Company possesses or can acquire without unreasonable effort or
expense that is necessary to make an informed investment decision with respect
to the investment and to verify the accuracy and completeness of the
information contained in the Disclosure Materials. Neither such inquiries nor
any other investigation conducted by or on behalf of such Purchaser or its
representatives, agents or counsel shall modify, amend or affect such
Purchaser's right to rely on the truth, accuracy and completeness of the
Disclosure Materials and the Company's representations and warranties contained
in the Transaction Documents.
(g) Reliance. Such Purchaser understands and acknowledges
that (i) the Securities to be acquired by it hereunder are being offered and
sold to it without registration under the Securities Act in a private placement
that is exempt from the registration provisions of the Securities Act and (ii)
the availability of such exemption, depends in part on, and the
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<PAGE> 16
Company will rely upon the accuracy and truthfulness of, the foregoing
representations and such Purchaser hereby consents to such reliance. Each
Purchaser hereby agrees to cooperate with the Company if, as required by law or
the Commission to confirm the availability of an exemption from the
registration requirements of the Securities Act for the transactions
contemplated herein, the Company shall reasonably request additional
information from such Purchaser.
The Company acknowledges and agrees that the Purchasers make
no representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to
the Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements thereof. In connection with any
transfer of any Securities other than pursuant to an effective registration
statement or to the Company, the Company may require the transferor thereof to
provide to the Company an opinion of counsel selected by the transferor, the
form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration under
the Securities Act. Notwithstanding the foregoing, the Company hereby consents
to and agrees to register (i) any transfer of Securities by one Purchaser to
another Purchaser, and agrees that no documentation other than executed
transfer documents shall be required for any such transfer, and (ii) any
transfer by any Purchaser to an Affiliate (as such term is defined under Rule
405 promulgated under the Securities Act) of such Purchaser or to an Affiliate
of another Purchaser, or any transfers among any such Affiliates provided the
transferee certifies to the Company that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act. Any such Purchaser or
Affiliate transferee shall have the rights of a Purchase under this Agreement
and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is
required by this Section 3.1 (b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO AN
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<PAGE> 17
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
[FOR DEBENTURES ONLY] THIS DEBENTURE IS SUBJECT TO CERTAIN
RESTRICTIONS ON CONVERSION SET FORTH IN SECTION 3.8 OF THE CONVERTIBLE
DEBENTURE PURCHASE AGREEMENT, DATED AS OF DECEMBER 30, 1997, AMONG
COTTON VALLEY RESOURCES CORPORATION (THE "COMPANY") AND THE ORIGINAL
HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF THE COMPANY.
Underlying Shares shall not contain the legend set forth above
if the conversion of Debentures, exercise of Warrants or other issuances of
Underlying Shares, as the case may be, occurs at any time while an Underlying
Securities Registration Statement is effective under the Securities Act or, in
the event there is not an effective Underlying Securities Registration
Statement at such time, if in the opinion of counsel to the Company such legend
is not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the staff of the
Commission). The Company agrees that it will provide each Purchaser, upon
request, with a certificate or certificates representing Underlying Shares,
free from such legend at such time as such legend is no longer required
hereunder. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company which enlarge the
restrictions of transfer set forth in this Section 3.1(b).
3.2 Acknowledgement of Dilution. The Company acknowledges that the
issuance of Underlying Shares upon (i) conversion of the Debentures and as
payment of interest thereon and (ii) exercise of the Warrants may result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Underlying Shares in accordance with the
Debentures and the Warrants is unconditional and absolute regardless of the
effect of any such dilution.
3.3 Furnishing of Information. As long as the Purchasers own
Securities, the Company covenants to timely file all reports required to be
filed by the Company after the date hereof pursuant to Section 13(a) or 15(d)
of the Exchange Act. If at any time prior to the date on which the Purchasers
may resell all of their Underlying Shares without volume restrictions pursuant
to Rule 144(k) promulgated under the Securities Act (as determined by counsel
to the Company pursuant to a written opinion letter to such effect, addressed
and acceptable to the Company's transfer agent for the benefit of and
enforceable by the Purchasers) the Company is not required to file reports
pursuant to such sections, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) promulgated under the
Securities Act annual and quarterly financial statements, together with a
discussion and analysis of such financial statements in form and substance
substantially similar to those that would otherwise be required to be included
in reports required by Section 13(a) or 15(d) of the Exchange Act in the time
period that such filings would have been required to have been made under the
Exchange Act. The Company further covenants that it will take such further
action
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as any holder of Securities may reasonably request, all to the extent required
from time to time to enable such Person to sell Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144 promulgated under the Securities Act, including the legal opinion
referenced above in this Section. Upon the request of any such Person, the
Company shall deliver to such Person a written certification of a duly
authorized officer as to whether it has complied with such requirements.
3.4 Use of Disclosure Materials. The Company consents to the use
of the Disclosure Materials and any information provided by or on behalf of the
Company pursuant to Section 3.3, and any amendments and supplements thereto, by
the Purchasers in connection with resales of the Securities other than pursuant
to an effective registration statement.
3.5 Blue Sky Laws. In accordance with the Registration Rights
Agreement, the Company shall qualify the Underlying Shares under the securities
or Blue Sky laws of such jurisdictions as the Purchasers may request and shall
continue such qualification at all times until the Purchasers notify the
Company in writing that they no longer own Securities; provided, however, that
neither the Company nor its Subsidiaries shall be required in connection
therewith to qualify as a foreign corporation where they are not now so
qualified or to take any action that would subject the Company to general
service of process in any such jurisdiction where it is not then so subject.
3.6 Integration. The Company shall not and shall use its best
efforts to ensure that no Affiliate shall sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or
sale of the Securities in a manner that would require the registration under
the Securities Act of the issue or sale of the Securities to the Purchasers.
3.7 Increase in Authorized Shares. At such time as the Company
would be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from (a) converting the full outstanding
principal amount of Debentures (and paying any accrued but unpaid interest in
respect thereof in shares of Common Stock) that remain unconverted at such date
or (b) honoring the exercise in full of the Warrants due to the unavailability
of a sufficient number of shares of authorized but unissued or re-acquired
Common Stock, the Board of Directors of the Company shall promptly (and in any
case within 30 Business Days from such date) prepare and mail to the
shareholders of the Company proxy materials requesting authorization to amend
the Company's restated certificate of incorporation to increase the number of
shares of Common Stock which the Company is authorized to issue to at least a
number of shares equal to the sum of (i) all shares of Common Stock then
outstanding, (ii) the number of shares of Common Stock issuable on account of
all outstanding warrants, options and convertible securities (other than the
Debentures and the Warrants) and on account of all shares reserved under any
stock option, stock purchase, warrant or similar plan, (iii) 200% of the number
of Underlying Shares as would then be issuable upon a conversion in full of the
then outstanding Debentures and as payment of all future interest thereon in
shares of common Stock in accordance with the terms of this Agreement and the
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<PAGE> 19
Debentures and (iv) such number of Underlying Shares as would then be issuable
upon the exercise in full of the Warrants. In connection therewith, the Board
of Directors shall (x) adopt proper resolutions authorizing such increase, (y)
recommend to and otherwise use its best efforts to promptly and duly obtain
stockholder approval to carry out such resolutions (and hold a special meeting
of the shareholders no later than the 60th day after delivery of the proxy
materials relating to such meeting) and (z) within 5 Business Days of obtaining
such shareholder authorization, file an appropriate amendment to the Company's
certificate of incorporation to evidence such increase.
3.8 Purchaser Ownership of Common Stock. In no event shall a
Purchaser be permitted to use its ability to convert Debentures or exercise its
Warrants to the extent that such conversion or exercise would result in that
Purchaser beneficially owning (for purposes of Rule 13d-3 under the Exchange
Act and the rules thereunder) in excess of 4.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of the Debentures held by such Purchaser after application of this Section 3.8.
To the extent that the limitation contained in this Section 3.8 applies, the
determination of whether Debentures are convertible (in relation to other
securities owned by a Purchaser) and of which Debentures are convertible shall
be in the sole discretion of such Purchaser, and the submission of Debentures
for conversion shall be deemed to be such Purchaser's determination of whether
such Debentures are convertible (in relation to other securities owned by a
Purchaser) and of which Debentures are convertible, in each case subject to
such aggregate percentage limitation, and the Company shall have no obligation
to verify or confirm the accuracy of such determination. Nothing contained
herein shall be deemed to restrict the right of a Purchaser to convert
Debentures or exercise Warrants at such time as such conversion or exercise
will not violate the provisions of this Section 3.8. The provisions of this
Section may be waived by a Purchaser as to itself (and solely as to itself)
upon not less than 65 days prior notice to the Company, and the provisions of
this Section 3.8 shall continue to apply until such 65th day (or later, if
stated in the notice of waiver).
3.9 Listing of Underlying Shares. The Company shall (1) not later
than the fifth Business Day following the Closing Date prepare and file with
the AMEX (as well as any other national securities exchange, market or trading
facility on which the Common Stock is then listed) an additional shares listing
application covering at least the sum of (i) two times the number of Underlying
Shares as would be issuable upon a conversion in full of (and as payment of
interest in respect of) the Debentures, assuming such conversion occurred on the
Original Issue Date or the Filing Date (whichever yields a lower Conversion
Price) and (ii) the number of Underlying Shares then issuable upon exercise in
full of the maximum number of Warrants which could be issued upon conversion of
the outstanding Debentures on either the Closing Date or the Filing Date
(whichever yields a higher number of Underlying Shares) (2) take all steps
necessary to cause the such shares to be approved for listing on the AMEX (as
well as on any other national securities exchange or market on which the Common
Stock is then listed) as soon as possible thereafter, and (3) provide to the
Purchasers evidence of such listing, and the Company shall maintain the listing
of its Common Stock on such exchange or market. In addition, if at any time the
number of shares of Common Stock issuable on conversion of all
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<PAGE> 20
then outstanding Debentures, on account of accrued and unpaid interest thereon
and upon exercise in full of the Warrants is greater than the number of shares
of Common Stock theretofore listed with the AMEX (and any such other national
securities exchange, market or trading facility), the Company shall promptly
take such action (including the actions described in the preceding sentence) to
file an additional shares listing application with the AMEX (and any such other
national securities exchange, market or trading facility) covering at least a
number of shares equal to the sum of (x) 200% of the sum of (A) the number of
Underlying Shares as would then be issuable upon a conversion in full of the
Debentures and (B) the number of Underlying Shares as would be issuable as
payment of interest on the Debentures, and (y) the number of Underlying Shares
as would then be issuable upon exercise of the maximum number of Warrants which
could then be issued upon conversion of the then outstanding Debentures.
3.10 Use of Proceeds. The Company shall use all of the proceeds
from the sale of the Securities for working capital and general corporate
purposes, including, without limitation, for the purchase of equipment and
other assets, and not for the satisfaction of any portion of Company debt or to
redeem Company equity or equity-equivalent securities. Pending application of
the proceeds of this placement in the manner permitted hereby the Company will
invest such proceeds in interest bearing accounts and/or short-term, investment
grade interest bearing securities.
3.11 Notice of Breaches. Each of the Company and each Purchaser
shall give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof,
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained in the Transaction
Document to be incorrect or breached as of such Closing Date. However, no
disclosure by either party pursuant to this Section 3.11 shall be deemed to
cure any breach of any representation, warranty or other agreement contained in
any Transaction Document.
Notwithstanding the generality of the foregoing, the Company shall
promptly notify the Purchasers of any notice or claim (written or oral) that it
receives from any lender of the Company to the effect that the consummation of
the transactions contemplated by the Transaction Documents violates or would
violate any written agreement or understanding between such lender and the
Company, and the Company shall promptly furnish by facsimile to the holders of
the Debentures a copy of any written statement in support of or relating to such
claim or notice.
3.12 Conversion Obligations of the Company. The Company shall honor
conversions of the Debentures and exercises of the Warrants and shall deliver
Underlying Shares in accordance with the respective terms and conditions and
time periods set forth in the Debentures and the Warrants.
3.13 Right of First Refusal; Subsequent Registrations; Certain
Corporate Actions. (a) Except for the pending transaction with Cambrian Capital
Corporation which has been disclosed
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<PAGE> 21
to the Purchasers prior to the date hereof, the Company shall not, directly or
indirectly, without the prior written consent of the Purchasers, offer, sell,
grant any option to purchase, or otherwise dispose (or announce any offer,
sale, grant or any option to purchase or other disposition) of any of its or
its Affiliates equity, equity-equivalent or derivative securities (a
"Subsequent Financing") for a period of 180 days after the Closing Date, except
(i) the granting of options or warrants to employees, officers and directors,
and the issuance of shares upon exercise of options granted, under any stock
option plan heretofore or hereinafter duly adopted by the Company, (ii) shares
issued upon exercise of any currently outstanding warrants and upon conversion
of any currently outstanding convertible preferred stock in each case disclosed
in Schedule 2.1 (c), and (iii) shares of Common Stock issued upon conversion of
the Debentures, as payment of interest thereon, or upon exercise of the
Warrants in accordance with their respective terms, unless (A) the Company
delivers to Palisades a written notice (the "Subsequent Financing Notice") of
its intention to effect such Subsequent Financing, which Subsequent Financing
Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent Financing shall be effected, and a term
sheet or similar document relating thereto shall be attached to such Subsequent
Financing Notice and (B) Palisades shall not have notified the Company by 5:00
p.m. (New York City Time) on the tenth (10th) Trading Day after its receipt of
the Subsequent Financing Notice of its willingness to cause any of the
Purchasers to provide (or to cause its sole designee to provide), subject to
completion of mutually acceptable documentation, financing to the Company on
substantially the terms set forth in the Subsequent Financing Notice. If
Palisades shall fail to notify the Company of its intention to enter into such
negotiations within such time period, the Company may effect the Subsequent
Financing substantially upon the terms and to the Persons (or Affiliates of
such Persons) set forth in the Subsequent Financing Notice; provided, that the
Company shall provide Palisades with a second Subsequent Financing Notice, and
Palisades shall again have the right of first refusal for a period of five
Trading Days from the date of its receipt of such second Subsequent Financing
Notice, if the Subsequent Financing subject to the initial Subsequent Financing
Notice shall not have been consummated for any reason on the terms set forth in
such Subsequent Financing Notice within thirty (30) Trading Days after the date
of the initial Subsequent Financing Notice with the Person (or an Affiliate of
such Person) identified in the Subsequent Financing Notice.
(b) Except Underlying Shares and other "Registrable Securities"
(as such term is defined in the Registration Rights Agreement) to be registered
in accordance with the Registration Rights Agreement, and other than Company
securities to be registered for resale in connection with financings permitted
pursuant to paragraph (a)(i) through (iii) of this Section, the Company shall
not, without the prior written consent of Palisades, (i) issue or sell any of
its or any of its Affiliates' equity or equity-equivalent securities pursuant
to Regulation S promulgated under the Securities Act, or (ii) register for
resale any securities of the Company for a period of not less than 90 Trading
Days after the date that the Underlying Securities Registration Statement is
declared effective by the Commission. Any days that a Purchaser is not
permitted to sell Underlying Shares under the Underlying Securities
Registration Statement shall be added to such 90 Trading Day period for the
purposes of (i) and (ii) above.
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<PAGE> 22
(c) As long as there are Debentures outstanding, the
Company shall not and shall cause the Subsidiaries not to, without the consent
of the holders of the Debentures, (i) amend its articles of amalgamation,
bylaws or other charter documents so as to adversely affect any rights of the
holders of Debentures; (ii) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of its Common Stock other than Underlying Shares in
accordance with the Transaction Documents; or (iii) enter into any agreement
with respect to any of the foregoing.
3.14 The Warrants. The Company shall issue and deliver Warrants
upon the conversion of Debentures in accordance with the terms of the
Debentures. Warrants shall be exercisable through December 31, 2001 into Common
Stock pursuant to the terms of the Warrants.
3.15 Security Documents. Simultaneously with the execution of this
Agreement, the Company, the Purchasers and certain of the Company's
Subsidiaries shall enter into (i) the Guaranty, pursuant to which, in
consideration of the substantial benefit they will derive as a result of the
transactions contemplated hereby, such Subsidiaries will guaranty the
Obligations (as defined in the Security Agreement) and (ii) the Security
Agreement and the Cash Collateral Agreement pursuant to which such Subsidiaries
will pledge Collateral (as defined in the Security Agreement) as security for
the Obligations.
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<PAGE> 23
ARTICLE IV
CLOSING CONDITIONS
4.1 Conditions Precedent to the Obligation of the Company to Sell
the Debentures. The obligation of the Company to sell the Debentures hereunder
is subject to the satisfaction or waiver by the Company, at or before the
Closing, of each of the following conditions:
(a) Accuracy of the Purchasers' Representations and
Warranties. The representations and warranties of each Purchaser shall be true
and correct in all material respects as of the date when made and as of the
Closing Date, as though made on and as of such date.
(b) Performance by the Purchasers. Each Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Purchaser at or prior to the
Closing.
(c) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by the Transaction Documents.
4.2 Conditions Precedent to the Obligation of the Purchasers to
Purchase the Debentures. The obligation of each Purchaser hereunder to acquire
and pay for the Debentures is subject to the satisfaction or waiver by such
Purchaser, at or before the Closing, of each of the following conditions:
(a) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company set forth in this
Agreement and in the other Transaction Documents shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made on and as of such date.
(b) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the other Transaction Documents.
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<PAGE> 24
(d) Adverse Changes. Since the date of the financial
statements included in the Company's Quarterly Report on Form 10-Q or Annual
Report on Form 10-K, whichever is more recent, last filed prior to the date of
this Agreement, no event which had a Material Adverse Effect and no material
adverse change in the financial condition or prospects of the Company shall
have occurred which is not disclosed in the Disclosure Materials (for purposes
hereof changes in the market price of the Common Stock may be considered in
determining whether there has occurred an event which has had a Material
Adverse Effect or whether a material adverse change has occurred);
(e) No Suspensions of Trading in Common Stock. The
trading in the Common Stock shall not have been suspended by the Commission or
on the AMEX which suspension shall remain in effect.
(f) Listing of Common Stock. The Company shall have filed
a listing application to list the Underlying Shares for trading on the AMEX.
(g) Legal Opinions. The Company shall have delivered to
the Purchasers the United States Opinion and the Canadian Opinion.
(h) Required Approvals. All Required Approvals shall have
been obtained.
(i) Shares of Common Stock. On or prior to the Closing
Date, the Company shall have duly reserved the number of Underlying Shares
required by the Transaction Documents to be reserved for issuance upon
conversion of the Debentures, the payment of interest thereon and conversion of
the Warrants.
(j) Delivery of Debentures. The Company shall have
delivered to each Purchaser, or such Purchaser's designee, the Debentures,
registered in the name of such Purchaser, or designee, each substantially in
the form of Exhibit A.
(k) Registration Rights Agreement. The Company shall have
executed and delivered the Registration Rights Agreement;
(l) Security Agreement. The Company and certain of its
Subsidiaries shall have executed and delivered the Security Agreement;
(m) Cash Collateral Agreement. The Company and certain of
its Subsidiaries shall have executed and delivered the Cash Collateral
Agreement;
(n) Guaranty. The Company and certain of its Subsidiaries
shall have executed and delivered the Guaranty;
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<PAGE> 25
(o) Transfer Agent Instructions. The Irrevocable Transfer
Agent Instructions, in the form of Exhibit F attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.
ARTICLE V
MISCELLANEOUS
5.1 Fees and Expenses. The Company shall pay at the Closing
$30,000 to Palisades for payment to RSPA&B for the preparation and negotiation
of the Transaction Documents and for the due diligence expenses and
disbursements incurred in connection with the transactions contemplated hereby;
provided that if the transactions contemplated hereby do not close solely due
to the fact that a Purchaser is not satisfied with its due diligence or because
of a Material Adverse Effect prior to Closing, then such amount shall be
$10,000. Other than the amounts contemplated by the immediately preceding
sentence, and except as set forth in the Registration Rights Agreement, each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident
to the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all stamp and other taxes and duties levied in
connection with the issuance of the Debentures pursuant hereto. The Purchasers
shall be responsible for their own respective tax liability that may arise as a
result of the investment hereunder or the transactions contemplated by this
Agreement. Except pursuant to the terms of this Agreement, if the Company sells
any securities to any of the Purchasers during the two-year period following
the Closing Date, the Company shall pay to Palisades a cash fee of 5% on any
amount up to $5,000,000, 4% on any amount between $5,000,000 and $10,000,000,
3% on any amount between $10,000,000 and $15,000,000 and 2.5% on any amount
greater than $15,000,000 of capital received by the Company from the sale of
such securities and Palisades shall pay any fees and expenses owed to Liviakis
under the consulting agreement between the Company and Liviakis arising as a
result of the transactions contemplated hereunder.
5.2 Entire Agreement; Amendments. This Agreement, together with
the Exhibits and Schedules hereto, the Debentures, the Guaranty, the Warrants,
the Security Agreement, the Cash Collateral Agreement and the Registration
Rights Agreement contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters.
5.3 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 7:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile
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telephone number specified in the Purchase Agreement later than 7:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
If to the Company: Cotton Valley Resources Corporation
8350 N. Central Expressway
Suite M2030
Dallas, TX 75206
Facsimile No.: (214) 363-4294
Attn: Chief Financial Officer
With copies to: Jackson Walker LLP
901 Main Street, Suite 6000
Dallas, Texas 75202
Facsimile No.: (214) 953-5822
Attn: Richard B. Goodner, Esq.
If to any Purchaser or the Purchasers, to the address set forth on
Schedule 1
With copies to (for Palisades Capital, Inc.
communications to 505 South Beverly Drive
any Purchaser): Suite 305
Beverly Hills, CA 90212
Facsimile No.: (310) 546-2807
Attn: Brad D. Greenspan
-and-
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person. Non-delivery of copies of any notice as specified above
shall not affect the validity of any notice given to any party to this
Agreement in accordance with the terms of this Agreement.
5.4 Amendments: Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by
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<PAGE> 27
both the Company and the Purchasers; or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
5.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
5.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns, including any Persons to whom any Purchaser transfers Debentures or
Warrants. The assignment by a party of this Agreement or any rights hereunder
shall not affect the obligations of such party under this Agreement.
5.7 No Third-Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and, other than with respect to permitted assignees under Section 5.6,
is not for the benefit of, nor may any provision hereof be enforced by, any
other Person. The obligations of the Purchasers under this Agreement and the
other Transaction Documents are several and not joint and no Purchaser shall be
responsible for any obligations of any other Purchaser.
5.8 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof.
5.9 Survival. The representations, warranties, agreements and
covenants contained in this Agreement shall survive the Closing and the
conversion of the Debentures and exercise of the Warrants.
5.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile
signature page were an original thereof.
5.11 Publicity. The Company and the Purchasers shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise
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<PAGE> 28
make any such public statement without the prior written consent of the other,
which consent shall not be unreasonably withheld or delayed, except that no
prior consent shall be required if such disclosure is required by law, in which
such case the disclosing party shall provide the other party with prior notice
of such public statement. In no event will any party publicly or otherwise
disclose the name of any Purchaser without such Purchaser's prior written
consent.
5.12 Severability. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement
shall not in any way be affected or impaired thereby and the parties will
attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.
5.13 Remedies. Each of the parties to this Agreement acknowledges
and agrees that the other parties would be damaged irreparably in the event any
of the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the parties
hereto agrees that the other parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions of this
Agreement in any action instituted in any court of the United States of America
or any state thereof having jurisdiction over the parties to this Agreement and
the matter, in addition to any other remedy to which they may be entitled, at
law or in equity.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have caused this Debenture
Purchase Agreement to be duly executed by their respective authorized persons
as of the date first indicated above.
COTTON VALLEY RESOURCES CORPORATION
By: /s/ EUGENE A. SOLTORO
--------------------------------------
Name: Eugene A. Soltoro
Title: Chief Executive Officer
WESTOVER INVESTMENTS L.P.
By: /s/ WILLIAM E. ROSE
--------------------------------------
Name: William E. Rose
Title: Authorized Signatory
MONTROSE INVESTMENTS L.P.
By: /s/ WILLIAM E. ROSE
--------------------------------------
Name: William E. Rose
Title: Authorized Signatory
LAKESHORE INTERNATIONAL
By: Global Capital Management, Inc.,
Investment Manager
By: /s/ JOHN D. BRANDENBORG
--------------------------------------
Name: John D. Brandenborg
Title: Vice President
JMG CAPITAL PARTNERS, L.P.
By: /s/ JONATHAN GLASER
--------------------------------------
Name: Jonathan Glaser
Title: President of General Partner
TRITON CAPITAL INVESTMENTS, LTD.
By: /s/ JONATHAN GLASER
--------------------------------------
Name: Jonathan Glaser
Title: Vice President
<PAGE> 30
LIONHART GLOBAL APPRECIATION FUND, LTD.
By: /s/ TERRENCE P. DUFFY
-------------------------------
Name: Terrence P. Duffy
---------------------------
Title: Director
---------------------------
GLOBAL PERSPECTIVES INTERNATIONAL, LTD.
BY: /s/ TERRENCE P. DUFFY
-------------------------------
Name: Terrence P. Duffy
---------------------------
Title: Director
---------------------------
GLOBAL EMERGING MARKETS, LTD.
By: /s/ EDWARD J. TOBIN
-------------------------------
Name: Edward J. Tobin
---------------------------
Title: Authorized Signatory
---------------------------
PALISADES HOLDINGS, INC.
By: /s/ ILLEGIBLE
-------------------------------
Name: ILLEGIBLE
----------------------------
Title: President
---------------------------
<PAGE> 1
EXHIBIT 10.4
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of December 30, 1997, by and between Cotton
Valley Resources Corporation, a corporation organized under the laws of Ontario,
Canada (the "Debtor"), Cotton Valley Energy Corporation, a Nevada corporation,
Mustang Well Servicing Company (formerly Mustang Drilling Company), a Nevada
corporation, Mustang Horizontal Services, Inc., a Nevada corporation, Mustang
OilField Equipment Company, a Nevada Corporation, Cotton Valley Energy, Inc. an
Oklahoma corporation and Aspen Energy Corporation, a Nevada corporation
(collectively, the "Subsidiaries"), and Westover Investments L.P. a Delaware
limited partnership ("Westover"), Montrose Investments L.P., a Cayman Islands
exempt limited partnership ("Montrose"), Lakeshore International, a Bermuda
corporation ("LI"), JMG Capital Partners, L.P. a California limited partnership
("JMG"), Triton Capital Investments, Ltd., a Caracao, corporation ("Triton"),
Lionhart Global Appreciation Fund, Ltd., a British Virgin Islands international
business corporation ("LGAF"), Global Perspectives International, Ltd, a British
Virgin Islands international business corporation ("Global Perspectives"),
Global Emerging Markets, Ltd., a Guernsey corporation ("Global Emerging
Markets"), and Palisades Holdings, Inc., a California corporation ("Palisades").
Each of Westover, Montrose, LI, JMG, Triton, LGAF, Global Perspectives, Global
Emerging Markets and Palisades is referred to herein as a "Secured Party" and
they are collectively referred to herein as the "Secured Parties."
WITNESSETH:
WHEREAS, the Debtor and the Secured Parties have executed and delivered a
Convertible Debenture Purchase Agreement between them dated the date hereof (the
"Purchase Agreement") pursuant to which the Secured Parties have purchased and
the Debtor has sold Debentures (as defined in the Purchase Agreement);
WHEREAS, pursuant to the Purchase Agreement, the Debtor and the
Subsidiaries have agreed to execute and deliver to the Secured Parties this
Security Agreement granting the Secured Parties a first lien, except with
respect to the Zama Property Collateral (as defined below), on and security
interest in the Collateral (as defined below) to secure the Obligations (as
defined below);
WHEREAS, the Debtor and the Subsidiaries shall provide additional security
to secure the Obligations in the form of Cash Collateral (as defined in the Cash
Collateral Agreement) and together with the Secured Parties have entered into a
Cash Collateral Agreement attached hereto as Exhibit I; and
<PAGE> 2
WHEREAS, the Debtor and the Subsidiaries shall maintain the amount of
Collateral required by this Security Agreement and the Cash Collateral
Agreement, provided, that, they may substitute Asset Collateral (as defined
below) for Cash Collateral and Cash Collateral for Asset Collateral, all as
provided in this Security Agreement and the Cash Collateral Agreement.
NOW, THEREFORE, in consideration of the premises and agreement herein
contained and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto hereby agree as follows:
1. Creation of Security Interest. To secure prompt payment and performance
of all obligations of the Debtor and the Subsidiaries on the part of the Debtor
and the Subsidiaries to be performed under the Debentures and the other
Transaction Documents (as defined in the Purchase Agreement) and all other
obligations and liabilities, whether direct or indirect, absolute or contingent,
due or to become due, now existing or hereafter incurred, whether on account of
principal, interest, reimbursement obligations, fees, indemnities, costs,
expenses (including without limitation, all fees and expenses of the Collateral
Agent (as defined in the Cash Collateral Agreement) and counsel to the
Collateral Agent) or otherwise of the Debtor and the Subsidiaries to any
Purchaser (as defined in the Purchase Agreement) and any holders of the
Debentures arising under the Debentures or any other Transaction Document
(collectively, the "Obligations"), the Debtor and the Subsidiaries hereby
unconditionally and irrevocably grant to the Secured Parties a continuing
security interest in, a first lien upon, except with respect to the liens on the
Asset Collateral consisting of the property referred to as the Zama Property
(the "Zama Property Collateral"), which liens shall be second priority liens
behind only commercial banks first priority liens established on the date of
acquisition of the Zama Property, and a right of set-off against (i) certain
assets of the Debtor as listed on Schedule I hereto, whether presently owned or
existing or hereafter acquired or coming into existence, and all additions and
accessions thereto and all substitutions and replacements thereof, and all
proceeds, products and accounts thereof, including, without limitation, all
proceeds of insurance covering the same and of any tort claims in connection
therewith (the "Asset Collateral"), and (ii) the Cash Collateral. Collectively,
the Asset Collateral and the Cash Collateral are referred to herein as, the
"Collateral."
2. Debtor's Warranties. Each of the Debtor and each of the Subsidiaries
warrant and covenant that:
(a) it is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization;
(b) it has full power, authority and legal right to execute, deliver
and perform this Security Agreement and the Cash Collateral Agreement, and the
execution, delivery and performance of this Security Agreement and the Cash
Collateral Agreement by it has been duly authorized by all necessary action
(corporate or otherwise) and each of this Security Agreement and the Cash
Collateral Agreement, when delivered in accordance with its terms
-2-
<PAGE> 3
shall constitute its legal valid, and binding obligation enforceable against it
in accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, Creditor'
rights and remedies or by other equitable principles of general application; and
(c) except for the security interest created by this Security
Agreement and the Cash Collateral Agreement, and except with respect to the Zama
Property Collateral, it is the owner of the Collateral free and clear of any
lien, security interest, claim or encumbrance.
3. Debtor's Use of Asset Collateral. So long as an Event of Default shall
not have occurred and be continuing, the Debtor and the Subsidiaries shall have
the right, in their regular course of business, to possess, sell, use or dispose
of the Asset Collateral and to retain all proceeds, products and collections of
the Asset Collateral and to substitute Cash Collateral for any Asset Collateral
and to substitute Asset Collateral (including, Asset Collateral acquired after
the date hereof) for any Cash Collateral, all in accordance with the terms of
the Purchase Agreement, this Security Agreement and the Cash Collateral
Agreement. Except as provided for above, neither the Debtor nor any of the
Subsidiaries will pledge, assign, transfer or otherwise encumber the
Collateral. Neither the Debtor nor any of the Subsidiaries may substitute
collateral other than Cash Collateral or collateral purchased with Cash
Collateral for any Asset Collateral without the prior written consent of the
Secured Parties.
4. Required Value of Asset Collateral; Continuing Security Interest. The
value (the "Required Value") of the Asset Collateral shall at all times be equal
or greater than 180% of the amount of the Obligations which are not secured by
Cash Collateral pursuant to the Cash Collateral Agreement. The value of the
Asset Collateral shall be the value assigned to such Asset Collateral in the
Company's financial statements prepared in accordance with United States
generally accepted accounting principles, as consistently applied (the
"Financial Statements"), or, if no value is assigned to such Asset Collateral
therein, such value shall be determined by an independent appraiser; provided,
however, that the value of the Zama Property Collateral shall, at any time, be
equal to (i) the lesser of (a) the purchase price paid by the Debtor for the
Zama Property Collateral and (b) the value of the Zama Property Collateral set
forth on the Financial Statements, less (ii) the amount of the obligations
secured by the first lien on the Zama Property Collateral. The Secured Parties
shall at all times have a continuing security interest in, a first lien upon,
except with respect to the liens on Zama Property, which liens shall be second
priority liens behind only commercial banks first priority liens established on
the date of acquisition of the Zama Properties, and a right of set-off against
the Asset Collateral.
5. Covenants.
(a) Maintenance of Corporate Existence. Each of the Debtor and each of
the Subsidiaries shall maintain its corporate existence, and all rights,
qualifications and franchises
-3-
<PAGE> 4
necessary to continue its business as it may be conducted and shall
substantially comply with all laws, rules, regulations, orders, judgments and
agreements applicable to it, its property and the conduct of its business if
non-compliance would materially adversely effect Debtor, its property, or its
business.
(b) Pledge and Security Interest. Each of the Debtor and each of the
Subsidiaries shall at all times maintain the liens and security interests
provided for in this Security Agreement and in the Cash Collateral Agreement as
valid and perfected liens and security interests in the Asset Collateral and the
Cash Collateral, and agrees to defend the same against any and all persons
whatsoever. Each of the Debtor and each of its Subsidiaries shall safeguard and
protect all Asset Collateral for the account of the Secured Parties and shall
not attempt to sell, assign, transfer, exchange or otherwise dispose of, or
grant any option with respect to, the Asset Collateral, nor will it create,
incur or permit to exist any pledge, lien, mortgage, hypothecation, security
interest, charge, option or any other encumbrance with respect to any of the
Asset Collateral, or any interest therein, except in the ordinary course of its
business and as permitted under this Security Agreement. At the request of a
Secured Party, the Debtor or any of the Subsidiaries will sign and deliver to
such Secured Party at any time or from time to time one or more further
Financing Statements pursuant to the Uniform Commercial Code in effect in the
State of Texas (the "Code") in form satisfactory to such Secured Party and will
pay the cost of filing the same in all public offices wherever filing is, or is
deemed by such Secured Party to be, necessary or desirable; each of the Debtor
and each of the Subsidiaries hereby irrevocably appoints each Secured Party as
its attorney-in-fact to prepare and file Financing Statements signed only by a
Secured Party covering the Asset Collateral and, in jurisdictions where its
signature is required, to sign its signature to such Financing Statements, and
promises to pay each Secured Party all reasonable fees and expenses incurred in
filing such Financing Statements, which fees and expenses shall become a part of
the Obligations. A carbon, photographic or other reproduction of this Agreement
or of any Financing Statement shall be sufficient as a Financing Statement. A
Secured Party shall deliver a copy of any such Financing Statement to the Debtor
and the Subsidiaries, as applicable, within three Business Days after the first
to occur of its signing such Financing Statement or filing such Financing
Statement in any jurisdiction.
(c) Performance of Obligations. The Debtor shall perform all of its
obligations under the Purchase Agreement in accordance with the terms thereof,
and each of the Debtor and each of the Subsidiaries shall perform all of its
promises and covenants set forth in this Security Agreement and the Cash
Collateral Agreement in accordance with the terms hereof and thereof,
respectively.
(d) Notice of Default, Litigation. Debtor shall promptly give notice
in writing to the Secured Parties of the occurrence of any Event of Default (as
hereinafter defined) or any material default or the occurrence of any material
dispute, litigation or proceedings affecting Debtor or any of the Subsidiaries,
if such litigation, proceeding or dispute is one which might have an adverse
effect upon the financial condition, business or normal
-4-
<PAGE> 5
operations of the Debtor or any of the Subsidiaries, or any adverse effect on
the Asset Collateral.
(e) Certificate. Debtor shall on the Closing Date and at least five
Business Days prior to any change in the make up of the Collateral deliver to
the Secured Parties a certificate executed by an executive officer of the Debtor
which describes the substituting and replaced Collateral and sets forth a list
of the Collateral and the value thereof giving effect to such change, including,
if applicable, schedule of the value of any Collateral to be purchased with the
withdrawn Cash Collateral. Such certificate shall also state that the Debtor and
the Subsidiaries are, and will be following such replacement, in compliance with
the terms of this Security Agreement and the Cash Collateral Agreement.
(f) Consents. No consent of any other party and no consent, license,
approval or authorization of, exemption by, or registration or declaration with,
any governmental instrumentality is required to be obtained in connection with
the execution, delivery or performance of this Security Agreement.
(g) Defense of Collateral. It will, if an Event of Default has
occurred and is continuing, defend the Secured Parties' right, title and
interest in and to the Asset Collateral and the income, distributions and
Proceeds thereof against the claims and demands of all persons and entities
whatsoever.
6. Defaults.
The following events shall be "Events of Default":
(a) an Event of Default under the Debentures;
(b) the Debtor or any of the Subsidiaries shall fail to perform on any
other Obligation;
(c) the Debtor or any of the Subsidiaries shall fail to observe or
perform any of their covenants set forth in Section 5 of this Security
Agreement;
(d) the Debtor or any of the Subsidiaries shall fail to observe or
perform any covenant or agreement contained in this Security Agreement (other
than those covered by Paragraphs 6(a), 6(b) or 6(c) above) or the Cash
Collateral Agreement for ten days after written notice thereof has been given to
the applicable Debtor or Subsidiary, by any Secured Party, provided that if the
default under this subparagraph 6(d) can reasonably be cured but not within ten
days and the Debtor or the Subsidiary has in good faith commenced to cure such
default and is diligently pursuing such cure, then such Debtor or Subsidiary
shall have a reasonable time to cure such default;
-5-
<PAGE> 6
(e) any representation, warranty, certification or statement made by
the Debtor or any Subsidiary in this Security Agreement or the Cash Collateral
Agreement shall prove to have been incorrect in any material respect when made
and has a material adverse effect on any Secured Party;
(f) a final judgment or order for the payment of money in excess of
$100,000 shall be rendered against the Debtor or any Subsidiary, which
judgment(s) or order(s) shall continue unsatisfied or unbonded or similarly
secured and in effect for a period of 30 days;
(g) any material adverse change in the condition or affairs (financial
or otherwise) of the Debtor or any Subsidiary that in any Secured Party's
reasonable opinion materially decreases the Debtor or any Subsidiaries ability
to timely perform its obligations under this Security Agreement or the Cash
Collateral Agreement; and
(h) the value of the Asset Collateral shall have, for a period of five
(5) consecutive days fallen below the Required Value as determined under Section
4 hereof.
If one or more Event of Default shall have occurred and be continuing,
then the Debtor shall give immediate notice to each Secured Party of the
happening of such Event of Default.
7. Remedies. (a) If an Event of Default shall have occurred and be
continuing for a period of five business days, then the Secured Parties may at
any time thereafter, without demand of performance or other demand,
advertisement or notice of any kind (all of which demands, advertisements and/or
notices are hereby expressly waived), apply the Asset Collateral to the payment
of the Obligations in such manner as the Secured Parties in their sole
discretion shall determine and the Secured Parties may sell all or any portion
of the Asset Collateral. The Secured Parties shall have no responsibility for
any loss of value of the Asset Collateral resulting from the timing of any such
sale, or otherwise.
(b) In addition to the rights, powers and remedies granted to it in
this Security Agreement, and in any other instrument or agreement, including,
without limitation, the Purchase Agreement, the Debentures, the Cash Collateral
Agreement, or otherwise, securing, evidencing or relating to any of the
Obligations, the Secured Parties shall have all of the rights, powers and
remedies now or hereafter permitted in law or equity, including, without
limitation, those of a secured party under the Code, all such rights and
remedies being cumulative, not exclusive and enforceable alternatively,
successively or concurrently, at such time or times as the Secured Parties
thinks expedient, such remedies to be exercised only after the occurrence and
continuance of an Event of Default.
8. Term of Agreement. This Security Agreement shall terminate when all
payments under the Debentures have been made in full and all other Obligations
have been paid or discharged. Upon such termination, each Secured Party, at the
request of Debtor, will join
-6-
<PAGE> 7
in executing any termination statement with respect to any financing statement
executed and filed pursuant to Section 5 of this Security Agreement.
9. Expenses. Debtor agrees to reimburse each Secured Party for any and all
expenses (including reasonable attorneys' fees) incurred in enforcing any and
all of Debtor's obligations hereunder.
10. Notice. Any and all payments, notices, requests, demands, consents,
approvals or other communications required or permitted to be given under any
provision of this Security Agreement shall be in writing and shall be deemed to
have been duly given when (i) delivered by hand, (ii) sent by telecopier,
provided that a copy is mailed by registered or certified mail, return receipt
requested, postage prepaid, or (iii) sent by Express Mail, Federal Express or
other express delivery service (receipt requested) addressed as set forth in the
Purchase Agreement. Notices to any Subsidiary shall be sent to the Debtor. Any
party may change its address for the purpose of this Security Agreement by
notice to the other party given as aforesaid.
11. Miscellaneous.
(a) This Security Agreement, the Cash Collateral Agreement and the
Guaranty dated the date hereof by the Subsidiaries in favor of the Secured
Parties constitute the entire agreement of the parties with respect to the
subject matter hereof and is intended to supersede all prior negotiations,
understandings and agreements with respect thereto. No provision of this
Security Agreement may be modified of amended except by a written agreement
specifically referring to this Security Agreement and signed by the parties
hereto.
(b) In the event that any provision of this Security Agreement is held
to be invalid, prohibited or unenforceable in any jurisdiction for any reason,
unless such provision is narrowed by judicial construction, this Security
Agreement shall, as to such jurisdiction, be construed as if such invalid,
prohibited or unenforceable provision had been more narrowly drawn so as not to
be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any
provision of this Security Agreement is held to be invalid, prohibited or
unenforceable in any jurisdiction, such provision, as to such jurisdiction,
shall be ineffective to the extent of such invalidity, prohibition or
unenforceability without invalidating the remaining portion of such provision or
the other provisions of this Security Agreement and without the validity or
enforceability of such provision or the other provisions of this Security
Agreement in any other jurisdiction.
(c) No waiver of any breach or default or any right under this
Security Agreement shall be considered valid unless in writing and signed by the
party giving such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default or right, whether of the same or similar nature or
otherwise.
-7-
<PAGE> 8
(d) This Security Agreement shall be binding upon and inure to the
benefit of each party hereto and its successors and assigns.
(e) Each party shall take such further action and execute and deliver
such further documents as may be necessary or appropriate in order to carry out
the provisions and purposes of this Security Agreement.
(f) This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of the State of Texas.
(g) This Security Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement
to be duly executed on the day and year first above written.
COTTON VALLEY RESOURCES CORPORATION
By: /s/ GENE SOLTERO
----------------------------
Name: Gene Soltero
Title:
COTTON VALLEY ENERGY CORPORATION
By: /s/ GENE SOLTERO
----------------------------
Name: Gene Soltero
Title:
MUSTANG WELL SERVICING COMPANY
By: /s/ JAMES E. HOGUE
----------------------------
Name: James E. Hogue
Title:
MUSTANG HORIZONTAL SERVICES, INC.
By: /s/ JAMES E. HOGUE
----------------------------
Name: James E. Hogue
Title:
MUSTANG OILFIELD EQUIPMENT COMPANY
By: /s/ JAMES E. HOGUE
----------------------------
Name: James E. Hogue
Title:
COTTON VALLEY ENERGY, INC.
By: /s/ GENE SOLTERO
----------------------------
Name: Gene Soltero
Title:
<PAGE> 10
ASPEN ENERGY CORPORATION
By: /s/ EUGENE A. SOLTGOLD
-------------------------
Name: Eugene A. Soltgold
Title: CEO
WESTOVER INVESTMENTS L.P.
By: /s/ WILLIAM E. ROSE
-------------------------
Name: William E. Rose
Title: Authorized Signatory
MONTROSE INVESTMENTS L.P.
By: /s/ WILLIAM E. ROSE
-------------------------
Name: William E. Rose
Title: Authorized Signatory
LAKESHORE INTERNATIONAL
By: Global Capital Management, Inc., Investment
Manager
By: /s/ JOHN D. BRANDENBORG
-------------------------
Name: John D. Brandenborg
Title: Vice President
JMG CAPITAL PARTNERS, L.P.
By: /s/ JONATHAN GLASER
-------------------------
Name:
Title:
TRITON CAPITAL INVESTMENTS, LTD.
By: /s/ JONATHAN GLASER
-------------------------
Name:
Title:
<PAGE> 11
LIONHART GLOBAL APPRECIATION FUND, LTD.
By: /s/ TERRENCE P. DUFFY
--------------------------
Name: Terrence P. Duffy
Title: Director
GLOBAL PERSPECTIVES INTERNATIONAL, LTD.
By: /s/ TERRENCE P. DUFFY
--------------------------
Name: Terrence P. Duffy
Title: Director
GLOBAL EMERGING MARKETS, LTD.
By: /s/ EDWARD J. TOBIN
--------------------------
Name: Edward J. Tobin
Title: Authorized Signatory
PALISADES HOLDINGS, INC.
By: /s/ ILLEGIBLE
--------------------------
Name: ILLEGIBLE
Title: ILLEGIBLE
<PAGE> 12
STATE OF MINNESOTA )
) ss.:
COUNTY OF HENNEPIN )
On this 23rd day of December, 1997, before me personally appeared John D.
Brandenborg to me known, who, being by me duly sworn, did depose and say that he
resides at 601 Carlson Pkwy. #200, Minnetonka, MN that he is Investment Manager
for Lakeshore International, Ltd. and Vice President of Global Capital
Management, the corporation described in and which executed the foregoing
Security Agreement; and that he signed his name thereto by order of the board of
directors of said corporation.
/s/ LORY A. FORSTNER
---------------------------------
Notary Public
[NOTARY PUBLIC SEAL OF LORY FORSTNER]
<PAGE> 13
STATE OF )
) ss.:
COUNTY OF )
On this 29th day of December, 1997, before me personally appeared William
Rose, to me known, who, being by me duly sworn, did depose and say that
he resides at 5519 Montrose, Dallas, TX 75209, that he is Principal of Westover
Investments LP, the corporation described in and which executed the foregoing
Security Agreement; and that he signed his name thereto by order of the board
of directors of said corporation.
/s/ BARBARA S. KENT
---------------------------------
Notary Public
[NOTARY PUBLIC SEAL OF BARBARA S. KENT]
<PAGE> 14
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared James E.
Hogue, to me known, who, being by me duly sworn, did depose and say that he
resides at 6405 Forest Lane, Dallas, Texas, that he is President of Mustang
Oilfield Equipment Co., the corporation described in and which executed the
foregoing Security Agreement; and that he signed his name thereto by order of
the board of directors of said corporation.
/s/ PATRICIA DICKERSON
[NOTARY PUBLIC SEAL OF ---------------------------------
PATRICIA DICKERSON] Notary Public
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared James E.
Hogue, to me known, who, being by me duly sworn, did depose and say that he
resides at 6405 Forest Lane, Dallas, Texas, that he is Chief Executive Officer
of Mustang Horizontal Services, Inc., the corporation described in and
which executed the foregoing Security Agreement; and that he signed his name
thereto by order of the board of directors of said corporation.
/s/ PATRICIA DICKERSON
[NOTARY PUBLIC SEAL OF ---------------------------------
PATRICIA DICKERSON] Notary Public
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared James E.
Hogue, to me known, who, being by me duly sworn, did depose and say that he
resides at 6405 Forest Lane, Dallas, Texas, that he is President of Mustang
Well Servicing Company, the corporation described in and which executed the
foregoing Security Agreement; and that he signed his name thereto by order of
the board of directors of said corporation.
/s/ PATRICIA DICKERSON
[NOTARY PUBLIC SEAL OF ---------------------------------
PATRICIA DICKERSON] Notary Public
<PAGE> 15
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared Eugene
A. Soltero, to me known, who, being by me duly sworn, did depose and say that he
resides at 7127 Hillgreen Drive, Dallas, Texas, that he is Chief Executive
Officer of Cotton Valley Energy, Inc., the corporation described in and which
executed the foregoing Security Agreement; and that he signed his name thereto
by order of the board of directors of said corporation.
/s/ DIANA LYNN CAMPBELL
[NOTARY PUBLIC SEAL OF ---------------------------------
DIANA L. CAMPBELL] Notary Public 1-22-2001
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared Eugene
A. Soltero, to me known, who, being by me duly sworn, did depose and say that he
resides at 7127 Hillgreen Drive, Dallas, Texas, that he is Chief Executive
Officer of Cotton Valley Resources Corporation, the corporation described in and
which executed the foregoing Security Agreement; and that he signed his name
thereto by order of the board of directors of said corporation.
/s/ DIANA LYNN CAMPBELL
[NOTARY PUBLIC SEAL OF ---------------------------------
DIANA L. CAMPBELL] Notary Public 1-22-2001
<PAGE> 16
STATE OF CALIFORNIA )
) ss.:
COUNTY OF LOS ANGELES )
On this 23rd day of December, 1997, before me personally appeared Jonathan
M. Glaser, to me known, who, being by me duly sworn, did depose and say that he
resides at 1999 Avenue of the Stars, Suite 1950, Los Angeles, California 90067,
that he is General Partner of JMG Capital Partners, L.P., the corporation
described in and which executed the foregoing Security Agreement; and that he
signed his name thereto by order of the board of directors of said corporation.
/s/ CYNTHIA M. PARENTI
[NOTARY PUBLIC SEAL OF ---------------------------------
CYNTHIA M. PARENTI] Notary Public
<PAGE> 17
SCHEDULE 1
ASSET COLLATERAL
<PAGE> 1
EXHIBIT 10.5
CASH COLLATERAL AGREEMENT
CASH COLLATERAL AGREEMENT dated as of December 30, 1997 (this
"Agreement"), among Cotton Valley Resources Corporation, a corporation
organized under the laws of Ontario, Canada ("Debtor"), Cotton Valley Energy
Corporation, a Nevada corporation, Mustang Well Servicing Company (formerly
Mustang Drilling Company), a Nevada corporation, Mustang Horizontal Services,
Inc., a Nevada corporation, Mustang Oil Field Equipment Company, a Nevada
Corporation, Cotton Valley Energy, Inc. an Oklahoma corporation and Aspen
Energy Corporation, a Nevada corporation (collectively, the "Subsidiaries"),
and Westover Investments L.P. a Delaware limited partnership ("Westover"),
Montrose Investments L.P., a Cayman Islands exempt limited partnership
("Montrose"), Lakeshore International, a Bermuda corporation ("LI"), JMG
Capital Partners, L.P. a California limited partnership ("JMG"), Triton Capital
Investments, Ltd., a Caracao corporation ("Triton"), Lionhart Global
Appreciation Fund, Ltd., a British Virgin Islands international business
corporation ("LGAF"), Global Perspectives International, Ltd., a British
Virgin Islands international business corporation ("Global Perspectives"),
Global Emerging Markets, Ltd., a Guernsey corporation ("Global Emerging
Markets"), Palisades Holdings, Inc., a California corporation ("Palisades"), and
Texas Commerce Bank, N.A., a bank organized under the laws of the United States
(the "Collateral Agent"). Each of Westover, Montrose, LI, JMG, Triton, LGAF,
Global Perspectives, Global Emerging Markets and Palisades is referred to
herein as a "Secured Party" and they are collectively referred to herein as the
"Secured Parties."
RECITALS
WHEREAS, Debtor and Secured Parties have executed and delivered a
Convertible Debenture Purchase Agreement between them dated the date hereof
(the "Purchase Agreement") pursuant to which the Secured Parties have purchased
and Debtor has sold Debentures (as defined in the Purchase Agreement);
WHEREAS, the Purchase Agreement requires the Debtor to enter into a
Security Agreement and the Debtor and the Subsidiaries have entered into a
Security Agreement, dated the date hereof, with the Secured Parties (the
"Security Agreement"), granting the Secured Parties a first lien, except with
respect to the Zama Property Collateral (as defined in the Security Agreement)
on and security interest in the Asset Collateral (as defined in the Security
Agreement) and the Cash Collateral (as defined below) to secure the Obligations
(as defined in the Security Agreement);
WHEREAS, the Security Agreement provides that the Debtor and the
Subsidiaries may deposit with the Collateral Agent Cash Collateral (as defined
below) which shall comprise part of the Collateral;
<PAGE> 2
WHEREAS, the Debtor and the Subsidiaries shall maintain the amount of
Collateral required by the Security Agreement and this Agreement, provided,
that, they may substitute Asset Collateral (as defined in the Security
Agreement) for Cash Collateral and Cash Collateral for Asset Collateral, all as
provided in the Security Agreement and this Agreement; and
WHEREAS, in order to set forth the understanding of the Secured
Parties, the Debtor, the Subsidiaries and the Collateral Agent with respect to
the Cash Collateral, the parties hereto have agreed to enter into this
Agreement, upon the terms, conditions and provisions more particularly
hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Debtor hereby agrees as follows:
1. Defined Terms. Each term used in this Agreement and not
defined herein shall have the meaning given to it in the Security Agreement
and, the following terms shall have the following meanings:
"CASH COLLATERAL ACCOUNT" shall have the meaning set forth in Section
4 hereof.
"CASH COLLATERAL" shall mean and include (i) all cash on deposit in the
Cash Collateral Account and all United States T-Bills with durations of one
year or less on deposit in the Cash Collateral Account, (ii) all interest, if
any, earned on any of the foregoing, and (iii) all Proceeds of the foregoing.
"PROCEEDS" shall have the meaning assigned to it in Section 9-306 of
the Code.
2. Pledge and Assignment of Collateral Account. The Debtor and the
Subsidiaries hereby pledge, assign, transfer and deliver to the Secured Parties
and grant to the Secured Parties a continuing lien on and security interest in
the Cash Collateral Account and in all Cash Collateral, in addition to any liens
delivered under the Security Agreement, as additional security for
the Obligations. Each of the Debtor and each of the Subsidiaries will, at its
cost and expense, upon demand, furnish to the Secured Parties such information
and will execute and deliver to the Secured Parties such financing statements
and other documents in form satisfactory to the Secured Parties and will do all
such acts and things as Secured Parties may at any time or from time to time
reasonably request or as may be necessary or appropriate to establish and
maintain a perfected first priority security interest in the Cash Collateral
Account and/or the Cash Collateral as security for the Obligations subject to
no adverse liens or encumbrances; and the Debtor will pay the cost of filing
the same or filing or recording such financing statements or other documents
and this instrument in all public offices wherever filing or recording is
deemed by the Secured Parties to be necessary or desirable. Notwithstanding
anything to the contrary in this Agreement, nothing contained in this Agreement
shall vitiate or impair any of the terms or provisions of the Security
Agreement.
-2-
<PAGE> 3
3. General Authority of the Collateral Agent over the Cash
Collateral. The Debtor, the Subsidiaries and the Secured Parties agree that the
Collateral Agent may take any and all appropriate action necessary or desirable
to carry out the terms of this Agreement and accomplish the purposes hereof,
including the following:
(1) to receive, take, endorse, assign and deliver any and
all checks, notes, drafts, acceptances, documents and other negotiable
and non-negotiable instruments taken or received by the Collateral
Agent as Cash Collateral from the Debtor and the Subsidiaries;
(2) so long as the Collateral Agent shall not have been
notified by any Secured Party that an Event of Default shall have
occurred and is continuing, and subject to Section 5 herein, the
Secured Parties hereby authorize and direct the Collateral Agent to
pay, apply, withdraw and disburse the Cash Collateral from time to
time as directed by the Debtor in accordance with Section 5 of this
Agreement; and
(3) if the Collateral Agent has been notified by any
Secured Party that an Event of Default shall have occurred and is
continuing, the Collateral Agent shall do, at its option and at the
expense and for the account of the Debtor and the Subsidiaries, at any
time or from time to time, all acts, and things which the Collateral
Agent deems necessary to protect or preserve the Cash Collateral and
the Debtor and the Subsidiaries hereby authorize and direct the
Collateral Agent to pay, apply, withdraw and disburse the Cash
Collateral from time to time as directed by the Secured Parties in
accordance with Section 6 of this Agreement.
4. Establishment and Maintenance of the Collateral Account.
(a) The Secured Parties, the Debtor and the Subsidiaries
have established and shall maintain at the Collateral Agent (or any other
financial institution selected by Secured Parties, Debtor and the Subsidiaries
from time to time), an interest-bearing account entitled: "Cotton Valley
Resources Corporation Collateral Account, Account No. 4813100 (together with any
accounts established in place thereof for purposes of this Agreement, the "Cash
Collateral Account"). Simultaneously with the execution and delivery hereof,
the Debtor and the Subsidiaries have delivered the Cash Collateral to the
Collateral Agent and they hereby acknowledge and agree that the Cash
Collateral has been deposited into the Cash Collateral Account to be held in
accordance with the provisions hereof. Other than as provided in Section 3 and
Section 5 hereof, neither the Debtor or any Subsidiary nor any other person or
entity claiming by, through or under the Debtor or any Subsidiary shall have
any control over the use of, or any right to withdraw any amount from, the
Cash Collateral Account and the Cash Collateral Account. Any interest on any
Cash Collateral shall be held in the Cash Collateral Account.
(b) The amount of the Cash Collateral held by the
Collateral Agent at any time shall be deemed to secure Obligations equal to
111% of the value of the Cash Collateral. The balance of the Obligations shall
be secured by the Asset Collateral pursuant to the Security Agreement.
-3-
<PAGE> 4
5. Reduction in Amount of Cash Collateral. The Secured Parties
hereby agree to allow the Debtor and the Subsidiaries, from time to time as
hereinafter set forth, to, upon five (5) business days prior written notice to
the Collateral Agent and the Secured Parties, reduce the amount of Cash
Collateral held with the Collateral Agent by withdrawing such amount from the
Cash Collateral Account, subject to the satisfaction of the following
conditions, at the time of making each withdrawal:
(a) the Secured Parties shall have received from the
Debtor and the Subsidiaries at least five (5) business days prior to
the date of the proposed withdrawal: (A) a copy of the written request
for withdrawal provided to the Collateral Agent by the Debtor and the
Subsidiaries in the form attached hereto and made a part hereof as
Exhibit A; (B) a certificate of each of the Debtor and each of the
Subsidiaries, signed by an authorized executive officer, certifying
that (i) the representations and warranties set forth in Section 2 of
the Security Agreement and Section 9 of this Agreement are true and
correct as of the date of the proposed withdrawal, (ii) as of the date
of the proposed withdrawal, there exists no Event of Default or
condition which would, with the giving of notice or the passage of
time or both, if not cured, constitute an Event of Default, and (iii)
prior to, on and immediately after the proposed withdrawal the
Obligations will be secured in accordance this Agreement and the
Security Agreement and at all such times the Asset Collateral shall be
equal to or greater than the Required Value; and (C) the certificate
required pursuant to Section 5(d) of the Security Agreement;
(b) there exists no Event of Default or condition which
would, with the giving of notice or the passage of time or both, if
not cured, constitute an Event of Default;
(c) The representations and warranties of the Debtor and
the Subsidiaries shall contained in this Agreement and the Security
Agreement shall be true and correct as of the date of each withdrawal;
(d) There shall be no pending or threatened lawsuits or
claims against the Debtor or any Subsidiary which, in the reasonable
opinion of Secured Parties, would impair the credit of the Debtor any
Subsidiary or its ability to fulfill its Obligations; and
(e) There shall have been no material adverse change in
the financial or business condition of the Debtor or any Subsidiary as
determined by any Secured Party in its sole discretion.
If the Collateral Agent shall not have received any notice from any Secured
Party objecting to such withdrawal, then the Collateral Agent may assume that
the above conditions have been satisfied by the Debtor and the Subsidiaries. If
any Secured Party shall notify the Collateral
-4-
<PAGE> 5
Agent that it objects to any such proposed withdrawal, the Collateral Agent
shall not permit such withdrawal. Notwithstanding the obligation of the Debtor
and the Subsidiaries to notify the Secured Parties of any proposed withdrawal,
if the Collateral Agent receives any notice of withdrawal from the Debtor or
any of the Subsidiaries pursuant to this Section 5, it shall, within one
business day of its receipt of such notice, give written notice to the Secured
Parties of its receipt of such notice and deliver such notice to the Secured
Parties.
6. Remedies. (a) If an Event of Default shall have occurred
and be continuing for a period of five business days following the notification
of the Debtor and the Subsidiaries of such Event of Default by any Secured
Party, then Secured Parties owning 2/3rds of the dollar value of the
outstanding Debentures may at any time thereafter, without demand of
performance or other demand, advertisement or notice of any kind (all of which
demands, advertisements and/or notices are hereby expressly waived), apply the
Cash Collateral to the payment of the Obligations, in such manner as such
Secured Parties in their sole discretion shall determine, provided that such
payment of the Obligations shall be made pro rata among all of the Secured
Parties, and such Secured Parties may sell all or any portion of the
instruments and securities constituting part of the Cash Collateral. The
Secured Parties shall have no responsibility for any loss of value of the Cash
Collateral resulting from the timing of any such sale, or otherwise.
(b) In addition to the rights, powers and remedies
granted to it in this Agreement, and in any other instrument or agreement,
including, without limitation, the Purchase Agreement, the Debentures, the
Security Agreement, or otherwise, securing, evidencing or relating to any of
the Obligations, the Secured Parties shall have all of the rights, powers and
remedies now or hereafter permitted in law or equity, including, without
limitation, those of a secured party under the Code, all such rights and
remedies being cumulative, not exclusive and enforceable alternatively,
successively or concurrently, at such time or times as the Secured Parties
thinks expedient, such remedies to be exercised only after the occurrence and
continuance of an Event of Default.
7. Duty as to Cash Collateral; Liability of Collateral Agent and
Secured Party. (a) Beyond the use of reasonable due care in the custody of the
Cash Collateral, neither the Secured Parties nor the Collateral Agent shall be
deemed to assume any responsibility for or obligation or duty with respect to
any part or all of the Cash Collateral, of any nature or kind or any matter or
proceedings arising out of or relating thereto, but the same shall be at the
sole risk at all times of the Debtor and the Subsidiaries, and without limiting
the generality of the foregoing, neither the Secured Parties nor the Collateral
Agent shall have any obligation, responsibility or liability for any loss
resulting from a fluctuation in interest rates. The Secured Parties shall not
be required to take any action of any kind to preserve or protect its or the
Debtor's or the Subsidiaries' rights in the Cash Collateral or against other
parties with respect thereto. Neither the Secured Parties nor the Collateral
Agent or any of their directors, officers, employees or agents shall be liable
for failure to demand, collect or realize upon any of the Cash Collateral or
for any delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Cash Collateral upon the request of the Debtor or the
Subsidiaries or otherwise.
-5-
<PAGE> 6
The Debtor and the Subsidiaries jointly and severally hereby release the
Secured Parties and the Collateral Agent from any claims, causes of action and
demands at any time arising out of or with respect to this Agreement, the use
of the Cash Collateral and/or any actions taken or omitted to be taken by the
Secured Parties with respect thereto, except to the extent caused by the gross
negligence or willful misconduct of the Secured Parties, and the Debtor and the
Subsidiaries jointly and severally hereby agree to hold the Secured Parties and
the Collateral Agent harmless from and with respect to any and all such claims,
causes of action and demands. The Secured Parties' prior recourse to any part
or all of the Cash Collateral shall not constitute a condition of any demand,
suit or proceeding for payment or collection of the Obligations. Neither the
Secured Parties nor the Collateral Agent shall have any responsibility for the
genuineness or validity of any document or other item deposited with them.
(b) Notwithstanding anything to the contrary contained in
this Agreement or the Security Agreement, the Debtor and the Subsidiaries
covenant and agree, at their sole cost and expense and without cost or expense
to the Secured Parties or the Collateral Agent, to pay, protect, indemnify,
defend (with counsel acceptable to the Secured Parties and the Collateral
Agent) and hold harmless the Secured Parties and the Collateral Agent from and
against any and all reasonable expenses, damages, claims, losses, liabilities,
obligations, penalties, fines, forfeitures, contests, actions, litigation,
orders, directives, demands, defenses, judgments, suits, proceedings,
settlement orders, costs, disbursements and reasonable expenses and all other
matters of like import (including, without limitation, reasonable attorneys'
fees and expenses) of any kind and nature whatsoever which may at any time be
imposed upon, incurred by or asserted against the Secured Parties or the
Collateral Agent and which arise out of the execution, delivery, observance and
performance of this Agreement.
(c) The provisions of this Section 7 shall survive the
termination for any reason of this Agreement.
8. No Release, Waivers, etc. (a) The Secured Parties shall not by
any act, delay, indulgence, omission or otherwise be deemed to have waived any
of their rights, powers or remedies hereunder or to have acquiesced in any
Event of Default or any breach hereof. No waiver of any right, power or remedy
hereunder on any one occasion shall be construed as a bar to any right, power
or remedy which the Secured Parties would otherwise have on any future
occasion. No failure to exercise or any delay in exercising, on the part of
the Secured Parties, any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
remedy hereunder preclude any other or further exercise thereof or the exercise
of any other right, power or remedy.
(b) Anything in this Agreement to the contrary
notwithstanding, (i) the Debtor and the Subsidiaries shall remain liable under
the Security Agreement to the extent set forth therein to perform all of the
Obligations to the same extent as if this Agreement had not been executed, and
(ii) the exercise by the Secured Parties of any of their rights hereunder shall
not release each of the Debtor and each of the Subsidiaries from its
Obligations under the Security
-6-
<PAGE> 7
Agreement, nor shall it constitute an election of remedies by the Secured
Parties or a waiver by the Secured Parties of any of their rights and remedies
under the Security Agreement.
9. Representations, Warranties and Covenants. Each of
the Debtor and the Subsidiaries hereby represent, warrant and covenant that:
(a) the Security Agreement and this Agreement are
effective to create a valid lien on and security interest of the first
priority in the funds on deposit in the Cash Collateral Account, and
the Debtor and the Subsidiaries have taken no action which would
subject such funds to any prior lien or security interest or to any
agreement purporting to grant to any third party a lien or security
interest on the property or assets of the Debtor or the Subsidiaries
which would include such funds, and upon the making of deposits in the
Cash Collateral Account, all action necessary or desirable to protect
and perfect such lien and security interest will have been duly taken;
(b) no security agreements have been executed and
delivered by the Debtor or the Subsidiaries, and no financing
statements have been filed by them in any jurisdiction, granting or
purporting to grant a lien on or security interest in the funds
constituting or to constitute the Cash Collateral to any secured party
except in connection with this Agreement and the Security Agreement;
(c) no consent of any other party and no consent,
license, approval or authorization of, exemption by, or registration
or declaration with, any governmental instrumentality is required to
be obtained in connection with the execution, delivery or performance
of this Agreement;
(d) it will, if an Event of Default has occurred and is
continuing, defend the Secured Parties' right, title and interest in
and to the Cash Collateral and the income, distributions and Proceeds
thereof against the claims and demands of all persons and entities
whatsoever; and
(e) it shall not attempt to sell, assign, transfer,
exchange or otherwise dispose of, or grant any option with respect to,
the Cash Collateral, nor will it create, incur or permit to exist any
pledge, lien, mortgage, hypothecation, security interest, charge,
option or any other encumbrance with respect to any of the Cash
Collateral, or any interest therein, except as permitted under this
Agreement and the Security Agreement.
10. Reimbursement of the Secured Parties. The Debtor and
the Subsidiaries agree to promptly reimburse the Secured Parties and the
Collateral Agent for their actual out-of-pocket expenses, including, without
limitation, reasonable administration and enforcement of this Agreement. The
agreements in this Section 10 shall survive the termination of this Agreement.
-7-
<PAGE> 8
11. Further Assurances. The Debtor and the Subsidiaries agree at
any time, and from time to time, upon the Secured Parties' request, to execute
and deliver to the Secured Parties such further documents and to do such
further acts and things as the Secured Parties may reasonably request in order
fully to effect the purposes of this Agreement and the Secured Parties' rights
in the Cash Collateral.
12. Notice. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile prior
to 7:00 p.m. (New York City time) on a business day, (ii) the business day
after the date of transmission, if such notice or communication is delivered
via facsimile later than 7:00 p.m. (New York City time) on any date and
earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business
Day following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice
is required to be given. The address for such notices and communications shall
be as follows:
If to the Debtor
or any Subsidiary: Cotton Valley Resources Corporation
8350 N. Central Expressway
Suite M2030
Dallas, TX 75206
Facsimile No.: (214) 363-4294
Attn: Chief Financial Officer
With copies to: Jackson Walker LLP
901 Main Street, Suite 6000
Dallas, Texas 75202
Facsimile No.: (214) 953-5822
Attn: Richard B. Goodner, Esq.
If to any Purchaser or the Purchasers, to the address set forth on
Schedule 1
With copies to (for Palisades Capital, Inc.
communications to 505 South Beverly Drive
any Purchaser): Suite 305
Beverly Hills, CA 90212
Facsimile No.: (310) 546-2807
Attn: Brad D. Greenspan
-and-
-8-
<PAGE> 9
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq.
If the Collateral
Agent: Texas Commerce Bank, N.A.
201 Main Street, 3rd Floor
Fort Worth, Texas 76102
Facsimile No.: (817) 878-7559
Attn: Susan R. Gazzola
Vice President
or such other address as may be designated in writing hereafter, in the same
manner, by such Person. Non-delivery of copies of any notice as specified above
shall not affect the validity of any notice given to any party to this
Agreement in accordance with the terms of this Agreement.
13. Assignment. The Secured Parties may assign their interest in
this Agreement, and upon any such assignment, the Secured Parties shall be
relieved of all further liability hereunder. None of the rights or obligations
of the Debtor or the Subsidiaries hereunder may be assigned or otherwise
transferred without the written consent of the Secured Parties. This Agreement
shall be binding upon the successors and assigns of the Debtor and the
Subsidiaries, and shall inure to the benefit of the successors and assigns of
Secured Parties, and any future holder(s) of the Note.
14. Governing Law. This Agreement shall be governed by, and
construed and interpreted in accordance with, the laws of the State of Texas,
except as such laws may be preempted by the federal laws of the United States.
15. Amendments in Writing. No change, amendment, modification,
cancellation or discharge of this Agreement or any part hereof shall be valid
unless in writing and signed by the Secured Parties, the Collateral Agent, the
Debtor and the Subsidiaries or their respective successors and assigns.
16. Severability. If one or more of the provisions of this
Agreement shall be invalid, illegal or unenforceable in any respect, such
provisions shall be deemed to be severed from this Agreement, and the validity,
legality herein shall not be affected or impaired in any way thereby.
17. No Third-Party Beneficiary. This Agreement is made and entered
into for the sole protection and benefit of the parties hereto, and no other
person or entity shall have a direct or indirect cause of action or claim in
connection with this Agreement.
-9-
<PAGE> 10
18. Cumulative Rights. The rights and remedies provided for under
this Agreement shall be in addition to and not to the exclusion of those
provided for in the Security Agreement and may be exercised by the Secured
Parties separately and cumulatively.
19. Termination. This Agreement shall terminate upon the
termination of the Security Agreement.
20. Fees. For its services pursuant to this Agreement, the
Collateral Agent shall be paid, through the date of termination of this
Agreement, an annual fee of $1,500, which fee shall be payable by Debtor
without proration.
21. New Collateral Agent. If the Collateral Agent at any time, in
its sole discretion, deems it necessary or advisable to relinquish custody of
the Cash Collateral, it may do so by giving five (5) days prior written notice
to the parties of its intention and thereafter delivering the Cash Collateral
to any collateral agent mutually agreeable to the parties hereto, and, if no
such collateral agent shall be selected within three days of the Collateral
Agent's notification to the parties hereto of its desire to so relinquish
custody of the Cash Collateral, then the Collateral Agent may do so by
delivering the Cash Collateral to the clerk or other proper officer of a court
of competent jurisdiction as may be permitted by law within the State of Texas.
The fee of any such court officer shall be borne by Debtor. Upon such delivery,
the Collateral Agent shall be discharged from any and all responsibility or
liability with respect to the Cash Collateral and Debtor shall promptly pay to
the Collateral Agent all monies which may be owed it for its services
hereunder.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Cash
Collateral Agreement to be duly executed on the day and year first
above written.
COTTON VALLEY RESOURCES CORPORATION
By: /s/ GENE SOLTERO
------------------------------------
Name:
Title:
COTTON VALLEY ENERGY CORPORATION
By: /s/ GENE SOLTERO
------------------------------------
Name:
Title:
MUSTANG WELL SERVICING COMPANY
By: /s/ JAMES E. HOGUE
------------------------------------
Name:
Title:
MUSTANG HORIZONTAL SERVICES, INC.
By: /s/ JAMES E. HOGUE
------------------------------------
Name:
Title:
MUSTANG OILFIELD EQUIPMENT COMPANY
By: /s/ JAMES E. HOGUE
------------------------------------
Name:
Title:
COTTON VALLEY ENERGY, INC.
By: /s/ GENE SOLTERO
------------------------------------
Name:
Title:
<PAGE> 12
ASPEN ENERGY CORPORATION
By: /s/ EUGENE A. SOLTERO
------------------------------------
Name: Eugene A. Soltero
Title: CEO
WESTOVER INVESTMENTS L.P.
By: /s/ WILLIAM E. ROSE
------------------------------------
Name: William E. Rose
Title: Authorized Signatory
MONTROSE INVESTMENTS P.
By: /s/ WILLIAM E. ROSE
------------------------------------
Name: William E. Rose
Title: Authorized Signatory
LAKESHORE INTERNATIONAL
By: Global Capital Management, Inc.,
Investment Manager
By: /s/ JOHN D. BRANDENBORG
------------------------------------
Name: John D. Brandenborg
Title: Vice President
JMG CAPITAL PARTNERS, L.P.
By: /s/ JONATHAN GLASER
------------------------------------
Name:
Title:
TRITON CAPITAL INVESTMENTS, LTD.
By: /s/ JONATHAN GLASER
------------------------------------
Name:
Title:
<PAGE> 13
LIONHART GLOBAL APPRECIATION FUND, LTD.
By: /s/ TERRENCE P. DUFFY
------------------------------------
Name: Terrence P. Duffy
------------------------------
Title: Director
------------------------------
GLOBAL PERSPECTIVES INTERNATIONAL, LTD.
By: /s/ TERRENCE P. DUFFY
------------------------------------
Name: Terrence P. Duffy
------------------------------
Title: Director
------------------------------
GLOBAL EMERGING MARKETS, LTD.
By: /s/ EDWARD J. TOBIN
------------------------------------
Name: Edward J. Tobin
------------------------------
Title: Authorized Signatory
------------------------------
PALISADES HOLDINGS, INC.
By: [ILLEGIBLE]
------------------------------------
Name:
------------------------------
Title:
------------------------------
TEXAS COMMERCE BANK, N.A.
By: /s/ CARLA FERRANT
------------------------------------
Name: Carla Ferrant
------------------------------
Title: Vice President
------------------------------
<PAGE> 14
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared
Eugene A. Soltero, to me known, who, being by me duly sworn, did depose and say
that he resides at 7127 Hillgreen Drive, Dallas, TX, that he is Chief Executive
Officer of Cotton Valley Resources Corp., the entity described in and which
executed the foregoing Cash Collateral Agreement; and that he signed his name
thereto by order of the board of directors of said entity.
[SEAL] /s/ DIANA LYNN CAMPBELL
---------------------------------
Notary Public 1-22-2001
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared
Eugene A. Soltero, to me known, who, being by me duly sworn, did depose and say
that he resides at 7127 Hillgreen Drive, Dallas, TX, that he is Chief Executive
Officer of Cotton Valley Energy Corp., the entity described in and which
executed the foregoing Cash Collateral Agreement; and that he signed his name
thereto by order of the board of directors of said entity.
[SEAL] /s/ DIANA LYNN CAMPBELL
---------------------------------
Notary Public 1-22-2001
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared
Eugene A. Soltero, to me known, who, being by me duly sworn, did depose and say
that he resides at 7127 Hillgreen Drive, Dallas, TX, that he is Chief Executive
Officer of Cotton Valley Energy Inc., the entity described in and which executed
the foregoing Cash Collateral Agreement; and that he signed his name thereto by
order of the board of directors of said entity.
[SEAL] /s/ DIANA LYNN CAMPBELL
--------------------------------
Notary Public 1-22-2001
<PAGE> 15
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared
James E. Hogue, to me known, who, being by me duly sworn, did depose and say
that he resides at 6405 Forest Lane, Dallas, Texas, that he is President of
Mustang Well Servicing Co., the entity described in and which executed the
foregoing Cash Collateral Agreement; and that he signed his name thereto by
order of the board of directors of said entity.
[SEAL] PATRICIA ANNE DICKERSON
Notary Public, State of Texas /s/ PATRICIA DICKERSON
My Comm. Exp. 03/29/99 ---------------------------
Notary Public
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared James
E. Hogue, to me known, who, being by me duly sworn, did depose and say that he
resides at 6405 Forest Lane, Dallas, Texas, that he is President of Mustang
Oilfield Equipment Co., the entity described in and which executed the
foregoing Cash Collateral Agreement; and that he signed his name thereto by
order of the board of directors of said entity.
[SEAL] PATRICIA ANNE DICKERSON
Notary Public, State of Texas /s/ PATRICIA DICKERSON
My Comm. Exp. 03/29/99 ---------------------------
Notary Public
STATE OF TEXAS )
) ss.:
COUNTY OF DALLAS )
On this 23rd day of December, 1997, before me personally appeared James
E. Hogue, to me known, who, being by me duly sworn, did depose and say that he
resides at 6405 Forest Lane, Dallas, Texas, that he is Chief Executive Officer
of Mustang Horizontal Services Inc., the entity described in and which executed
the foregoing Cash Collateral Agreement; and that he signed his name thereto by
order of the board of directors of said entity.
[SEAL] PATRICIA ANNE DICKERSON
Notary Public, State of Texas /s/ PATRICIA DICKERSON
My Comm. Exp. 03/29/99 ---------------------------
Notary Public
<PAGE> 16
STATE OF )
) ss.:
COUNTY OF )
On this 29th day of December, 1997, before me personally appeared
William Rose, to me known, who, being by me duly sworn, did depose and say that
he resides at 5519 Montrose, Dallas, TX 75209, that he is Principal of Montrose
Investments LTD., the entity described in and which executed the foregoing Cash
Collateral Agreement; and that he signed his name thereto by order of the board
of directors of said entity.
[SEAL] BARBARA S. KENT
Notary Public /s/ BARBARA S. KENT
STATE OF TEXAS ---------------------------
My Comm. Exp. 05/15/2001 Notary Public
<PAGE> 17
STATE OF MINNESOTA )
) ss.:
COUNTY OF HENNEPIN )
On this 23rd day of December, 1997, before me personally appeared John
D. Brandenborg to me known, who, being by me duly sworn, did depose and say
that he resides at 601 Carlson Pky. #200 Minnetonka, MN, that he is Vice
President of Global Capital Management and Investment Manager of Lakeshore
International, LTD., the entity described in and which executed the foregoing
Cash Collateral Agreement; and that he signed his name thereto by order of the
board of directors of said entity.
/s/ LORY A. FORSTNER
--------------------------------
Notary Public
[SEAL] LORY A. FORSTNER
NOTARY PUBLIC-MINNESOTA
My Commission Expires Jan. 31, 2000
<PAGE> 1
EXHIBIT 10.6
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 30, 1997, by and among Cotton Valley Resources
Corporation, a corporation organized under the laws of Ontario, Canada (the
"Company"), Westover Investments L.P. a Delaware limited partnership
("Westover"), Montrose Investments L.P., a Cayman Islands exempt limited
partnership ("Montrose"), Lakeshore International, a Bermuda corporation
("LI"), JMG Capital Partners, L.P. a California limited partnership ("JMG"),
Triton Capital Investments, Ltd., a Caracao corporation ("Triton"), Lionhart
Global Appreciation Fund, Ltd., a British Virgin Islands international business
corporation ("LGAF"), Global Perspectives International, Ltd., a British Virgin
Islands international business corporation ("Global Perspectives"), Global
Emerging Markets, Ltd., a Guernsey corporation ("Global Emerging Markets"), and
Palisades Holdings, Inc., a California corporation ("Palisades"). Each of
Westover, Montrose, LI, JMG, Triton, LGAF. Global Perspectives, Global Emerging
Markets and Palisades is referred to herein as a "Purchaser" and they are
collectively referred to herein as the "Purchasers."
This Agreement is made pursuant to the Convertible Debenture Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers
(the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that
are defined in the Purchase Agreement shall have the meanings given such terms
in the Purchase Agreement. As used in this agreement, the following terms shall
have the following meanings:
"Advice" shall have the meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control
with such Person. For the purposes of this definition, "control," when used
with respect to any Person, means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
<PAGE> 2
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government actions to
close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, no par value per
share.
"Debentures" means Company's 7% Convertible Debentures due December
31, 2001 issued to the Purchasers pursuant to the Purchase Agreement.
"Effectiveness Date" means the 90th day following the Closing Date, or
if such day is not a Business Day the next Business Day thereafter.
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the 30th Business Day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may be,
from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"New York Courts" shall have the meaning set forth in Section 7(j).
"Person" means a corporation an association, a partnership,
organization, government, a business, an individual, a political subdivision
thereof or a governmental agency.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus
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<PAGE> 3
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock issuable
upon (a) conversion in full of the Debentures, (b) exercise in full of the
Warrants and (c) payment of interest in respect of the Debentures; provided
however that in order to account for the fact that the number of shares of
Common Stock that are issuable upon conversion of Debentures is determined in
part upon the market price of the Common Stock at the time of conversion,
Registrable Securities contemplated by clause (a) of this definition shall be
deemed to include not less than 200% of the number of shares of Common Stock
into which the Debentures are convertible, assuming such conversion occurred on
the Closing Date or the Filing Date (whichever date yields a lower Conversion
Price, as such term is defined in the Debentures). The initial Registration
Statement shall cover at least such number of shares of Common Stock as equals
the sum of (x) 200% of the number of shares of Common Stock into which the
Debentures are convertible, assuming such conversion occurred on the Closing
Date or the Filing Date (whichever date yields a lower Conversion Price), (y)
interest thereon and (z) the number of shares of Common Stock as are issuable
upon exercise in full of the maximum number of Warrants which could be issued
upon conversion of the Debentures outstanding on either the Closing Date or the
Filing Date, whichever yields a higher number of shares of Common Stock. The
Company shall be required to file additional Registration Statements to the
extent the actual number of shares of Common Stock into which Debentures are
convertible (together with interest thereon) and Warrants are exercisable
exceeds the number of shares of Common Stock initially registered in accordance
with the immediately prior sentence. The Company shall have 15 Business Days to
file such additional Registration Statement after notice of the requirement
thereof, which the Holders may give at such time when the number of shares of
Common Stock as are issuable upon conversion of Debentures exceeds 185% of the
number of shares of Common Stock into which Debentures are convertible,
assuming such conversion occurred on the Closing Date or the Filing Date
(whichever yields a lower Conversion Price.)
"Registration Statement" means the registration statement contemplated
by Section 2(a) (covering such number of Registrable Securities and any
additional Registration Statements contemplated in the definition of
Registrable Securities), including (in each case) the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference in such registration
statement.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
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<PAGE> 4
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means one law firm acting as counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
2. Shelf Registration
(a) On or prior to the Filing Date the Company shall prepare and
file with the Commission a Registration Statement covering all Registrable
Securities. The Registration Statement shall initially be on Form SB-2 (or, if
the Company is not permitted to register the resale of the Registrable
Securities on Form SB-2, the Registration Statement shall be on such other
appropriate form in accordance herewith as the Holders of a majority in
interest of the Registrable Securities may consent). The Company shall file a
"shelf" Registration Statement on Form S-3, for an offering to be made on a
continuous basis pursuant to Rule 415, within five Trading Days of becoming
eligible to use such form, which Registration Statement shall cover all
Registrable Securities that are unsold on the date the Company becomes so
eligible. At any time when the Company is eligible to use Form S-3, its
obligations under this Section 2(a) shall be met only by the use of such form.
The Company shall use its best efforts to cause the Registration Statement to
be declared effective under the Securities Act as promptly as possible after
the filing thereof, but in any event prior to the Effectiveness Date, and shall
file such post-effective amendments as may be required, and otherwise use its
best efforts to keep such Registration Statement continuously effective under
the Securities Act until the date which is three years after the date that such
Registration Statement is declared effective by the Commission or such earlier
date when all Registrable Securities covered by such Registration Statement
have been sold or may be sold without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act, as determined by the counsel to
the Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent (the "Effectiveness Period");
provided, however, that the Company shall not be deemed to have used its best
efforts to keep the Registration Statement effective during the Effectiveness
Period if it voluntarily takes any action that would result in the Holders not
being able to sell the Registrable Securities covered by such Registration
Statement during the Effectiveness Period, unless such action is required under
applicable law or the Company has filed a post-effective amendment to the
Registration Statement and the Commission has not declared it effective.
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<PAGE> 5
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such
Person (i) agrees to sell its Registrable Securities on the basis provided in
any underwriting agreements approved by the Persons entitled hereunder to
approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement (and any additional Registration Statements as
may be required) in accordance with Section 2(a), and cause the Registration
Statement to become effective and remain effective as provided herein;
provided, however, that not less than five (5) Business Days prior to the
filing of the Registration Statement or any related Prospectus or any amendment
or supplement thereto (including any document that would be incorporated or
deemed to be incorporated therein by reference), the Company shall (i) furnish
to the Holders, their Special Counsel and any managing underwriters, copies of
all such documents proposed to be filed, which documents (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders, their Special Counsel and such managing underwriters,
and (ii) cause its officers and directors, counsel and independent certified
public accountants to respond to such inquiries as shall be necessary, in the
opinion of respective counsel to such Holders and such underwriters, to conduct
a reasonable investigation within the meaning of the Securities Act. The
Company shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object on a timely basis.
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<PAGE> 6
(b) (i) Prepare and file with the Commission such
amendments, including post-effective amendments, to the Registration Statement
as may be necessary to keep the Registration Statement continuously effective
as to the applicable Registrable Securities for the Effectiveness Period and
prepare and file with the Commission such additional Registration Statements in
order to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented by
any required Prospectus supplement, and as so supplemented or amended to be
filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; (iii) respond as promptly as practicable
to any comments received from the Commission with respect to the Registration
Statement or any amendment thereto and promptly provide the Holders true and
complete copies of all correspondence from and to the Commission relating to
the Registration Statement; and (iv) comply with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in
such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be
sold, their Special Counsel and any managing underwriters immediately (and, in
the case of (i)(A) below, not less than five (5) days prior to such filing) and
(if requested by any such Person) confirm such notice in writing no later than
one (1) Business Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
is proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement (the Company
shall provide true and complete copies thereof and all written responses
thereto to each of the Holders) and (C) with respect to the Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true
and correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect
or that requires any revisions to the Registration Statement, Prospectus or
other documents so that, in the case of the Registration Statement or the
Prospectus, as the case may be, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or
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<PAGE> 7
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the
Holders of a majority in interest of the Registrable Securities to be sold in
connection with an Underwritten Offering, (i) promptly incorporate in a
Prospectus supplement or post-effective amendment to the Registration Statement
such information as such managing underwriters and such Holders reasonably
agree should be included therein and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated
in such Prospectus supplement or post-effective amendment; provided, however,
that the Company shall not be required to take any action pursuant to this
Section 3(e) that would, in the opinion of counsel for the Company, violate
applicable law or be materially detrimental to the business prospects of the
Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent reasonably
requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special
Counsel, and any underwriters, without charge, as many copies of the Prospectus
or Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable
Securities, use its best efforts to register or qualify or cooperate with the
selling Holders, any underwriters and their Special Counsel in connection with
the registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do any
and all other acts or things necessary or advisable to enable the disposition
in such jurisdictions of the Registrable Securities covered by a Registration
Statement; provided, however, that the Company shall not be required to
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<PAGE> 8
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action that would subject it to general service of
process in any such jurisdiction where it is not then so subject or subject the
Company to any material tax in any such jurisdiction where it is not then so
subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request at least three
Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the American Stock
Exchange ("AMEX") and any other securities exchange, quotation system, market
or over-the-counter bulletin board, if any, on which similar securities issued
by the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance as
is customary in Underwritten Offerings) and take all such other actions in
connection therewith (including those reasonably requested by any managing
underwriters and the Holders of a majority of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered into, (i)
make such representations and warranties to such Holders and such underwriters
as are customarily made by issuers to underwriters in underwritten public
offerings, and confirm the same if and when requested; (ii) obtain and deliver
copies thereof to each Holder and the managing underwriters, if any, of
opinions of counsel to the Company and updates thereof addressed to each
selling Holder and each such underwriter, in form, scope and substance
reasonably satisfactory to any such managing underwriters and Special Counsel
to the selling Holders covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately prior to
the effectiveness of the Registration Statement or at the time of delivery of
any Registrable Securities sold pursuant thereto, obtain and deliver copies to
the Holders and the managing underwriters, if any, of "cold comfort" letters
and
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<PAGE> 9
updates thereof from the independent certified public accountants of the
Company (and, if necessary, any other independent certified public accountants
of any subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data is, or is required to be,
included in the Registration Statement), addressed to each Person and in such
form and substance as are customary in connection with Underwritten Offerings;
(iv) if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the selling
Holders and the underwriters, if any, than those set forth in Section 7 (or
such other provisions and procedures acceptable to the managing underwriters,
if any, and holders of a majority of Registrable Securities participating in
such Underwritten Offering); and (v) deliver such documents and certificates as
may be reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing underwriters to
evidence the continued validity of the representations and warranties made
pursuant to clause 3(l)(i) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.
(m) Make available for inspection by the selling Holders, a
representative of such Holders, an underwriter participating in any disposition
of Registrable Securities, and an attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries
to supply all information in each case requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential
by such Persons, unless (i) disclosure of such information is required by court
or administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such person; or (iv) such information becomes available to such
person from a source other than the Company and such source is not known by
such Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90
days after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date
of the Registration Statement, which statement shall cover said 12-month
period, or such shorter period as is consistent with the requirements of Rule
158.
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<PAGE> 10
(o) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such selling
Holder as is required by law to be disclosed in the Registration Statement and
the Company may exclude from such registration the Registrable Securities of
any such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (if such reference to such Holder by name or
otherwise is not required by the Securities Act or any similar Federal statute
then in force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder agrees by its acquisition of such Registrable Securities
that (i) it will not offer or sell any Registrable Securities under the
Registration Statement until it has received copies of the Prospectus as then
amended or supplemented as contemplated in Section 3(g) and notice from the
Company that such Registration Statement and any post/effective amendments
thereto have become effective contemplated by Section 3(c) and (ii) it will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by
Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the
extent specified in Section 4(b), be borne by the Company whether or not
pursuant to an Underwritten Offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be made
with the AMEX and each other securities exchange or market on which Registrable
Securities are required hereunder to be listed and (B) in compliance with state
securities or Blue Sky laws (including, without limitation, fees and
disbursements
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<PAGE> 11
of counsel for the underwriters or Holders in connection with Blue Sky
qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any, or the Holders of a
majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the managing underwriters, if any, or by the
holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) fees and disbursements of counsel for the
Company and Special Counsel for the Holders, in the case of the Special
Counsel, to a maximum amount of $5,000, (iv) Securities Act liability
insurance, if the Company so desires such insurance, and (v) fees and expenses
of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement. In addition,
the Company shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to
the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses,
claims, damages, liabilities, costs (including, without limitation, costs of
preparation and attorneys' fees) and expenses (collectively, "Losses"), as
incurred, arising out of or relating to any untrue or alleged untrue statement
of a material fact contained in the
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<PAGE> 12
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein (in
the case of any Prospectus or form of prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading, except
to the extent, but only to the extent, that such untrue statements or omissions
are based solely upon information regarding such Holder furnished in writing to
the Company by or on behalf of such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto. The Company shall notify the Holders promptly of the
institution, threat or assertion of any Proceeding of which the Company is
aware in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or arising solely out of or based solely
upon any omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for inclusion
in the Registration Statement or such Prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant
to this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent
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<PAGE> 13
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced
the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within 10
Business Days of written notice thereof to the Indemnifying Party (regardless
of whether it is ultimately determined that an Indemnified Party is not
entitled to indemnification hereunder; provided, that the Indemnifying Party
may require such Indemnified Party to undertake to reimburse all such fees and
expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of
a material fact,
-13-
<PAGE> 14
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 5(c), any reasonable attorneys' or other reasonable fees or
expenses incurred by such party in connection with any Proceeding to the extent
such party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), the Purchasers
shall not be required to contribute, in the aggregate, any amount in excess of
the amount by which the proceeds actually received by the Purchasers from the
sale of the Registrable Securities subject to the Proceeding exceeds the amount
of any damages that the Purchasers have otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.
The Company and each Holder agree that monetary damages would not provide
adequate compensation for any losses incurred by reason of a breach by it of
any of the provisions of this Agreement and hereby further agrees that, in the
event of any action for specific performance in respect of such breach, it
shall waive the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 6(b) attached hereto, neither the Company
nor any of its subsidiaries has, as of the date hereof, nor shall the Company
or any of its subsidiaries, on or after the date of this Agreement, enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specifically set forth in
Schedule 6(b) attached hereto, neither the Company nor any of its subsidiaries
has previously entered into any agreement granting any registration rights with
respect to any of its securities to any
-14-
<PAGE> 15
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specifically set forth in Schedule 2.1(s) to the Purchase Agreement, neither
the Company nor any of its security holders (other than the Holders in such
capacity pursuant hereto) may include securities of the Company in the
Registration Statement other than the Registrable Securities, and the Company
shall not enter into any agreement providing any such right to any of its
securityholders.
(d) Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare
and file with the Commission a registration statement relating to an offering
for its own account or the account of others under the Securities Act of any of
its equity securities, other than on Form S-4 or Form S-8 (each as promulgated
under the Securities Act) or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans, then the Company shall send to each holder of
Registrable Securities written notice of such determination and, if within
twenty (20) days after receipt of such notice, any such holder shall so request
in writing, the Company shall include in such registration statement all or any
part of the Registrable Securities such holder requests to be registered. No
right to registration of Registrable Securities under this Section shall be
construed to limit any registration otherwise required hereunder.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of Holders and that
does not directly or indirectly affect the rights of other Holders may be given
by Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance
with the provisions of the immediately preceding sentence.
-15-
<PAGE> 16
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 7:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 7:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the Business Day following the date of mailing,
if sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as set forth in the Purchase
Agreement or if not so set forth then to the address of such Holder as it
appears in the stock transfer books of the Company, or such other address as
may be designated in writing hereafter, in the same manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign its rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement.
(h) Assignment of Registration Rights. The rights of a Purchaser
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by such Purchaser to any assignee or transferee of all
or a portion of the Debentures, the Warrants or Registrable Securities without
the consent of the Company if: (i) such Purchaser agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to such registration rights are
being transferred or assigned, (iii) at or before the time the Company receives
the written notice contemplated by clause (ii) of this Section, the transferee
or assignee agrees in writing with the Company to be bound by all of the
provisions of this Agreement, and (iv) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. The
rights to assignment shall apply to the Purchasers' (and to subsequent)
successors and assigns.
(i) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and
effect as if such facsimile signature were the original thereof.
-16-
<PAGE> 17
(j) Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to principles of conflicts of law. Each party hereby
irrevocably submits to the nonexclusive jurisdiction of any New York state
court sitting in the Borough of Manhattan, the state and federal courts sitting
in the City of New York or any federal court sitting in the Borough of
Manhattan in the City of New York (collectively, the "New York Courts") in
respect of any Proceeding arising out of or relating to this Agreement, and
irrevocably accepts for itself and in respect of its property, generally and
unconditionally, jurisdiction of the New York Courts. The Company irrevocably
waives to the fullest extent it may effectively do so under applicable law any
objection that it may now or hereafter have to the laying of the venue of any
such proceeding brought in any New York Court and any claim that any such
Proceeding brought in any New York Court has been brought in an inconvenient
forum. Nothing herein shall affect the right of any Holder. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by receiving a copy thereof sent
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any manner permitted by law.
(k) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the
parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would
have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
(m) Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(n) Shares Held by The Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchasers or transferees or successors or
assigns thereof if such Persons are deemed to be Affiliates solely by reason of
their holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
-17-
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
COTTON VALLEY RESOURCES CORPORATION
By: /s/ EUGENE A. SOLTORO
--------------------------------
Name: Eugene A. Soltoro
Title: Chief Executive Officer
WESTOVER INVESTMENTS L.P.
By: /s/ WILLIAM E. ROSE
--------------------------------
Name: William E. Rose
Title: Authorized Signatory
MONTROSE INVESTMENTS L.P.
By: /s/ WILLIAM E. ROSE
--------------------------------
Name: William E. Rose
Title: Authorized Signatory
LAKESHORE INTERNATIONAL
By: /s/ JOHN D. BRANDENBORG
--------------------------------
Name: John D. Brandenborg
Title: Vice President
JMG CAPITAL PARTNERS, L.P.
By: /s/ JONATHAN GLASER
--------------------------------
Name:
Title:
TRITON CAPITAL INVESTMENTS, LTD.
By: /s/ JONATHAN GLASER
--------------------------------
Name:
Title:
<PAGE> 19
LIONHART GLOBAL APPRECIATION FUND, LTD.
By: /s/ TERRENCE P. DUFFY
----------------------------
Name: Terrence P. Duffy
Title: Director
GLOBAL PERSPECTIVES INTERNATIONAL, LTD.
By: /s/ TERRENCE P. DUFFY
----------------------------
Name: Terrence P. Duffy
Title: Director
GLOBAL EMERGING MARKETS, LTD.
By: /s/ EDWARD J. TOBIN
----------------------------
Name: Edward J. Tobin
Title: Authorized Signatory
PALISADES HOLDINGS, INC.
By: /s/ [ILLEGIBLE]
----------------------------
Name: [ILLEGIBLE]
Title: President
<PAGE> 1
EXHIBIT 10.7
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT made this 1st day of October, 1997
BETWEEN:
PARAMOUNT RESOURCES LTD., a body corporate registered to carry on
business in the Province of Alberta and having an office in the
City of Calgary, in the Province of Alberta (hereinafter called
"PARAMOUNT")
-and-
J. ARON RESOURCES COMPANY, an unlimited liability company
constituted pursuant to the laws of the Province of Nova Scotia
and registered to carry on business in the Province of Alberta
(hereinafter called "J. ARON")
(Paramount and J. Aron are collectively referred to as the
"Vendor")
-and-
COTTON VALLEY RESOURCES CORPORATION, a body corporate registered
to carry on business in the Province of Alberta and having an
office in the City of Calgary, in the Province of Alberta
(hereinafter called the "Purchaser")
WHEREAS the Vendor has agreed to sell the Assets to the Purchaser and the
Purchaser has agreed to purchase the Assets from the Vendor on the terms and
conditions set forth herein;
NOW THEREFORE in consideration of the premises and the mutual covenants and
warranties herein contained, the Parties agree as follows:
1.00 INTERPRETATION
1.01 Definitions
In this Agreement, including the recitals and the Schedules, the
following terms shall have the respective meanings hereby assigned
to them, subject to Subclause 8.02D:
A. "Agreement" means this document, together with the Schedules
attached hereto and made a part hereof.
B. "Assets" means the Petroleum and Natural Gas Rights, the
Tangibles and the Miscellaneous Interests.
<PAGE> 2
-2-
C. "Closing" means the exchange of Conveyance Documents at the
Closing Date, as more particularly described in Clause 3.03,
and the delivery by the Purchaser to the Vendor of the Purchase
Price, as described in Paragraph 2.03 (b).
D. "Closing Date" means the hour of 2:00 p.m. on the later of:
(i) December 1, 1997; and
(ii) the third business day following the day on which any and
all preferential, pre-emptive or first purchase rights of
third parties that become operative by virtue of this
Agreement or the transaction to be effected by it shall
have been exercised or waived by the holders thereof or
all time periods within which such rights may be
exercised shall have expired
or such other time and date as may be agreed to by the Parties
pursuant to Clause 3.00 or Paragraph 8.02B(b)(i).
E. "Conveyance Documents" means the documents described in
Paragraphs 3.03 A (a) and (b), which provide for the
assignment, transfer or other disposition of the Assets to the
Purchaser.
F. "Deposit" means the payment set forth in Paragraph 2.03(a).
G. "Effective Date" means 8:00 a.m., on the thirtieth day of June,
1997.
H. "Lands" means the lands set forth and described in Schedule "A"
and any lands pooled or unitized therewith.
I. "Leases" means the leases, licences, permits and other
documents of title set forth and described in Schedule "A", by
virtue of which the holder thereof is entitled to drill for,
win, take, own or remove the Petroleum Substances within, upon
or under the Lands or by virtue of which the holder thereof is
deemed to be entitled to a share of Petroleum Substances
removed from the Lands or any lands with which the Lands are
pooled or unitized and includes, if applicable, all renewals
and extensions of such documents and all documents issued in
substitution therefor.
J. "Miscellaneous Interests" means the entire interest of the
Vendor in and to all property, assets and rights on or with
respect to the Lands, other than the Petroleum and Natural Gas
Rights and the Tangibles, to the extent such property, assets
and rights pertain to the Petroleum and Natural Gas Rights or
the Tangibles, or any rights relating thereto, including,
without limitation, the entire interest of the Vendor in:
(a) all contracts, agreements and documents, to the extent that
they relate directly to the Petroleum and Natural Gas
Rights or the Tangibles, including agreements for the sale,
processing or transportation of Petroleum Substances;
<PAGE> 3
-3-
(b) excepting for roads required by the Vendor for access to
other properties which roads are set forth and described in
Schedule "E", all subsisting rights to enter upon, use and
occupy the surface of any of the Lands, of any lands upon
which any Tangibles are located or of any lands to be
crossed in order to gain access to any of the Lands or the
Tangibles;
(c) all Well bores and casing located on the Lands which may be
used to produce Petroleum Substances from the Lands or
otherwise serve the Lands; and
(d) copies of geological, geophysical and engineering records,
files, reports and data that, in the Vendor's reasonable
judgement, relate directly to the Petroleum and Natural Gas
Rights, any Well thereon or the Tangibles, excluding the
Vendor's tax and financial records and financial hedges and
economic evaluations.
Unless otherwise agreed in writing by the Parties, however, the
Miscellaneous Interests shall not include agreements, documents
or data to the extent that:
(i) they pertain to the Vendor's proprietary technology;
(ii) they are owned or licensed by third parties with
restrictions on their deliverability or disclosure by
the Vendor to any assignee which is not an affiliate
of the Vendor; or
(iii) they are referred to specifically as exclusions in
Schedule "A".
K. "Party" means a person, partnership or corporation which is
bound by this Agreement.
L. "Permitted Encumbrances" means:
(a) any encumbrances, overriding royalties, net profits
interests and other burdens identified in Schedule "A";
(b) any preferential rights of purchase or any similar
restriction applicable to any of the Assets including, but
not limited to, those identified in Schedule "A" hereto;
(c) the terms and conditions of the Leases, including, without
limitation, the requirement to pay any rentals or royalties
to the grantor thereof to maintain the Leases in good
standing and any gross royalty trusts applicable to the
grantor's interest in any of the Leases;
(d) the right reserved to or vested in any grantor, government
or other public authority by the term of any Lease or by
the Regulations to terminate any Lease;
(e) easements, rights of way, servitudes or other similar
rights in land, including, without limitation, rights of
way and servitudes for highways, railways, sewers, drains,
gas and oil pipelines, gas and water mains, electric light,
power, telephone or cable television conduits, poles, wires
or cables;
<PAGE> 4
-4-
(f) the right to levy taxes on Petroleum Substances or the
income or revenue therefrom and governmental requirements
pertaining to production rates from Wells on the Lands or
operations being conducted on the Lands or otherwise
affecting the value of any of the Assets;
(g) agreements for the sale of Petroleum Substances, which
either are terminable on not greater than thirty (30) days'
notice (without an early termination penalty or other cost)
or are identified in Schedule "A";
(h) the Regulations and any rights reserved to or vested in any
municipality or governmental, statutory or public authority
to control or regulate any of the Assets in any manner;
(i) undetermined or inchoate liens incurred or created as
security in favour of any person with respect to the
development or operation of any of the Assets, as regards
the Vendor's share of the costs and expenses thereof;
(j) the reservations, limitations, provisos and conditions in
any grants or transfers from the Crown of any of the Lands
or interests therein, and statutory exceptions to title;
(k) agreements and plans relating to pooling or unitization,
provided that any pooled interest or unit agreement
applicable to the Lands shall be identified in Schedule
"A";
(l) agreements respecting the processing, treating or
transmission of Petroleum Substances or the operation of
Wells by contract field operators as identified in
Schedule "A" hereto;
(m) provisions for penalties and forfeitures under agreements
as a consequence of non-participation in operations
provided that any such penalties or forfeitures which apply
to the Assets as a result of the Vendor's (or predecessor
in interest's) failure to participate in a particular
operation prior to the Effective Date shall be identified
in Schedule "A", and
(n) liens granted in the ordinary course of business to a
public utility, municipality or governmental authority with
respect to operations pertaining to any of the Assets.
M. "Petroleum and Natural Gas Rights" means the entire interest of
the Vendor in and to the Lands and, insofar as they pertain to
the Lands, the Leases, including the working and other
interests, if any, set forth and described in Schedule "A".
N. "Petroleum Substances" means petroleum, natural gas, sulphur
and every other mineral or substance, or any of them, the right
to explore for which, or an interest in which, is granted
pursuant to the Leases, insofar only as they pertain to the
Lands.
O. "Prepaid Gas Obligations" means, with respect to production,
sale or related contracts pertaining to the Petroleum and
Natural Gas Rights, the obligations of the Vendor under "take
or pay" and similar provisions either to repay payments
<PAGE> 5
-5-
made by the purchasers thereunder for Petroleum Substances not
taken by them or to deliver such gas or substances to such
purchasers without full payment therefor, and includes, without
limitation, any obligations to TransCanada Pipelines Limited,
Topgas Holdings Limited, Topgas Two Inc. or Alberta and
Southern Gas Co. Ltd. arising from such "take or pay"
provisions.
P. "Prime Rate" means the annual rate of interest announced from
time to time by the main branch of the Bank of Montreal in
Calgary, Alberta as a reference rate for the determination of
interest rates of Canadian dollar commercial loans to customers
in Canada which is in effect on the Effective Date;
Q. "Purchase Price" means the amount payable by the Purchaser to
the Vendor pursuant to Clause 2.02, as modified by the
adjustments and reductions provided for herein.
R. "Regulations" means all statutes, laws, rules, orders and
regulations in effect from time to time and made by governments
or governmental boards or agencies having jurisdiction over the
Assets.
S. "Tangibles" means the entire interest of the Vendor in and to
all tangible depreciable property, real property and assets
that are:
(a) located in, on, or in the vicinity of the Lands and used,
or intended for use solely, in connection with
production, processing, gathering, storage, treatment or
transportation operations respecting the Lands,
including, without limitation, the Well equipment, if
any, relating to Wells on the Lands; and
(b) notwithstanding Subclauses 1.01S(a) above, "Tangibles" do
not include items, whether located on or off the Lands
that are indicated in Schedule "A" to be specifically
excluded as Tangibles.
T. "Title Defect" means a defect, deficiency or discrepancy in or
affecting the title of the Vendor in and to any of the Assets,
other than as specifically disclosed herein or in Schedule "A",
which is sufficiently material and adverse to the enforcement
of title that it would not be acceptable to a knowledgeable,
prudent purchaser buying similar oil and gas properties, acting
reasonably.
U. "Wells" means all producing, shut-in, water source,
observation, disposal, injection, abandoned, suspended and
similar wells located on the Lands or directly relating to the
operation of the Lands, including without limitation, wells
identified on Schedule "A".
1.02 Schedules
The following Schedules are attached hereto and made part of this
Agreement:
(a) Schedule "A", which includes: (i) the Lands; (ii) the Leases;
(iii) any agreements, documents or data which specifically are
to be excluded from the Miscellaneous Interests; (iv) any
encumbrances, preferential rights of purchase, production sale
<PAGE> 6
-6-
agreements, other agreements required to be included in
Schedule "A" pursuant to Subclause 1.01L and (v) any Tangibles
described in Paragraph 1.01S(b);
(b) Schedule "B", which is a General Conveyance;
(c) Schedule "C", which is a Disclosure Schedule;
(d) Schedule "D", which is the form of the certificate to be
provided pursuant to Article 10.00 with respect to the truth of
a Party's representations and warranties; and
(e) Schedule "E" which is a list of Vendor's roads excluded from
1.01J(b) Miscellaneous Interests.
1.03 References
The references "hereunder", "herein" and "hereof" refer to the
provisions of this Agreement, and references to Articles, Clauses,
Subclauses, Paragraphs or Subparagraphs herein refer to Articles,
Clauses, Subclauses, Paragraphs or Subparagraphs of this Agreement. Any
reference to time shall refer to Mountain Standard Time or Mountain
Daylight Savings Time during the respective intervals in which each is
in force.
1.04 Headings
The headings of the Articles, Clauses, Schedules and any other
headings, captions or indices herein are inserted for convenience of
reference only and shall not be used in any way in construing or
interpreting any provision hereof.
1.05 Singular/Plural
Whenever the singular or masculine or neuter is used in this Agreement
or in the Schedules, it shall be interpreted as meaning the plural or
feminine or body politic or corporate, and vice versa, as the context
requires.
1.06 Use Of Canadian Funds
All references to "dollars" or "$" herein shall refer to lawful
currency of Canada.
1.07 Derivatives
Where a term is defined herein a capitalized derivative of such term
shall have a corresponding meaning unless the context otherwise
requires.
1.08 Interpretation If Closing Does Not Occur
In the event that Closing does not occur, each provision of this
Agreement which presumes that the Purchaser has acquired the Assets
hereunder shall be construed as having been contingent upon Closing
having occurred.
<PAGE> 7
-7-
1.09 Conflicts
If there is any conflict or inconsistency between a provision of
the body of this Agreement and that of a Schedule or a Conveyance
Document, the provision of the body of this Agreement shall
prevail. If any term or condition of this Agreement conflicts with
a term or condition of a Lease or the Regulations, the term or
condition of such Lease or the Regulations shall prevail, and this
Agreement shall be deemed to be amended to the extent required to
eliminate any such conflict.
2.00 PURCHASE AND SALE
2.01 Agreement Of Purchase And Sale
The Purchaser agrees to purchase the Assets from the Vendor and
the Vendor agrees to sell the Assets to the Purchaser on the terms
and conditions set forth herein.
2.02 Allocation Of Purchase Price
Subject to the adjustments provided for in clause 2.04 and in
Article 4.00 and such other reductions as may be made pursuant to
Article 7.00 and Clause 8.02, the monetary consideration payable
by the Purchaser to the Vendor for the Assets is Nine Million Five
Hundred Thousand ($9,500,000.00) Dollars (Canadian), and shall be
allocated among the Assets as follows:
<TABLE>
<S> <C>
(a) To Petroleum and Natural Gas Rights $ 8,549,999.00
--------------
(b) To Tangibles $ 950,000.00
--------------
(c) To Miscellaneous Interests $ 1.00
--------------
TOTAL $ 9,500,000.00
==============
</TABLE>
The Parties comprising Vendor agree that the proceeds of
disposition shall be disbursed as follows: Paramount -
$6,531,250.00 (68.75%) and J. Aron - $2,968,750.00 (31.25%).
The Parties have taken into account the Purchaser's assumption of
responsibility for the future abandonment and reclamation costs
associated with the Assets, as set forth in this Agreement, and
the Vendor's release of responsibility therefor when they
determined the Purchase Price.
2.03 Payment Of Purchase Price
The Purchase Price shall be paid by the Purchaser to the Vendor as
follows:
(a) the deposit of $475,000.00 paid towards the Purchase Price by
Purchaser on or before October 30, 1997, such amount to be
deposited by Paramount at the Bank of Montreal and, upon
Closing, will be distributed to the parties comprising Vendor
in the same ratio as the disbursement of the Purchase Price as
provided in clause 2.02 hereof; and
<PAGE> 8
-8-
(b) the delivery of the Purchase Price, less the Deposit, to the
Vendor at Closing, subject to any adjustments as provided in
this Agreement.
The Purchaser shall also remit to the Vendor at Closing the seven
percent (7%) goods and services tax applicable to that portion of
the Purchase Price allocated to the Tangibles, in accordance with
the Excise Tax Act (Canada), being $66,500.00 (Paramount's GST
Registration Number - R132554775 and J. Aron's GST Registration
Number - R136214087). Such amounts shall be paid by certified
cheque or bank draft payable in immediately available funds to the
Vendor.
2.04 Interest
Interest shall be paid by the Purchaser to the Vendor as follows:
(a) At closing the Purchaser shall pay to the Vendor interest at
the Prime Rate plus two (2%) percent which interest payment
shall be shared by the parties comprising Vendor in the same
ratio as the disbursement of the Purchase Price as provided in
Clause 2.02 hereof.
(b) Interest shall accrue on the Purchase Price from and including
June 30, 1997 to the date of payment of the Deposit, and shall
accrue on the Purchase Price less the Deposit from and
including the date of payment of the Deposit to the Closing
Date.
2.05 Refund of Deposit
The Vendor shall only be required to refund the Deposit together
with interest accrued thereon to the Purchaser where Closing does
not occur:
(a) and the failure to Close is occasioned by virtue of Vendor's
inability to meet any material obligation within its control
required for Closing to occur; or
(b) where the Vendor or Purchaser elects to terminate this
Agreement pursuant to Subclause 8.02B(c); or
(c) due to the nonsatisfaction of any one of the conditions
contained in Clause 10.02.
3.00 CLOSING
3.01 Place Of Closing
Unless otherwise agreed in writing by the Parties, Closing shall
take place at the offices of Paramount at 4000, 350 - 7th Avenue
S.W., Calgary, Alberta on the Closing Date.
3.02 Effective Date Of Transfer
The transfer and assignment of the Assets from the Vendor to the
Purchaser shall be effective as of the Effective Date, provided
Closing occurs. Possession of the Assets, however, shall not pass
to the Purchaser until after Closing on the Closing Date, and the
Vendor shall maintain the Assets on behalf of the Purchaser
between the Effective Date and the Closing Date pursuant to the
provisions of Article 5.00.
<PAGE> 9
-9-
3.03 Deliveries At Closing
A. At Closing, the Vendor shall deliver the following to the
Purchaser:
(a) a General Conveyance, in the form attached as Schedule
"B", which has been prepared and executed by the Vendor;
(b) all specific assignments, registrable transfers, novation
agreements, notices of assignment, trust agreements and
other instruments prepared by the Vendor at its sole cost
and which are required to convey the Vendor's interest in
the Assets to the Purchaser, unless and to the extent
that the Purchaser allows the Vendor to deliver such
documents to the Purchaser at a later date, provided that
such documents shall not require the Vendor to assume or
incur any obligation, or to provide any representation or
warranty, beyond that contained in this Agreement;
(c) copies of all waivers of rights of first refusal and of
requests for consents to disposition obtained by the
Vendor with respect to the sale of the Assets to the
Purchaser;
(d) the certificates required by Paragraphs 10.02(a) and (d);
(e) an assignment of a ten (10%) percent working interest
from the Vendor's twenty-seven decimal four (27.4%)
percent working interest in Meander River Road #2;
(f) notice of resignation and change of operatorship letters
substantially the same as those used in the July 1, 1994
acquisition by Paramount from Mobil Oil Canada;
(g) no interest letters relating to security registered
against the Vendor's name; and
(h) such other documents as may be specifically required
hereunder or as may be reasonably requested by the
Purchaser upon reasonable notice to the Vendor.
B. At Closing, the Purchaser shall deliver the following to the
Vendor:
(a) the Purchase Price, less the Deposit, and the applicable
goods and services tax (if any), in accordance with
Clause 2.03;
(b) a General Conveyance in the form attached as Schedule
"B", which has been executed by the Purchaser;
(c) the certificate required by Paragraph 10.03(c); and
(d) such other documents as may be specifically required
hereunder.
3.04 Costs Of Registration
<PAGE> 10
-10-
The Purchaser shall bear all costs incurred in registering any
conveyances of title to the Assets to it and all costs of
preparing and registering any further assurances required to
convey the Assets to it. Paramount shall register all such
conveyances promptly after Closing.
3.05 File Delivery
The Vendor shall deliver to Purchaser copies of the Vendor's
records, files, reports and data pertaining to the Assets promptly
after Closing.
4.00 ADJUSTMENTS
4.01 Benefits And Obligations To Be Apportioned
A. All benefits and obligations of any kind and nature accruing,
payable, paid, received or receivable with respect to the
Assets (including, without limitation, maintenance,
development, capital and operating costs, advances, payments
with respect to the Permitted Encumbrances, proceeds from the
sale of production, accounts receivable and incentives
accruing pursuant to the Regulations) shall be apportioned, as
of the Effective Date, between the Vendor and the Purchaser in
accordance with generally accepted accounting principles,
subject to the provisions of this Agreement. All costs of
whatever nature pertaining to work performed or goods or
services provided with respect to the Assets prior to the
Effective Date shall be borne by the Vendor, notwithstanding
that such costs may be payable in whole or in part after the
Effective Date.
B. Notwithstanding the provisions of Subclause 4.01A, all rentals
and all similar payments required to preserve any of the
Leases and all taxes (other than income taxes and taxes based
on the volume of the production of Petroleum Substances)
levied with respect to the Assets shall be apportioned between
the Vendor and the Purchaser on a per diem basis as of the
Effective Date.
C. Petroleum Substances which were produced, but not sold, as of
the Effective Date shall not form part of the Assets and shall
be credited to the Vendor.
D. Adjustments made pursuant to this Article shall be shared by
the parties comprising Vendor in accordance with the following
interests: Paramount 68.75% and J. Aron - 31.25%.
4.02 Adjustments To Accounts
A. An interim accounting and adjustment shall be conducted for
Closing, based on the Vendor's and the Purchaser's good faith
estimate of all adjustments to be made for the transactions
herein pursuant to this Article, and a final accounting and
adjustment shall be conducted within one hundred and eighty
(180) days following the Closing Date. Subject to Subclauses B
and C of this Clause, the Parties shall not be obligated to
make any adjustments after such one hundred and eighty (180)
day period unless such adjustment has been specifically
requested, by notice, within such period. All adjustments
shall be settled by payment by the Party required to make
payment hereunder within fifteen (15) days of being notified
of the determination of the amount owing.
<PAGE> 11
-11-
B. During the one hundred and eighty (180) day period following
the Closing Date, the Purchaser may audit the books, records
and accounts of the Vendor respecting the Assets, for the
purpose of effecting adjustments pursuant to this Article.
Such audit shall be conducted upon reasonable notice to the
Vendor at the Vendor's offices during the Vendor's normal
business hours, and shall be conducted at the sole expense of
the Purchaser. Any claims of discrepancies disclosed by such
audit shall be made in writing to the Vendor within two (2)
months following the completion of such audit, and the Vendor
shall respond in writing to any claims of discrepancies within
six (6) months of the receipt of such claims. To the extent
that the Parties are unable to resolve any outstanding claims
of discrepancies disclosed by such audit within two (2) months
of the Vendor's response thereto, such audit exceptions shall
be resolved pursuant to Article 9.00.
C. Notwithstanding the preceding Subclauses of this Clause,
Clause 6.01, Clause 6.03 and Clause 13.01, any adjustments
resulting from joint venture or royalty audits for the Assets:
(i) relating to the period prior to Closing Date and for
which audit queries are outstanding at Closing Date; or
(ii) that occur after Closing Date but not later than two (2)
years after Closing Date or for the applicable period in
the governing agreements included in Miscellaneous
Interests, whichever is later (in the case of joint
venture audits), or four (4) years after Closing Date (in
the case of Crown royalty audits);
shall be made as they occur and payment for them shall be made
within thirty (30) days of each adjustment and shall be made
by Purchaser to Vendor, or vice versa, as the case may be.
5.00 MAINTENANCE OF BUSINESS
5.01 The Vendor shall continue to maintain the Assets in a proper and
prudent manner in accordance with good oil field practice and the
Regulations until the Closing Date.
5.02 Prior to the Closing Date, the Vendor shall not, without the prior
consent of the Purchaser, assume any material obligation or
commitment or propose or initiate any operation with respect to
the Assets where the Vendor's share of the expenditure associated
with such obligation, commitment or operation is estimated to
exceed $25,000, unless and to the extent that the Vendor
reasonably determines that such expenditures or actions are
necessary for the protection of life or property, in which case
the Vendor shall promptly notify the Purchaser of such intention
or actions and the Vendor's estimate of the costs and expenses
associated therewith.
5.03 Following Closing and to the extent that the Purchaser must be
novated into operating agreements or other agreements governing
any of the Assets, the Vendor shall be deemed to have been acting
as the agent of the Purchaser until the novation has been
effected. Insofar as the Vendor maintains the Assets and takes
actions with respect thereto on behalf of the Purchaser pursuant
to this Article, the Vendor shall be deemed to have been
<PAGE> 12
-12-
the agent of the Purchaser hereunder. The Purchaser ratifies all
actions taken by the Vendor or refrained to be taken by the Vendor
as authorized hereunder in such capacity during such period, with
the intention that all such actions shall be deemed to be those of
the Purchaser. In addition to the foregoing, prior to the Closing
Date Vendor shall not, without first obtaining the prior written
consent of the Purchaser (which consent shall not be unreasonably
withheld), make any material amendment to any of the Leases or
contracts applicable to the Assets, or enter into any new
contracts applicable to the Assets, save where this would be done
in the ordinary and usual course of business.
5.04 The Purchaser shall indemnify the Vendor and its directors,
officers, servants, agents or employees against all liabilities,
losses, costs (including reasonable legal costs on a
solicitor-client basis), claims or damages which the Vendor or its
directors, officers, servants, agents or employees may suffer or
incur as a result of maintaining the Assets as the agent of the
Purchaser pursuant to this Article, insofar as such liabilities,
losses, costs, claims or damages are not a direct result of the
gross negligence or wilful misconduct of the Vendor or its
directors, officers, servants, agents or employees. An action or
omission of the Vendor or its directors, officers, servants,
agents or employees shall not be regarded as gross negligence or
wilful misconduct, however, to the extent it was done or omitted
to be done in accordance with the instructions of or with the
concurrence of the Purchaser.
5.05 Notwithstanding anything to the contrary herein contained, if
prior to Closing:
(i) Vendor seeks recourse against Purchaser pursuant to Clause
5.04; or
(ii) Vendor or Purchaser identify any third party unsatisfied
judgments, claims, proceedings, actions, investigations or
lawsuits in existence against Purchaser and/or contemplated or
threatened in writing against Purchaser,
with respect to the Assets, with a claimed amount in excess of
$50,000.00 and which arise out of any matter or thing occurring,
attributable or arising during the period between and including
the Effective Date to and including the day prior to the Closing
Date, Purchaser may, on or before Closing, terminate this
Agreement by written notice to Vendor without prejudice to any
other rights of Purchaser against Vendor hereunder. The Purchaser,
in electing to terminate the Agreement pursuant to this clause,
must act reasonably and in good faith.
5.06 Paramount hereby agrees that it will make necessary surface and
mines and minerals lease rental payments on behalf of the
Purchaser through to and including January 31st, 1998. Such
payments will be adjusted in accordance with the provisions of
Clause 4.02.
6.00 REPRESENTATIONS AND WARRANTIES OF PARTIES
6.01 Vendor's Representations And Warranties
The Vendor represents and warrants to the Purchaser that:
(a) Standing: Paramount is a corporation, duly organized, validly
subsisting and registered under the laws of the Province of
Alberta, and J. Aron is a corporation duly organized, validly
subsisting and registered under the laws of the Province
<PAGE> 13
-13-
of Nova Scotia, and both are authorized to carry on business
in the jurisdiction where the Lands are located;
(b) Requisite Authority: The Vendor has the requisite capacity,
power and authority to execute this Agreement and the
Conveyance Documents and to perform the obligations to which
it thereby becomes subject;
(c) No Conflict: The execution and delivery of this Agreement and
the completion of the sale of the Assets in accordance with
the terms of this Agreement are not and will not be in
violation or breach of, or be in conflict with:
(i) any term or provision of the charter, by-laws or other
governing documents of the Vendor;
(ii) any agreement, instrument, permit or authority to which
the Vendor is a party or by which the Vendor is bound;
or
(iii) the Regulations or any judicial order, award, judgement
or decree applicable to the Vendor or the Assets;
(d) Execution And Enforceability: The Vendor has taken all actions
necessary to authorize the execution and delivery of this
Agreement, and, as of the Closing Date, the Vendor shall have
taken all actions necessary to authorize and complete the sale
of the Assets in accordance with the provisions of this
Agreement. This Agreement has been validly executed and
delivered by the Vendor, and this Agreement and all other
documents executed and delivered on behalf of the Vendor
hereunder shall constitute valid and binding obligations of
the Vendor enforceable in accordance with their respective
terms and conditions, subject to the qualifications that such
enforcement may be limited by bankruptcy, insolvency,
liquidation, re-organization or similar laws of general
application relating to or affecting creditors rights;
(e) Residency For Tax Purposes: The Vendor is not a non-resident
of Canada within the meaning of the Income Tax Act (Canada);
(f) No Finders' Fees: The Purchaser shall not have any
responsibility for any obligation or liability, contingent or
otherwise, for brokers' or finders' fees, if any, incurred by
the Vendor with respect to the transactions herein;
(g) Lawsuits And Claims: There are no unsatisfied judgments,
claims, proceedings, actions, governmental investigations or
lawsuits in existence, or to the best of the information,
knowledge and belief of the Vendor contemplated or threatened
against or with respect to the Assets or the interest of the
Vendor therein other than as previously disclosed in writing
to the Purchaser,
(h) Compliance With Leases And Agreements: To the best of the
information, knowledge and belief of the Vendor, no act or
omission has occurred whereby the Vendor is, or would be, in
default under the terms of the Regulations, any Lease or any
agreement pertaining to the Assets, where such a default would
impact materially and adversely upon the Assets, or any of
them;
<PAGE> 14
-14-
No Default Notices: Except as has been specifically identified
in Schedule "A", the Vendor has not received any notice of
default under the Leases or any notice alleging its default
under any agreement pertaining to any of the Assets, which
default has not been rectified as of the date of this
Agreement, or which if not rectified would materially and
adversely impact upon the Assets or any of them;
(j) Payment Of Royalties And Taxes: To the best of the
information, knowledge and belief of the Vendor, all royalties
and all ad valorem, property, production, severance and
similar taxes and assessments based on, or measured by, the
Vendor's ownership of the Assets, the production of Petroleum
Substances from the Lands or the receipt of proceeds therefrom
that are payable by the Vendor and which accrued prior to the
Effective Date will have been properly and fully paid and
discharged in the manner and at the time prescribed by the
Leases and the Regulations;
(k) Encumbrances: The Vendor does not warrant its title to the
Assets, but does warrant that the interest of the Vendor in
the Assets is free and clear of any and all liens, mortgages,
pledges, claims, options, preferential rights of purchase,
encumbrances, overriding royalties, net profits interests or
other burdens created by, through or under the Vendor or of
which the Vendor is otherwise actually aware, other than the
Permitted Encumbrances;
(l) No Reduction: The interests of the Vendor in the Assets are
not subject either to reduction, or to change to an interest
of any other size or nature whatsoever by virtue of any right
or interest granted by, through or under the Vendor or of
which the Vendor is otherwise actually aware, except for the
Permitted Encumbrances and any such rights and interests
identified in Schedule "A";
(m) Sale Agreements: The Petroleum and Natural Gas Rights are not
subject to any gas balancing agreement or, except as
identified in Schedule "A", any agreement for the sale of
Petroleum Substances therefrom which the Purchaser is required
to assume that requires either the sale of more than thirty
(30) days of production (without an early termination penalty
or other cost) or the delivery of Petroleum Substances to the
purchaser thereof without receiving in due course (and being
entitled to retain) full payment at current market price or
the contract price therefor;
(n) Environmental Matters: The Vendor is not aware of and has not
received:
i) any orders or directives under the Regulations which
relate to environmental matters and which require any
work, repairs, construction or capital expenditures with
respect to the Assets, where such orders or directives
have not been complied with in all material respects; and
ii) any demand or notice issued under the Regulations with
respect to the breach of any environmental, health or
safety law applicable to the Assets, including, without
limitation, any Regulations respecting the use, storage,
treatment, transportation or disposition of environmental
contaminants, which demand or notice remains outstanding
on the Closing Date
<PAGE> 15
-15-
except as have been specifically disclosed in writing by the
Vendor, by notice to the Purchaser prior to the Vendor's
submission of this Agreement to the Purchaser for the
Purchaser's execution;
(o) Authorized Expenditures: There are no outstanding
authorizations for expenditure or outstanding financial
commitments respecting the Assets, pursuant to which
expenditures are or may be required by the Purchaser as a
result of the acquisition of the Assets or in respect of which
any amount is outstanding, other than as specifically
identified in Schedule "C";
(p) Assets Do Not Comprise Substantially All Of Vendor's Assets:
The Assets do not comprise all or substantially all of the
Vendor's assets;
(q) Quiet Enjoyment: Subject at all times to the Vendor's other
representations and warranties made pursuant to this Clause,
the Permitted Encumbrances and the satisfaction of the
obligations required to maintain the Leases in good standing
by the applicable lessees, the Purchaser may, for the residue
of the term of the Leases, hold and utilize the Assets for the
Purchaser's own use and benefit without any interruption by
the Vendor or any other person claiming by, through or under
the Vendor;
(r) Prepaid Gas Obligations: There are no existing or future
Prepaid Gas Obligations applicable to the Petroleum and
Natural Gas Rights;
(s) Condition of Wells: To the best of the information, knowledge
and belief of the Vendor, each Well located on the Lands,
whether producing, shut-in, injection, disposal or otherwise,
has been drilled and, if completed, completed and operated in
accordance with good oil and gas field practises and the
material requirement of the Regulations during the period of
Vendor's ownership;
(t) Abandonment of Wells: To the best of the information,
knowledge and belief of the Vendor, each Well located on the
Lands which has been abandoned by Vendor has been plugged and
abandoned, and the wellsite therefor properly restored, in
accordance with good oil and gas field practises and the
material requirements of the Regulations;
(u) Condition of Tangibles: To the best of the information,
knowledge and belief of the Vendor, the Tangibles constructed,
installed or maintained by Vendor have been constructed,
installed maintained and operated in accordance with generally
accepted engineering practises, good oil and gas field
practises and the material requirements of the Regulations;
(v) Regulatory Production Penalties and Allowables: Except as
specifically identified in Schedule "A", to the best of the
information, knowledge and belief of the Vendor:
(a) each Well located on the Lands drilled by Vendor which
has been drilled for the purpose of producing Petroleum
Substances therefrom has been drilled at a location for
which an off target penalty is not applicable under the
Regulations; and
<PAGE> 16
-16-
(b) none of the Wells located on the Lands have been produced
in excess of applicable production allowables imposed by
the Regulations and there is no pending change in such
production allowable, other as may generally be
applicable pursuant to a change in the Regulations during
the period of ownership by Vendor;
(w) No Removal of Tangibles: To the best of the information,
knowledge and belief of Vendor, no tangible depreciable
property and assets which are used, were used or are intended
to be used in producing, processing, gathering, treating,
measuring, making marketable or injecting the leased
substances or any of them or in connection with water
injection or removal operations that pertain to the Petroleum
and Natural Gas Rights, has been removed from its location
since the Effective Date, nor has Vendor alienated or
encumbered any such tangible depreciable property and assets
since such date;
(x) Licences and Permits: To the best of its information,
knowledge and belief, Paramount, in its capacity as operator,
holds all valid licenses, permits and similar rights and
privileges that are required and necessary under applicable
law to operate the Assets as presently operated;
(y) Area of Mutual Interest: Except for an area of mutual interest
provision between the two Vendors, there are no active area of
mutual interest provisions in any of the Title Documents or
other agreements or documents to which the Assets are subject;
and
(z) Well Licences: Paramount is validly able to assign all well
licences in respect of those wells for which Paramount is the
licencee.
6.02 Purchaser's Representations And Warranties
The Purchaser represents and warrants to the Vendor that:
(a) Standing: The Purchaser is a corporation, duly organized,
valid and subsisting under the laws of its jurisdiction of
incorporation, and duly registered and authorized to carry on
business in the jurisdiction in which the Lands are located;
(b) Requisite Authority: The Purchaser has the requisite capacity,
power and authority to execute this Agreement and the
Conveyance Documents and to perform the obligations to which
it thereby becomes subject;
(c) No Conflict: The execution and delivery of this Agreement and
the completion of the purchase of the Assets in accordance
with the terms of this Agreement are not and will not be in
violation or breach of, or be in conflict with;
(i) any term or provision of the charter, by-laws or other
governing documents of the Purchaser; or
(ii) the Regulations or any judicial order, award, judgement
or decree applicable to the Purchaser;
<PAGE> 17
-17-
(d) Execution And Enforceability: The Purchaser has taken all
actions necessary to authorize the execution and delivery of
this Agreement, and, as of the Closing Date, the Purchaser
shall have taken all actions necessary to authorize and
complete the purchase of the Assets in accordance with the
provisions of this Agreement. This Agreement has been validly
executed and delivered by the Purchaser, and this Agreement
and all other documents executed and delivered on behalf of
the Purchaser hereunder shall constitute valid and binding
obligations of the Purchaser enforceable in accordance with
their respective terms and conditions, subject to the
qualifications that such enforcement may be limited by
bankruptcy, insolvency, liquidation, re-organization or
similar laws of general application relating to or affecting
creditors rights;
(e) Purchaser as Principal: Purchaser is acquiring the Assets as
principal;
(f) No Sales Commission: The Purchaser has not incurred any
obligation or liability, contingent or otherwise, for brokers'
or finders' fees with respect to the transactions herein for
which the Vendor shall have any responsibility;
(g) Investment Canada Act: The Purchaser shall comply with the
Investment Canada Act to the extent, if any, that it is
applicable to the transactions herein; and
(h) Well Licence Transfers: The Purchaser is validly able to be
assigned all well licences in respect of those wells for which
the Vendor is the licencee.
6.03 Survival Of Representations And Warranties
Each Party acknowledges that the other may rely on the
representations and warranties made by such Party pursuant to
Clause 6.01 or 6.02, as the case may be. The representations and
warranties in Clauses 6.01 and 6.02 shall be true on the Effective
Date and on the Closing Date, and such representations and
warranties shall continue in full force and effect and shall
survive the Closing Date for a period of one (1) year, for the
benefit of the Party for which such representations and warranties
were made. No claim or action shall be commenced with respect to a
breach of any such representation or warranty, unless, within such
period, written notice specifying such breach in reasonable detail
has been provided to the Party which made such representation or
warranty.
6.04 No Merger
The representations and warranties in Clauses 6.01 and 6.02 shall
be deemed to apply to all assignments, conveyances, transfers and
other documents conveying any of the Assets from the Vendor to the
Purchaser. There shall not be any merger of any of such
representations or warranties in such assignments, conveyances,
transfers or other documents, notwithstanding any rule of law,
equity or statute to the contrary, and all such rules are hereby
waived.
6.05 No Additional Representations Or Warranties By Vendor
A. The Vendor makes no representations or warranties to the
Purchaser in addition to those expressly enumerated in Clause
6.01. Except and to the extent provided in Clause 6.01, the
Vendor does not warrant title to the Assets or make
<PAGE> 18
-18-
representations or warranties with respect to: (i) the
quantity, quality or recoverability of Petroleum Substances
respecting the Lands; (ii) any estimates of the value of the
Assets or the revenues applicable to future production from
the Lands; (iii) any engineering, geological or other
interpretations or economic evaluations respecting the Assets;
(iv) the rates of production of Petroleum Substances from the
Lands; (v) the quality, condition or serviceability of the
Assets; or (vi) the suitability of their use for any purpose.
Without restricting the generality of the foregoing, but
subject always to Clause 6.03, the Purchaser acknowledges that
it has made its own independent investigation, analysis,
evaluation and inspection of the Vendor's interests in the
Assets and the state and condition thereof and that it has
relied solely on such investigation, analysis, evaluation and
inspection as to its assessment of the condition, quantum and
value of the Assets.
B. Except with respect to the representations and warranties in
Clause 6.01, the Purchaser forever releases and discharges the
Vendor and its directors, officers, servants, agents and
employees from any claims and all liability to the Purchaser
or the Purchaser's assigns and successors, as a result of the
use or reliance upon advice, information or materials
pertaining to the Assets which was delivered or made available
to the Purchaser by the Vendor or its directors, officers,
servants, agents or employees prior to or pursuant to this
Agreement, including, without limitation, any evaluations,
projections, reports and interpretive or non-factual materials
prepared by or for the Vendor, or otherwise in the Vendor's
possession.
7.00 THIRD PARTY RIGHTS AND CONSENTS
7.01 Preferential Right Of Purchase
A. If any of the Assets are subject to a preferential right of
purchase or similar restriction the Vendor shall promptly
serve all notices as are required under such preferential
purchase. Unless otherwise agreed by the Purchaser, each such
notice shall include a request for a waiver of any
preferential or similar right to purchase any of the Assets.
B. The Purchaser, acting reasonably, shall advise the Vendor of
the value placed by the Purchaser, for the purposes of this
purchase, on any of the Assets with respect to which the
Vendor is required to give notice pursuant to this Clause, and
such allocation shall be used for the purposes of this Clause
except where such allocations are deemed to be unreasonable by
the Vendor.
C. The Purchaser shall indemnify and save the Vendor and its
directors, officers, servants, agents and employees harmless
from and against all losses, costs, damages and expenses
whatsoever which the Vendor and its directors, officers,
servants, agents and employees may sustain, pay or incur as a
result of any matter or thing arising out of, resulting from,
attributable to or connected with the Purchaser's placement of
value on any of the Assets with respect to which the Vendor is
required to give notice pursuant to this clause.
D. If the holder of any preferential right to purchase any of the
Assets exercises such right, Vendor shall notify Purchaser in
writing forthwith and such right shall not be considered a
Title Defect.
<PAGE> 19
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7.02 Consents Under Sales Agreements
The Parties acknowledge that the consent to assignment from buyers
under production sales agreements included in the Assets may not
be obtainable until after Closing. The Parties shall cooperate in
seeking such consents.
7.03 Operatorship And Third Parties
Nothing in this Agreement shall be interpreted as any assurance by
the Vendor that the Purchaser will be able to serve as operator
with respect to any of the Assets in which interests are held by
third parties, whether or not such Assets are presently operated
by the Vendor. Where Paramount is the operator Paramount shall,
after Closing, recommend to third parties that the Purchaser be
appointed operator of the Assets.
8.00 PURCHASER'S REVIEW
8.01 Vendor To Provide Access
The Vendor shall, subject to the Regulations and all contractual
and fiduciary obligations and limits:
(a) at the office of Paramount during normal business hours,
provide the Purchaser and its nominees reasonable access to
the Vendor's records, files and documents directly relating to
the Assets, for the purpose of the Purchaser's review of the
Assets and the Vendor's title thereto, including, without
limitation, the Leases and applicable operating agreements,
unit agreements, overriding royalty agreements and production
sale contracts; and
(b) subject to sub-clause 10.02(f), provide the Purchaser and its
nominees with a reasonable opportunity to inspect the Assets
at the Purchaser's sole cost, risk and expense, insofar as the
Vendor can reasonably provide such access to the Assets.
8.02 Title Defects
A. The Purchaser shall conduct its review of the Vendor's title
to the Assets with reasonable diligence. Not later than ten
(10) business days prior to the Closing Date, the Purchaser
shall give the Vendor written notice of the Title Defects
which the Purchaser does not waive. Such notice shall specify
such Title Defects in reasonable detail, the Assets directly
affected thereby and the Purchaser's requirements for the
rectification or curing thereof. The Vendor shall thereupon
diligently make reasonable efforts to cure such Title Defects
on or before the Closing Date.
B. Insofar as the Title Defects described in the Purchaser's
notice (the "Affected Interests") have not been cured to the
Purchaser's reasonable satisfaction, but subject at all times
to Clause 10.04 with respect to prior third party rights, the
Purchaser may elect, at or before the Closing Date by notice
to the Vendor, to do one of the following:
<PAGE> 20
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(a) where the cumulative amount by which the value of the Assets
has been reduced is, in Purchaser's opinion, acting
reasonably, less than Four Hundred and Seventy-Five Thousand
($475,000.00) Dollars, Purchaser shall complete the purchase
of Vendor's interest in and to the Assets without any
adjustment of the Purchase Price.
(b) where the cumulative amount by which the value of the Assets
has been reduced is, in Purchaser's opinion, acting
reasonably, equal to or greater than Four Hundred and
Seventy-Five Thousand ($475,000.00) Dollars, the following
options shall arise:
(i) the Parties may delay Closing to a mutually agreeable
time and date during which time Vendor shall make further
attempts to cure or remove the uncured Title Defects. In
the event that said Title Defects have not been cured
prior to December 1, 1997, the elections set out in this
Paragraph 8.02B(b) shall once again be made; or
(ii) Purchaser may waive the uncured Title Defects, in which
case all of Vendor's interest in and to the Assets shall
be purchased by Purchaser without an adjustment to the
Purchase Price; or
(iii)Purchaser shall purchase Vendor's interest in and to the
Assets in which case the Purchase Price shall be adjusted
by an amount equal to that number arrived at by
subtracting $475,000.00 from the value attributed to the
Affected Interest by the Parties, or any arbitrator, such
that only positive values resulting from this calculation
are to be adjusted. Provided that in reaching the
mutually agreed upon value, the Parties, or any
arbitrator appointed hereunder, shall take into account
the probability of the Title Defect actually
materializing having regard to the particular
circumstances.
(c) where the cumulative amount by which the value of the Assets
has been reduced, in Purchaser's opinion, acting reasonably,
by Twenty (20%) Percent or more of the Purchase Price then, in
addition to the elections set out in Clause 8.02B(b), either
Vendor or Purchaser may terminate this Agreement upon written
notice to the other Party, in which case Vendor shall
forthwith return the Deposit and accrued interest to Purchaser
and the Parties shall have no further obligation to each other
hereunder, and shall have no right to claim further damages or
other remedies.
C. If the Purchaser elects to proceed with Closing pursuant to
Paragraph 8.02B(b)(iii) and the Parties have neither previously
determined the portion of the Purchase Price applicable to the
Assets directly affected by the applicable uncured Title Defects
nor otherwise agreed upon such portion prior to the Closing Date,
the following shall apply:
(a) the Purchaser shall deduct from the Purchase Price an amount
equal to the Purchaser's good faith estimate of the portion of
the Purchase Price applicable to the directly affected Assets,
as of the Effective Date, less $475,000.00 and deposit such
amount with a Canadian chartered bank in an interest bearing
account, in trust for the purposes of this Agreement;
<PAGE> 21
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(b) the Parties then shall refer the determination of the portion
of the Purchase Price applicable to the directly affected
Assets, as of the Effective Date, to an arbitrator pursuant to
Article 9.00, insofar as they are unable to agree on such
portion; and
(c) the funds retained in trust pursuant to Paragraph (b) of this
Subclause and the accrued interest thereon shall be released
from such trust account following such determination. To the
extent (if any) that the Purchaser's estimate of the
applicable portion of the Purchase Price varies from the
amount determined pursuant to Paragraph (b) of this Subclause,
the excess or deficiency and the interest which accrued
thereon shall be paid by the Purchaser to the Vendor within
fifteen (15) days of such determination or be retained by the
Purchaser, as applicable.
D. If a portion of the Assets is excluded from the Closing pursuant
to Article 7.00:
(a) the terms "Assets", "Lands", "Leases", "Miscellaneous
Interests", "Petroleum and Natural Gas Rights" and "Tangibles"
shall be construed as meaning only that portion of the subject
matter of those terms with respect to which Closing occurs;
(b) the Purchase Price shall be reduced by the aggregate value
attributed to the Assets with respect to which Closing does
not occur, the term "Purchase Price" shall then be construed
to be such reduced amount and the allocation of the Purchase
Price pursuant to Clause 2.02 shall be determined by agreement
of the Parties or by Article 9.00 and adjusted accordingly.
9.00 ARBITRATION
9.01 Reference To Arbitration
A. Insofar as the Parties are unable to agree on any matter which
expressly may be referred to arbitration hereunder, either
Party may serve the other Party written notice that it wishes
such matter referred to arbitration.
B. The Parties shall meet within seven (7) days of the receipt of
a notice issued pursuant to Subclause 9.01A, to attempt to
agree on a single arbitrator qualified by experience,
education and training, to determine such matter. If the
Parties are unable to agree on the selection of the
arbitrator, the Party which issued such notice shall forthwith
make application to a judge of the Court of Queen's Bench of
the Province of Alberta pursuant to the Arbitration Act of the
Province of Alberta (S.A. 1991 c.43-1, as amended from time to
time, hereinafter referred to as the "Arbitration Act") for
the appointment of a single arbitrator, and failing such
action on the part of the Party which issued such notice, the
other Party may make such application.
9.02 Proceeding
A. The arbitrator selected pursuant to Clause 9.01 shall proceed
as soon as is practicable to hear and determine the matter in
dispute, and shall be directed to
<PAGE> 22
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provide a written decision respecting such matter within
forty-five (45) days of appointment. The Parties shall provide
such assistance and information as may be reasonably necessary to
enable the arbitrator to determine such matter.
B. Except to the extent modified in this Article, the arbitrator
shall conduct any arbitration hereunder pursuant to the provisions
of the Arbitration Act.
10.00 CONDITIONS TO CLOSING
10.01 Conditions for the Benefit of Vendor and Purchaser
(a) Required Approvals It is a condition precedent to Closing that
any and all approvals required under the Regulations
(including, without limitation, any approval required under
the Investment Canada Act) required to permit the transactions
to be completed shall have been obtained or that such approval
requirement shall have been waived or otherwise lapsed. Each
of the Parties shall use all reasonable efforts to obtain any
such consents. Notwithstanding the foregoing, the Parties
acknowledge that the consent of buyers under production sale
agreements and approvals required for the transfer of a well
licence from the Vendor to the Purchaser may not be obtainable
until after Closing and that the acquisition of such consents
shall not be a condition precedent to Closing.
10.02 Conditions For Benefit Of Purchaser
The obligation of the Purchaser to complete the purchase hereunder
is subject to the following conditions precedent:
(a) No Substantial Damage: There shall have been no damage to or
alteration of any of the Assets between the Effective Date and
the Closing Date which, in the Purchaser's reasonable opinion,
would materially and adversely affect the value of the Assets,
except and to the extent approved in writing by the Purchaser,
and the Vendor shall have delivered to the Purchaser a
certificate of a Vice President, Corporate Secretary or other
senior officer of the Vendor, dated as of the Closing Date,
that, to the best of the information, knowledge and belief of
the Vendor, there has been no such damage or alteration of any
of the Assets during such period, provided that a change in
the prices at which Petroleum Substances may be sold in no
event shall be regarded as material damage to or an alteration
of the Assets;
(b) Availability Of Documents: The Vendor shall have provided the
nominees of the Purchaser with reasonable access to the
Vendor's records and documents pertaining to the Assets
pursuant to Article 8.00, in order to confirm the Vendor's
title to the Assets;
(c) Material Compliance By Vendor: The Vendor shall have performed
or complied in all material respects with each of the terms,
covenants and conditions of this Agreement to be performed or
complied with by the Vendor at or prior to the Closing Date;
(d) Certificate That Representations Are Correct: The Vendor shall
have delivered to the Purchaser the certificate of a
Vice-President, Corporate Secretary or other
<PAGE> 23
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senior officer of the Vendor, in the form of Schedule "D" and
dated as of the Closing Date, to the effect that each of the
covenants, representations and warranties contained in Clause
6.01 was, as of the Effective Date, and is, as of the Closing
Date, true and correct in all material respects, except for
those changes thereto which necessarily arise as a consequence
of the operation of the provisions of this Agreement, as
specifically provided herein;
(e) Delivery Of Conveyance Documents: The Vendor shall have
delivered to the Purchaser those of the Conveyance Documents
described in Paragraph 3.03A(a) executed by the Vendor and
those other documents and materials described in Paragraphs
3.03 A(b), (c), (d), (e) and (f) which are to be provided to
the Purchaser at Closing;
(f) Physical Review of Assets: The Vendor shall permit Purchaser
and its nominees to conduct an evaluation and physical review
of any or all of the Assets. The purpose of such review is for
the Purchaser to satisfy itself as to the environmental
condition of the Assets. If, in the reasonable opinion of the
Purchaser, material and adverse deficiencies are identified,
Purchaser may, by written notice issued on or before September
22, 1997, terminate this Agreement. If Purchaser elects to
proceed, or fails to notify Vendor of any deficiencies within
the time frame herein contemplate, Purchaser acknowledges that
the Assets shall be purchased on an 'as is, where is basis;
(g) Transfer of Well Licences: If Purchaser obtains a written
notification from the Alberta Energy and Utilities Board
relative to new operatorship requirements to be imposed on the
Purchaser as a condition for approval of the transfer of well
licences to the Purchaser, which aggregate new operatorship
requirements include posting cash security in excess of
$250,000.00, then Purchase may, within five (5) business days
of execution of this Agreement but no later than October 30,
1997, elect to terminate this Agreement;
(h) No Unidentified Preferential Right of Purchase: If the Vendor
has omitted to identify in Schedule "A" a preferential right
of purchase or similar restriction that was both material and
adverse taking into account the magnitude of the Lands
affected by the unidentified preferential right of purchase,
then Purchaser may, on or before Closing, terminate this
Agreement;
(i) No Clause 5.05 Termination: Purchaser has not terminated this
Agreement in accordance with Clause 5.05; and
(j) Contractual Arrangements: On or before Closing, Purchaser
shall be satisfied, acting reasonably, with the existing
contractual arrangements for the transportation, processing
and sale of the Petroleum Substances, to ensure that the terms
thereof are not materially adverse to the interest of the
Purchaser.
10.03 Conditions For Benefit Of Vendor
The obligation of the Vendor to complete the sale hereunder is subject to
the following conditions precedent:
<PAGE> 24
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(a) Material Compliance By Purchaser: The Purchaser shall have
performed or complied in all material respects with each of
the terms, covenants and conditions of this Agreement to be
performed or complied with by the Purchaser at or prior to the
Closing Date;
(b) Payment Of Purchase Price: The Purchaser shall have tendered
to the Vendor the Purchase Price and the applicable goods and
services tax (if any) in the manner provided for in Clause
2.03, subject to any adjustments provided for in Article 4.00
and any alteration expressly provided for herein;
(c) Certificate That Representations Are Correct: The Purchaser
shall have delivered to the Vendor a certificate of a
Vice-President, Corporate Secretary or other senior officer of
the Purchaser, in the form of Schedule "D" and dated as of the
Closing Date, to the effect each of the covenants,
representations and warranties contained in Clause 6.02 was,
as of the Effective Date, and is, as of the Closing Date, true
and correct in all material respects; and
(d) Delivery Of Conveyance Documents: The Purchaser shall have
delivered to the Vendor at least one copy of the Conveyance
Documents described in Paragraph 3.03B(b) executed by the
Purchaser.
10.04 Waiver Of Conditions
The conditions in Clauses 10.02 and 10.03 are for the sole benefit
of the Purchaser and the Vendor respectively. The Party for the
benefit of which such conditions have been included may waive any
of them, in whole or in part, by written notice to the other
Party, without prejudice to any of the rights of the Party waiving
such condition, including, without limitation, reliance on or
enforcement of the representations, warranties or covenants which
are preserved and pertain to conditions similar to the condition
so waived. However, the Purchaser may not waive the existence and
operation of any preferential right of a third party to purchase
any of the Assets.
10.05 Failure To Satisfy Conditions
(a) In the event any of the conditions in Clauses 10.02 or 10.03
has not been satisfied at or before the Closing Date and such
condition has not been waived by the Party for the benefit of
which such condition has been included, such Party may
terminate this Agreement by written notice to the other Party.
However, a Party may not terminate this Agreement in such
manner after Closing, and its remedies thereafter, if any,
with respect to the failure to satisfy such condition shall be
limited to damages.
(b) If Purchaser terminates this Agreement pursuant to any one of
the conditions contained in Clause 10.02, Vendor shall
forthwith return the Deposit and any accrued interest thereon
to Purchaser with no right to claim further damages or other
remedies from Vendor. Other than as outlined in Subclause
8.02B(c), if Vendor terminates this Agreement, Vendor shall be
entitled to retain the Deposit and any accrued interest
thereon as liquidated damages and not as a penalty, with no
right to claim further damages or other remedies from
Purchaser.
10.06 Parties To Exercise Diligence With Respect To Conditions
<PAGE> 25
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Each Party shall proceed diligently, honestly and in good faith
and use all reasonable efforts with respect to all matters within
its control to satisfy the conditions referred to in Clauses
10.01, 10.02 and 10.03.
11.00 CONFIDENTIALITY
11.01 Information respecting the Assets shall be retained in confidence
and used only for the purposes of this acquisition, provided that
the Purchaser's rights to use or disclose such information shall
be subject only to any operating, unit or other agreements that
may apply thereto following the Purchaser's acquisition of the
Assets. Any additional information obtained as a result of such
access which does not relate to the Assets shall continue to be
treated as confidential and shall not be used by the Purchaser
without the prior written consent of the Vendor, to the extent
that such information is not in the public domain.
12.00 INTEREST ACCRUES ON AMOUNTS OWING
Any amount owing to a Party by the other Party pursuant to any
provision of this Agreement after Closing and remaining unpaid
shall bear compound interest, as computed monthly, from the day
such amount was due to be paid until the day such amount was paid,
at the rate of two (2%) percent per annum above the Prime Rate
regardless of whether such Party has given the other Party prior
notice of the accrual of interest hereunder.
13.00 LIABILITY AND INDEMNIFICATION
13.01 Responsibility Of Vendor
Subject to Clauses 13.03 and 13.04 and provided that Closing has
occurred, the Vendor shall:
(a) be liable to the Purchaser for all losses, costs, damages and
expenses whatsoever which the Purchaser may suffer, sustain,
pay or incur; and
(b) indemnify and save the Purchaser and its directors, officers,
servants, agents and employees harmless from and against all
claims, liabilities, actions, proceedings, demands, losses,
costs, damages and expenses whatsoever which may be brought
against or suffered by the Purchaser, its directors, officers,
servants, agents or employees or which they may sustain, pay
or incur;
as a direct result of a breach as of the Closing Date of any
warranty or representation of Vendor contained in this Agreement,
except any losses, costs, damages, expenses, claims, liabilities,
actions, proceedings and demands to the extent that the same
either are reimbursed (or reimbursable) by insurance maintained by
the Purchaser or are caused by the gross negligence or wilful
misconduct of the Purchaser, its directors, officers, servants,
agents, employees or assigns. The indemnity granted by the Vendor
herein, however, is not a title warranty and does not provide
either an extension of any representation or warranty contained in
Clause 6.01 or an additional remedy with respect to the Vendor's
breach of such a representation or warranty. Notwithstanding any
provision herein, the liability of the Vendor and the indemnity
hereby granted by the
<PAGE> 26
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Vendor to the Purchaser shall only apply with respect to claims
made within one (1) year following the Closing Date.
13.02 Responsibility Of Purchaser
Provided that Closing has occurred, the Purchaser shall:
(a) be liable to the Vendor for all losses, costs, damages and
expenses whatsoever which the Vendor may suffer, sustain, pay
or incur; and
(b) indemnify and save the Vendor and its directors, officers,
servants, agents and employees harmless from and against all
claims, liabilities, actions, proceedings, demands, losses,
costs, damages and expenses whatsoever which may be brought
against or suffered by the Vendor, its directors, officers,
servants, agents or employees or which they may sustain, pay
or incur;
as a direct result of any matter or thing arising out of,
resulting from, attributable to or connected with the Assets and
occurring or attributable to the period after the Effective Date,
except any losses, costs, damages, expenses, claims, liabilities,
actions, proceedings and demands to the extent that the same
either are reimbursed (or reimbursable) by insurance maintained by
the Vendor or are caused by the gross negligence or wilful
misconduct of the Vendor, its directors, officers, servants,
agents, employees or assigns. Nothing in this Clause, however,
shall operate either to limit any representation or warranty made
by the Vendor pursuant to Clause 6.01 or to affect the Purchaser's
right to make a claim against the Vendor for the breach of such a
representation or warranty within a period of one (1) year
following Closing.
13.03 Limit On Vendor's Responsibility
In no event shall the total of the liabilities and indemnities of
the Vendor under this Agreement, including, without limitation,
any claims relating to its representations and warranties, exceed
the Purchase Price, except in the event of fraud.
13.04 Assets Acquired On "As Is" Basis
Notwithstanding the foregoing provisions of this Article, the
Purchaser acknowledges that it is acquiring the Assets on an "as
is" basis, as of the Effective Date. The Purchaser acknowledges
that it is familiar with the condition of the Assets, including
the past and present use of the Lands and the Tangibles, that the
Vendor has provided the Purchaser with a reasonable opportunity to
inspect the Assets at the sole cost, risk and expense of the
Purchaser (insofar as the Vendor could reasonably provide such
access) and that the Purchaser is not relying upon any
representation or warranty of the Vendor as to the condition,
environmental or otherwise, of the Assets, except as is
specifically made pursuant to Clause 6.01(n). Provided that
Closing has occurred, the Purchaser further agrees that, as of the
Effective Date, it shall:
(a) be solely liable and responsible for any and all losses,
costs, damages and expenses which the Vendor may suffer,
sustain, pay or incur; and
(b) indemnify and save the Vendor and its directors, officers,
servants, agents and employees harmless from any and all
claims, liabilities, actions, proceedings,
<PAGE> 27
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demands, losses, costs, damages and expenses whatsoever which
may be brought against or suffered by the Vendor, its
directors, officers, servants, agents or employees or which
they may sustain, pay or incur;
as a result of any matter or thing arising out of, resulting from,
attributable to or connected with any environmental liabilities
pertaining to the acquired Assets, or any of them, including,
without limitation, damage from or removal of hazardous or toxic
substances, clean-up, Well abandonment and reclamation. Once
Closing has occurred, the Purchaser shall be solely responsible
for all environmental liabilities respecting the Lands, the
abandonment of all Wells on the Lands and the reclamation of the
Lands as between the Vendor and the Purchaser, and hereby releases
the Vendor from any claims the Purchaser may have against the
Vendor with respect to all such liabilities and responsibilities.
Nothing in this Clause, however, shall operate either to limit any
representation or warranty made by the Vendor pursuant to Clause
6.01(n) or to affect the Purchaser's right to make a claim
against the Vendor for the breach of such a representation or
warranty within a period of one (1) year following Closing.
13.05 No Merger Of Legal Responsibilities
The liabilities and indemnities created in this Article shall be
deemed to apply to, and shall not merge in, all assignments,
transfers, conveyances, novations, trust agreements and other
documents conveying any of the Assets from the Vendor to the
Purchaser, notwithstanding the terms of such assignments,
transfers, conveyances, novations and other documents, the
Regulations or any rule of law or equity to the contrary, and all
such rules are hereby waived.
13.06 Responsibility Extends To Legal Costs
Notwithstanding any provision to the contrary contained in this
Article, references to costs in the liability and indemnification
obligations prescribed by Clauses 13.01, 13.02 and 13.04 shall be
deemed to include reasonable legal costs on a solicitor-client
basis.
14.00 WAIVER
14.01 Waiver Must Be In Writing
No waiver by any Party of any breach (whether actual or
anticipated) of any of the terms, conditions, representations or
warranties contained herein shall take effect or be binding upon
that Party unless the waiver is expressed in writing under the
authority of that Party. Any waiver so given shall extend only to
the particular breach so waived and shall not limit or affect any
rights with respect to any other or future breach.
15.00 ASSIGNMENT
15.01 Assignments Before Closing
Prior to Closing, neither Party may assign its interest in or
under this Agreement or to the Assets without the prior written
consent of the other Party, except as may be required by the
Vendor to comply with its obligations respecting any preferential
rights, as provided in Article 7.00.
<PAGE> 28
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15.02 Assignments By Purchaser After Closing
No assignment, transfer or other disposition of this Agreement or
all or any portion of the Assets by the Purchaser after Closing
shall relieve the Purchaser from its obligations to the Vendor
herein. The Vendor shall have the option to claim payment or
performance of such obligations from the Purchaser or the assignee
or transferee, and to bring proceedings in the event of default
against either or all of them, provided that nothing herein shall
entitle the Vendor to receive duplicate payment or performance of
the same obligation.
16.00 NOTICE
16.01 Service Of Notice
Notwithstanding anything to the contrary contained herein, all
notices required or permitted hereunder shall be in writing. Any
notice to be given hereunder shall be deemed to be served properly
if served in either of the following modes:
(a) personally, by delivering the notice to the Party on which it
is to be served at that Party's address for service.
Personally served notices shall be deemed to be received by
the addressee when actually delivered as aforesaid, provided
that such delivery shall be during normal business hours on
any day other than a Saturday, Sunday or statutory holiday in
Alberta. If a notice is not delivered on such a day or is
delivered after the addressee's normal business hours, such
notice shall be deemed to have been received by such Party at
the commencement of the addressee's first business day next
following the time of the delivery; or
(b) by telecopier or telex (or by any other like method by which a
written message may be sent) directed to the Party on which it
is to be served at that Party's address for service. A notice
so served shall be deemed to be received by the addressee
when actually received by it, if received within normal
business hours on any day other than a Saturday, Sunday or
statutory holiday in Alberta or at the commencement of the
next ensuing business day following transmission if such
notice is not received during such normal business hours.
16.02 Addresses For Notices
The address for service of notices hereunder of each of the
Parties shall be as follows:
VENDOR:
PARAMOUNT RESOURCES LTD. J. ARON RESOURCES COMPANY
4000 - First Canadian Centre c/o GOLDMAN SACHS & CO.
350 - 7th Avenue S.W. 23rd Floor, 85 Broad Street
Calgary, Alberta New York, New York
T2P 3W5 USA 10004
Attention: Manager, Land & Legal Attention: Mr. Jonathan Farber
Fax: (403) 262-7994 Fax: (212) 357-4451
<PAGE> 29
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and
c/o BURNET DUCKWORTH & PALMER
First Canadian Centre
1400, 350 - 7 Avenue SW
Calgary, Alberta
T2P 3N9
Attention: Mr. Ken Stickland
Fax: (403) 260-0330
PURCHASER:
COTTON VALLEY RESOURCES CORPORATION
8350 N. Central Expressway, Suite ME030
Dallas, Texas
USA 75205
Attention: Mr. Eugene Soltero and Mr. James Hogue
Fax: (214) 353-4294
and
c/o APEX ENERGY CONSULTANTS INC.
Suite 700, 815 - 8 Avenue SW
Calgary, Alberta
T2P 3P2
Attention: Mr. Michael Kamis
Fax: (403) 262-3748
16.03 Right To Change Address
A Party may change its address for service by notice to the other
Party, and such changed address for service thereafter shall be
effective for all purposes of this Agreement.
17.00 PUBLIC ANNOUNCEMENTS
17.01 Parties To Discuss Press Releases
A. The Parties shall cooperate with each other in relaying to
third parties information concerning this Agreement and the
transactions contemplated herein, and shall discuss drafts of
all press releases and other releases of information for
dissemination to the public pertaining hereto. However,
nothing in this Clause shall prevent a Party from furnishing
any information to any governmental agency or regulatory
authority or to the public, insofar only as is required by the
Regulations or securities laws applicable to such Party,
provided that a Party which proposes to make such a public
disclosure shall, to the extent reasonably possible, provide
the other Party with a draft of such statement a sufficient
time
<PAGE> 30
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prior to its release to enable such other Party to review such
draft and advise that Party of any comments it may have with
respect thereto.
B. Notwithstanding Subclause 17.01A, the Vendor shall be
permitted to disclose information pertaining to this Agreement
and the identity of the Purchaser, to the extent required to
enable the Vendor to fulfill its obligations pertaining to
preferential rights of purchase and other third party rights,
in accordance with Article 7.00.
17.02 Signs And Notification To Governmental Agencies
Following Closing, the Vendor may remove any signs which indicate
the Vendor's ownership or operation of the Assets. If the
Purchaser will be the operator of the Assets, it shall be the
responsibility of the Purchaser to erect or install any signs
required by governmental agencies which pertain to the Assets. In
addition, the Purchaser shall be responsible for promptly advising
governmental agencies, contractors, suppliers and other affected
third parties of the Purchaser's interest in the Assets, subject
to Article 7.00 and Clause 10.01.
18.00 MISCELLANEOUS PROVISIONS
18.01 Further Assurances
At the Closing Date and thereafter as may be necessary, the
Parties shall execute, acknowledge and deliver such instruments
and take such other actions as may be reasonably necessary to
fulfill their respective obligations under this Agreement. The
Vendor shall cooperate with the Purchaser as reasonably required
to secure execution by third parties of the documents referred to
in Paragraph 3.03A(b).
18.02 Governing Law
This Agreement shall be subject to and be interpreted, construed
and enforced in accordance with the laws in effect in the Province
of Alberta. Each Party accepts the jurisdiction of the courts of
the Province of Alberta and all courts of appeal therefrom.
18.03 Time
Time shall be of the essence in this Agreement.
18.04 No Amendment Except In Writing
Subject to Clause 16.03, this Agreement may be amended only by
written instrument executed by the Vendor and the Purchaser.
18.05 Consequences Of Termination
If this Agreement is terminated in accordance with its terms prior
to Closing, then except for the provisions of Articles 11.00 and
12.00 and the covenants, warranties, representations or other
obligations breached prior to the time at which such termination
occurs, the Parties shall be released from all of their
obligations under this Agreement other than in respect of the
provisions of Subclause 2.03(a). If this Agreement is so
<PAGE> 31
-31-
terminated, the Purchaser shall promptly return to the Vendor
all materials delivered to the Purchaser by the Vendor hereunder,
together with all copies of them that may have been made by or for
the Purchaser.
18.06 Supersedes Earlier Agreements
This Agreement supersedes all other agreements between the Parties
with respect to the Assets and expresses the entire agreement of
the Parties with respect to the transactions contained herein.
18.07 Enurement
Subject to the provisions of Article 15.00, this Agreement shall
be binding upon and enure to the benefit of the Parties and their
respective successors and permitted assigns.
18.08 Obligations of Vendor
Notwithstanding anything contained herein to the contrary, the
rights, duties, obligations, indemnities and liabilities of each
of the Parties comprising the Vendor are several and not joint or
collective and the representations and warranties made by the
Vendor shall be construed as being made by each of the Parties
comprising the Vendor with respect only to itself and in any event
only as to its percentage share, as set out in Clause 4.01D, in
the Assets. Purchaser's right of recovery, if any, from each Party
comprising Vendor shall be limited to that portion of the Purchase
Price received by each such Party.
18.09 Counterpart Execution
This Agreement may be executed in counterpart and when each Party
has executed a counterpart, all counterparts taken together shall
constitute one agreement.
<PAGE> 32
IN WITNESS WHEREOF the parties have duly executed this Agreement.
(VENDOR) PARAMOUNT RESOURCES LTD.
PER: /s/ CHARLES E. MORIN
-------------------------------
Charles E. Morin L.L.B.
Manager, Land & Legal
PER: /s/ G. BARRY PADLEY
-------------------------------
G. Barry Padley
Chief Financial Officer
J. ARON RESOURCES COMPANY
PER: /s/ DONALD R. TEXTAR
-------------------------------
PER:
-------------------------------
(PURCHASER) COTTON VALLEY RESOURCES CORPORATION
PER: /s/ GENE SOLTERO, CEO
-------------------------------
PER:
-------------------------------
THIS COUNTERPART EXECUTION PAGE IS ATTACHED TO AN AGREEMENT OF PURCHASE AND
SALE DATED OCTOBER 1, 1997 AMONG PARAMOUNT RESOURCES LTD., J. ARON RESOURCES
COMPANY AND COTTON VALLEY RESOURCES CORPORATION.
<PAGE> 1
EXHIBIT 10.9
AGREEMENT
OF
PURCHASE AND SALE
BETWEEN
PHILLIPS PETROLEUM COMPANY, SELLER
AND
COTTON VALLEY ENERGY, INC., PURCHASER
DATED THE 14TH DAY OF JANUARY, 1998
AND MADE EFFECTIVE THE 1ST DAY OF JANUARY, 1998
<PAGE> 2
TABLE OF CONTENTS
I. Effective Date
II. Sale Price and Closing
III. Failure to Close
IV. Seller's Representations
V. Purchaser's Representations
VI. Property Review
VII. Obligations of Seller and Purchaser
VIII. Gas Imbalances
IX. Environmental Conditions/Indemnities
X. Operations
XI. Conditions of Closing
XII. Post-Closing Obligations
XIII. Final Conditions
Exhibit "A" : Properties and Oil and Gas Leases
Exhibit "B" : Assignment and Bill of Sale
Exhibit "C" : Property Transfer Accounting Agreement
Exhibit "D" : Dispute Resolution
<PAGE> 3
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement is dated as of the 14th day of January,
1998, between PHILLIPS PETROLEUM COMPANY, a Delaware corporation (hereinafter
referred to as "Seller"), with a regional office address at P. O. Box 1967,
Houston, Texas 77251-1967, and COTTON VALLEY ENERGY, INC., an Oklahoma
corporation (hereinafter referred to as "Purchaser"), whose address is 8350
North Central Expressway, Suite M2030, Dallas, Texas 75206.
WHEREAS, Seller is the owner of certain properties located in Caddo
County, Oklahoma, specifically described in Exhibit "A", attached hereto and
made a part hereof; and
WHEREAS, Seller desires to sell and Purchaser desires to acquire all of
Seller's right, title and interest in and to the following (hereinafter
collectively referred to as the "Assets"):
- the oil and gas lease(s) described in Exhibit "A" insofar as
same covers and pertains to the acreage and depths
specifically described in said Exhibit (hereinafter referred
to as the "Leases", whether one or more),
- all permits, licenses, easements, surface leases and rights of
way of every kind as may be assignable relating solely and
exclusively to operations conducted on the Leases,
- any contracts or agreements as may be assignable, including
but not limited to, unit agreements, joint operating
agreements, farmout and farmin agreements, pooling agreements,
gas contracts, and other validly existing agreements, whether
of record or not, insofar as same pertain to operations
conducted on the Leases and/or to production therefrom, save
and except Seller shall retain any calls on production reserved
or created under any such contracts or agreements, and
- the wells, equipment, and personal property located on the
Leases and being used solely and exclusively in connection with
the production of oil and gas therefrom, provided that Seller
reserves and shall retain vehicles, tools, rental equipment,
office equipment, communications equipment, computer equipment,
and software and further reserves and retains any surface
equipment which is not in operational use on the Leases
subsequent to the Effective Date and is removed prior to
Closing.
SAVE AND EXCEPT intellectual property, patents copyrights, names,
logos, trade secrets, and proprietary information.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
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<PAGE> 4
I. EFFECTIVE DATE
The effective date of the sale and purchase provided for in this Agreement
shall be January 1, 1998 at 7:00 a.m. local time for all purposes, including
apportionment of revenues, expenses and production (hereinafter referred to as
the "Effective Date").
II. SALE PRICE AND MANNER OF PAYMENT
(a) The sale price for the Assets shall be the sum of Four Million
Dollars ($4,000,000.00) (hereinafter referred to as the "Sale Price"). Payment
of the Sale Price shall be made on or before Closing (as hereinafter defined)
by cashier's check or by wire transfer to Seller.
(b) The consummation of the transaction contemplated by this
Agreement (hereinafter referred to as the "Closing") shall take place in
Seller's office located in Houston, Texas on May 31, 1998, or at such other
place to which the parties may agree in writing or on such earlier date as
acceptable to both parties (hereinafter referred to as the "Closing Date").
(b) At the Closing, the following shall occur:
(i) Seller shall execute, acknowledge and deliver to
Purchaser an Assignment and Bill of Sale in the form attached hereto
as Exhibit "B" assigning and transferring the Assets to Purchaser.
(ii) Purchaser shall provide written documentation
establishing to Seller's satisfaction that Purchaser has complied or
will comply with all applicable laws and regulations pertaining to the
operation or ownership of wells including, without limitation,
regulations pertaining to the plugging and abandonment of dry or
inactive well(s) included in the Assets. Such documentation shall
include evidence of filing of an appropriate bond, surety letter,
letter of credit or proof of insurance in a form acceptable to the
governmental agency or agencies having jurisdiction or regulatory
authority over such well(s).
(iii) Subject to the provisions of Article X, Seller shall
provide with copies of executed change of operator forms on all wells
(active or inactive) operated by Seller, as required by the applicable
regulatory body, to effect a change of operator for the Assets. Seller
shall be responsible for filing such forms with the applicable
regulatory body following Closing and shall be entitled to recover any
fees related thereto in the final accounting provided for in
Sub-article XIII(f).
(iv) Seller and Purchaser shall execute and deliver a
Property Transfer Accounting Agreement substantially in the form of
Exhibit "C".
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<PAGE> 5
III. LIQUIDATED DAMAGES
(a) In the event Purchaser and Seller fail to close this
transaction at the time and place specified in Article III then this Agreement
shall terminate and neither party shall thereafter have any further obligation
to the other party, except however, if Purchaser has met all of the conditions
of closing applicable to Purchaser, and is ready and able to close and willing
to waive any conditions of closing applicable to Seller which Seller has not
met, and Seller fails or refuses to close, Purchaser shall be entitled to
liquidated damages in the amount of $1,000,000.00.
(b) It is expressly agreed and understood that the parties have
specifically negotiated and bargained for the time of Closing as set forth in
Article III, that time is of the essence in Closing, and that failure to close
and consummate this transaction in the time and manner specified in Article III
shall constitute a material breach of this Agreement which permits the remedies
set forth in sub-article III(a).
IV. SELLER'S REPRESENTATIONS
Seller represents and warrants to and with Purchaser that:
(a) Seller is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Delaware and Seller is duly
qualified to carry on its business in the state in which the Assets are
located.
(b) Seller has all requisite power and authority to carry on its
business as presently conducted, to enter into this Agreement, to sell the
Assets on the terms described in this Agreement, and to perform its obligations
hereunder.
(c) To the best of Seller's knowledge, there are no actions, suits,
proceedings or agency enforcement actions pending against the Assets other than
those listed in Exhibit "A".
(d) Seller will protect, defend and indemnify Purchaser from and
against, any liability or expense as a result of any undertakings or agreements
of Seller for brokerage fees, finder's fees, agent's commissions or other
similar forms of compensation in connection with this Agreement or any agreement
or transaction contemplated hereby.
(e) If any mortgage, deed of trust, or similar lien created by
Seller exists with respect to the Assets, Seller will obtain and file of record
a release of same.
(f) The assignment of the Assets from Seller to Purchaser shall be
without warranty of title, either express or implied, and shall be subject to
all validly existing encumbrances, other than those referred to in sub-article
V(e) above, which pertain to the Leases or other assets.
- 3 -
<PAGE> 6
(g) THE EXPRESS REPRESENTATIONS OF SELLER CONTAINED IN THIS
AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ANY OTHER REPRESENTATIONS OR
WARRANTIES. SELLER EXPRESSLY DISCLAIMS AND NEGATES AND PURCHASER HEREBY
WAIVES, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE QUALITY, QUANTITY OR
VOLUME OF RESERVES, OIL, GAS OR OTHER HYDROCARBONS, IF ANY, IN OR UNDER THE
LEASES; THE ENVIRONMENTAL CONDITION, EITHER SURFACE OR SUBSURFACE, OR OTHER
CONDITION OF THE ASSETS; OR THE OWNERSHIP OR OPERATION OF THE ASSETS OR ANY
PART THEREOF. SELLER DOES NOT MAKE OR PROVIDE, AND PURCHASER HEREBY WAIVES,
ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO THE QUALITY,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO SAMPLES, OR
CONDITION OF THE ASSETS OR ANY PART THEREOF. SELLER DISCLAIMS AND NEGATES, AND
PURCHASER HEREBY WAIVES, ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS,
IMPLIED OR STATUTORY. THE PERSONAL PROPERTY, EQUIPMENT, IMPROVEMENTS, FIXTURES
AND APPURTENANCES CONVEYED AS PART OF THE ASSETS ARE SOLD AND PURCHASER
ACCEPTS SAME "AS IS, WITH ALL FAULTS".
V. PURCHASER'S REPRESENTATIONS
Purchaser represents and warrants to and with Seller that:
(a) Purchaser is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Oklahoma and Purchaser is
duly qualified to carry on its business in the state in which the Assets are
located.
(b) Purchaser has all requisite power and authority to carry on
its business as presently conducted, to enter into this Agreement, to purchase
the Assets on the terms described in this Agreement, and to perform its
obligations hereunder.
(c) Purchaser is now, and hereafter shall continue to be,
qualified to own Federal and State oil, gas and mineral leases in all
jurisdictions where such leases lie, if such leases are included in the Assets,
and the consummation of the transactions contemplated hereby will not cause
Purchaser to be disqualified as such an owner or to exceed any acreage
limitation imposed by any law, statute, rule, or regulation.
(d) Purchaser will protect, defend, and indemnify Seller from and
against, any liability or expense as a result of undertakings or agreements of
Purchaser for brokerage fees or expenses, finder's fees, agent's commissions or
other similar forms of compensation in connection with this Agreement or any
agreement or transaction contemplated hereby.
- 4 -
<PAGE> 7
(e) Purchaser shall not pay any commissions or fees to any
employee, officer or agent of Seller nor favor employees, officers or agents of
Seller with gifts or entertainment of significant cost or value, nor enter into
any business arrangement with employees, officers or agents of Seller other
than as representative of Seller, without Seller's written approval.
VI. PROPERTY REVIEW
(a) Seller shall allow Purchaser access to examine title and such
documents as listed in Article XIV which relate to the Leases at Seller's office
in Houston, Texas. Seller shall not be obligated to perform any title work and
shall not be required to update or supplement abstracts or title opinions.
PURCHASER ACKNOWLEDGES THAT SELLER HAS MADE NO REPRESENTATIONS OR WARRANTIES AS
TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION OR AS TO ITS TITLE TO THE
ASSETS, AND IN ENTERING INTO AND PERFORMING THIS AGREEMENT, PURCHASER HAS
RELIED AND WILL RELY SOLELY UPON ITS INDEPENDENT INVESTIGATION OF AND JUDGMENT
WITH RESPECT TO THE ASSETS, THEIR VALUE, AND SELLER'S TITLE THERETO.
(b) Purchaser shall notify Seller in writing not later than 12:00
noon, central time, May 1, 1998, of any Title Defect which is discovered by
Purchaser. For purposes of this Agreement, a "Title Defect" shall mean that
Seller's title (as to one or more of the Assets) is subject to an outstanding
mortgage, deed of trust, lien or encumbrance not reflected on Exhibit "A".
FAILURE TO TIMELY GIVE SUCH NOTICE SHALL BE DEEMED A WAIVER OF SUCH DEFECTS, IF
ANY, BY PURCHASER. Upon timely receipt of notice of a Title Defect, Seller
may, at its sole discretion, take any steps it believes are reasonable in
attempting to eliminate such defect, but Seller shall be under no obligation to
cure any alleged Title Defect. In the event Seller does not eliminate a Title
Defect, Purchaser shall have the option to either complete the purchase of the
Assets, notwithstanding the alleged Title Defect, or, upon written notice to
Seller, cancel this Agreement and the same shall be of no further force and
effect.
(c) In the event Seller's working interest and net revenue
interest in the Assets is different than the amounts set forth in Exhibit "A";
the Sale Price shall be appropriately adjusted by the same proportion that the
difference between the actual working interest and/or net revenue interest
bears to the working interest and/or net revenue interest set forth in Exhibit
"A".
VII. OBLIGATIONS OF SELLER AND PURCHASER
(a) Purchaser agrees to reimburse Seller for the value of any and
all merchantable stock tank oil and/or condensate produced and saved as of 7:00
a.m. on the Effective Date hereof, at the prevailing market value, adjusted for
grade and gravity. At 7:00 a.m. on the Effective Date hereof, Purchaser and
Seller shall make a joint gas sales meter reading and a joint oil and/or
condensate sales gauge reading. If Purchaser does not participate in such
readings,
- 5 -
<PAGE> 8
Purchaser agrees to accept the readings taken by Seller. All revenues with
respect to Seller's interest in the Assets attributable to the production of
oil, gas, natural gas liquids and other salable substances commencing with
Effective Date shall be for the benefit of Purchaser.
(b) Except as provided for in Articles VII(c), VII(d) and X,
Seller shall retain all risk and liability of whatsoever nature connected with
operations conducted on the Assets prior to the Closing Date and agrees to
indemnify, defend and hold Purchaser harmless from all liabilities, penalties,
claims, causes of action, demands, lawsuits, and expenses associated with the
operations prior to the Closing Date. Seller reserves and retains all claims
and accounts of Seller for recovery of money or damages, rights to insurance
and indemnity coverage, rights to tax refunds, and audit rights, if any, and
adjustments resulting therefrom attributable to the Assets with respect to any
period prior to the Effective Date. Purchaser shall assume all risk and
liability of whatsoever nature connected with operations conducted on the
Assets from and after the Closing Date, and agrees to release, indemnify,
defend and hold Seller harmless from all liabilities, penalties, claims, causes
of action, demands, lawsuits, and expenses associated with the operations from
and after the Closing Date.
(c) Purchaser assumes full responsibility for, and agrees to
release, indemnify, hold harmless and defend Seller, its agents, officers, and
employees from and against all loss, liability, claims, fines, expenses, costs
(including attorney's fees and expenses) and causes of action caused by or
arising out of any federal, state or local laws, rules, orders and regulations
applicable to any waste material or hazardous substances on or included with
the Assets or the presence, disposal, release or threatened release of all
waste material or hazardous substance from the Assets into the atmosphere or
into or upon land or any water course or body of water, including ground water,
whether or not attributable to Seller's activities or the activities of
Seller's officers, employees or agents, or to the activities of third parties
(REGARDLESS OF WHETHER OR NOT SELLER WAS OR IS AWARE OF SUCH ACTIVITIES AND
REGARDLESS OF ANY CLAIMED NEGLIGENCE IN WHOLE OR IN PART ATTRIBUTABLE TO
SELLER) prior to, during or after the period of Seller's ownership of the
Assets. This indemnification and assumption shall apply to liability for
voluntary environmental response actions undertaken pursuant either to the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA),
as such may be amended from time to time, or to any other federal, state or
local law or regulation.
(d) Purchaser agrees to comply with all laws and governmental
regulations with respect to abandonment of wells and/or abandonment of the
leasehold property including, where applicable, plugging of wells, compliance
with laws or rules regarding inactive or unplugged wells, including bonding
requirements, and restoration as specified in the Leases. Purchaser agrees to
release, protect, defend, indemnify and hold Seller, its officers, agents and
employees free and harmless from and against any and all costs, expenses,
claims, demands and causes of action of every kind and character arising out of,
incident to, or in connection with the abandonment of wells and/or abandonment
of and proper disposition of any leasehold property, including, without
limitation, the Leases, any structures, materials, land, wells, casing,
leasehold equipment, and other personal property, plugging requirements or
exceptions thereto, including
- 6 -
<PAGE> 9
bonding requirements, regardless of whether the liability therefor is based in
whole or in part upon some alleged act, negligence or omission of Seller, or of
the Purchaser, or of some other party.
(e) All accounts payable and other costs and expenses with respect
to the Seller's interest in the Assets incurred prior to the Effective Date
shall be the obligation of and be paid by Seller, and those incurred commencing
with the Effective Date shall be the obligation of and be paid by Purchaser.
Purchaser, however, shall have no obligation to Seller for the costs and
expenses that Seller incurred for the purchase of the Niject Gas Treating Plant
and Nitrogen Reinjection Facility located on the East Binger Unit premises, nor
shall Purchaser have any associated rights to the reimbursement to Seller from
the East Binger Unit Working Interest Owners for their share of the purchase of
said Plant and Facility.
(f) All prepaid utility charges applicable to periods following
the Effective Date relating to the Assets shall be prorated as of the Effective
Date pursuant to that Purchase and Sale Agreement dated January 8, 1998 between
Seller and Niject Corporation.
(g) Seller shall transfer to Purchaser possession, responsibility
and liability for the management, administration, and disbursement of any
suspended funds attributable to the interests of third parties and accrued by
Seller, for any reason, pursuant to Seller's disbursement of proceeds from the
sale of production from the property or the Leases and/or units of which the
Assets are a part, to the extent such funds are attributable to production sold
prior to the Effective Date (collectively the "Suspended Funds"). The Suspended
Funds shall be transferred to Purchaser, subject to accounting adjustments, by
wire transfer, in immediately available funds in U.S. dollars for the account
of Purchaser, and Purchaser agrees to indemnify, defend and hold Seller
harmless from any claim relating to Purchaser's disposition and management of
said funds.
Seller shall provide Purchaser a listing of all Suspended Funds,
setting forth the name (if known) of each interest owner, the decimal of
interest suspended, the amount suspended for each interest owner, the reason
the funds are in suspense and the date the interest was first suspended.
Seller shall deliver to Purchaser, as soon after Closing as practicable, a copy
of Seller's records and files that apply to or are related to the Suspended
Funds transferred or assigned to Purchaser.
If, in the administration or disposition of any of the Suspended Funds,
it is determined that Seller suspended excess funds, Purchaser shall promptly
refund to Seller such excess amount.
(h) If monies are received by either party hereto which, under the
terms of this Article, belong to the other party, the same shall immediately be
paid over to the proper party. If an invoice or other evidence of an obligation
is received which is applicable to periods both prior to and after the
Effective Date and is thus, under the terms of the preceding paragraphs,
partially the obligation of Seller and partially the obligation of Purchaser,
then the parties shall consult with each other and each shall promptly pay its
portion of such obligation to the obligee.
- 7 -
<PAGE> 10
(i) All ad valorem taxes relating to the Assets for the tax period
in which the Effective Date occurs shall be prorated as of the Effective Date
between Seller and Purchaser. The portion of such prorated tax liability which
is attributable to Seller shall be credited to Purchaser's account in the final
accounting statement provided for in sub-article XII(f) hereof. Purchaser shall
pay or cause to be paid to the taxing authorities all such taxes relating to
the tax period in which the Effective Date occurs. Purchaser shall supply
Seller with proof of payment promptly after paying same.
All taxes, including, but not limited to, excise taxes, state
severance taxes, ad valorem taxes, and any other local, state, and/or federal
taxes or assessments attributable to the Assets or any part thereof prior to
the Effective Date, remain Seller's responsibility and all deductions, credits
and refunds relating to said taxes, attributable to the Assets or any part
thereof prior to the Effective Date (no matter when received), belong to
Seller. All such taxes attributable to the Assets or any part thereof at and
after the Effective Date are Purchaser's responsibility, and Purchaser shall
reimburse Seller for any such taxes previously paid by Seller and all
deductions, credits, and refunds relating thereto at and after the Effective
Date (no matter when received) belong to Purchaser.
(j) Purchaser shall be liable for any sales tax or other transfer
tax, as well as any applicable conveyance, transfer and recording fees and real
estate transfer stamps or taxes imposed on the transfer of the Assets pursuant
to this Agreement. Purchaser shall defend, indemnify and hold Seller harmless
with respect to the payment of any of these taxes, including any interest or
penalties assessed thereon. If Seller is required by applicable state law to
report and pay these taxes and/or fees, Purchaser shall, upon Seller's
presentation of an invoice, promptly deliver a check to Seller in full payment
of the invoice.
(k) Seller and Purchaser shall each bear their own costs and
expenses, including, but not limited to, attorney's fees and third-party
consultant fees, incurred in connection with the transactions contemplated in
this Agreement.
(l) The sale of the Assets shall be subject to, and Purchaser
shall assume, pay for and perform all duties, liabilities, and obligations
relating to the Assets, including, but not limited to, those imposed or
required by any applicable and valid recorded or unrecorded contracts and
agreements (including, but not limited to, royalties, production payments,
net profits interests, carried working interests, required sale/delivery of
oil or gas in accordance with any existing contracts, or similar burdens and
commitments).
(m) Seller may require that a Letter of Credit in the format
attached as Exhibit "D" hereto, be established with a firm, approved by Seller,
in the below described amounts to insure faithful performance of all lease
obligations from the Effective Date until the requisite government agency
approves the Department of Interior assignments, at which time said Letter of
Credit may be canceled. This temporary letter of credit is to protect Seller's
exposure (plugging,
- 8 -
<PAGE> 11
abandonment, surface restoration, royalty payments, etc.) and is in addition to
any bonds required by the appropriate federal agencies. The responsible federal
agencies may require a period of six (6) months time or longer for their
approval assignment of the Leases. Said letter of credit shall be delivered to
Seller at or before Closing. The maximum amount of such Letter of Credit shall
be one hundred thousand dollars ($100,000.00).
VIII. GAS IMBALANCES
Purchaser hereby assumes any liability and obligation for gas
production imbalances (whether over or under) attributable to the interest
acquired hereunder as of the Effective Date. In assuming this liability,
Purchaser shall not be obligated to make any additional payment over the Sale
Price to Seller and Seller shall not be obligated to refund any of said price
to reimburse Purchaser for any over-balances existing at the time of sale.
IX. ENVIRONMENTAL CONDITIONS/INDEMNITIES
(a) The Assets which have been identified herein and are the
subject of this Agreement have been utilized by Seller for the purpose of
exploration, development, processing, temporary storage, and transportation of
oil, gas and/or condensate. All information, to the best of Seller's knowledge,
regarding any substantial quantity of crude oil and produced water which may
have been spilled or disposed of onsite and the locations thereof, including pit
closures, burial, land farming, land spreading, and underground injection will
be made available to Purchaser at Seller's office within thirty (30) days of the
date of this Agreement; provided, however, that Seller shall not be liable for
unintentional failure to disclose such information. Seller shall provide
information which is a matter of public record or filed with governmental
agencies and which Seller possesses in its files located in its offices.
Purchaser acknowledges that there may have been spills of these materials in the
past onto the Assets described herein. In addition, some oil and gas field
production equipment or flow lines may contain asbestos and/or Naturally
Occurring Radioactive Material (hereinafter referred to as "NORM"). In this
regard, Purchaser expressly understands that NORM may affix or attach itself to
the inside of wells, materials and equipment as scale, or in other forms, and
that said wells, material and equipment located on the property described herein
may contain NORM and that NORM-containing material may be buried or otherwise
disposed of on the Assets. Purchaser also expressly understands that special
procedures may be required for the removal and disposal of asbestos and NORM
from the Assets where it may be found and Purchaser agrees to assume all
liability for such asbestos and NORM and for use of appropriate procedures and
activities required to handle and dispose of same.
(b) Promptly after execution of this Agreement by both parties,
Purchaser shall have the right at its own risk and expense, to conduct or have
conducted an environmental assessment of the Assets. Seller will provide
Purchaser (or its contractor) as may be requested with reasonable access to the
Assets operated by Seller to conduct the environmental assessment. Purchaser
shall release and indemnify and hold harmless Seller, its agents, officers and
employees against any liability or damage to persons or property arising out of
such environmental
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<PAGE> 12
assessment. Such indemnity shall also apply regardless of whether the liability
or damage arises in whole or in part from the negligence of Seller.
(c) Purchaser shall advise Seller in writing of any material
Adverse Environmental Conditions (as hereinafter defined) related to the Assets
and provide evidence thereof on or before May 1, 1998. For purposes of this
sub-article, such conditions shall be "material" only if they will cost in
excess of two percent (2%) of the Sale Price to cure or remedy and were not
disclosed on or before the execution of this Agreement. Not later than ten (10)
days after receipt of such written notice, Seller may either (1) remedy or
agree to remedy such material Adverse Environmental Conditions, (2) agree with
Purchaser on an adjustment to the Sale Price which adjustment shall reflect
Purchaser's cost to remedy such conditions, or (3) remove the asset or assets
from the Assets being conveyed and adjust the Sale Price accordingly; provided
that either Purchaser or Seller may cancel this Agreement if the aggregate
value of any excluded Assets exceeds twenty percent (20%) of the Sale Price. In
the event of such cancellation, neither party shall have any further obligation
hereunder.
As used herein, Adverse Environmental Conditions shall mean
any contamination or condition resulting from any discharge, release, disposal,
production, storage or treatment on or in the Assets or from the Assets to any
other land or body of water wherever located, prior to the Effective Date, of
any wastes, pollutant, contaminants, hazardous materials or other materials or
substances that are subject to regulation under laws in effect as of the
Effective Date relating to the protection of the environment.
(d) Purchaser shall dispose of or discharge any waste from the
Assets (including but not limited to produced water, drilling fluids and other
associated wastes) in accordance with applicable local, state and federal
regulations. To the extent that the Assets are not sold in fee to Purchaser,
Purchaser shall keep records of the types, amounts and location of wastes which
are disposed onsite and offsite. When and if any lease, an interest in which
has been assigned hereunder, is terminated, Purchaser shall take at its sole
expense whatever remedial action or cleanup of the Assets is necessary to meet
any local, state or federal requirements directed at protecting human health
and the environment in effect at that time, as well as whatever action may be
required to meet contractual or lease obligations related to the Assets.
(e) Purchaser, its successors and assigns, hereby releases and
agrees to indemnify and defend Seller, its agents, officers, employees,
successors and assigns, from and against all requirements, obligations, claims,
demands and causes of action, including, without limitation, any civil fines,
penalties, costs of clean-up or plugging liabilities for any and all wells,
brought by any and all persons, including, without limitation, Purchaser's and
Seller's employees, agents, or representatives and any private citizens,
persons, organizations, and any agency, branch or representative of federal,
state or local government, on account of any personal injury or death or damage,
destruction, or loss of property, contamination of natural resources (including
without limitation, soil, air, surface water or ground water) resulting from or
arising out of any liability or obligation caused by or connected with the
presence, disposal or release of any material of any
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<PAGE> 13
kind, including, without limitation, asbestos, NORM, solid waste, pollutants,
contaminants, hydrocarbons, or hazardous substance, in, under, or on the Assets
at the time the Assets are assigned to Purchaser, or thereafter caused by acts
of Purchaser, its employees, representatives, or agents with regard to its use
of the Assets subsequent to the assignment of the Assets pursuant to this
Agreement.
(f) THE INDEMNITIES, ASSUMPTIONS OF OBLIGATIONS, AND RELEASES, AS
SET FORTH IN (a), (b), (d), AND (e) OF THIS ARTICLE IX, SHALL APPLY WITHOUT
REGARD TO WHETHER OBLIGATIONS, LIABILITY, INJURY, DEATH, DAMAGE, DESTRUCTION,
LOSS OR CONTAMINATION IS CAUSED IN WHOLE OR IN PART BY ANY CLAIMED STRICT
LIABILITY, NEGLIGENCE, ACTIVE OR PASSIVE, ON THE PART OF SELLER OR OTHER
INDEMNIFIED PARTY. Such indemnities, assumptions of obligations, and releases
shall be in addition to any other indemnity provisions contained in this
Agreement, and it is expressly understood and agreed that the terms of this
Article shall control over any conflicting terms or provisions contained in
this Agreement and shall survive and remain as valid continuing covenants and
obligations following Closing.
X. OPERATIONS
Seller, as to the portion of the Assets to be conveyed which it now
operates, shall from the date of execution of this Agreement, continue to
operate the same in a good and workmanlike manner until the Closing, when such
operations shall be turned over to and become the responsibility of Purchaser,
unless an applicable unit, pooling, communitization, operating or other
agreement requires otherwise, in which case (unless Purchaser and Seller
otherwise agree) Seller shall continue the physical operation of such portion of
the Assets pursuant to and under the terms of such applicable agreement, until
such time after the Closing as such applicable agreement may require; provided,
however, that Seller shall have no liability as operator to Purchaser for losses
or damages sustained, or liabilities incurred, except as may result directly
from Seller's gross negligence or willful misconduct. Such operations from and
after the Closing shall be conducted by Seller for and on behalf of Purchaser,
and Seller shall make appropriate charges to the to the Purchaser pursuant to
any applicable operating agreement. In the absence of any applicable operating
agreement, for any such services as operator of the Assets (or portions thereof)
performed by Seller from and after the Closing, Purchaser shall pay to Seller
all reasonable and necessary expenses incurred by Seller in such operation, or
in the protection or maintenance of the Assets. Any such charges and expenses
shall be recovered by Seller as part of the final accounting described in
sub-article XIII(f).
XI. CONDITIONS OF CLOSING
Each party's obligation to consummate the transaction provided for
herein is subject to the satisfaction or waiver by the other party of the
following conditions:
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<PAGE> 14
(a) The representations contained in Articles IV and V hereof
shall be true and correct in all material respects on Closing Date as though
made on and as of the Closing Date.
(b) Each party shall have performed in all material respects the
obligations, covenants and agreements hereunder to be performed by it at or
prior to the Closing Date.
(c) Purchaser has delivered or caused to be delivered to Seller
proof of bonds, in form and substance and issued by corporate sureties
satisfactory to Seller, covering the Assets required under any laws, rules or
regulations of any federal, Indian tribe, state or local government agencies
having jurisdiction over the Assets, or a commitment by a surety company,
satisfactory to Seller, to issue such bonds upon Closing.
(d) That the purchase and sale contemplated by that certain
Purchase and Sale Agreement dated January 14, 1998 between Cotton Valley
Energy, Inc. and Phillips Petroleum Company is closed and consummated.
XII. POST-CLOSING OBLIGATIONS
(a) Seller shall deliver to Purchaser, at Purchaser's expense, as
soon after Closing as practicable, copies of title files, title opinions,
certificates of title, abstracts, supplemental abstracts, division order files,
surveys, agreements, contracts, lease files, well files and operation files,
including data provided to the other working interest owners, and other similar
materials relating to operation or ownership of the Assets (except papers
protected by the attorney-client privilege or attorney work product, or
proprietary data, which includes but is not limited to interpretive geological
and/or geophysical information, interpretive studies, reserve reports, economic
analyses, bids or proposals to purchase the Assets, and any document or data
which is protected by third party confidentiality provisions); provided,
however, that Seller shall not be liable for unintentional failure to deliver
any such material and Seller does not warrant the completeness or accuracy of
any information contained therein. For a period of seven (7) years after the
Effective Date, Seller shall have reasonable access to such materials for
purpose of audit or where, in the opinion of Seller's counsel, access is
required by law or necessary to Seller's defense or prosecution of legal
actions.
(b) Purchaser shall maintain a true and correct set of records
pertaining to all activities relating to its performance of this Agreement and
all transactions related thereto for at least three (3) years from the
Effective Date for purposes of determining compliance with the terms and
conditions of this Agreement and the joint operating agreements in place as of
the Effective Date. Seller or its representatives shall have the right to audit
said records during the three (3) year period.
(c) Except as provided for in sub-article III(b)(iv), Purchaser
shall be solely responsible for all filings and recording of documents and
other costs related to the Assets and for all fees
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<PAGE> 15
connected therewith, and Purchaser shall advise Seller of the pertinent
recording data. Seller shall not be responsible for any loss to Purchaser
because of Purchaser's failure to file or record documents promptly.
(d) Purchaser shall use its best efforts after the Closing to
promptly obtain approval of assignments of federal and state leases which
require consent to assignment and at its own cost. Until such approvals are
obtained, Seller shall continue to hold record title and/or operating rights to
such Leases as nominee for Purchaser, during which time Purchaser shall
indemnify and hold Seller harmless from any and all claims, suits, obligations
and liabilities of any kind, or character relating to such Leases. Seller
agrees to cooperate fully with Purchaser and to assist Purchaser in obtaining
the consent of the Bureau of Land Management or Minerals Management Service or
other state or federal organization as to any and all assignments of working
interests and operating rights contained in the Assets covering federal, state
or privately owned lands.
(e) Subject to the provisions of Article X, Purchaser shall within
fifteen (15) days after Closing remove or cause to be removed the names and
marks used by Seller and all variations and deviations thereof and logos
relating thereto from the Assets and shall not thereafter make any use
whatsoever of those names, marks and logos.
(f) As soon as reasonably practicable after Closing, Seller shall
prepare, in accordance with this Agreement and with standard industry practice,
and deliver to Purchaser, a final accounting statement showing the proration of
credits and payment obligations of Purchaser and Seller (excluding the cost and
expense borne by Seller in the purchase of the Gas Treating Plant as stated in
sub-article VII(e). Not later than thirty (30) days after receipt thereof,
Purchaser shall deliver to Seller a written report containing any changes that
Purchaser proposes to be made to such statement. The parties shall use all
reasonable efforts to reach agreement on the final statement within one hundred
twenty (120) days after the Closing Date. If pursuant to such accounting either
party shall owe any obligation to the other, then the party owing the
obligation shall promptly pay to the other party the amount of such obligation.
(g) After Closing, Seller and Purchaser shall execute, acknowledge
and deliver all such further conveyances, transfer orders, notices, assumptions
and releases and such other instruments, and shall take such further actions, as
may be necessary or appropriate to assure fully to Purchaser and its successors
or assigns all of the Assets and to assure fully to Seller and its successors
and assigns the assumptions of liabilities and obligations by Purchaser.
However, Purchaser shall assume all responsibility for notifying the purchaser
of oil and gas production from the Assets, and such other designated persons who
may be responsible for disbursing payments for the purchase of such production,
of the change of ownership of the Assets.
(h) To the extent not already obtained prior to Closing, Purchaser
shall immediately upon Closing seek unconditional approval from all governmental
authorities, including, where applicable, the Minerals Management Service, for
assignment of the Assets and for designation of Purchaser as operator thereof
(to the extent permitted by any applicable operating agreement or
- 13 -
<PAGE> 16
joint venture) and shall actively pursue recognition and acceptance by such
authorities of Purchaser's assumption of obligations and responsibilities.
XIII. FINAL CONDITIONS
(a) Seller and Purchaser, singularly and plurally, warrant and
agree that each shall use its best efforts to take or cause to be taken all
such actions as may be necessary to consummate and make effective the
transaction contemplated by this Agreement, including but not limited to
obtaining any required governmental or other approvals or consents, and to
assure that it will not be under any material, corporate, legal or contractual
restriction that would prohibit or delay the timely consummation of such
transaction.
(b) In the event all or part of the Assets, including equipment
and personal property, are damaged or destroyed by fire or other calamity prior
to Closing, Seller shall have the option, but not the obligation, of repairing
the damage at its sole cost or deleting the damaged Assets from the sale.
(c) Seller further reserves from the sale all pipelines, equipment
and rights-of-way owned and operated by any Phillips' pipeline subsidiary or
affiliate.
(d) All of the terms, covenants and conditions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto, their
respective heirs, successors and assigns.
(e) This Agreement is for the benefit of Seller and Purchaser only
and not for the benefit of third parties.
(f) Neither Seller nor Purchaser may assign any rights or delegate
any duties established pursuant to this Agreement without the prior written
consent of the other party except that Purchaser may assign its interest in
this Agreement to its parent corporation or any wholly-owned subsidiary of
itself or its parent corporation.
(g) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Texas, without giving effect to any
principles of conflicts of law. All assignments and instruments of Conveyance
executed in accordance with this Agreement shall be governed by, interpreted and
enforced in accordance with the laws of the State where the Assets conveyed
thereby are located.
(h) Neither party shall make press release or other public
announcements, concerning this transaction, without the prior written approval
of the other party and agreement to the form of the announcement, except as may
be required by applicable laws or rules and regulation of any governmental
agency or stock exchange. Purchaser shall keep the Sale Price and the terms of
this Agreement confidential at all times, except with Seller's prior written
consent or as may be required by applicable laws, rules or regulations.
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<PAGE> 17
(i) All notices, consents, requests, instructions, approvals and
other communications provided for herein shall be deemed to be validly given,
made or served, if in writing and delivered personally or sent by courier
service, telefax, telex or certified mail to the address listed below:
Phillips Petroleum Company Cotton Valley Energy, Inc.
P. 0. Box 1967 8350 North Central Expressway, Suite M2030
Houston, Texas 77251-1967 Dallas, Texas 75206
Attention: Paul Burdick Attention: E. A. Soltero
Phone: (713) 669-3691 Phone: (214) 363-1968
Telefax: (713) 669-7453 Telefax: (214) 363-4294
(j) This Agreement is specifically conditioned upon Seller
receiving all waivers, consents, approvals, permits and authorizations and
actions of third parties, including lessors' consents and waivers of
preferential purchase rights, which by federal, state or local law, rule or
regulation, agreement or by their inherent nature are required to be obtained
to complete the purchase and sale contemplated herein. Seller shall notify all
holders of such preferential rights and rights to consent to or approve
assignment of all or any part of the Assets of its intention to sell the
portion of the Assets affected thereby, and of such terms and conditions of
this Agreement to which the holders of such rights are entitled. Seller shall
promptly notify Purchaser if any preferential rights are exercised, any
consents or approvals denied, or if the requisite period has elapsed without
said rights having been exercised or consents or approvals having been
received. Further, at Closing, the Sale Price shall be adjusted downward by the
value allocated on Exhibit "E" to any Asset affected by the failure to obtain a
consent or by the exercise of a preferential right.
(k) WAIVER OF DECEPTIVE TRADE PRACTICES/CONSUMER RIGHTS.
Purchaser hereby waives the provisions of the Texas Deceptive Trade Practices
Act, Chapter 17, Subchapter E, Sections 17.41 through 17.63, inclusive, of the
Texas Business and Commerce Code, a law that gives consumers special rights and
protections. Purchaser acknowledges that Purchaser is not in a significantly
disparate bargaining position in regard to this Agreement and the sale
contemplated herein and that Purchaser has voluntarily consented to this waiver
after consultation with an attorney of Purchaser's own selection.
(l) THE INDEMNIFICATION, RELEASE AND ASSUMPTION PROVISIONS
PROVIDED FOR IN THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, THOSE SET FORTH
IN SUB-ARTICLES IV(g), VII(b), (c), (d), AND (g) AND ARTICLE XI SHALL BE
APPLICABLE WHETHER OR NOT THE LOSSES, COSTS, EXPENSES AND DAMAGES IN QUESTION
AROSE SOLELY OR IN PART FROM THE GROSS, ACTIVE, PASSIVE OR CONCURRENT
NEGLIGENCE, FAULT, OR STRICT LIABILITY OF ANY INDEMNIFIED PARTY. INDEMNITIES AND
RELEASES SHALL EXTEND TO AND PROTECT THE INDEMNIFIED PARTY'S OFFICERS,
EMPLOYEES, AND AGENTS.
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<PAGE> 18
(m) The parties agree that they will use the procedures outlined
in Exhibit "E" attached hereto, to resolve disputes which may arise between
them under this Agreement; provided, however, that this sub-article XIII(m) and
Exhibit "E" shall not apply to disputes arising under sub-articles IX(a), (b),
(d), or (e) or to any disputes related in any manner to indemnity or release
obligations. It is further provided, notwithstanding the provisions of Exhibit
"E" that either party may seek a restraining order, temporary injunction, or
other provisional judicial relief if the party in its sole judgment believes
that such action is necessary to avoid irreparable injury or to preserve the
status quo, but parties will continue to participate in good faith in the
procedures despite any such request for provisional relief
(n) If any release, assumption or obligation or liability, or
indemnity is held to be invalid or unenforceable, then the parties intend and
agree that the remaining portion of such release, assumption, or indemnity
shall remain in force and effect, modified to the minimum extent required to
comply with applicable law for enforceability.
(o) This Agreement constitutes the entire Agreement between Seller
and Purchaser with respect to the transactions contemplated herein, and
supersedes all prior oral or written agreements, commitments, understandings,
or information otherwise furnished by Seller to Purchaser with respect to such
matters. No amendment shall be binding unless in writing and signed by
representatives of both parties.
IN WITNESS WHEREOF, the Seller and Purchaser, acting through
their authorized representatives, do hereby execute and deliver this Agreement
as of the date first written above.
SELLER:
PHILLIPS PETROLEUM COMPANY
By: /s/ M.B. SMITH
---------------------------------
M.B. Smith, Attorney-in-Fact
PURCHASER:
COTTON VALLEY ENERGY, INC.
By: /s/ E.A. SOLTERO
---------------------------------
E. A. Soltero, Chief Executive
Officer
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<PAGE> 1
EXHIBIT 10.10
PROPERTY OPTION AGREEMENT
This agreement entered into as of the date set forth below is between Cotton
Valley Energy Corporation, a Nevada Corporation (hereinafter referred to as
"Purchaser"), with its address at 5232 Forest Lane, Suite 120, Dallas, Texas,
75244 and East Texas Limestone Limited Partnership (hereinafter referred to as
"Seller"), represented by its general partner, Hibernia Management Company,
located at 2707 Hibernia St., Suite 301, Dallas, Texas 75204
WITNESSETH
WHEREAS, Seller represents that it owns, or holds executive rights to
5,389 net acres of Oil, Gas, and Mineral leases within the boundaries outlined
on EXHIBIT "A" attached, "Cheneyboro Field Oil Productivity Map", designated as
the "Contract Area", and
WHEREAS, Seller has initiated negotiations to acquire an additional
2,947 net acres of Oil, Gas and Mineral leases within the area outlined on
Exhibit A as the "Option Area"; and
WHEREAS, Seller also has reason to believe that it can acquire
additional leases within the areas outlined as the "North Substitute Area" and
"South Substitute Area";
NOW THEREFORE, for and in consideration of the delivery of certain
securities of Purchaser as set forth below and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, Seller hereby
grants an exclusive option to Purchaser until May 25, 1995 (the "Option Date")
to purchase all or any portion of Seller's interests in oil, gas and mineral
leases ("Leases") and related property and equipment in the Contract Area, and
an exclusive option until 30 days following the Option Date to purchase all or
any portion of Leases Seller may purchase or contract to purchase in the Option
Area, all according to the following terms and conditions:
1. The securities (which shall be delivered to Seller on or
before March 15, 1995) shall consist of: (a) 8,131,333 shares of the Common
Stock of Purchaser, $0.001 par value (the "Common Stock"); (b) a warrant to
purchase 2,032,833 shares of Common Stock at Three Canadian Dollars (C$3.00)
per share on or before March 15, 1996 (the "C$3.00 Warrant"); (c) a warrant to
purchase 2,032,833 shares of Common Stock at Four Canadian Dollars (C$4.00) per
share on or before March 15, 1997 (the "C$4.00 Warrant"); and (d) a warrant to
purchase 2,032,833 shares of Common Stock at Five Canadian Dollars (C$5.00) per
share on or before March 15, 1998 (the "C$5.00 Warrant"). Seller shall execute
a securities acquisition agreement with respect to the securities being
acquired in the form of Exhibit B attached hereto. The warrants to be delivered
shall be in the form of Exhibit C attached hereto.
2. Each Lease delivered by Seller shall either: (i) have a
minimum of two years remaining primary term; or (ii) be held by production. To
the extent any Lease owned by Seller does not meet one of the foregoing
criteria, Seller shall, at its own expense, make its best efforts to acquire a
top-Lease or renewal Lease which meets the criteria, and shall tender such top-
Lease or renewal
Property Option Agreement....Page 1
<PAGE> 2
Lease to Purchaser within 60 days following the Option Date. If, within 60 days
following the Option Date, Seller is unable to deliver good and marketable to
title to at least 4,000 net acres of Leases within the 25,000 barrel iso-
cumulative contour area shown in Exhibit A for the Contract Area and Option
Area, Seller shall use its best efforts to acquire and tender to Purchaser the
difference in net acres of Leases from the North Substitute Area and the South
Substitute Area.
3. The purchase price for the first 4,000 net acres of Leases
delivered by Seller and accepted by Purchaser within the Contract Area shall be
one hundred dollars ($100.00) per net acre, and the purchase price for the next
1,389 net acres of Leases within the Contract Area shall be twenty-one and
59/100 dollars ($21.59) per net acre. The purchase price for the Leases
delivered by Seller in the Option Area and Substitute Areas shall be one
hundred dollars ($ 100.00) per net acre.
4. All Leases assigned will have an average of 80.0% Net Revenue
Interest with the understanding that a 2.0% Overriding Royalty Interest (ORRI)
in the Contract Area and North Substitute Area will be assigned to Mr. Al
Jasper, Five Star Exploration Company, before subsequently assigning net 78%
revenue leases to Purchaser.
5. In order to exercise its option, Purchaser shall place into an
escrow account, on or before the Option Date, two hundred thousand dollars
($200,000.00), from which payments will be made to Seller as Leases meeting the
qualifications of Paragraph 2 above are assigned to Purchaser.
6. In the event Purchaser acquires a minimum of 2,000 net acres
of Leases within the Contract Area, Purchaser will agree to recomplete the
horizontal Texlan (ARCO) Billy Chandler #1 Well. Seller would have complete
access to the location and all test data.
7. An Area of Mutual Interest ("AMI") is hereby established with
respect to the North Cheneyboro Area and South Cheneyboro Area, as shown in
Exhibit A. Any interests in any Leases after 60 days beyond the Option Date
which are acquired by Seller within the AMI must be offered to the Purchaser at
Seller's cost within ten days after acquisition. An overriding royalty interest
of two percent (2%) shall be assigned to Mr. Al Jasper with respect to any
Leases acquired pursuant to this paragraph which lie within the North Area of
Mutual Interest as shown on Exhibit A.
8. On any re-entry by Purchaser of an existing wellbore for
horizontal recompletion within the North Area of Mutual Interest (including the
aforementioned Chandler Well), Seller will be carried for a reversionary one-
quarter Working Interest in such well, where the amount to be paid out includes
all costs of the Purchaser with respect to such well. On any new wellbore
drilled by Purchaser in the North Area of Mutual Interest, vertical or
horizontal, Seller will be carried for a one-sixteenth reversionary Working
Interest.
9. Any new acreage acquired by Purchaser in the AMI would be for
Purchaser's account with said acreage costs to be "loaded" on the first
commercial reentry or new well drilled in the AMI subsequent to acreage
acquisition.
Property Option Agreement....Page 2
<PAGE> 3
10. In the event Purchaser elects to acquire at least 4,000 net
acres of Leases within the 25,000 barrel iso-cumulative contour as shown in
Exhibit A, and Seller is unable, within 60 days following the Option date, to
deliver good and merchantable title to at least 4,000 of said net acres, Seller
shall return to Purchaser shares of Common Stock, C$3.00 Warrants, C$4.00
Warrants and C$5.00 Warrants proportional to the amount of net acres of Leases
under 4,000 within the 25,000 barrel isocumulative contour that Seller is
unable to deliver. In the event Purchase does not exercise any portion of its
option hereunder, for any reason, Seller, upon written demand, shall return 50%
of amounts it previously received of Common Stock, C$3.00 Warrants, C$4.00
Warrants and C$5.00 Warrants.
11. This agreement shall be governed by the laws of the State of
Texas.
12. Should any additional instruments need to be executed,
certified, or delivered by one Party to the other, to any third party and/or
filed with or delivered to any public officer in order to carry our the purpose
and intent of this Agreement, each Party hereto agrees to promptly execute and
deliver any and all such instruments reasonable necessary to carry out the
purpose and intent of this Agreement.
13. This Agreement may be executed in multiple counterparts, each
of which shall be deemed an original and each of which alone, and all of which
together, shall constitute one and the same instrument. It is agreed to that a
facsimile transmission signed copy of this Agreement shall be treated and
considered an original for all intended purposes.
14. It is expressly agreed that this Agreement embodies the entire
agreement of the parties with regard to the subject matter herein, and that
there is no other oral or written agreement or understanding between the
parties at the time of execution hereunder. In addition, this Agreement may be
amended or modified only by written agreement signed by all of the parties
hereto.
15. The terms and provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their successors, transferees,
sub-licensees and assigns.
Executed as of this First day of March, 1995.
COTTON VALLEY ENERGY CORPORATION
By /s/ EUGENE A. SOLTERO Title: Managing Director
----------------------- ---------------------------
EAST TEXAS LIMESTONE LIMITED PARTNERSHIP
HIBERNIA MANAGEMENT COMPANY, General Partner
By: /s/ WILLIAM H. AVERY Title: President
----------------------- ---------------------------
Property Option Agreement....Page 3
<PAGE> 1
EXHIBIT 10.11
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT, made and entered into this 29th day of August, 1997, by
and between COTTON VALLEY RESOURCES CORPORATION, hereinafter referred to as
"BUYER" and CROWN PARTNERS L.L.C. MINERALS DIVISION hereinafter referred to as
"SELLER".
Seller owns the undivided interest described in Exhibit "A" in and to
the entire estates created by the oil and gas leases, Corporation Commission
Pooling Orders, operating agreements and other agreements affecting the
interests described in Exhibit "A" attached hereto and made a part hereof,
(hereinafter called the "Leases"), insofar as the Leases cover and related to
the land described in Exhibit "A" (hereinafter called the "Land"), together with
an identical undivided interest in and to all property and rights incident
thereto, including all rights in, to and under all agreements, product purchase
and sales contracts, leases, permits, rights-of-way, easements, licenses,
partnership rights, options and orders in any way relating thereto, in and to
all of the personal property, fixtures and improvements now or as of the
"Effective Time" (as hereinafter defined) thereon, appurtenant thereto or used
or obtained in connection therewith or with the production or treatment or sale
or disposal of liquid or gaseous hydrocarbons produced from or attributable to,
together with all other interests owned by Seller in and to said Land. All of
the foregoing are herein referred to as the "Interests".
Seller desires to sell and convey and Buyer desires to purchase and
pay for the Interests set forth in the Exhibit "A", effective as of March 1,
1997 at 7:00 o'clock a.m. CDT (hereinafter referred to as the "Effective
Time").
IN CONSIDERATION of the above recitals and of the benefits to be
derived by each Party under this Agreement, it is agreed as follows:
1. Sale and Purchase - Seller agrees to sell and convey and Buyer
agrees to purchase and pay for that portion of the Interests set forth on
Exhibit "A", subject to the terms of this Agreement.
2. Purchase Price - The aggregate purchase price for the
Interests shall be $34,545.00.
3. Title Information - Seller shall make available to Buyer title
information pertaining to the Interests prior to Closing including copies of
all title opinions, title reports, and division orders pertaining to the
Interests heretofore received by Seller or to which Seller has reasonable
access.
<PAGE> 2
All such information now in possession of Seller shall also be open to
inspection by Buyer at any reasonable time from the date hereof through the
closing of title to the interests herein (the "Closing") or the termination of
this Agreement. If such information or any other information or date shall
reflect the existence of any encumbrance, encroachment, defect in or objection
to title which Buyer does not waive (all of which are herein called the "Title
Defects"), written notice of the Title Defects shall be given to Seller prior to
Closing. No matter shall be construed as a Title Defect unless so construed
under generally accepted oil and gas industry title examination standards for
the State of Oklahoma. If Title Defects shall be so specified, Seller may make
reasonable effort to cure or remove all of the Title Defects at the expense of
Seller.
If Title Defects are not cured or removed at or before the Closing,
Buyer may elect in writing to either: (1) extend the Closing Date and during
such extension Seller may make a good faith effort to cure and remove the Title
Defects; (2) waive the Title Defects and proceed with the Closing; or (3)
terminate this Agreement. If this Agreement is so terminated or terminated under
any other provision of this Agreement, Buyer shall return to Seller all of the
items which Seller has delivered to Buyer hereunder. If this Agreement is
terminated for any reason or is breached, this paragraph shall not be construed
to limit Seller's or Buyer's legal or equitable remedies.
4. Seller's Representations - Seller represents, warrants and
agrees as to its respective Interests to and with Buyer that:
(a) The Interests will be free and clear of all liens and
encumbrances by Closing, and Seller has provided
Buyer with Seller's information relating to the
Interests including but not limited to production
information, product pricing information and lease
operating expense.
(b) To the knowledge of Seller, the Leases are in full force and
effect, are valid and subsisting, and cover the entire estate
which they purport to cover, and Seller has never been advised
directly or indirectly by any Lessor under any Lease or by any
other Party of a default under any Lease or of any
requirements or demands to drill additional wells on any of
the Land covered by the Leases.
(c) The Interests entitle Seller to receive not less than
the undivided Interests shown on Exhibit "A" as "Net
Revenue Interests" of all indicated hydrocarbons
produced, saved and marketed from the Land and all
Wells located thereon. Seller's obligation to bear
costs and expenses relating to the development of and
operations on the Leases, Land and Wells thereon will
not be greater than the "Working Interests" set forth
on Exhibit "A".
(d) It is understood that Seller will warrant and forever
defend the title of Buyer as to the acts of Seller to the
Interests against all claims made by, through and under
Seller, but not otherwise.
<PAGE> 3
5. Closing - Unless extended pursuant to the terms of this
Agreement, the Closing shall occur on or before September 10, 1997, unless
extended by the mutual consent of the Parties hereto. As a condition to Buyer
Closing, the representations of Seller set forth in Paragraph 4 above must be
true and correct. At Closing the following shall occur:
(a) Seller shall execute, acknowledge and deliver an
Assignment, Bill of Sale and Conveyance in the form
attached hereto as Exhibit "B" and an Assignment of
General Partnership Interest in the form attached
hereto as Exhibit "C", conveying title to the
Interests to Buyer, free, and clear of all liens and
encumbrances, which instrument shall be effective as
of the Effective Time.
(b) Seller agrees to indemnify and save and hold harmless
Buyer against all claims, costs, expenses and other
liabilities with respect to the interest, which
accrue or relate to times prior to the Effective
Time. Likewise, Buyer agrees to indemnify and save
and hold harmless Seller against all claims, costs,
expenses and other liabilities with respect to the
Interests, which accrue or relate to times after the
Effective Time.
(c) Seller agrees that Buyer shall be entitled to receive
all proceeds from production attributable to the
Interests after the Effective Time and Buyer shall be
responsible for all costs attributable to the
Interests after the Effective Time.
(d) Buyer agrees that Seller shall be entitled to receive
all proceeds from production attributable to the
Interests prior to the Effective Time and Seller
shall be responsible for all costs attributable to
the Interests prior to the Effective Time. Buyer
shall deliver to Seller the Purchase Price as set
forth above. Buyer shall also reimburse Seller for
direct expenses paid by Seller after the Effective
Time and Seller shall remit to Buyer any proceeds for
production after the Effective Time, provided Seller
shall have given notice to Buyer of such expenses and
receipts not less than Three (3) Business Days prior
to the Closing Time.
(f) Seller shall deliver (subject to the terms of applicable
operating agreements) to Buyer exclusive possession of the
Interests. In addition, Seller shall deliver to Buyer all the
lease files, well logs, well files, geological files,
production files, division orders, title documentation,
records pertaining to rentals, delay rentals and shut-in
payments, correspondence, and objective data in possession or
control of Seller that relate to the Interests. Buyer agrees
to maintain and allow Seller to copy such information for a
period of three years from the Effective Time.
(g) At the Closing and thereafter as may be necessary,
the Parties hereto shall execute, acknowledge and
deliver transfer orders, additional assignments and
such other instruments and shall take such other
action as may be necessary to carry out their
obligations under this Agreement.
<PAGE> 4
6. Gas Balancing - Prior to Closing, Seller agrees to disclose to
Buyer all gas imbalances affecting the Interests. Should Buyer discover (before
Closing) that Seller's interests are either over/under produced due to a gas
balancing arrangement, Buyer may terminate this Agreement.
7. Casualty Loss - If, prior to Closing, all or any part of the
Interests shall be destroyed by fire or other casualty, or if any part of the
Interests shall be taken in condemnation or under the rights of eminent domain
or if any proceedings for such purposes shall be pending or threatened, Buyer
may elect to terminate this Agreement. If Buyer shall so elect, neither Party
shall have any further obligation to the other hereunder.
8. Notices - All communications required or permitted under this
Agreement shall be in writing, and any communication or delivery hereunder
shall be deemed to have been duly made if actually delivered, or if mailed by
registered or certified mail, postage prepaid, addressed as set forth above.
Either Party may, by written notice so delivered to the other, change the
address to which delivery shall thereafter be made.
9. Binding Effect - This Agreement shall be binding upon and
shall inure to the benefit of the Parties thereto and their respective
successors and assigns.
10. Entire Agreement - This Instrument and Exhibits attached
hereto state the entire agreement between the Parties and may be supplemented,
altered, amended, modified or revoked by writing only, signed by each of the
Parties. The headings are for guidance only and shall have no significance in
the interpretation of this Agreement.
11. Final Accounting - Within Sixty (60) Days of the Closing Date,
Seller shall deliver to Buyer a Final Accounting Statement showing the
proration of credits and payment obligations of Buyer and Seller. Within Ten
(10) Days thereafter, the Parties shall use their best efforts to reach
agreement on the final settlement and make final payments accordingly.
12. Taxes - All ad valorem taxes, real property taxes and personal
property taxes with respect to the Interests for the Tax Period in which the
Effective Time occurs shall be apportioned as of the Effective Time between
Seller and Buyer. Such apportionment shall be made using tax information for
the current year if available, and if not available, the prior year actual
taxes.
13. Governing Law - This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Oklahoma. All
assignments and instruments of conveyance executed in accordance with this
Agreement shall be governed by and interpreted and enforced in accordance with
the laws of the State of Oklahoma.
<PAGE> 5
Executed to be effective for all purposes as of the date and time first above
written.
"BUYER"
COTTON VALLEY RESOURCES CORPORATION
ATTEST
/s/ PATTY DICKERSON By: /s/ JAMES E. HOGUE
- ------------------------------- ----------------------------------
Asst. Secretary James E. Hogue
President
"SELLER"
CROWN PARTNERS L.L.C. MINERALS DIVISION
/s/ JACK E. WHEELER
---------------------------
Jack E. Wheeler
Managing Partner
<PAGE> 1
EXHIBIT 10.12
EXCLUSIVE OPTION AGREEMENT TO ACQUIRE THE
INTEREST OF CONOCO INC. IN THE SWORD UNIT
SANTA MARIA BASIN OFFSHORE CALIFORNIA
This agreement (hereinafter the "Offshore Pacific Agreement") entered into as
of the date set forth below is between Cotton Valley Energy Corporation, a
Nevada Corporation (hereinafter "Cotton Valley"), with its address at 5232
Forest Lane, Suite 120, Dallas, Texas, 75244 and Offshore Pacific Limited
Partnership, a Nevada Limited Partnership (hereinafter "Offshore Pacific") with
its address at 660 Preston Forest Center, Dallas, Texas, 75230.
W I T N E S S E T H
WHEREAS, Conoco Inc. ("Conoco") currently owns 51.79217% working interest in,
and operates, the Sword Unit in the Channel Islands Area of the Santa Maria
Basin of Offshore California, consisting of the following oil, gas and mineral
leases: OCS-P 0319, OCS-P 0320, OCS-P 0322 and OCS-P 0323, further described in
Exhibit A and Exhibit B attached hereto; and
FURTHER WHEREAS, PetroGreen Company, a Colorado Limited Liability Corporation
(hereinafter referred to as "PetroGreen"), has entered into a "Lease Interest
Purchase Option Agreement" dated May 5, 1992 and extended September 9, 1992 and
September 12, 1993 (hereinafter the "Conoco Option Agreement") backed by an
exhibit "Purchase and Sale Agreement", with Conoco to acquire all of Conoco's
interest in the Sword Unit; and
FURTHER WHEREAS, Offshore Pacific holds certain rights with respect to the
Conoco Option Agreement and is willing to release all its rights and interests
in the Conoco Option Agreement in favor of Cotton Valley; and
FURTHER WHEREAS, Offshore Pacific is willing to provide Cotton Valley the
opportunity to arrange the initial funding and letter of credit required of
PetroGreen under the Conoco Option Agreement and is willing to make
arrangements for Cotton Valley to acquire from PetroGreen its option to
purchase the Conoco interest in the Sword Unit held through the Conoco Option
Agreement; and
FURTHER WHEREAS, Cotton Valley has entered into a finders' fee agreement dated
as of March 1, 1995 with MIRO, a Texas General Partnership (the "MIRO
Agreement") relating to the introduction of Offshore Pacific and PetroGreen to
Cotton Valley;
NOW THEREFORE BE IT KNOWN
For ten dollars ($10.00) herewith paid, the mutual promises herein, and other
good and valuable consideration, the sufficiency of which is hereby
acknowledged, Offshore Pacific
Offshore Pacific--Cotton Valley Agreement .....Page 1
<PAGE> 2
hereby agrees to exclusively assist Cotton Valley to acquire the right to
exercise the Conoco Option Agreement under terms and conditions which are set
forth below.
1. In the event Cotton Valley and PetroGreen do not, on or before
April 1, 1995, enter into an agreement (the "PetroGreen Agreement") whereby
Cotton Valley would have the right to acquire PetroGreen's option with Conoco,
this Offshore Pacific Agreement shall automatically terminate and neither party
shall have any liability or obligation to the other party.
2. Within 90 days following the date of execution of the
PetroGreen Agreement (hereinafter the "Offshore Pacific First Payment Date"),
Cotton Valley shall pay Offshore Pacific $100,000 by the delivery of a
cashier's check or bank wire transfer. If such payment is not timely made, the
PetroGreen Agreement shall be deemed to have been automatically assigned by
Cotton Valley to Offshore Pacific as of the Offshore Pacific First Payment
Date. Upon receipt of the payment, Offshore Pacific shall renounce and release
any claims it may have with respect to the Conoco Option Agreement, except as
set forth in this Offshore Pacific Agreement.
3. The parties hereto contemplate that the PetroGreen Agreement
will provide for a $200,000 payment to be made to PetroGreen by Cotton Valley
on or before June 30, 1995, or such other date as may be mutually agreeable
between PetroGreen and Cotton Valley (hereinafter the "PetroGreen First Payment
Date"). If such payment is not timely made, the PetroGreen Agreement shall be
deemed to have been automatically assigned by Cotton Valley to Offshore Pacific
as of the PetroGreen First Payment Date.
4. The parties hereto further contemplate that the PetroGreen
Agreement will provide for a closing of the property purchase under the Conoco
Option Agreement (the "Closing") whereby Cotton Valley will make certain cash
payments to PetroGreen and Conoco, and will further provide that Cotton Valley
would have the right to be assigned the entire 51.79217% interest being
acquired from Conoco. At the Closing, Cotton Valley will deliver Offshore
Pacific the following payments, marketable securities, and interests, LESS AND
EXCEPT those payments, marketable securities, and interests which are paid by
Cotton Valley at Closing to PetroGreen under the PetroGreen Agreement, which
are paid by Cotton Valley at closing to Conoco under the Conoco Option
Agreement, and which are paid by Cotton Valley to MIRO at Closing under the
MIRO Agreement:
A. Cash in the form of cashier's check or bank wire transfer in
the amount of $8,000,000.
B. $4,000,000 market value of marketable securities of publicly
traded corporations reasonably acceptable to Offshore Pacific and
engaged principally in the oil and gas industry, where: (i) the amount
of any single
Offshore Pacific--Cotton Valley Agreement .....Page 2
<PAGE> 3
security delivered must be less than 10% of the total amount which is
issued and outstanding of that security; and (ii) any security
delivered must be listed and tradable on at least one of the
following: New York Stock Exchange, American Stock Exchange, Midwest
Stock Exchange, Pacific Stock Exchange, Toronto Stock Exchange,
Vancouver Stock Exchange, Alberta Stock Exchange, NASDAQ National
Market or NASDAQ Small Cap Market. Any affiliate of Cotton Valley
meeting the two foregoing requirements shall be deemed acceptable to
Offshore Pacific.
C. A carried working interest in the Sword Unit equal to
6.79217%, whereby the remaining 45% interest shall pay all capital
costs and expenses of the carried working interest through the
completion of construction of the first offshore multi-well production
platform and the drilling and completion of the first ten development
wells.
5. During the year following the PetroGreen Payment Date, Cotton
Valley shall use its best efforts to sell at least two-thirds of its rights
under this offshore Pacific Agreement, the PetroGreen Agreement and the Conoco
Option Agreement (collectively, the "Rights") to other independent oil and gas
producing entities. To the extent that Cotton Valley is successful in selling a
portion of its Rights to entities who are willing to pay Cotton Valley more
than a pro rata share of Cotton Valley's purchase price and other payments
under the foregoing agreements, 50% of the excess proceeds from such sales
shall be paid by Cotton Valley to Offshore Pacific as received. If Cotton
Valley is able to require some of such entities to post some of Cotton Valley's
portion of the letter of credit required in the Conoco Option Agreement,
Offshore Pacific will not share in that benefit. A copy of each letter of
intent or agreement representing a sale shall be sent by Cotton Valley to
Offshore Pacific within ten business days of execution.
6. In the event that Cotton Valley has not entered into binding
agreements to sell at least 30% working interest in the Sword Unit from its
Rights by one year from the PetroGreen Payment Date, Cotton Valley shall assign
to Offshore Pacific any amounts of Rights it retains exceeding 15% working
interest in the Sword Unit, after taking into account delivery of the 6.79217%
carried working interest; and Cotton Valley shall deliver to Offshore Pacific
copies of all its correspondence with potential purchasers.
7. Both parties agree that operations of the Sword Unit, after
acquisition from Conoco, should be undertaken by an oil and gas company with
significant offshore experience and capability and will use their respective
best efforts to encourage Samedan Petroleum Corporation to become the operator.
If Cotton Valley sells of any of its interests as contemplated in Paragraph 5
above, Cotton Valley shall reserve and the retain voting rights
Offshore Pacific--Cotton Valley Agreement .....Page 3
<PAGE> 4
for operator under the Sword Unit Operating Agreement with respect to the
interest sold. Cotton Valley shall vote for Unit Operator as directed in
writing by Offshore Pacific.
8. The parties have previously executed the Confidentiality
Agreement attached hereto as Exhibit C. Offshore Pacific specifically
authorizes Cotton Valley to provide confidential information and data as
defined in the Confidentiality Agreement to potential investors in Cotton
Valley or the Sword Unit, provided, however, that each such potential investor
execute a similar confidentiality agreement with Cotton Valley, and further
provided, however, that a copy of this Offshore Pacific Agreement may not be
shown to any person or entity without specific written approval from Offshore
Pacific with respect to such person or entity.
9. This Offshore Pacific Agreement shall be governed by the laws
of the State of Texas.
10. Should any additional instruments need to be executed,
certified, or delivered by one Party to the other, to any third party and/or
filed with or delivered to any public officer in order to carry out the purpose
and intent of this Offshore Pacific Agreement, each Party hereto agrees to
promptly execute and deliver any and all such instruments reasonable necessary
to carry out the purpose and intent of this Offshore Pacific Agreement.
11. This Offshore Pacific Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and each of which
alone, and all of which together, shall constitute one and the same instrument.
It is agreed to that a facsimile transmission signed copy of this Offshore
Pacific Agreement shall be treated and considered an original for all intended
purposes.
EXECUTED as of this 1 day of March, 1995.
OFFSHORE PACIFIC COTTON VALLEY ENERGY
LIMITED PARTNERSHIP CORPORATION
By: MILLENIUM GAS COMPANY
General Partner
/s/ C. MICHAEL JONES /s/ JAMES E. HOGUE
- ----------------------------- -------------------------
C. Michael Jones, James E. Hogue, Chairman
Vice President
/s/ EUGENE A. SOLTERO
-------------------------
Eugene A. Soltero, CEO
Offshore Pacific--Cotton Valley Agreement .....Page 4
<PAGE> 1
EXHIBIT 10.13
LOAN AGREEMENT
LOAN AGREEMENT dated to be effective the 18th day of July, 1997, between
Cotton Valley Energy Corporation ("Borrower") and those individuals who have
signed a Subscription Agreement which is attached hereto as Exhibit "A" (each
referred to as an "individual lender" and collectively referred to as
"Lender").
SECTION 1. DEFINITIONS AND GENERAL RULES. The following definitions and
general rules will apply hereto:
1.1. General Rules. For the purposes of this Agreement:
(a) The terms defined in this Section 1, unless the context
otherwise requires, will have the meanings applied to them in Section 1 and
will include the plural as well as the singular. Additional definitions may
be found throughout the Agreement.
(b) All terms defined by the Uniform Commercial Code as enacted
in the State of Texas shall have the meaning as defined therein unless
expressly defined otherwise in this Agreement.
(c) The words "herein", "hereof", "thereunder" and words of
similar import refer to this Agreement as a whole and not to a particular
section, paragraph or other subdivision.
1.2. Definitions. As used in this Agreement, the following terms
will have the following meanings unless the context requires otherwise:
Agreement means this loan agreement as originally executed or hereafter
amended.
Business Day means a day on which banks in Dallas, Texas are open for
business.
Collateral means the oil and gas leases described in the attached Exhibit
"B", together with, all and singular, all renewals thereof, and all rights and
appurtenances pertaining thereto, also sometimes referred to herein as the
Property.
Deed of Trust means a Deed of Trust creating a first lien on the
Collateral, as copy of which is attached hereto as Exhibit "D".
<PAGE> 2
Default means any event specified in Section 7.1 of this Agreement,
regardless of whether any requirement for the giving of notice or lapse of time
or any other condition has been satisfied.
Event of Default means any event specified in Section 7.1 of this
Agreement, provided that any requirement in connection with such event for the
giving of notice or lapse of time or any other condition has been satisfied.
Governmental Authority means the United States, the State, the County, the
City, or any other political subdivision in which the Property is located, and
any other political subdivision, agency, or instrumentality exercising
jurisdiction over Borrower or the Improvements, Property and/or Additional
Property.
Governmental Requirements means all laws, ordinances, rules, and
regulations of any Governmental Authority applicable to Borrower and/or the
Improvements, Property, or Additional Property.
Guaranty means a guaranty executed by Cotton Valley Resources Corporation
which unconditionally guaranties payment of the Notes in the form of Exhibit
"E" attached hereto.
Maturity Date means the maturity date set forth in each promissory note
executed by Borrower pursuant to Sections 3.1, 3.2 and 3.3.
Notes means the promissory notes described in Section 3.1, 3.2 and 3.3
hereof, as the same have been or may be renewed, extended or rearranged from
time to time and at any time, also sometimes referred to herein as the Notes.
Obligations means the outstanding principal amounts of the Notes.
Person means any corporation, partnership, trust, estate, individual,
unincorporated business entity or governmental department, administrative
agency or instrumentality.
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<PAGE> 3
Security Instruments means this Agreement, the Deed of Trust, the Notes,
and such other instruments evidencing, securing, or pertaining to this Loan and
the Notes as shall, from time to time, be executed and delivered by Borrower or
any other party to Lender pursuant to this Agreement.
Warrants means warrants to purchase common stock of Cotton Valley
Resources Corporation at a strike price of $2.08 with an expiration date of
April 30, 2002.
SECTION 2. REPRESENTATIONS AND WARRANTIES. Borrower represents, warrants and
covenants that:
2.1. Authority. Borrower is a Nevada corporation, in good
standing, and has the authority as such to cause a duly authorized
representative to execute this Agreement as well as all documents anticipated
by this Agreement.
2.2. Ownership. Borrower is a wholly owned subsidiary of Cotton
Valley Resources Corporation, an Ontario, Canada corporation in good standing
and fully authorized to execute the Guaranty.
2.3. Collateral. The Borrower has good and marketable title to the
Collateral.
2.4. Availability of Records. Borrower will permit any Lender
representative, accountant, agent, employee, or attorney of Lender to visit and
inspect the Collateral, the books and financial records of the Borrower
relating to the Collateral, at such reasonable times during normal business
hours and as often as the Lender may desire, and all after reasonable prior
notice to the Borrower.
2.5. Liens. The Collateral is not subject to any liens,
attachments, or pledges which would prevent Lender from having a first and
valid lien against the Collateral upon the execution of the Security
Instruments.
-3-
<PAGE> 4
SECTION 3. THE LOAN.
3.1. Notes. Subject to and upon the terms, conditions, covenants
and agreements contained herein, Lender and Borrower agree as follows:
Borrower agrees to execute individual Promissory Notes in the form of
Exhibit "C" attached hereto, payable to the order of the individual lenders.
The Notes shall be in the amounts set forth in Exhibit "A". Borrower agrees to
pay interest on the unpaid principal amount of the Notes quarterly at the rate
of 15%. After maturity or the occurrence of an Event of Default, the Notes
will provide for interest at 18% per annum. Payments of interest only on the
Notes shall be due and payable quarterly beginning October 18, 1997, and
continuing on the 18th day of January, April, July and October thereafter until
maturity on July 17, 1999, when the entire balance of principal and accrued
interest will be payable.
3.2. Renewals. Lender does not undertake to renew the Notes
following their Maturity Date and shall be under no obligation to do so.
3.3. Payments.
(a) All payments of principal of and interest on the Notes and
all other amounts payable by Borrower to Lender under this Agreement shall be
made in lawful money of the United States of America and shall be made to
Lender at its office set forth in Section 8.7.
(b) Whenever any payment of principal of or interest on the Notes
shall be due on a day which is not a Business Day, the date for payment thereof
shall be extended to the next succeeding Business Day and interest shall be
payable for such extended time at the rate of interest with respect thereto in
effect at the due date.
3.4. Computations of Interest. Interest on the unpaid principal
amount of the Notes from time to time outstanding shall be computed on the
basis of a year of 365 days and paid for the actual number of days elapsed.
-4-
<PAGE> 5
3.5. Security. (a) Payment of the Notes and Obligations and
performance of the Borrower's obligations under this Agreement and the Security
Instruments will be secured by a Deed of Trust, subject to no prior or superior
lien, security interest or encumbrance on the Collateral. The Deed of Trust
will be executed by Borrower simultaneous with the execution of the Notes and
this Agreement.
(b) Lender agrees that Borrower may pledge the Collateral to
secure other debt of Borrower to additional lenders under the terms of this
Loan Agreement provided that the combined amount of such additional debt and
the debt owed to Lender does not exceed $1,000,000. Any such pledge shall have
equal lien priority to that held by Lender.
(c) Borrower agrees to execute, acknowledge and deliver to Lender
such Security Instruments, statements, financing statements and other
instruments and documents, in a form acceptable to Lender as may in the good
faith and discretion of counsel for Lender be deemed necessary to enforce, to
grant to Lender and to perfect the assignments, security interests and liens on
the Collateral.
(d) Lender agrees to execute and deliver to Borrower within 10
days of request for same from Borrower such documents as are reasonably
required to enable Borrower to develop the leases forming the Collateral.
Lender agrees to subordinate its lien to the lien of a third party lender
funding drilling and production expenses for a well on any lease which is
Collateral. Such subordination shall only cover the actual acreage involved in
the particular well being developed.
3.6. Prepayment of Notes. Lender is willing to allow prepayment of
the Notes in full without penalty at any time and from time to time at
Borrower's option.
3.7. Warrants. In consideration of Lender agreeing to enter into
this Agreement, Borrower agrees to cause to be issued to Lender the Warrants in
the amounts shown in Exhibit "A". The form of the warrants is shown in
Exhibit "F".
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<PAGE> 6
SECTION 4. CONDITIONS TO LOAN. The commitment of Lender to make the
loans is subject the satisfaction of the following further conditions:
4.1. Accuracy of Representation. The fact that the representations
and warranties contained in this Agreement are true and correct in all material
respects on and as of the applicable date of borrowing.
4.2. Delivery of Documents. Receipt by Lender of the documents
required or contemplated hereunder from the appropriate parties, including,
without limitation, the following:
(a) Copy of the Articles of Incorporation and Certificate of Good
Standing;
(b) Board Resolution authorizing this loan;
(c) The executed Security Instruments contemplated by this
Agreement;
(d) The executed Guaranty contemplated by this Agreement; and
(e) Evidence that the lien formerly held by East Texas Limestone
on the Collateral has been released.
SECTION 5. AFFIRMATIVE COVENANTS. During the term of this Agreement and
until the Notes and the obligations have been fully and finally paid, unless
compliance with the provisions of the following Sections shall have been waived
in writing by Lender, Borrower agrees that:
5.1. Payment of Liabilities. Borrower will pay and discharge, when
due, all liabilities, all Indebtedness and all Obligations, except those being
contested in good faith.
5.2. Notice; Litigation. Borrower will promptly give written
notice to Lender of (i) any legal, judicial or regulatory proceedings affecting
the Collateral which involved is material and is not covered (subject to normal
deductibles) by insurance and that is likely to have a material adverse effect
on the Collateral, (ii) any dispute between Borrower and any govern-
-6-
<PAGE> 7
mental regulatory body or other person that is likely to interfere materially
with the normal operations of the Collateral, and (iii) any other action, event
or condition of any nature of which it has knowledge which is reasonably likely
to result in any material adverse effect upon the Collateral.
5.3. Maintenance of Leases. Borrower will use best efforts to (a)
develop the oil and gas leases which are Collateral commensurate with the
Borrower's financial capabilities and prudent business practices, and (b)
maintain in effect all oil and gas leases which are Collateral, including
renewing such leases if they expire during the term of this Agreement.
5.4. Further Assurances. Etc. Borrower will at any time and from
time to time, execute and deliver, such further instruments and take such
further action as may reasonably be requested by Lender, in order to cure any
defects in the execution and delivery of, or to comply with or accomplish the
covenants and agreements contained in, this Agreement, the Security Instruments
or the Notes.
SECTION 6. NEGATIVE COVENANTS. Borrower agrees that during the term
hereof and as long as the Notes are outstanding, unless Lender otherwise shall
give its prior written consent:
6.1. Limitations on Liens. Borrower will not create, assume or
suffer to exist any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind upon the Collateral, except as allowed pursuant to
Section 3.5 herein.
SECTION 7. DEFAULT.
7.1. Events of Default.
(a) Failure to pay any principal of or interest on the
Notes when same is due or declared due.
(b) Failure to comply with the terms of the Deed of Trust or the
covenants of this Agreement.
-7-
<PAGE> 8
(c) Any representation or warranty made by Borrower in this Agreement
or in any financial report or other statement furnished by Borrower pursuant
hereto or in connection herewith is untrue in any material respect as of the
date made or furnished;
(d) If an Event of Default as defined herein or in a Security
Instrument occurs, Lender shall give written notice to Borrower of such
default. Borrower shall have 10 days from the receipt of such notice to cure
any monetary default and 30 days to cure any non-monetary default. If such
default has not then been cured, Lender may proceed with any enforcement rights
related to an Event of Default.
(e) Failure to comply with the terms of the Warrants.
7.2. Suits for Enforcement. In case any one or more Events of Default
shall occur and be continuing, Lender may, at its option, proceed individually
and collectively and enforce its rights or remedies either by suit in equity or
by action at law or by both, whether for specific performance of any covenant,
agreement or other provision contained herein or in any document or instrument
delivered in connection with or pursuant to this Agreement or to enforce
payment of the Notes or any legal or equitable right or remedy.
7.3. Rights and Remedies Cumulative. No right or remedy
herein conferred upon Lender is intended to be exclusive of any other right or
remedy contained herein, in the Security Instruments, in the Notes or in any
other instrument or document delivered in connection with this Agreement, or of
any right existing at law or in equity or by statute or otherwise or in any
other agreement.
7.4. Rights and Remedies Not Waived. No course of dealing between
Borrower and Lender or any failure or delay on the part of Lender in exercising
any rights or remedies hereunder shall operate as a waiver of any rights or
remedies of Lender and no single or partial exercise of any right or remedies
hereunder shall operate as a waiver or preclude the exercise of any other
rights or remedies hereunder.
-8-
<PAGE> 9
7.5. Pro Rata Rights and Remedies. All individual lenders hereunder
shall share such rights, interests, and benefits as are created hereunder on a
pro rata basis, based on the ratio that the amount of the note held by an
individual (or entity) lender bears to the total dollar amount of the Notes
held collectively by the Lender. Any foreclosure conducted pursuant to a Deed
of Trust or any voluntary or involuntary transfer of assets by Borrower to
Lender, shall be for the benefit of and shared by all of the Lenders on the
pro rata basis as set forth above.
SECTION 8. MISCELLANEOUS.
8.1. Survival of Agreements. All agreements, covenants,
representations and warranties made herein shall survive the execution and
delivery of this Loan Agreement, the Notes, and all other documents and
instruments to be executed and delivered in accordance herewith, and shall
continue in full force and effect until all obligations have been paid in full.
8.2. Successors. This Agreement shall be binding upon Borrower and its
successors and assigns, and shall inure to the benefit of Lender and its
successors and assigns.
8.3. Counterparts. This Agreement may be executed in any number of
counterparts and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
8.4. Severability. In case any one or more of the provisions contained
in this Agreement or in the Notes or any other documents executed in connection
therewith or herewith should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected thereby.
8.5. Usury Savings Clause. It is the intention of the parties hereto
to comply with the laws of the State of Texas; accordingly, it is agreed that
notwithstanding any provisions to the contrary in this Agreement, the Notes or
in any of the documents or otherwise relating hereto, in no event shall the
holders of the Notes or obligations be entitled to contract for, receive,
collect or apply, as interest on said Notes and Obliga-
-9-
<PAGE> 10
tions, any amount in excess of the maximum amount permitted by such laws of the
State of Texas, nor shall this Agreement or such instruments or documents
require the payment or permit the collection of interest, as defined under the
laws of the State of Texas, in excess of the maximum amount permitted by such
law. If any such excess of interest is contracted for, charged or received,
under this Agreement, the Notes or otherwise or the indebtedness evidenced by
the Notes is accelerated in whole or in part, or in the event that all or part
of the principal or interest of the Notes shall be prepaid, so that under any
of such circumstances the amount of interest contracted for, charged or
received under this Agreement, the Notes, or under any of the instruments
otherwise relating hereto, on the amount of principal actually outstanding from
time to time under the Notes shall exceed the maximum amount of interest
permitted by the laws of the State of Texas, then in any such event (a) the
provisions of this Section shall govern and control, (b) neither Borrower nor
any other person or entity now or hereafter liable for the payment of the
Notes shall be obligated to pay the amount of such interest to the extent that
it is in excess of the maximum amount of interest permitted to be contracted
for by, charged to or received from the party obligated thereon under the laws
of the State of Texas, (c) any such excess which may have been collected shall
be either applied as a credit against the then unpaid principal amount on the
Notes or refunded to the person paying the same, at the holder's option, and
(d) the effective rate of interest shall be automatically reduced to the
maximum lawful rate of interest permitted to be contracted for by, charged to
or received from the party obligated thereon under the laws of the State of
Texas as now or hereafter construed by the courts having jurisdiction thereof.
It is further agreed that without limitation of the foregoing, all calculations
of the rate of interest contracted for, charged or received under this
Agreement, the Notes, or under such other documents which are made for the
purpose of determining whether such rate exceeds the maximum lawful rate of
interest, shall be made to the extent permitted by the laws of the State of
Texas, by amortizing, prorating, allocating and spreading in equal parts during
the period of the full stated term of the Notes, all interest at any time
contracted for, charged or received from the undersigned or otherwise by the
holder or holders thereof in connection with the Notes.
-10-
<PAGE> 11
8.6. Notices. All notices, requests and demands shall be given to
or made upon the respective parties hereto as follows:
If to Borrower: Cotton Valley Energy Corporation
8350 N. Central Expressway
Suite M2030
Dallas, TX 75206
If to Lender: To address shown on the attached Exhibit "A".
All notices and other communications given to any party hereto
in accordance with the provisions of this Agreement shall be deemed to have
been given to any party when received after being sent by registered or
certified mail, if by mail, or when delivered to the addressee party, if by
telegram, in each case addressed to such party as provided herein or in
accordance with the latest unrevoked written notice from such party in
accordance with this Section.
8.8. Controlling Document. All documents executed contemporaneously
with or pursuant to this Agreement shall be interpreted in such a manner as to
be consistent with this Agreement, except in the event of actual conflict. In
the event of actual conflict in the terms and provisions of this Agreement and
any other documents referred to in this Agreement, the terms and provisions of
this Agreement will control. Any renewals, extensions, modifications and
rearrangements of the Notes referred to herein shall be deemed to be made
pursuant to this Agreement and, to the extent that they vary the rate of
interest or other terms and conditions of the Notes, shall be deemed to be an
amendment to this Agreement (even though the Notes are not executed by both
parties to this Agreement), and accordingly, shall be subject to the terms and
provisions hereof (except to the extent that the interest rate and other terms
and conditions of the Notes are amended).
8.9. Amendment. This Agreement may not be amended except in writing
signed by Borrower and Lender.
-11-
<PAGE> 12
8.10. Descriptive Headings. Descriptive headings of the several
sections and subsections of this Agreement are inserted for convenience only
and do not constitute a part of this Agreement.
8.11. Venue. All obligations and duties in any way arising out of
the terms and conditions of all documents related to this loan transaction
shall and are hereby declared to be fully performable in Waco, McLennan County,
Texas.
8.12. Borrower In Control. In no event shall Lender's rights and
interests under the Security Instruments be construed to give Lender the right
to, or be deemed to indicate that Lender is in control of the business,
management or properties of Borrower or has power over the daily management
functions and operating decisions made by Borrower.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be duly executed as of the date first above mentioned.
COTTON VALLEY ENERGY CORPORATION
BY: /s/ E. A. SOLTERO
----------------------------------
NAME: E. A. Soltero
--------------------------------
TITLE: CEO
-------------------------------
LENDER:
/s/ DARLENE M. MABERY
-------------------------------------
/s/ JIM PHILLIPS
-------------------------------------
-------------------------------------
-------------------------------------
-12-
<PAGE> 13
EXHIBIT "A"
SUBSCRIPTION AGREEMENT
Cotton Valley Resources Corporation, and its wholly owned subsidiary,
Cotton Valley Energy Corporation, (collectively the "Company"), propose to
issue and sell promissory notes and warrants (the "Securities") to certain
investors in a transaction exempt from the registration requirements of the
Securities Act of 1933. The availability of this exemption depends in part upon
the nature of the purchasers in the offering. In order to satisfy its due
diligence obligations with respect to the qualifications of such investors to
participate in the offering, the Company requests that the undersigned investor
certify as to the following items:
1. The undersigned has had an opportunity to ask questions and
receive answers from the Company or a person or persons acting on its behalf,
concerning the terms and conditions of this investment and has had an
opportunity to examine all applicable documents and information, to the extent
such documents and information are relevant to this transaction and are
possessed by the Company or are obtainable by the Company without unreasonable
effort or expense, and all such questions have been answered and documents and
information have been supplied to the full satisfaction of the undersigned.
2. The undersigned understands that an investment in the Company
may be an illiquid investment and further recognizes and agrees that the
undersigned's investment in the Company will, most likely, be held for a
lengthy period of time.
3. The undersigned acknowledges that there are substantial
restrictions on the transferability of the Securities. The Securities may not
be, and the undersigned agrees that they shall not be, sold unless such sale is
exempt from such registration under the Securities Act and any other applicable
state blue sky laws or regulations. The undersigned also acknowledges
responsibility for compliance with all conditions on transfer imposed by any
securities administrator of any state.
4. The undersigned is an "Accredited Investor", as such term is
defined in Rule 501 promulgated under the Securities Act. Accredited Investors
include (a) any natural person whose net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeds $1,000,000,and (b) any
natural person who had an individual income in excess of $200,000 in each of
the two most recent years or joint income with that person's spouse in excess
of $200,000 in each of those years and has a reasonable
<PAGE> 14
expectation of reaching the same income level in the current year.
5. The undersigned is acquiring the Securities for which he
hereby subscribes for his own account, as principal, for investment purposes
only and not with a view to the distribution thereof.
6. The undersigned has adequate means of providing for his
current needs and personal contingencies and has no need for liquidity in his
investment.
7. The undersigned has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of the
proposed investment. The undersigned can bear the economic risks in and can
afford a complete loss of any investment he may make by virtue of his
purchasing Securities and can afford to hold any such investment for an
indefinite period.
8. The undersigned has previously purchased securities which were
sold in reliance on a private offering exemption for registration under the
Securities Act.
9. The undersigned desires to purchase a promissory note in the
amount set forth below and to purchase. 40 warrants for each dollar the subject
of such note below from the Company. Such purchase is subject to the terms of a
Loan Agreement dated July 18, 1997, executed by the Company.
10. By executing this Subscription Agreement, the undersigned
authorizes the Company to attach it as Exhibit "A" to a Loan Agreement dated
July 18, 1997 (the "Loan Agreement"). The undersigned agrees to the terms and
conditions of the Loan Agreement.
Executed as of _____________, 1997.
INVESTOR:
----------------------------------------
Printed Name:
---------------------------
Social Security No:
---------------------
Address:
--------------------------------
--------------------------------
Promissory Note Amount: $
---------------
<PAGE> 15
EXHIBIT "B"
<TABLE>
<S> <C>
(1)
Lessor: Geneva Penney, Individually and as Independent
Executrix U/W/0 J. A. Penney, Deceased
Lessee: East Texas Limestone Limited Partnership
Date of Lease: June 27, 1995
Recorded: Volume 1318, page 848, Deed Records, Navarro County, Texas
(2)
Lessor: P. D. Fullwood
Lessee: East Texas Limestone Limited Partnership
Date of Lease: June 27, 1995
Recorded: Volume 1318, page 844, Deed Records, Navarro County, Texas
(3)
Lessor: Billy Wayne Chandler and wife, Peggy Sue Chandler
Lessee: East Texas Limestone Limited Partnership
Date of Lease: September 5, 1995
Recorded: Volume 1332, page 471, Deed Records, Navarro County, Texas
(4)
Lessor: Mary Lou Vannice a/k/a Lou Vannice
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 11, 1995
Recorded: Volume 1318, page 838, Deed Records, Navarro County, Texas
(5)
Lessor: Lois Gaines
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 11, 1995
Recorded: Volume 1318, page 832, Deed Records, Navarro County, Texas
(6)
Lessor: Jo Frances Curry a/k/a Jo Curry
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 11, 1995
Recorded: Volume 1318, page 829, Deed Records, Navarro County, Texas
</TABLE>
<PAGE> 16
<TABLE>
<S> <C>
(7)
Lessor: Clarence D. Bonner and Ora Lee Bonner
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 392, Deed Records, Navarro County, Texas
(8)
Lessor: Brice R. Bonner, III and Mary E. Bonner, a widow
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 396, Deed Records, Navarro County, Texas
(9)
Lessor: Thomas L. Soutter, Trustee for the Estate of Gary Franklin Dockery, Deceased
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 8, 1995
Recorded: Volume 1332, page 401, Deed Records, Navarro County, Texas
(10)
Lessor: Emma Hamilton, a widow
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 8, 1995
Recorded: Volume 1332, page 399, Deed Records, Navarro County, Texas
(11)
Lessor: Larry Norman
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 410, Deed Records, Navarro County, Texas
(12)
Lessor: Suzanne Slatkin and Beth Norman Hyatt
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 413, Deed Records, Navarro
County, Texas
</TABLE>
<PAGE> 17
<TABLE>
<S> <C>
(13)
Lessor: Dora Lee Grantham, acting herein by and through her agent
and attorney-in-fact, C. D. Layne
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 2, 1995
Recorded: Volume 1332, page 416, Deed Records, Navarro County, Texas
(14)
Lessor: Mary Frances Montgomery Robinson, Individually and as Agent
and Attorney-in-fact for Leona Daniel Montgomery and Jerry
Daniel Montgomery
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 423, Deed Records, Navarro County, Texas
(15)
Lessor: Kirby Lee Hill and wife, Amy Rene Hill
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 3, 1995
Recorded: Volume 1332, page 426, Deed Records, Navarro County, Texas
(16)
Lessor: Olen E. May and wife, Pam May
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 23, 1995
Recorded: Volume 1332, page 432, Deed Records, Navarro County, Texas
(17)
Lessor: Robert L. Patterson, Jr., Hazel E. Stewart, Eleanor Dorsett
and Anna Ruth Wood
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 2, 1995
Recorded: Volume 1332, page 435, Deed Records, Navarro County, Texas
(18)
Lessor: Carolyn Montgomery Taylor
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 438, Deed Records, Navarro
County, Texas
</TABLE>
<PAGE> 18
<TABLE>
<S> <C>
(19)
Lessor: Margaret Montgomery Thomas
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 441, Deed Records, Navarro County, Texas
(20)
Lessor: William A. McCarter
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 7, 1996
Recorded: Volume 1332, page 453, Deed Records, Navarro County, Texas
(21)
Lessor: Don Chandler and wife, Hattie Chandler
Lessee: East Texas Limestone Limited Partnership
Date of Lease: January 19, 1996
Recorded: Volume 1332, page 447, Deed Records, Navarro County, Texas
(22)
Lessor: Charles V. McCarter
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 7, 1996
Recorded: Volume 1332, page 450, Deed Records, Navarro County, Texas
(23)
Lessor: S. R. Harvard and wife, Emma L. Harvard
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 5, 1996
Recorded: Volume 1332, page 456, Deed Records, Navarro County, Texas
(24)
Lessor: Farm Credit Bank of Texas (formerly the Federal Land Bank of
Texas)
Lessee: East Texas Limestone Limited Partnership
Date of Lease: January 24, 1996
Recorded: Volume 1332, page 466, Deed Records, Navarro County, Texas
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
(25)
Lessor: Mary Rosamond King
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 7, 1996
Recorded: Volume 1332, page 458, Deed Records, Navarro County, Texas
(26)
Lessor: Leroy Poteet and wife, Ruby Slater Poteet
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 14, 1996
Recorded: Volume 1332, page 461, Deed Records, Navarro County, Texas
(27)
Lessor: Gladys Smith, a widow; Frances Elizabeth Smith, a widow; Glen
B. Smith; Ben C. Smith and Johnny Price Smith
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 19, 1996
Recorded: Volume 1332, page 464, Deed Records, Navarro County, Texas
(28)
Lessor: Gene L. Thomas and wife, Margaret Thomas
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 419, Deed Records, Navarro
County, Texas
</TABLE>
<PAGE> 20
EXHIBIT "C"
NOTE
Date: July 18, 1997
Maker: Cotton Valley Energy Corporation
Maker's Mailing Address: 8350 N. Central Expressway, Suite M2030, Dallas, Texas
75206
Payee: ?
Place for Payment: ?
Principal Amount: ? ($?)
Annual Interest Rate on
Unpaid Principal from Date: Fifteen percent (15%)
Annual Interest Rate on
Matured, Unpaid Amounts: Eighteen percent (18%)
Terms of Payment (principal and interest): Payments of interest only shall be
due and payable quarterly beginning October 18, 1997, and continuing on the
18th day of January, April, July and October thereafter until maturity on July
18, 1999, when the entire unpaid principal balance and accrued interest shall
be due and payable in full.
Security for Payment
A Security Interest Created and Granted in the Following Deed of
Trust:
Date: July 18, 1997
Grantor: Cotton Valley Energy Corporation
Trustee: David W. Wilson
Beneficiary: Those individuals named in the Exhibit "A" attached to
the Deed of Trust.
Property: All of Grantor's interest in those certain oil & gas leases
situated in Navarro County, Texas, described in the Exhibit "B"
attached to the Deed of Trust.
<PAGE> 21
Other Security for Payment: Guaranty dated July 18, 1997, executed by Cotton
Valley Resources Corporation.
Maker promises to pay to the order of Payee at the place for payment
and according to the terms of payment the principal amount plus interest at the
rates stated above. All unpaid amounts shall be due by the final scheduled
payment date.
If Maker defaults in the payment of this note or in the performance of
any obligation in any instrument securing or collateral to it, and the default
continues after Payee gives Maker notice of the default and the time within
which it must be cured, written as may be required by law or by that certain
Loan Agreement dated July 18, 1997, (the "Loan Agreement"), then Payee may
declare the unpaid principal balance and earned interest on this note
immediately due. Except as otherwise set forth above, Maker and each surety,
endorser, and guarantor waive all demands for payment, presentations for
payment, notices of intention to accelerate maturity, notices of acceleration
of maturity, protests, and notices of protest, to the extent permitted by law.
If this note or any instrument securing or collateral to it is given
to an attorney for collection or enforcement, or if suit is brought for
collection or enforcement, or if it is collected or enforced through probate,
bankruptcy, or other judicial proceeding, then Maker shall pay Payee all costs
of collection and enforcement, including reasonable attorney's fees and court
costs, in addition to other amounts due.
Interest on the debt evidenced by this note shall not exceed the
maximum amount of nonusurious interest that may be contracted for, taken,
reserved, charged, or received under law; any interest in excess of that
maximum amount shall be credited on the principal of the debt or, if that has
been paid, refunded. On any acceleration or required or permitted prepayment,
any such excess shall be canceled automatically as of the acceleration or
prepayment or, if already paid, credited on the principal of the debt or, if
the principal of the debt has been paid, refunded. This provision overrides
other provisions in this and all other instruments concerning the debt.
Payee and Maker warrant and represent that the entire agreement
relating to this loan transaction made between the parties is contained within
the Loan Agreement and other documents contemplated therein, and that there
exists no oral nor other unwritten agreements of promises between the parties
that are not reflected in the language of the various documents
<PAGE> 22
executed in conjunction with this transaction. This notice is given by Payee
with respect to this Agreement and all documents contemplated by this
Agreement, pursuant to Section 26.02 of the Texas Business and Commerce Code.
Maker acknowledges, represents and warrants to Payee that Payee has given and
such party has received this notice and that the following language and this
notice is fully incorporated into all Security Instruments, Guaranties and all
other documents contemplated by this Agreement.
THIS DOCUMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Each Maker is responsible for all obligations represented by this
note.
When the context requires, singular nouns and pronouns include the
plural.
COTTON VALLEY ENERGY
CORPORATION
BY:
----------------------------
NAME:
---------------------------
TITLE:
--------------------------
<PAGE> 23
EXHIBIT "D"
DEED OF TRUST
SECURITY AGREEMENT-FINANCING STATEMENT
Date: July 18, 1997
Grantor: Cotton Valley Energy Corporation
Grantor's Mailing Address: 8350 N. Central Expressway, Suite M2030, Dallas,
Texas 75206
Trustee: David W. Wilson, Jr.
Trustee's Mailing Address: 409 N. 14th St., Corsicana, Texas 75151
Beneficiary: Those individuals named in Exhibit "1".
Note(s): Various notes executed by Grantor to Beneficiary, dated
July 18, 1997 pursuant to a Loan Agreement between Grantor and
Beneficiary, dated July 18, 1997 (the "Loan Agreement").
Property (including any improvements): All of Grantor's interest in those
certain oil & gas leases situated in Navarro County, Texas, described in the
attached Exhibit "2".
Prior Liens (including recording information): None
For value received and to secure the payment of the Notes, Grantor
conveys the property to Trustee in trust. Grantor warrants and agrees to defend
the title to the property. If Grantor performs all the covenants and pays the
Notes according to its terms, this deed of trust shall have no further effect,
and Beneficiary shall release it at Grantor's expense.
GRANTOR'S OBLIGATIONS.
Grantor agrees to:
1. pay all taxes and assessments on the property when due;
2. preserve the lien's priority as it is established in this Deed
of Trust;
<PAGE> 24
BENEFICIARY'S RIGHTS.
1. Beneficiary may appoint in writing a substitute or successor
trustee, succeeding to all rights and responsibilities of the
original trustee.
2. If the proceeds of the Notes are used to pay any debt secured
by prior liens, Beneficiary is subrogated to all of the rights
and liens of the holders of any debt so paid.
3. If Grantor fails to perform any of Grantor's obligations,
Beneficiary may perform those obligations and be reimbursed by
Grantor, on demand, at the place where the Notes is payable
for any sums so paid, including attorney's fees, plus interest
on those sums from the dates of payment at the rate stated in
the Notes for mature, unpaid amounts. The sum to be reimbursed
shall be secured by this deed of trust.
4. If Grantor defaults on any one of the Notes or fails to
perform any of Grantor's obligations or if default occurs on a
prior lien Notes or other instrument, and the default
continues after Beneficiary gives Grantor notice of the
default and the time within which it must be cured, as may be
required by law or by the Loan Agreement, then Beneficiary
may:
a. declare the unpaid principal balance and earned interest
on the Notes immediately due;
b. Request Trustee to foreclose this lien, in which case
Beneficiary or Beneficiary's agent shall give notice of the
foreclosure sale as provided by The Texas Property Code as
then amended; and
c. purchase the property at any foreclosure sale by offering
the highest bid and have the bid credited on the Notes.
5. All individuals (or entities) who are Beneficiary shall share
such rights, interests, and benefits as are created hereunder
on a pro rata basis, based on the ratio that the amount of the
note held by an individual (or entity) bears to the total
dollar amount of the Notes held collectively by the
Beneficiary. Any foreclosure conducted pursuant to this Deed
of Trust or any voluntary or involuntary transfer of assets by
Grantor to Beneficiary, shall be for the benefit of and shares
by all of the Beneficiary on the pro rata basis as set forth
above.
<PAGE> 25
TRUSTEE'S DUTIES.
If requested by Beneficiary to foreclose this lien, Trustee shall:
1. either personally or by agent give notice of the foreclosure
sale as required by The Texas Property Code as then amended;
2. sell and convey all or part of the property to the highest
bidder for cash with a general warranty binding Grantor
subject to prior liens and to other exceptions to conveyance
and warranty; and
3. from the proceeds of the sale, pay, in this order:
a. actual expenses of foreclosure;
b. to Beneficiary, the full amount of principal,
interest, attorney's fees, and other charges due and
unpaid as set forth under Section 5, Beneficiary's
Rights;
c. any amounts required by law to be paid before
payment to Grantor; and
d. to Grantor, any balance.
GENERAL PROVISIONS.
1. If any of the property is sold under this deed of trust,
Grantor shall immediately surrender possession to the
purchaser. If Grantor fails to do so, Grantor shall become a
tenant at sufferance of the purchaser, subject to an action
for forcible detainer.
2. Recitals in any trustee's deed conveying the property will be
presumed to be true.
3. Proceeding under this deed of trust, filing suit for
foreclosure, or pursuing any other remedy will not constitute
an election of remedies.
4. If any portion of the Notes cannot be lawfully secured by this
deed of trust, payments shall be applied first to discharge
that portion.
5. Grantor assigns to Beneficiary all sums payable to or received
by Grantor from condemnation of all or part of the property,
from private sale in lieu of condemnation, and from damages
caused by public works or construction on or near the
property. After deducting any expenses incurred, including
attorney's fees, Beneficiary may release any remaining sums to
Grantor or apply such sums to reduce the Notes.
<PAGE> 26
Beneficiary shall not be liable for failure to collect or to
exercise diligence in collecting any such sums.
6. Grantor collaterally assigns to Beneficiary, all present and
future income and production from the Property. Grantor
warrants the validity and enforceability of the assignment.
Beneficiary neither has nor assumes any obligations as lessee
with respect to the Property. Beneficiary is not required to
act under this paragraph, and acting under this paragraph does
not waive any of Beneficiary's other rights or remedies. If
Grantor becomes a voluntary or involuntary bankrupt,
Beneficiary's filing a proof of claim in bankruptcy will be
tantamount to the appointment of a receiver under Texas law.
7. Interest on the debt secured by this deed of trust shall not
exceed the maximum amount of nonusurious interest that may be
contracted for, taken, reserved, charged, or received under
law; any interest in excess of that maximum amount shall be
credited on the principal of the debt or, if that has been
paid, refunded. On any acceleration or required or permitted
prepayment, any such excess shall be canceled automatically as
of the acceleration or prepayment or, if already paid,
credited on the principal of the debt or, if the principal of
the debt has been paid, refunded. This provision overrides
other provisions in this and all other instruments concerning
the debt.
8. When the context requires, singular nouns and pronouns include
the plural.
9. The term "Notes" includes all sums secured by this deed of
trust.
10. This deed of trust shall bind, inure to the benefit of, and be
exercised by successors in interest of all parties.
11. If Grantor and Maker are not the same person, the term Grantor
shall include Maker.
12. Grantor represents that this deed of trust and the Notes are
given for the following purposes: The indebtedness, the
payment of which is hereby secured, represents cash that
Beneficiary advanced to Grantor on this day at Grantor's
request and that Grantor acknowledges receiving.
13. In addition to creating a deed of trust lien on all the real
and other property described above, Grantor also grants to
Beneficiary a security interest in all
<PAGE> 27
Property other than the realty pursuant to the Texas Uniform
Commercial Code. In the event of a foreclosure sale under this
Deed of Trust, Grantor agrees that all the Property may be
sold as a whole at Beneficiary's option and that the Property
need not be present at the place of sale.
COTTON VALLEY ENERGY CORPORATION
BY:
---------------------------
NAME:
-------------------------
TITLE:
-------------------------
THE STATE OF TEXAS )
COUNTY OF _______________ )
This instrument was acknowledged before me on the day
-----
of 1997 by
-------------, --------------, -----------------------,
of Cotton Valley Energy Corporation, on behalf of said corporation.
----------------------------------
Notary Public
<PAGE> 28
EXHIBIT "1"
LENDERS
RICK BLANYER ($25,000)
Rt. 2, Box 171AC
Smithville, Texas 78957
FRED B. DULOCK ($50,000)
P.O. Box 2155
Waco, Texas 76703
BILL J. KEMP ($25,000)
408 S. 9th St.
Waco, Texas 76706
JACK D. & DARLENE M. MABERY ($25,000)
3302 Creek Bend Dr.
Garland, Texas 75044
DAN MALONE ($50,000)
300 E. Main, Suite 1100
El Paso, Texas 79901
JIM PHILLIPS ($150,000)
8202 Woodcreek
Waco, Texas 76712
<PAGE> 29
EXHIBIT "2"
(1)
Lessor: Geneva Penney, Individually and as Independent
Executrix U/W/0 J. A. Penney, Deceased
Lessee: East Texas Limestone Limited Partnership
Date of Lease: June 27, 1995
Recorded: Volume 1318, page 848, Deed Records, Navarro County,
Texas
(2)
Lessor: P. D. Fullwood
Lessee: East Texas Limestone Limited Partnership
Date of Lease: June 27, 1995
Recorded: Volume 1318, page 844, Deed Records, Navarro County,
Texas
(3)
Lessor: Billy Wayne Chandler and wife, Peggy Sue Chandler
Lessee: East Texas Limestone Limited Partnership
Date of Lease: September 5, 1995
Recorded: Volume 1332, page 471, Deed Records, Navarro County,
Texas
(4)
Lessor: Mary Lou Vannice a/k/a Lou Vannice
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 11, 1995
Recorded: Volume 1318, page 838, Deed Records, Navarro County,
Texas
(5)
Lessor: Lois Gaines
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 11, 1995
Recorded: Volume 1318, page 832, Deed Records, Navarro County,
Texas
(6)
Lessor: Jo Frances Curry a/k/a Jo Curry
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 11, 1995
Recorded: Volume 1318, page 829, Deed Records, Navarro County,
Texas
<PAGE> 30
(7)
Lessor: Clarence D. Bonner and Ora Lee Bonner
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 392, Deed Records, Navarro County,
Texas
(8)
Lessor: Brice R. Bonner, III and Mary E. Bonner, a widow
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 396, Deed Records, Navarro County,
Texas
(9)
Lessor: Thomas L. Soutter, Trustee for the Estate of Gary
Franklin Dockery, Deceased
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 8, 1995
Recorded: Volume 1332, page 401, Deed Records, Navarro County,
Texas
(10)
Lessor: Emma Hamilton, a widow
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 8, 1995
Recorded: Volume 1332, page 399, Deed Records, Navarro County,
Texas
(11)
Lessor: Larry Norman
Lessee: East Texas Limestone Limited partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 410, Deed Records, Navarro County,
Texas
(12)
Lessor: Suzanne Slatkin and Beth Norman Hyatt
Lessee: East Texas Limestone Limited Partnership
Date of Lease: July 31, 1995
Recorded: Volume 1332, page 413, Deed Records, Navarro County,
Texas
<PAGE> 31
(13)
Lessor: Dora Lee Grantham, acting herein by and through her
agent and attorney-in-fact, C. D. Layne
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 2, 1995
Recorded: Volume 1332, page 416, Deed Records, Navarro County,
Texas
(14)
Lessor: Mary Frances Montgomery Robinson, Individually and as
Agent and Attorney-in-fact for Leona Daniel
Montgomery and Jerry Daniel Montgomery
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 423, Deed Records, Navarro County,
Texas
(15)
Lessor: Kirby Lee Hill and wife, Amy Rene Hill
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 3, 1995
Recorded: Volume 1332, page 426, Deed Records, Navarro County,
Texas
(16)
Lessor: Olen E. May and wife, Pam May
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 23, 1995
Recorded: Volume 1332, page 432, Deed Records, Navarro County,
Texas
(17)
Lessor: Robert L. Patterson, Jr., Hazel E. Stewart, Eleanor
Dorsett and Anna Ruth Wood
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 2, 1995
Recorded: Volume 1332, page 435, Deed Records, Navarro County,
Texas
(18)
Lessor: Carolyn Montgomery Taylor
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 438, Deed Records, Navarro County,
Texas
<PAGE> 32
(19)
Lessor: Margaret Montgomery Thomas
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 441, Deed Records, Navarro County,
Texas
(20)
Lessor: William A. McCarter
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 7, 1996
Recorded: Volume 1332, page 453, Deed Records, Navarro County,
Texas
(21)
Lessor: Don Chandler and wife, Hattie Chandler
Lessee: East Texas Limestone Limited Partnership
Date of Lease: January 19, 1996
Recorded: Volume 1332, page 447, Deed Records, Navarro County,
Texas
(22)
Lessor: Charles V. McCarter
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 7, 1996
Recorded: Volume 1332, page 450, Deed Records, Navarro County,
Texas
(23)
Lessor: S. R. Harvard and wife, Emma L. Harvard
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 5, 1996
Recorded: Volume 1332, page 456, Deed Records, Navarro County,
Texas
(24)
Lessor: Farm Credit Bank of Texas (formerly the Federal Land
Bank of Texas)
Lessee: East Texas Limestone Limited Partnership
Date of Lease: January 24, 1996
Recorded: Volume 1332, page 466, Deed Records, Navarro County,
Texas
<PAGE> 33
(25)
Lessor: Mary Rosamond King
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 7, 1996
Recorded: Volume 1332, page 458, Deed Records, Navarro County,
Texas
(26)
Lessor: Leroy Poteet and wife, Ruby Slater Poteet
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 14, 1996
Recorded: Volume 1332, page 461, Deed Records, Navarro County,
Texas
(27)
Lessor: Gladys Smith, a widow; Frances Elizabeth Smith, a
widow; Glen B. Smith; Ben C. Smith and Johnny Price
Smith
Lessee: East Texas Limestone Limited Partnership
Date of Lease: February 19, 1996
Recorded: Volume 1332, page 464, Deed Records, Navarro County,
Texas
(28)
Lessor: Gene L. Thomas and wife, Margaret Thomas
Lessee: East Texas Limestone Limited Partnership
Date of Lease: August 15, 1995
Recorded: Volume 1332, page 419, Deed Records, Navarro County,
Texas
<PAGE> 34
EXHIBIT "E"
GUARANTY
For value received, Cotton Valley Resources Corporation (the
"Company") absolutely and unconditionally guarantees payment of a promissory
note dated July 18, 1997, executed by Cotton Valley Energy Corporation, and
payable to the order of____________, in the sum of $ __________ (the "Note"),
according to its terms to the same extent as if the Company were maker of the
Note. Except as set forth in that certain Loan Agreement dated July 18, 1997
between Cotton Valley Energy Corporation and the Payee of the Note, the Company
waives all demands for payment, presentations for payment, notices of intention
to accelerate maturity, notices of acceleration of maturity, protests, and
notices of protest, to the extent permitted by law, pertaining to the Note.
This is a guaranty of payment and performance, not of collection, and it is an
agreement of guaranty, not of suretyship.
Dated this 18th day of July, 1997.
COTTON VALLEY RESOURCES CORPORATION
BY:
------------------------------------
EUGENE SOLTERO, CEO
<PAGE> 35
EXHIBIT "F"
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY
BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT
PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION
FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE.
COTTON VALLEY RESOURCES CORPORATION
Incorporated Under the Laws of the Province of Ontario
No. Common Stock
Purchase Warrants
CERTIFICATE FOR COMMON STOCK
PURCHASE WARRANTS
1. Warrant. This Warrant Certificate certifies that , or registered
assigns (the "Registered Holder"), is the registered owner of the above
indicated number of Warrants expiring on the Expiration Date, as hereinafter
defined. One (1) Warrant entitles the Registered Holder to purchase one (1)
share of the common stock (a "Share") of Cotton Valley Resources Corporation,
an Ontario corporation (the "Company"), from the Company at a purchase price of
Two Dollars and Eight Cents (US$2.08) (the "Exercise Price") at any time during
the Exercise Period, as hereinafter defined, upon surrender at the principal
office of the Company of this Warrant Certificate with the exercise form
appended hereto duly completed and executed and accompanied by payment of the
Exercise Price.
Upon due presentment for transfer or exchange of this Warrant
Certificate at the principal office of the Company, a new Warrant Certificate
or Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued in exchange for this Warrant Certificate,
subject to the limitations provided herein, upon payment of any tax or
governmental charge imposed in connection with such transfer. Subject to the
terms hereof, the Company shall deliver Warrant Certificates in required whole
number denominations to Registered Holders in connection with any transfer or
exchange permitted hereunder.
2. Restrictive Legend. Each Warrant Certificate and each certificate
representing Shares issued upon exercise of a Warrant, unless such Shares are
then
-1-
<PAGE> 36
registered under the Securities Act of 1933, as amended (the "Act"), shall bear
a legend in substantially the following form:
"THE [SECURITIES] REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY
LAWS OF ANY STATE AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND
QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES
OR BLUE SKY LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION
IS APPLICABLE."
3. Exercise. Subject to the terms hereof, the Warrants evidenced by this
Warrant Certificate may be exercised at the Exercise Price in whole or in part
at any time during the period (the "Exercise Period") commencing on June 18,
1997 and terminating at 5:00 p.m., Central standard time, on April 30, 2002
(the "Expiration Date"). The Exercise Period may be extended by the Company's
Board of Directors.
A Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date (the "Exercise Date") of the surrender to the
Company at its principal offices of this Warrant Certificate with the exercise
form attached hereto completed and executed by the Registered Holder and
accompanied by payment to the Company, in cash or by check (which shall be
accepted subject to collection), of an amount equal to the aggregate Exercise
Price for the Warrants being exercised, in lawful money of Canada.
The person entitled to receive the Shares issuable upon exercise of a
Warrant or Warrants ("Warrant Shares") shall be treated for all purposes as the
holder of such Warrant Shares as of the close of business on the Exercise Date.
The Company shall not be obligated to issue any fractional share interests in
Warrant Shares issuable or deliverable on the exercise of any Warrant or scrip
or cash with respect thereto, and such right to a fractional share shall be of
no value whatsoever. If more than one Warrant shall be exercised at one time by
the same Registered Holder, the number of full Shares which shall be issuable on
exercise thereof shall be computed on the basis of the aggregate number of full
shares issuable on such exercise.
Promptly, and in any event within ten business days after the
Exercise Date, the Company shall cause to be issued and delivered to the person
or persons entitled to receive the same, a certificate or certificates for the
number of Warrant Shares deliverable on such exercise.
The Company may deem and treat the Registered Holder of the Warrants
at any time as the absolute owner thereof for all purposes, and the Company
shall not be affected by any notice to the contrary. The Warrants shall not
entitle the Registered
-2-
<PAGE> 37
Holder thereof to any of the rights of shareholders or to any dividend declared
on the Shares unless the Registered Holder shall have exercised the Warrants
and thereby purchased the Warrant Shares prior to the record date for the
determination of holders of Shares entitled to such dividend or other right.
4. Reservation of Shares and Payment of Taxes. The Company covenants
that it will at all times reserve and have available from its authorized Common
Stock such number of Shares as shall then be issuable on the exercise of
outstanding Warrants. The Company covenants that all Warrant Shares which shall
be so issuable shall be duly and validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
The Registered Holder shall pay all documentary, stamp or similar
taxes and other government charges that may be imposed with respect to the
issuance, transfer or delivery of any Warrant Shares on exercise of the
Warrants. In the event the Warrant Shares are to be delivered in a name other
than the name of the Registered Holder of the Warrant Certificate, no such
delivery shall be made unless the person requesting the same has paid the
amount of any such taxes or charges incident thereto.
5. Registration of Transfer. The Warrant Certificates may be transferred
in whole or in part, provided any such transfer complies with all applicable
securities laws. Warrant Certificates to be transferred shall be surrendered to
the Company at its principal office. The Company shall execute, issue and
deliver in exchange thereof the Warrant Certificate or Certificates which the
Registered Holder making the transfer shall be entitled to receive.
The Company shall keep transfer books at its principal office which
shall register Warrant Certificates and the transfer thereof. On due
presentment of any Warrant Certificate for registration of transfer at such
office, the Company shall execute, issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants. All Warrant Certificates presented for
registration of transfer or exercise shall be duly endorsed or be accompanied
by a written instrument or instruments of transfer in form satisfactory to the
Company. The Company may require payment of a sum sufficient to cover any tax
or other government charge that may be imposed in connection therewith.
All Warrant Certificates so surrendered, or surrendered for exercise,
or for exchange in case of mutilated Warrant Certificates, shall be promptly
canceled by the Company and thereafter retained by the Company until the
Expiration Date. Prior to due presentment for registration of transfer thereof,
the Company may treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof (notwithstanding any notations of ownership or writing
thereon made by anyone other
- 3 -
<PAGE> 38
than the Company), and the Company shall not be affected by any notice to the
contrary.
6. Loss or Mutilation. On receipt by the Company of evidence
satisfactory as to the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate, the Company shall execute and deliver,
in lieu thereof, a new Warrant Certificate representing an equal aggregate
number of Warrants. In the case of loss, theft or destruction of any Warrant
Certificate, the individual requesting issuance of a new Warrant Certificate
shall be required to indemnify the Company in a form and amount satisfactory to
the Company. In the event a Warrant Certificate is mutilated, such Certificate
shall be surrendered and canceled by the Company prior to delivery of a new
Warrant Certificate. Applicants for a new Warrant Certificate shall also comply
with such other regulations and pay such other reasonable charges as the
Company may prescribe.
7. Adjustment of Shares. The number and kind of securities issuable
upon exercise of a Warrant shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
(a) Stock Splits, Stock Combinations and Certain Stock
Dividends. If the Company shall at any time subdivide or combine its
outstanding Shares, or declare a dividend in Shares or other
securities of the Company convertible into or exchangeable for Shares,
a Warrant for the same Exercise Price shall, after such subdivision or
combination or after the record date for such dividend, be exercisable
for that number of Shares and other securities of the Company that the
Registered Holder would have owned immediately after such event with
respect to the Shares and other securities for which a Warrant may
have been exercised immediately before such event had the Warrant been
exercised immediately before such event. Any adjustment under this
Section 7(a) shall become effective at the close of business on the
date the subdivision, combination or dividend becomes effective.
(b) Adjustment for Reorganization, Consolidation, Merger. In
case of any reorganization of the Company (or any other corporation
the stock or other securities of which are at the time receivable upon
exercise of a Warrant) or in case the Company (or any such other
corporation) shall merge into or with or consolidate with another
corporation or convey all or substantially all of its assets to
another corporation or enter into a business combination of any form
as a result of which the Shares or other securities receivable upon
exercise of a Warrant are converted into other stock or securities of
the same or another corporation, then and in each such case, the
Registered Holder of a Warrant, upon exercise of the purchase right at
any time after the consummation of such reorganization, consolidation,
merger, conveyance or combination, shall for the
-4-
<PAGE> 39
same Exercise Price be entitled to receive, in lieu of the Shares or other
securities to which such Registered Holder would have been entitled had he
exercised the purchase right immediately prior thereto, such stock and
securities which such Registered Holder would have owned immediately after
such event with respect to the Shares and other securities for which a
Warrant may have been exercised immediately before such event had the
Warrant been exercised immediately prior to such event.
In each case of an adjustment in the Shares or other securities
receivable upon the exercise of a Warrant, the Company shall promptly notify the
Registered Holder of such adjustment. Such notice shall set forth in reasonable
detail the facts upon which such adjustment is based.
8. Reduction in Exercise Price at Company's Option. The Company's Board
of Directors may, at its sole discretion, reduce the Exercise Price of the
Warrants in effect at any time either for the remaining life of the Warrants or
any shorter period of time determined by the Company's Board of Directors. The
Company shall promptly notify the Registered Holders of any such reduction in
the Exercise Price.
9. Registration Rights.
(a) If, at any time during the Exercise Period and the
three (3) years following any exercise hereunder, the Company proposes to file
a registration statement with respect to any class of securities (other than
pursuant to a registration statement on Forms S-4 or S-8 or any successor form)
under the Securities Act, the Company shall notify the Registered Holder at
least twenty (20) days prior to the filing of such registration statement and
will offer to include in such registration statement all or any portion of the
Warrant Shares. In a written notice to be delivered to the Company within twenty
(20) days after receipt of any such notice from the Company, the Registered
Holder shall state the number of Warrant Shares that it wishes to register for
resale and distribution publicly under the proposed registration statement. The
Company will use its best efforts, through its officers, directors, auditors and
counsel in all matters necessary or advisable, to file at least one (1) such
registration statement by November 30, 1997. The Company will also use its best
efforts, through its officers, directors, auditors and counsel in all matters
necessary or advisable, to include within the coverage of each such registration
statement (except as hereinafter provided) the Warrant Shares that Registered
Holder has advised the Company that Registered Holder wishes to register
pursuant to such registration statement for resale and distribution, to
prosecute each such registration statement diligently to effectiveness, to cause
such registration statement to become effective as promptly as practicable, and
to register or qualify the securities so being registered under such state and
provincial securities or "blue sky" laws as the Registered Holder may
reasonably request. In that regard, the
-5-
<PAGE> 40
Company makes no representations or warranties as to its ability to have any
registration statement declared effective.
All registrations requested pursuant to this Section 9(a) are referred to
herein as "Piggyback Registrations." In the event the Company is advised by the
staff of the Securities and Exchange Commission, Nasdaq Stock Market or any
self-regulatory or state securities agency that the inclusion of the Warrant
Shares will prevent, preclude or materially delay the effectiveness of a
registration statement filed, the Company, in good faith, may amend such
registration statement to exclude the Warrant Shares without otherwise
affecting the Registered Holder's rights to any other registration statement
herein.
(i) Primary Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company, and if the
underwriter thereof advises the Company in writing that in its opinion the
number of Warrant Shares requested to be included in such registration
statement exceeds the number that can be sold in such offering without
materially adversely affecting the distribution of such securities by the
Company, then the Company will include in such registration statement first,
the securities that the Company proposes to sell and second, the securities
requested to be included in such registration statement by selling
securityholders, such rights to inclusion being apportioned pro rata among
the Registered Holder and the other holders of any other securities
requesting registration according to the market value of Warrant Shares and
other securities requested to be registered.
Notwithstanding the above, if any such underwriter shall advise the
Company in writing that the distribution of the Warrant Shares being included
in the registration statement concurrently with the securities being registered
by the Company would materially adversely affect the distribution of such
securities by the Company, then the Registered Holder shall delay its offering
and sale for such period ending on the earliest of (a) one hundred eighty (180)
days following the effective date of the Company's registration statement, (b)
the earliest date that, in the opinion of such underwriter, such adverse effect
would no longer be caused, or (c) such date as the Company, managing
underwriter and Registered Holder shall otherwise agree. In the event of such
delay, the Company shall file such supplements and post-effective amendments
and take any such other actions as may be necessary or appropriate to permit
such Registered Holder to make its proposed offering and sale for a period of
at least ninety (90) days commencing immediately following the end of such
period of delay. If any party
- 6 -
<PAGE> 41
disapproves of the terms of any such underwriting, it may elect
to withdraw therefrom by written notice to the Company, the
underwriter and the Registered Holder. Notwithstanding the foregoing,
the Company shall not be required to include Warrant Shares within the
coverage of a registration statement being filed pursuant to this
Section 9(a)(i) if, in the opinion of counsel for both the Company and
Registered Holder, all of the Warrant Shares proposed to be registered
may be immediately transferred pursuant to the provisions of Rule 144
under the Securities Act.
(ii) Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of
holders of securities of the Company, and the underwriter thereof
advises the Company in writing that in its opinion the number of
Warrant Shares requested to be included in such registration statement
exceeds the number of which can be sold in such offering without
materially adversely affecting the distribution of such securities,
then the Company will include in such registration statement the
securities requested to be included in such registration statement by
selling securityholders on a pro rata basis, with such rights to
inclusion being apportioned among the Registered Holder and the other
holders of any other securities requesting registration according to
the market value of Warrant Shares and other securities requested by
them, respectively, to be registered. Notwithstanding the foregoing,
the Company shall not be required to include Warrant Shares within the
coverage of a registration statement being filed pursuant to this
Section 9(a)(ii) if, in the opinion of counsel for both the Company
and Registered Holder, all of the Warrant Shares proposed to be
registered may be immediately transferred pursuant to the provisions
of Rule 144 under the Securities Act.
(b) If at any time after June 18, 1997 and prior to the third (3rd)
anniversary of the earlier of the Expiration Date and the exercise of the
final Warrant represented hereby and the Warrant Shares issued or issuable
upon exercise of the Warrants represented hereby are not then registered
under one or more Piggyback Registrations and then covered by a prospectus
complying with the requirements of the Securities Act, the Registered
Holder may by written notice to the Company required the Company to file a
registration statement under the Securities Act covering such Warrant
Shares as the Registered Holder may specify in such notice. A Registered
Holder shall be entitled so to require the Company to file a registration
statement pursuant to this Section 9(b) on only one (1) occasion. The
Company will file such a registration statement within ninety (90) days of
receipt of such notice; and thereafter will prosecute such registration
statement diligently to effectiveness; will cause such registration
statement to become effective as promptly as practicable; will promptly
file all such
-7-
<PAGE> 42
supplements and post-effective amendments to such registration statement and
take any such other actions as may be necessary or appropriate to make
available to Registered Holder on as continuous a basis as is practicable a
prospectus meeting the requirements of the Securities Act through the earliest
of (a) the date on which the final Warrant Shares have been sold and
distributed by Registered Holder, (b) the date on which, in the opinion of
counsel for both the Company and Registered Holder, all of the Warrant Shares
which Registered Holder then holds may be immediately transferred pursuant to
the provisions of Rule 144 under the Securities Act, and (c) April 30, 2002;
and will register or qualify the securities so being registered under such
state and provincial securities or "blue sky" laws as the Registered Holder may
reasonably request. In that regard, the Company makes no representative or
warranties as to its ability to have any registration statement or
post-effective amendment thereto declared effective.
(c) In the event of any registration of a security pursuant to this
Section 9, the Company shall indemnify the Registration Holder and its officers,
directors and other controlling persons against all losses, claims, damages and
liabilities caused by any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus (and as
amended or supplemented) relating to such registration, or caused by any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which they are made unless such statement or omission
was made in reliance upon and in conformity with information furnished to the
Company by the Registered Holder expressly for use therein. The Registered
Holder shall also indemnify the Company, its officers and directors and each
underwriter of the Warrant Shares so registered with respect to losses, claims
damages and liabilities caused by any untrue statement or omission made in
reliance upon and in conformity with information furnished by the Registered
Holder to the Company in writing expressly for use in such registration
statement or prospectus.
(d) All expenses of any registration referred to in this Section 9,
except the fees and disbursements of counsel to the Registered Holder,
underwriting commissions or discounts and any transfer or other taxes
applicable to the transfer of Warrant Shares by the Registered Holder, shall be
borne by the Company.
(e) Following the exercise of Warrants hereunder and the disposition of
Warrant Shares, the Registered Holder shall promptly advise the Company when
Registered Holder no longer holds any Warrant Shares acquired through the
exercise of Warrants hereunder, and upon the request of the Company, the
Registered Holder shall advise the Company from time to time of the number of
Warrant Shares then held by Registered Holder.
(f) The registration rights granted hereunder to the Registered Holder
with respect to Warrant Shares shall also apply to any other shares of the
Company's
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<PAGE> 43
Common Stock or other securities issued by the Company other than Warrants
which are then held by the Registered Holder and constitute "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act, on the same basis as if such securities were Warrant Shares.
10. Notices. All notices, demands, elections, or requests (however
characterized or described) required or authorized hereunder
shall be deemed given sufficiently if in writing and sent by
registered or certified mail, return receipt requested and
postage prepaid, or by facsimile or telegram to the Company,
at its principal executive office, and to the Registered
Holder, at the address of such holder as set forth on the
books maintained by the Company.
11. General Provisions. This Warrant Certificate shall be
construed and enforced in accordance with, and governed by, the laws of the
Province of Ontario. Except as otherwise expressly stated herein, time is of
the essence in performing hereunder. The headings of this Warrant Certificate
are for convenience in reference only and shall not limit or otherwise affect
the meaning hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the 24th day of June, 1997.
COTTON VALLEY RESOURCES
CORPORATION, an Ontario, Canada corporation
By: /s/ E. A. SOLTORO
-------------------------------
Name: E. A. Soltoro
Title: CEO
-9-
<PAGE> 44
COTTON VALLEY RESOURCES CORPORATION
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
TEN ENT - as tenants by the entireties Custodian
JR TEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts
tenants in common to Minors Act ___
(State)
Additional abbreviations may also be used though not in the above list.
FORM OF ASSIGNMENT
(To be Executed by the Registered Holder if He
Desires to Assign Warrants Evidenced by the
Within Warrant Certificate)
FOR VALUE RECEIVED __________________________________________________
hereby sells, assigns and transfers unto ___________________________ (_________)
Warrants, evidenced by the within Warrant Certificate, and does hereby
irrevocably constitute and appoint _______________________ Attorney to transfer
the said Warrants evidenced by the within Warrant Certificates on the books of
the Company, with full power of substitution.
Dated:_________________________ _______________________________________
Signature
Notice: The above signature must correspond with the name as written upon the
face of the Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
Signature Guaranteed: ________________________________________
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
-10-
<PAGE> 45
FORM OF ELECTION TO PURCHASE
(To be Executed by the Holder if he Desires to Exercise
Warrants Evidenced by the Warrant Certificate)
To Cotton Valley Resources Corporation:
The undersigned hereby irrevocably elects to exercise ____________________
__________________ (_____) Warrants, evidenced by the within Warrant
Certificate for, and to purchase thereunder, _______________________ __________
(____) full shares of Common Stock issuable upon exercise of said Warrants and
delivery of CS ________________ and any applicable taxes.
The undersigned requests that certificates for such shares be issued in
the name of:
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If said number of Warrants shall not be all the Warrants evidenced by the
within Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercised by issued in the name of
and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SIGNATURES CONTINUED ON FOLLOWING PAGE)
-11-
<PAGE> 46
Dated: ______________________ Signature: ____________________
NOTICE: The above signature must correspond with the name as written upon
the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever. If
signed by any other person, the Form of Assignment hereon must be
duly executed by the registered holder in favor of the person so
signing, and if the certificate representing the shares or any
warrant Certificate representing Warrants not exercised is to be
registered in a name other than that in which the within Warrant
Certificate is registered, the signature of the holder hereof must
be guaranteed.
Signature Guaranteed: _______________________________________
ANY SIGNATURE GUARANTY REQUIRED MUST BE PROVIDED BY A COMMERCIAL BANK OR MEMBER
FIRM OF ONE OF THE FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC
COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
_________________________
<PAGE> 1
EXHIBIT 10.14
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement"), dated and effective as of November
7, 1996 is entered into by and between COTTON VALLEY RESOURCES CORPORATION, an
Ontario, Canada corporation (herein referred to as the "Company") and LIVIAKIS
FINANCIAL COMMUNICATIONS, INC., a California corporation (herein referred to as
the "Consultant").
RECITALS
WHEREAS, Company is a publicly held corporation with its common stock
traded through the Canadian Dealing Network; and
WHEREAS, Consultant has experience in the area of corporate finance,
investor communications and financial and investor public relations; and
WHEREAS, Company desires to engage the services of Consultant to assist
and consult with the Company in matters concerning corporate finance and to
represent the company in investors' communications and public relations with
existing shareholders, brokers, dealers and other investment professionals as
to the Company's current and proposed activities;
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Term of Consultancy. Company hereby agrees to retain the Consultant to act
in a consulting capacity to the Company, and the Consultant hereby agrees to
provide services to the Company commencing November 7, 1996 and ending on
January 2, 1998.
2. Duties of Consultant. The Consultant agrees that it will generally provide
the following specified consulting services through its officers and employees
during the term specified in Section 1.:
(a) Advise and assist the Company in developing and implementing
appropriate plans and materials for presenting the Company and its business
plans, strategy and personnel to the financial community, establishing an image
for the Company in the financial community, and creating the foundation for
subsequent financial public relations efforts;
(b) Introduce the Company to the financial community;
(c) With the cooperation of the Company, maintain an awareness during the
term of this Agreement of the Company's plans, strategy and personnel, as they
may evolve during such period, and advise and assist the Company in
communicating appropriate information regarding such plans, strategy and
personnel to the financial community;
(d) Assist and advise the Company with respect to its (i) stockholder and
investor relations, (ii) relations with brokers, dealers, analysts and other
investment professionals, and (iii) financial public relations generally;
(e) Perform the functions generally assigned to investor/stockholder
relations and public relations departments in major corporations, including
responding to telephone and written
1.
<PAGE> 2
inquiries (which may be referred to the Consultant by the Company); preparing
or reviewimg press releases, reports and other communications with or to
shareholders, the investment community and the general public; advising with
respect to the timing, form, distribution and other matters related to such
releases, reports and communications; and consulting with respect to corporate
symbols, logos, names, the presentation of such symbols, logos and names, and
other matters relating to corporate image;
(f) Disseminate information regarding the Company to shareholders, brokers,
dealers, other investment community professionals and the general investing
public;
(g) Conduct meetings, in person or by telephone, with brokers, dealers,
analysts and other investment professionals to advise them of the Company's
plans, goals and activities, and assist the Company in preparing for press
conferences and other forums involving the media, investment community
professionals and the general investment public;
(h) At the Company's request, review business plans, strategies, mission
statements budgets, proposed transactions and other plans for the purpose of
advising the Company of the investment community implications thereof; and
(i) Otherwise perform as the Company's financial relations and public
relations consultant.
It is understood that until January 2, 1997, the Consultant will only be
responsible to advise the Company on matters concerning corporate finance and
to assist the Company in creation of its investor relations infrastructure. The
Consultant will not be expected to perform any proactive investor relations or
financial public relations activities until January 2, 1997.
3. Allocation of Time and Energies. The Consultant hereby promises to perform
and discharge well and faithfully the responsibilities which may be assigned to
the Consultant from time to time by the officers and duly authorized
representatives of the Company in connection with the conduct of its financial
and investor public relations and communications activities, so long as such
activities are in compliance with applicable securities laws and regulations.
Consultant shall diligently and thoroughly provide the consulting services
required hereunder. Although no specific hours-per-day requirement will be
required, Consultant and the Company agree that Consultant will perform the
duties set forth hereinabove in a diligent and professional manner. The parties
acknowledge and agree that a disproportionately large amount of the effort to be
expended and the costs to be incurred by the Consultant and the benefits to be
received by the Company are expected to occur upon and shortly after, and in any
event, within one month of the effectiveness of this Agreement. It is
explicitly understood that Consultant's performance of its duties hereunder will
in no way be measured by the price of the Company's common stock, nor the
trading volume of the Company's common stock, both of which cannot be guaranteed
by the Consultant. It is also understood that the Company is entering into this
Agreement with Liviakis Financial Communications, Inc. ("LFC"), a corporation
and not any individual member of LFC, and with such, Consultant will not be
deemed to have breached this Agreement if any member, officer or director of LFC
leaves the firm or dies or becomes physically unable to perform any meaningful
activities during the term of the Agreement, provided the Consultant otherwise
performs its obligations under this Agreement.
4. Remuneration. As full and complete compensation for services described in
this Agreement, the Company shall compensate Consultant as follows:
2.
<PAGE> 3
4.1 In connection with Consultant undertaking this engagement, the Company
agrees to sell, and Consultant and Robert B. Prag ("RBP"), an affiliate
of consultant, severally agree to buy, for One Canadian Dollar (C$1.00)
per unit five hundred thousand (500,000) units (the "Units"), each
consisting of one share of the Company's common stock ("Common Stock")
and one stock purchase warrant (a "Warrant") entitling the holder thereof
to purchase a share of Common Stock at an exercise price of One Dollar
and Ten Cents Canadian (C$1.10) through November 7, 2001. The Warrants
shall be evidenced by the form of warrant certificate attached hereto as
Exhibit A. It is understood that the Units, the shares of Common Stock
and Warrants constituting the Units, and the shares of Common Stock
issuable upon exercise of the Warrants have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and
consequently such securities constitute and will constitute "restricted
securities" as defined in Rule 144 promulgated under the Securities Act,
unless registered under the Securities Act.
Consultant shall purchase three hundred seventy-five thousand (375,000)
Units, for which he shall deliver to the Company his promissory note in
the amount of Two Hundred Eighty-One Thousand Two Hundred Fifty United
States Dollars (US$281,250), payable in four monthly installments on the
fifteenth (15th) day of December 1996 and January, February and March
1997 of US$56,250, US$75,000, US$75,000 and US$75,000, respectively. RBP
shall purchase one hundred twenty-five thousand (125,000) Units, for which
he shall deliver to the Company his promissory note in the amount of
Ninety-Three Thousand Seven Hundred Fifty United States Dollars
(US$93,750), payable in four monthly installments on the fifteenth (15th)
day of December 1996 and January, February and March 1997 of US$18,750,
US$25,000, US$25,000, and US$25,000 respectively. Certificates
representing the shares of Common Stock and Warrants constituting the
Units shall be issued in the names of Consultant and RBP and delivered in
trust to Weir & Foulds, counsel to the Company, pursuant to irrevocable
instructions under which Weir & Foulds is to deliver the certificates
representing such securities to Consultant and RBP, respectively, pro
rata as such promissory notes are paid.
In addition, as consideration for Consultant undertaking this
engagement, the Company shall issue and deliver to Consultant an aggregate
of one million four hundred ninety thousand (1,490,000) shares (the
"Consideration Shares") of Common Stock. The Consideration Shares shall
be issued by the Company and delivered to Consultant in accordance with
the following schedule:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<S> <C>
400,000 Upon execution of this agreement
800,000 January 2, 1997
50,000 January 31, 1997
50,000 February 28,1997
50,000 March 31, 1997
50,000 April 31, 1997
50,000 May 31, 1997
40,000 June 30, 1997
---------
1,490,000
</TABLE>
3.
<PAGE> 4
It is understood that the Consideration Shares have not been registered
under the Securities Act and consequently such securities constitute and will
constitute "restricted securities" as defined in Rule 144 promulgated under
the Securities Act, unless registered under the Securities Act.
The Company agrees that, when issued and delivered to Consultant and RBP,
the Consideration Shares, the shares of Common Stock constituting part of the
Units and the shares of Common Stock issuable upon exercise of the Warrants
shall be duly authorized, validly outstanding, fully paid and non-assessable.
The Company also understands and agrees that Consultant has foregone
significant opportunities to accept this engagement and that the Company
derives substantial benefit from the execution of this Agreement and the
ability to announce its relationship with Consultant. The Consideration
Shares, therefore, constitute payment for Consultant's agreement to represent
the Company and are a nonrefundable, non-apportionable and non-ratable
retainer. If the Company elects to terminate this Agreement prior to January
2, 1998 for any reason whatsoever, it is agreed and understood that
Consultant will not be and may not be required or requested by the company to
return any of the Consideration Shares or any securities constituting the
Units or issued upon exercise of the Warrants.
The Consideration Shares and the shares of Common Stock constituting the
Units shall have the benefit of the same registration rights as the shares of
Common Stock issuable upon exercise of the Warrants receive pursuant to the
terms of the warrant certificates representing the Warrants. The Company
agrees to file by November 30, 1997 and thereafter to prosecute diligently to
effectiveness a registration statement under the Securities Act covering,
among other securities, such Consideration Shares, shares of common Stock
constituting part of the Units, and shares of Common Stock issuable upon
exercise of the Warrants as Consultant and RBP may request. Consultant and
RBP agree that they, respectively, will not sell shares of Common Stock
received hereunder prior to January 2, 1998.
4.2 Consultant and Prag (hereinafter referred to as "Consultants") acknowledge
that the shares of Common Stock, the Options and the shares issuable upon the
exercise of the Options to be issued pursuant to this Agreement
(collectively, the "Shares") have not been registered under the Securities
Act of 1933, and accordingly are "restricted securities" within the meaning
of Rule 144 of the Act. As such, the Options and the Shares may not be
resold or transferred unless the Company has received an opinion of counsel
reasonably satisfactory to the Company that such resale or transfer is
exempt from the registration requirements of that Act.
4.3 In connection with the acquisition of Shares hereunder, the Consultants
represent and warrant to the Company as follows:
(a) Consultants acknowledge that the Consultants have been afforded the
opportunity to ask questions of and receive answers from duly authorized
officers or other
4.
<PAGE> 5
representatives of the Company concerning an investment in the Shares,
and any additional information which the Consultants have requested.
(b) Consultants' investment in restricted securities is reasonable in
relation to the Consultants' net worth, which is in excess of ten (10) times
the Consultants' cost basis in the Shares. Consultants have had experience
in investments in restricted and publicly traded securities, and
Consultants have had experience in investments in speculative securities
and other investments which involve the risk of loss of investment.
Consultants acknowledges that an investment in the Shares is speculative
and involves the risk of loss. Consultants have the requisite knowledge to
assess the relative merits and risks of this investment without the
necessity of relying upon other advisors, and Consultants can afford the
risk of loss of his entire investment in the Shares. Consultants are (i)
accredited investors, as that term is defined in Regulation D promulgated
under the Securities Act of 1933, and (ii) a purchaser described in Section
25102(f)(2) of the California Corporate Securities Law of 1968, as
amended.
(c) Consultants are acquiring the Shares for the Consultants' own
account for long-term investment and not with a view toward resale or
distribution thereof except in accordance with applicable securities laws.
(d) In any vote of shareholders for the election of directors or any
related matter (such as increasing or decreasing the authorized number of
directors or creating a classified board of directors) held prior to
January 1, 2001, Consultants shall vote any shares of Common Stock received
by Consultants pursuant to this Agreement, either directly or through the
exercise of warrants, and then held by Consultants (i) in connection with
the election of directors for such nominees as may be designated by Eugene
A. Soltero and James E. Houge and (ii) with respect to related matters in
such manner as Messrs. Soltero and Houge may designate. Any designation
regarding voting by Messrs. Soltero and Houge shall be made in a written
notice executed by Messrs. Soltero and Houge and delivered to Consultants.
It is understood that any shares of Common Stock transferred by Consultants
to person or entities not subject to the control of Consultants shall be
transferred free of any obligation with respect to voting arising under
this subparagraph.
5. Financing "Finder's Fee". It is understood that in the event Consultant
introduces Company, or its nominees, to a lender or equity purchaser, not
already having a preexisting relationship with the Company, who Company, or
its nominees, ultimately finances or causes the completion of such
financing, Company agrees to compensate Consultant for such services with a
"finder's fee" in the amount of 2.5% of total gross financing provided by
Company payable in cash. This will be in addition to any fees payable by
Company to any other intermediary, if any, which shall be per separate
agreements negotiated between Company and such other intermediary.
5.1 It is further understood that Company, and not Consultant, is responsible
to perform any and all due diligence on such lender or equity purchaser
introduced to it by Consultant under this Agreement, prior to Company
receiving funds. However, Consultant will not introduce any parties to
Company about which Consultant has any prior knowledge of questionable,
unethical or illicit activities.
5.
<PAGE> 6
5.2 Company agrees that said compensation to Consultant shall be paid in full
at the time said financing is closed. Moreover, said compensation, will be
a condition precedent to the closing of such or financing and Company shall
execute any and all documents necessary to effect said compensation.
5.3 As further consideration to Consultant, Company, or its nominees, agrees
not to obtain any other financing from any lender or equity purchaser
supplied or referred to Company by Consultant for a period of five years
from the date of this Agreement, either directly or indirectly through
third parties or nominees. In the event of circumvention by Company, or
its nominees, Consultant shall receive a fee equal to that outlined in
Section "5" herein.
5.4 Consultant will notify Company of introductions it makes for potential
sources of financing in a timely manner (approximately 3 days within
introduction) via facsimile memo. If Company has a preexisting
relationship with such nominee and believes such party should be excluded
from this Agreement, then Company will notify Consultant immediately of
such circumstance via facsimile memo.
6. Expenses. Consultant agrees to pay for all its expenses (phone, mailing,
labor, etc.), other than extraordinary items (travel required by/or
specifically requested by the Company, luncheons or dinners to large groups
of investment professionals, mass faxing to a sizable percentage of the
Company's constituents, investor conference calls, print advertisements in
publications, etc.) approved by the Company prior to its incurring an
obligation for reimbursement.
7. Indemnification. The Company warrants and represents that all oral
communications, written documents or materials, other than those designated
by the Company to the Consultant as "confidential" or "Company private",
furnished to Consultant by the Company with respect to financial affairs,
operations, profitability and strategic planning of the Company are accurate
and Consultant may rely upon the accuracy thereof without independent
investigation. The Company will protect, indemnify and hold harmless
Consultant against any claims or litigation including any damages,
liability, cost and reasonable attorney's fees with respect thereto
resulting from Consultant's communication or dissemination of any said
information, documents or materials not designated by the Company to the
Consultant as "confidential" or "Company private", excluding any such claims
or litigation resulting from Consultant's communication or dissemination of
information not provided or authorized by the Company. To the extent
feasible, the Company agrees to make Consultant an additional insured on any
and all commercial liability and directors and officers liability insurance
policies and to provide Consultant with current Certificates of Insurance
reflecting the same.
8. Representations. Consultant represents that it is not required to
maintain any licenses and registrations under federal or any state
regulations necessary to perform the services set forth herein. Consultant
acknowledges that to the best of its knowledge, the performance of the
services set forth under this Agreement will not violate any rule or
provision of any regulatory agency having jurisdiction over Consultant.
Consultant acknowledges that, to the best of its
6.
<PAGE> 7
knowledge, Consultant and its officers and directors are not the subject of any
investigation, claim, decree or judgment involving any violation of the SEC or
securities laws. Consultant further acknowledges that it is not a securities
Broker Dealer or a registered investment advisor.
Company acknowledges that, to the best of its knowledge, it has not
violated any rule or provision of any regulatory agency having jurisdiction
over the Company. Company acknowledges that, to the best of its knowledge,
Company is not the subject of any investigation, claim, decree or judgment
involving any violation of the SEC or securities laws.
9. Legal Representation. The Company acknowledges that it has been represented
by independent legal counsel in the preparation of this Agreement. Consultant
represents that they have consulted with independent legal counsel and/or tax,
financial and business advisors, to the extent the Consultant deemed necessary.
10. Status as Independent Contractor. Consultant's engagement pursuant to
this Agreement shall be as independent contractor, and not as an employee,
officer or other agent of the Company. Neither party to this Agreement shall
represent or hold itself out to be the employer or employee of the other.
Consultant further acknowledges the consideration provided hereinabove is a
gross amount of consideration and that the Company will not withhold from such
consideration any amounts as to income taxes, social security payments or any
other payroll taxes. All such income taxes and other such payment shall be made
or provided for by Consultant and the Company shall have no responsibility or
duties regarding such matters. Neither the Company or the Consultant possess
the authority to bind each other in any agreements without the express written
consent of the entity to be bound.
11. Attorney's Fee. If any legal action or any arbitration or other
proceeding is brought for the enforcement or interpretation of this Agreement,
or because of an alleged dispute, breach, default or misrepresentation in
connection with or related to this Agreement, the successful or prevailing
party shall be entitled to recover reasonable attorneys' fees and other costs
in connection with that action or proceeding, in addition to any other relief
to which it or they may be entitled.
12. Waiver. The waiver by either party of a breach of any provision of this
Agreement by the other party shall not operate or be construed as a waiver of
any subsequent breach by such other party.
13. Notices. All notices, requests, and other communications hereunder shall
be deemed to be duly given if sent by U.S. mail, postage prepaid, addressed to
the other party at the address as set forth herein below:
To the Company: Mr. James E. Hogue, President
Cotton Valley Resources Corporation
8350 N. Central Expressway
Suite M2030
Dallas, TX 75206
7.
<PAGE> 8
To the Consultant: Liviakis Financial Communications, Inc.
John M. Liviakis, President
2420 "K" Street, Suite 220
Sacramento, CA 95816.
It is understood that either party may change the address to which notices
for it shall be addressed by providing notice of such change to the other party
in the manner set forth in this paragraph.
14. Choice of Law, Jurisdiction and Venue. This Agreement shall be governed
by, construed and enforced in accordance with the laws of the State of
California. The parties agree that Sacramento County, CA. will be the venue of
any dispute and will have jurisdiction over all parties.
15. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or the alleged breach thereof, or relating to Consultant's activities
or remuneration under this Agreement, shall be settled by binding arbitration
in California, in accordance with the applicable rules of the American
Arbitration Association, and judgment on the award rendered by the arbitrator(s)
shall be binding on the parties and may be entered in any court having
jurisdiction thereof. The provisions of Title 9 of Part 3 of the California
Code of Civil Procedure, including section 1283.05, and successor statutes,
permitting expanded discovery proceedings shall be applicable to all disputes
that are arbitrated under this paragraph.
16. Complete Agreement. This Agreement instrument contains the entire
agreement of the parties relating to the subject matter hereof. This Agreement
and its terms may not be changed orally but only by an agreement in writing
signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
AGREED TO:
"Company" COTTON VALLEY RESOURCES CORPORATION
Date: By:
------------------- ------------------------------------
Peter Lucas, Secretary/Treasurer
& Its Duly Authorized Officer
"Consultant" LIVIAKIS FINANCIAL COMMUNICATIONS, INC.
Date: By:
------------------- ----------------------- ----------------------
John M. Liviakis Robert B. Prag
President Sr. Vice President
8.
<PAGE> 1
EXHIBIT 10.15
CONVERTIBLE SECURED PROMISSORY NOTE
$1,000,000 Los Angeles, California
June 24, 1997
FOR VALUE RECEIVED, the undersigned, COTTON VALLEY RESOURCES
CORPORATION (hereinafter referred to as "Borrower"), promise(s) to pay to the
order of LIVIAKIS FINANCIAL COMMUNICATIONS, INC. ("Lender"), at 2420 "K" Street,
Suite 220, Sacramento, California 95816, or at any other place that may be
designated in writing by Lender, on or before the Maturity Date (hereinafter
defined), the sum of One Million Dollars ($1,000,000) or so much thereof as may
have been advanced hereunder, whichever is lesser, with interest thereon at the
rate of nine percent (9%) per annum until paid in full. All sums are due and
payable in lawful money of the United States of America.
1. Security. This Secured Promissory Note (the "Note") will be, and upon
execution hereof is, secured by a Security Agreement, of even date herewith.
2. Payments. Each payment under this Note shall be credited first to
any and all costs and expenses to enforce this Note, then to interest then due
and the remainder to the reasonably unpaid principal.
3. Prepayment. Borrower shall have the right to make payments at any
time and from time to time without penalty or premium, to be applied to all or
any portion of the balance due under this Note.
4. Maturity Date. The Maturity Date for this Note, when the outstanding
principal balance and all interest accrued thereon shall be due and payable, is
October 24, 1997, unless extended at the instance and request of Borrower as
herein after set forth. In the event Borrower fails to close and receive the
resulting funds from a private placement of Borrower's equity securities in the
amount of $1,000,000 or more prior to October 24, 1997, Borrower, upon written
notice to Lender, may extend the Maturity date to November 24, 1997.
5. Advances. Upon the execution hereof, Lender shall immediately loan
and advance to Borrower by wire transfer the amount of $579,000.00.
Subsequently, during the term of this Note and at the request of Borrower,
Lender, without being obligated to approve such request, may loan and advance
to Borrower an additional amount or amounts which in the aggregate shall not
exceed $421,000.00.
<PAGE> 2
6. Waivers. Borrower waives diligence, presentment and protest, and also
waives notice of protest, dishonor and nonpayment of this Note and expressly
agrees that this Note or any payment due hereunder may be extended from time to
time, and consents to the acceptance of further security or release of any
security for this Note, all without in any way affecting Borrower's liability
under this Note, even if Borrower is not a party to such agreement.
7. Costs and Expenses. In addition to all other sums due hereunder,
Borrower shall be obligated to pay:
(a) All costs and expenses of collection, including, without
limitation, reasonable attorneys' fees, if this Note or any other instrument,
agreement, or document executed in connection with, or securing, Lender's
payment of this Note is placed in the hands of an agent for collection or
enforcement and such collection or enforcement is commenced without legal
proceeding; and
(b) All costs and expenses, including, without limitation,
reasonable attorneys' fees, incurred by Lender in connection with any
bankruptcy, insolvency, or reorganization proceeding or receivership involving
Borrower including, without limitation, reasonable attorneys' fees incurred in
making any appearance in any such proceeding or in seeking relief from any stay
or injunction issued in or arising out of any such proceeding.
8. Maximum Rate. This Note is subject to the express condition that at
no time shall Borrower be obligated or required to pay interest on the principal
balance of this Note at a rate which could subject Lender either to civil or
criminal penalty as a result of interest being in excess of the maximum rate
which Borrower is permitted by law to contract or agree to pay. If, by the terms
of this Note, Borrower at any time is required or obligated to pay interest on
the principal balance of this Note at a rate in excess of the maximum rate, then
the rate of interest under this Note shall be deemed to be immediately reduced
to the maximum rate and interest payable hereunder shall be computed at the
maximum rate and any prior interest payments made in excess of the maximum rate
shall be applied and shall be deemed to have been payment made in reduction of
the principal balance of this Note.
9. Unconditional Obligation. Borrower acknowledges that this Note and
Borrower's obligations under this Note are and shall at all times continue to be
absolute and unconditional in all respects, and shall at all times be valid and
enforceable irrespective of any other agreements or circumstances of any nature
whatsoever which might otherwise constitute a defense to this Note and the
obligations of Borrower under this Note or the obligations of any other person
or party relating to this Note.
2
<PAGE> 3
10. Compliance with Covenants. Borrower shall perform and comply
with each of the covenants, conditions, provisions, and agreements contained in
every agreement or instruments now evidencing or securing the indebtedness
represented by this Note.
11. Conversion. This Note shall be convertible into Common Stock
of Borrower as follows:
(a) Subject to and upon compliance with the provisions of
this Section 11, Lender shall have the right at his option, at any time or from
time to time during the term of this Note, to convert all or any part of this
Note into shares of Common Stock of Borrower. The number of shares issuable
upon conversion of all or part of this Note shall be determined by dividing the
principal and accrued but unpaid interest to be converted by the then
applicable Conversion Price. The Conversion Price shall be One Dollar and
Sixty-Six and 2/3 Cents (US$1.66 2/3), subject to adjustment as provided
herein.
(b) Lender may exercise the conversion right specified in
Section 11(a) by delivering to Borrower a written notice, specifying the amount
of the Note to be converted and providing representations regarding compliance
with applicable securities laws and regulations. Conversion shall be deemed to
have been effected on the date when such written notice of an election to
convert is received by Borrower, and such date is referred to herein as the
"Conversion Date". As promptly as practicable thereafter, Borrower shall issue
and deliver to or upon the written order of Lender a certificate or
certificates for the number of full shares of Common Stock to which Lender is
entitled and a check or cash with respect to any fractional interest in a share
of Common Stock as provided in Section 11(c) hereof. The person in whose name
the certificate or certificates for Common Stock are to be issued shall be
deemed to have become a holder of record of such Common Stock on the applicable
Conversion Date. Upon conversion of only a portion of this Note, the amount of
any such conversion shall be deemed a principal payment hereon. Upon
conversion of all of this Note, the Note shall be marked "PAID" and returned to
Borrower, and Lender shall release any and all collateral securing this Note.
(c) No fractional shares of Common Stock or scrip shall
be issued upon conversion of any portion of this Note. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any portion of this Note, Borrower shall pay a cash adjustment in
respect of such fractional interest in an amount equal to that fractional
interest of the Conversion Price.
(d) The number of shares of Common Stock issuable upon
conversion of this Note shall be subject to adjustment from time to time as
follows:
3
<PAGE> 4
(i) Stock Splits, Stock-Combinations and Certain Stock
Dividends. If Borrower shall at any time subdivide or combine its
outstanding shares of Common Stock, or declare a dividend in Common
Stock or other securities of Borrower convertible into or exchangeable
for Common Stock, this Note shall, after such subdivision or
combination or after the record date for such dividend, be convertible
for that number of shares of Common Stock and other securities of
Borrower that the Lender would have owned immediately after such event
with respect to the Common Stock and other securities into which this
Note may have been converted immediately before such event had this
Note been converted immediately before such event. Any adjustment
under this Section 11(d) shall become effective at the close of
business on the date the subdivision, combination or dividend becomes
effective.
(ii) Adjustment for Reorganization, Consolidation, Merger.
In case of any reorganization of Borrower (or any other corporation
the stock or other securities of which are at the time receivable upon
conversion of this Note) or in case Borrower (or any such other
corporation) shall merge into or with or consolidate with another
corporation or convey all or substantially all of its assets to
another corporation or enter into a business combination of any form
as a result of which the Common Stock or other securities receivable
upon conversion of this Note are converted into other stock or
securities of the same or another corporation, then and in each such
case, Lender, upon exercise of the conversion right at any time after
the consummation of such reorganization, consolidation, merger,
conveyance or combination, shall for the same Conversion Price be
entitled to receive, in lieu of the Shares or other securities to
which such Lender would have been entitled had he exercised the
conversion right immediately prior thereto, such stock and securities
which Lender would have owned immediately after such event with
respect to the Common Stock and other securities for which this Note
may have been converted immediately before such event had this Note
been converted immediately prior to such event.
In each case of an adjustment in the Common Stock or other securities
receivable upon the conversion of this Note, Borrower shall promptly notify
Lender of such adjustment. Such notice shall set forth in reasonable detail
the facts upon which such adjustment is based.
12. Dispute Resolution. Texas law shall govern the construction,
interpretation, validity and enforcement of this Note. If any legal action or
any arbitration or other proceeding is brought for the enforcement or
interpretation of this Note, or because of an alleged dispute, breach, default
or misrepresentation, in connection with or related to this Note, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs in connection with that action or proceeding, in addition to any
other relief to which it may be entitled. As used in this Note, the
"prevailing
4
<PAGE> 5
party" is the person awarded greater relief in the action, arbitration or
proceeding. This paragraph is and is intended to be severable from the
remaining provisions of this Note, and shall survive any judgment awarded under
this Note and shall not be merged into any such judgment.
13. Miscellaneous.
(a) All notices, requests, demands, and other
communications required or permitted to be given pursuant to this Note shall be
in writing and shall be deemed to be duly given (i) on the day of service
personally on the party to whom directed, (ii) seventy-two (72) hours after
mailing by first-class mail, registered or certified postage prepaid and
properly addressed to the party at its principal place of business or (iii) the
next business day after facsimile transmittal, so long as confirmed by sending
the original of same by first-class mail or courier service not later than
seventy-two (72) hours thereafter. Addresses for service as set forth above
are as follows:
If to Borrower:
Cotton Valley Resources Corporation
8350 North Central Expressway
Suite M2030
Dallas, Texas 75206
If to Lender:
Liviakis Financial Communications, Inc.
2420 "K" Street
Suite 220
Sacramento, California 95816
From time to time, any person named above may change his address for notice by
informing the other persons of the change in the manner provided hereunder.
(b) Except as set forth in the Security Agreement, time
and strict and punctual performance are of the essence with respect to each
provision of this Note.
(c) This Note is binding upon and to the benefit of the
heirs, successors-in-interest and assigns of Borrower and Lender.
(d) This Note, together with the Security Agreement and that
certain Certificate for Common Stock Purchase Warrants of even date herewith,
sets forth the entire agreement between the parties, fully superseding any and
all prior agreements or
5
<PAGE> 6
understandings between them pertaining to the subject matter hereof. No
amendment, change, modification or variance to or from the terms and conditions
set forth in this Note shall be binding unless it is set forth in a writing and
duly executed by Borrower.
(e) No waiver of any default under this Note shall be
effective unless the waiver is evidenced by a writing duly executed by Lender.
No such waiver shall constitute a continuing waiver of the same or any other
default or provision of this Note or render unnecessary Lender's consent to or
approval of any other act or subsequent act.
(f) If any portion of this Note is declared invalid,
illegal, or unenforceable by any court of competent jurisdiction, such portion
of this Note shall be deemed severed from this Note and the remaining portions
shall continue in full force and effect.
(g) In the event of the loss, theft, or destruction of
this Note, upon Borrower's receipt of a reasonably satisfactory indemnification
agreement executed in favor of Borrower by the party who held this Note
immediately prior to its loss, theft, or destruction, or in the event of the
mutilation of this Note, upon Lender's surrender to Borrower of the mutilated
Note, Borrower shall execute and deliver to such party or Lender, as the case
may be, a new promissory note in the form and content identical to this Note in
lieu of the lost, stolen, destroyed, or mutilated Note.
IN WITNESS WHEREOF, Borrower has executed this Note on the date set forth
above.
"Borrower"
COTTON VALLEY RESOURCES CORPORATION
By: /s/ E. A. SOLTERO
-----------------------
Name: E. A. Soltero
Title: CEO
6
<PAGE> 1
EXHIBIT 10.16
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") is entered into as of June
24, 1997 by and among COTTON VALLEY RESOURCES CORPORATION, a corporation
incorporated under the laws of Ontario, Canada (the "Borrower"), and COTTON
VALLEY ENERGY, INC., an Oklahoma corporation, (the Pledgor") a wholly-owned
subsidiary of Borrower and LIVIAKIS FINANCIAL COMMUNICATIONS, INC. (the
"Secured Party").
RECITALS
Concurrently herewith, Borrower has executed a certain Convertible
Secured Promissory Note of even date herewith in the amount of One Million
Dollars ($1,000,000) in favor of Secured Party (the "Note"). In order to secure
prompt payment and performance in full under the Note and other instruments
evidencing the obligation of Borrower to Secured Party, Pledgor has agreed to
grant Secured Party certain security interests as described herein.
It is a condition to the consummation of the transaction evidenced by
the Note that Borrower, Pledgor and Secured Party shall have undertaken the
obligations contemplated by this Agreement.
NOW, THEREFORE, in consideration of the above and in order to induce
Secured Party to enter into the transaction evidenced by the Note with
Borrower, Secured Party, Borrower and Pledgor hereby agree as follows:
AGREEMENT
1. Certain Defined Terms. Terms used and not otherwise defined
herein have the respective meanings assigned to them in the Note.
2. Security Interest. Pledgor hereby assigns and grants to Secured
Party for its benefit a security interest in all of Pledgor's right, title and
interest of every kind or nature whatsoever without limitation in and to (but
none of its obligations with respect to) all its assets in the N. E. Alden
Field, Caddo County, Oklahoma, which are listed on Exhibit A hereto, including
all products and proceeds thereof (the "Collateral").
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<PAGE> 2
3. Security for Obligations. This Agreement secures, and the
Collateral is collateral security for Borrower's obligations under the Note.
All such obligations of Borrower are referred to herein as the "Secured
Obligations."
4. Financing Statements. At any time and from time to time, upon
request of Secured Party, Pledgor will give, execute, file and/or record any
notice, financing statement, continuation statement, instrument, document or
agreement that Secured Party may consider necessary or desirable to create,
preserve, continue, perfect or validate any security interest granted hereunder
or which Secured Party may consider necessary or desirable to exercise or
enforce its rights hereunder with respect to such security interest.
5. Representations and Warranties. Borrower and Pledgor,
jointly and severally, represent and warrant to Secured Party as follows:
(a) Pledgor owns all of the Collateral free and clear of
any lien, security interest, preferential arrangement or other charge or
encumbrance (collectively, a "Lien") except for the security interest created
by this Agreement.
(b) Borrower and Pledgor have full power and lawful
authority to enter into this Agreement; and Pledgor has full power and
authority to assign and grant to Secured Party a first priority security
interest in the Collateral as herein provided; the execution, delivery and
performance hereof are not in contravention of any indenture, agreement or
undertaking to which Borrower or Pledgor is a party or by which Pledgor or its
property is bound; and this Agreement constitutes the legally valid and binding
obligation of Borrower and Pledgor enforceable against Borrower and Pledgor in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium, and other similar laws of general
applicability relating to or affecting creditors' rights generally and to
equitable principles relating to enforceability.
(c) No consent of any other party (including, without
limitation, creditors of Borrower or Pledgor) and no consent, authorization,
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body is required either (i) for the grant by Pledgor of
the security interest granted hereby or for the execution, delivery or
performance of this Agreement by Borrower and Pledgor or (ii) for the exercise
by Secured Party of the rights provided for in this Agreement or the remedies
in respect of the Collateral pursuant to this Agreement, except for the filing
of any UCC Financing Statements.
2
<PAGE> 3
(d) This Agreement creates a valid and perfected first
priority security interest in the Collateral, unless otherwise consented to in
writing by Secured Party securing the payment of the Secured Obligations, upon
the filing of UCC Financing Statements and the taking of such other actions as
are necessary or desirable to perfect and protect the security interest granted
hereby.
6. Certain Covenants. Pledgor hereby covenants that, until the
Secured Obligations have been terminated in accordance with the Note, Pledgor
will:
(a) not (i) sell, assign (by operation of law or
otherwise) or otherwise dispose of, or grant any interest with respect to, any
of the Collateral or (ii) create or permit to exist any Lien upon or with
respect to any of the Collateral, except for the security interest created
under this Agreement;
(b) promptly notify Secured Party of any event of which
Pledgor becomes aware causing material and unusual loss or depreciation in the
value of the Collateral;
(c) promptly deliver to Secured Party copies of all
written notices received by it with respect to the Collateral which have a
material, adverse effect on the Collateral; and
(d) pay or discharge, prior to delinquency, all taxes,
charges, fees, expenses, Liens and assessments of every nature levied or
imposed upon the Collateral.
7. Further Assurances. Pledgor agrees that at any time and from
time to time, at the expense of Pledgor, Pledgor will promptly execute and
deliver all further instruments and documents, and take all further actions,
that may reasonably be necessary or desirable, or that Secured Party may
request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Secured Party to exercise and
enforce its rights and remedies hereunder with respect to any Collateral.
8. Secured Party May Perform. If Borrower or Pledgor fail to
perform any agreement contained herein, Secured Party may itself perform, or
cause performance of, such agreement, and the expenses of Secured Party
incurred in connection therewith shall be payable by Borrower under Section
13(b).
3
<PAGE> 4
9. Standard of Care. The powers conferred on Secured Party
hereunder are solely to protect its interest in the Collateral and shall not
impose on it any duty to exercise such powers. Pledgor and Secured Party shall
each be deemed to have exercised reasonable care in the custody and
preservation of any Collateral in their possession if such Collateral is
accorded treatment substantially equivalent to that rendered by a reasonably
prudent operator of oil and gas properties. Neither Pledgor nor Secured Party
shall have any responsibility for (a) taking any necessary steps (other than
steps taken in accordance with the standard of care set forth above to maintain
possession of the Collateral) to preserve rights against any parties with
respect to any Collateral, (b) taking any necessary steps to collect or realize
upon the Secured Obligations or any guarantee therefor, or any part thereof; or
any of the Collateral, or (c) initiating any action to protect the Collateral
against the possibility of a decline in value.
10. Events of Default. The occurrence of the following
shall be an "Event of Default" under this Agreement: Borrower's breach of its
obligations to Secured Party under the Note and such breach continues for (i)
ten (10) days with respect to a payment default, and (ii) thirty (30) days with
respect to a non-payment default, after Borrower's and Pledgor's receipt of
written notice thereof.
11. Remedies Upon Default. If any Event of Default shall
have occurred and be continuing, Secured Party may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party on
default under the Commercial Code as in effect in the State of Oklahoma (or any
other state with jurisdiction over the Collateral) at that time, and Secured
Party may also in its sole discretion, without notice (except as specified
below), sell the Collateral or any part thereof in one or more parcels at
public or private sale, at any exchange, broker's board or any of Secured
Party's offices or elsewhere, for cash, on credit or for future delivery, at
such time or times and at such price or prices and upon such other terms as
Secured Party may deem commercially reasonable, irrespective of the impact of
any such sales on the market price of the Collateral. Secured Party may be the
purchaser of any or all of the Collateral at any such sale and shall be
entitled, for the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of the Collateral sold at any such public
sale, to use and apply any of the Secured Obligations as a credit on account of
the purchase price of any Collateral payable by Secured Party at such sale.
Each purchaser at any such sale shall hold the property sold absolutely free
from any claim or right on the part of Pledgor, and Pledgor hereby waives (to
the extent permitted by law) all rights of redemption, stay and/or appraisal
which it now has or may at any time in the future have under any rule of law or
statute now existing or hereafter enacted. Pledgor agrees that, to the extent
that notice of sale shall be required by law, at least ten days' notice to
Pledgor of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. Secured
Party shall
4
<PAGE> 5
not be obligated to make any sale of Collateral regardless of notice of sale
having been given. Secured Party may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned. Pledgor hereby waives any claims against Secured Party arising by
reason of the fact that the price at which any Collateral may have been sold at
such a private sale was less than the price which might have been obtained at a
public sale, even if Secured Party accepts the first offer received and does
not offer such Collateral to more than one offeree. If the proceeds of any sale
or other disposition of the Collateral are insufficient to pay all the Secured
Obligations, Borrower shall be liable for the deficiency and the reasonable
fees of any attorneys employed by Secured Party to collect such deficiency.
12. Application of Proceeds. All Proceeds received by Secured
Party in respect of any sale of, collection from, or other realization upon all
or any part of the Collateral may, in the discretion of Secured Party, be held
by Secured Party as Collateral for, and/or then or at any time thereafter
applied in whole or in part by Secured Party against the Secured Obligations in
the following order of priority:
FIRST: To the payment of the costs and expenses of such sale,
collection or other realization, and all expenses, liabilities and advances
made or incurred by Secured Party in connection therewith, including reasonable
compensation to Secured Party and his agents and counsel, in accordance with
Section 13(b);
SECOND: To the payment in full of all Secured Obligations in such
order as Secured Party shall elect; and
THIRD: To the payment to or upon the order of Borrower or Pledgor, or
to whosoever may be lawfully entitled to receive the same or as a court of
competent jurisdiction may direct, of any surplus then remaining from such
proceeds.
13. Indemnity and Expenses.
(a) Borrower, and where the claim, loss, liability, cost or
expense incurred by Secured Party arises out of or in connection with the
pledge of the Collateral herein by Pledgor, joined herein by Pledgor, agree to:
indemnify Secured Party from and against any and all claims, losses and
liabilities in any way relating to, growing out of or resulting from this
Agreement and the transactions contemplated hereby (including, without
limitation, enforcement of this Agreement), except claims, losses or
liabilities resulting from Secured Party's (i) breach of this agreement, (ii)
gross negligence or (iii) willful misconduct;
(b) Upon the occurrence of an Event of Default pay to Secured
Party the amount of any and all costs and expenses, including the reasonable
fees and expenses
5
<PAGE> 6
incurred in connection with (i) the administration of this Agreement, (ii) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (iii) the exercise or enforcement of
any of the rights of Secured Party hereunder, or (iv) the failure by Borrower
to perform or observe any of the provisions hereof; and
(c) Indemnify and hold harmless Secured Party and its directors,
officers, employees, affiliates, agents and assigns, from and against any and
all losses of Secured Party directly or indirectly, as a result of, or based
upon or arising from any inaccuracy in or breach or nonperformance of any of
the representations, warranties, covenants or agreements made by Borrower in or
pursuant to this Agreement or the Note.
14. Waivers. Borrower, and where applicable as a result of or in
connection with the pledge of the Collateral herein by Pledgor, joined herein
by Pledgor, agree to:
(a) Except as otherwise required by the Note or this Agreement,
waive any right to require Secured Party to (i) proceed against Borrower, any
guarantor of any of the Secured Obligations or any other person or entity; (ii)
proceed against or exhaust any other security held from any other person or
entity; (iii) give notice to Borrower of the terms, time and place of any
public or private sale or the Collateral or any other security, or otherwise
comply with the notice provisions of the Commercial Code as in effect in the
State of Oklahoma; (iv) pursue any other remedy in Secured Party's power; or
(v) make or give any presentments, demands for performance, notices of
nonperformance, protests, notices of protest or notices of dishonor in
connection with any obligations or evidences of indebtedness which constitute
in whole or in part the Secured Obligations or in connection with the creation
of new or additional Secured Obligations;
(b) Waive any defense arising by reason of: (i) any disability or
other defense of Borrower or any other entity, including, without limitation,
any defense based on or arising out of the unenforceability of any of the
Secured Obligations, legal or equitable discharge of the Secured Obligations or
this Agreement or any statute of limitations affecting Borrower's liability
hereunder or the enforcement hereof; (ii) the cessation from any cause
whatsoever, other than termination, of the Secured Obligations; (iii) any act
or omission by Secured Party which directly or indirectly results in or aids
the discharge of Borrower or any of the Secured Obligations by operation of law
or otherwise; (iv) the release of any other collateral securing the Secured
Obligations or the failure by Secured Party to perfect or maintain the
perfection of any such other collateral; (v) any modification of the Secured
Obligations, in any form whatsoever, including, but not limited to the renewal,
extension, acceleration or other change in the time for payment of the Secured
Obligations, and any change in the terms of the Secured Obligations; and (vi)
any law limiting the liability of or exonerating guarantors or sureties.
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<PAGE> 7
(c) Until all the Secured Obligations shall have terminated, waive
any right to enforce any remedy which Secured Party now has or may hereafter
have against Borrower and waives any benefit of, or any right to participate in
any security whatsoever now or hereafter held by Secured Party for the Secured
Obligations.
15. Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall (a) remain in full
force and effect until termination of all Secured Obligations, (b) be binding
upon Borrower, Pledgor, their successors and assigns, and (c) inure, together
with the rights and remedies of Secured Party hereunder, to the benefit of
Secured Party and its successors. Secured Party may not assign or otherwise
transfer this Agreement or the benefits hereunder to any other person or
entity. Upon the termination of all Secured Obligations, Pledgor shall be
entitled to the execution of UCC Termination Statements and the return upon its
request and at its expense, against receipt and without recourse to Secured
Party, of such of the Collateral in Secured Party's possession as shall not
have been sold or otherwise applied pursuant to the terms hereof.
16. No Waiver by Secured Party. No failure on the part of Secured
Party to exercise, and no course of dealing with respect to, and no delay in
exercising, any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise by Secured Party of any
right, power or remedy hereunder preclude any other or further exercise thereof
or the exercise of any other right, power or remedy. The remedies herein
provided are cumulative to the fullest extent permitted by law and are not
exclusive of any remedies provided by law.
17. Amendment, Etc. No amendment or waiver of any provision of
this Agreement, nor consent to any departure by Borrower or Pledgor herefrom,
shall in any event be effective unless the same shall be in writing and signed
by all parties to this Agreement, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
18. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telegraphic or telecopy
communications) and, if to any party, mailed, telegraphed, telecopied or
delivered to it, addressed to it at the address of such party specified in the
Note, or as to any party at such other address as shall be designated by such
party in a written notice to each other party complying as to delivery with the
terms of this Section 18. All such notices and other communications shall be
effective upon receipt.
19. Governing Law; Terms. This agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Texas,
except as required by mandatory provisions of law and except to the extent that
the validity or
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<PAGE> 8
perfection of the security interest hereunder, or remedies hereunder, in
respect of any particular collateral are governed by the laws of a jurisdiction
other than the State of Texas.
20. Severability. Any provisions of this Agreement which are
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdictions, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
21. Consent to Jurisdiction and Service of Process. All judicial
proceedings brought against Borrower with respect to this Agreement may be
brought in any state or federal court of competent jurisdiction in the State of
California, and by execution and delivery of this Agreement, Borrower accepts
for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts, and
irrevocably agrees to be bound by any judgment rendered thereby in connection
with this Agreement. Borrower designates and appoints Eugene A. Soltero and Jim
E. Hogue and such other persons as may hereafter be selected by Borrower
irrevocably agreeing in writing to so serve, as its agent to receive on its
behalf service of all process in any such proceedings in any such court, such
service being hereby acknowledged by Borrower to be effective and binding
service in every respect. A copy of any such process so served shall be mailed
by registered mail to Borrower at its address referred to in Section 18, except
that unless otherwise provided by applicable law, any failure to mail such copy
shall not affect the validity of service of process. If any agent appointed by
Borrower refuses to accept service, Borrower hereby agrees that service upon it
by mail shall constitute sufficient notice. Nothing herein shall affect the
right to serve process in any other manner permitted by law or shall limit the
right of the Agent to bring proceedings against Borrower in the courts of any
other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first written above.
"Secured Party"
Liviakis Financial Communications, Inc.
By:
-----------------------------------
John M. Liviakis, President
(SIGNATURES CONTINUED ON NEXT PAGE)
8
<PAGE> 9
(SIGNATURES CONTINUED FROM PRECEDING PAGE)
"Pledgor"
COTTON VALLEY ENERGY, INC.
By: /s/ JAMES E. HOGUE
--------------------------------
James E. Hogue
President
"Borrower"
COTTON VALLEY RESOURCES
CORPORATION
By: /s/ EUGENE A. SOLTERO
------------------------------
Eugene A. Soltero
Chief Executive Officer
9
<PAGE> 10
EXHIBIT "A"
ATTACHED TO AND MADE A PART OF THAT CERTAIN ASSIGNMENT AND BILL OF SALE
BETWEEN THE HOME-STAKE ROYALTY CORPORATION, ET AL. AND COTTON VALLEY ENERGY,
INC.
<TABLE>
<CAPTION>
LEASE # LESSOR LESSEE DATED INSOFAR AS SAID LEASE COVERS BOOK PAGE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OK1605A00 Guy Quoetone (Kiowa Allottee No. 1743 Don E. Baldwin June 25, 1951 SE/4 SW/4 Section 1- 181 223
a/k/a Guy Quoetone and Zo-quo-o) and 6N-13W, Caddo County,
Nellie Quoetone, his wife Oklahoma
- ---------------------------------------------------------------------------------------------------------------------------------
OK1605B00 Ruth Yeoman German and William M. Sinclair Oil and Sept. 1, 1949 SE/4 SW/4 Section 1- 165 189
German, her husband Gas Company 6N-13W, Caddo County,
Oklahoma
- ---------------------------------------------------------------------------------------------------------------------------------
OK1605C00 Thelma Davison, a widow, Lois Wilsey W. E. Howell April 19, 1954 W/2 NE/4, also 215 377
and W. L. w&h, and Oris L. described in Lot 2 and
Barney and Margaret Barney, h&w the SW/4 NE/4 Section
1-6N-13W, Caddo County,
Oklahoma
- ---------------------------------------------------------------------------------------------------------------------------------
OK1605D00 Bob Hancock Sinclair Oil and Jan. 14, 1955 N/2 SW/4 Section 1-6N- 225 383
Gas Company 13W, Caddo County,
Oklahoma
- ---------------------------------------------------------------------------------------------------------------------------------
OK1605D00 R. S. Mason Sinclair Oil and June 2, 1955 N/2 SW/4 Section 1-6N- 232 139
Gas Company 13W, Caddo County,
Oklahoma
- ---------------------------------------------------------------------------------------------------------------------------------
OK1605D00 Joseph Bowes Sinclair Oil and Oct. 7, 1955 N/2 SW/4 Section 1-6N- 238 67
Gas Company 13W, Caddo County,
Oklahoma
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 11
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OK1605D00 J. R. Tolbert Sinclair Oil and Nov. 2, 1955 N/2 SW/4 Section 1-6N- 239 3
Gas Company 13W, Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
OK1605D00 W. H. Elson Jack Malloy Dec. 11, 1952 N/2 SW/4 Section 1-6N- 200 417
13W, Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
R. H. Lynn, Trustee Sinclair Oil and Nov. 2, 1955 N/2 SW/4, Section 1-6N- 239 5
Gas Company 13W, Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
Kerr-McGee Oil Industries, Inc. Sinclair Oil and Nov. 2, 1955 N/2 SW/4 Section 1-6N- 239 7
Gas Company 13W, Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
Hargrove Hudson, a single man Sinclair Oil and Nov. 9, 1955 N/2 SW/4 Section 1-6N- 239 9
Gas Company 13W, Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
Dean A. McGee Sinclair Oil and Nov. 2, 1955 N/2 SW/4 Section 1-6N- 241 353
Gas Company 13W, Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
OK1605E00 Susie Ei-ke-ah-pi-Hoodle Cities Service Mar. 12, 1952 SE/4 Section 1-6N-13W, 191 403
Alotte No. 252 Oil Company Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
OK1605F00 Ray A. Giles, et ux. Sinclair Prairie Dec. 28, 1948 SE/4 Section 2-6N-13W, 159 339
Oil Company Caddo County,
Oklahoma, as to the
Bromide Formation only
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 12
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OK1605F00 Ray A. Giles, et ux. Sinclair Oil & Feb. 2, 1954 SE/4 Section 2-6N-13W, 212 297
Gas Company Caddo County,
Oklahoma, as to the
Bromide Formation only
- -------------------------------------------------------------------------------------------------------------------------------
George Dyer, et al. H. C. Bluhm Jan. 5, 1955 N/2 SW/4 Section 1-6N- 226 255
13W, Caddo County,
Oklahoma
- -------------------------------------------------------------------------------------------------------------------------------
Interests acquired under OCC Pooling Section 1-6N-13W
Order 333336 and OCC Pooling Order
337924
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Subject to Letter Agreement, as amended, dated November 11, 1988,
between TXO Production Corp. and The Home-Stake Royalty Corporation and The
Home-Stake Oil & Gas Company covering Section 1-6N-13W, Caddo County, Oklahoma
Subject to Letter Agreement dated January 18, 1989, by and between The
Home-Stake Royalty Corporation and The Home-Stake Oil & Gas Company ad R. H.
Siegfried, Inc. covering Section 1-6N-13W, Caddo County, Oklahoma
Subject to Farmout Agreement dated September 15, 1995, by and between
The Home-Stake Royalty Corporation and The Home-Stake Oil & Gas Company, Farmor,
and Bruce E. Galbierz, Farmee, covering Section 1-6N-13W, Caddo County,
Oklahoma.
Subject to Operating Agreement dated January 5, 1956 between Sinclair
Oil & Gas Company, Operator, and Stanolind Oil and Gas Company, et al.,
Non-Operator, covering the Alden Bromide Unit.
Subject to Plan of Utilization Alden Bromide Unit dated September 1,
1974, between Atlantic-Richfield Company, Operator, and Clinton Oil Company,
Non-Operator.
Subject to OCC Order No. 107019 dated August 8, 1974, Cause CD 39169
approving Alden Bromide Unit.
Subject to Communitization Agreement No. OKNM79745 dated June 1, 1989,
covering Section 1-6N-13W, Caddo County, Oklahoma.
3
<PAGE> 13
Subject to Exploration Agreement dated September 30, 1991, between The
Home-Stake Royalty Corporation and CCW Interests, Inc., covering the W/2 NE/4,
Section 1-6N-13W, Caddo County, Oklahoma.
Subject to Exploration Agreement dated June 30, 1991, between the Home-
Stake Royalty Corporation and Robert E. Rasor, covering the W/2 NE/4, Section
1-6N-13W, Caddo County, Oklahoma.
Subject to Exploration Agreement dated June 30, 1991, between The Home-
Stake Royalty Corporation and Ream Interests, Inc., covering the W/2 NE/4,
Section 1-6N-13W, Caddo County, Oklahoma.
Subject to Exploration Agreement dated June 30, 1991, between The Home-
Stake Royalty Corporation and Dail C. West, covering the W/2 NE/4, Section
1-6N-13W, Caddo County, Oklahoma.
Subject to Exploration Agreement dated June 30, 1991, between The Home-
Stake Royalty Corporation and BCS Working Interest Partners, covering the
W/2 NE/4, Section 1-6N-13W, Caddo County, Oklahoma.
Subject to Exploration Agreement dated June 30, 1991, between The Home-
Stake Royalty Corporation and BCS 1991 L.P., covering the W/2 NE/4, Section
1-6N-13W, Caddo County, Oklahoma.
4
<PAGE> 1
EXHIBIT 10.17
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY
BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT
PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION
FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE.
COTTON VALLEY RESOURCES CORPORATION
Incorporated Under the Laws of the Province of Ontario
No. 97L-1 161,351 Common Stock
Purchase Warrants
CERTIFICATE FOR COMMON STOCK
PURCHASE WARRANTS
1. Warrant. This Warrant Certificate certifies that LIVIAKIS FINANCIAL
COMMUNICATIONS, INC., or registered assigns (the "Registered Holder"), is the
registered owner of the above indicated number of Warrants expiring on the
Expiration Date, as hereinafter defined. One (1) Warrant entitles the
Registered Holder to purchase one (1) share of the common stock (a "Share") of
Cotton Valley Resources Corporation, an Ontario corporation (the "Company"),
from the Company at a purchase price of Two Dollars and Eight Cents (US$2.08)
(the "Exercise Price") at any time during the Exercise Period, as hereinafter
defined, upon surrender at the principal office of the Company of this Warrant
Certificate with the exercise form appended hereto duly completed and executed
and accompanied by payment of the Exercise Price.
Upon due presentment for transfer or exchange of this Warrant
Certificate at the principal office of the Company, a new Warrant Certificate
or Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued in exchange for this Warrant Certificate,
subject to the limitations provided herein, upon payment of any tax or
governmental charge imposed in connection with such transfer. Subject to the
terms hereof, the Company shall deliver Warrant Certificates in required whole
number denominations to Registered Holders in connection with any transfer or
exchange permitted hereunder.
2. Restrictive Legend. Each Warrant Certificate and each
certificate representing Shares issued upon exercise of a Warrant, unless such
Shares are then
-1-
<PAGE> 2
registered under the Securities Act of 1933, as amended (the "Act"), shall bear
a legend in substantially the following form:
"THE [SECURITIES] REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE
SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY BE OFFERED AND SOLD
ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF
FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION FROM
SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE."
3. Exercise. Subject to the terms hereof, the Warrants evidenced
by this Warrant Certificate may be exercised at the Exercise Price in whole or
in part at any time during the period (the "Exercise Period") commencing on
June 18, 1997 and terminating at 5:00 p.m., Central standard time, on April 30,
2002 (the "Expiration Date"). The Exercise Period may be extended by the
Company's Board of Directors.
A Warrant shall be deemed to have been exercised immediately
prior to the close of business on the date (the "Exercise Date") of the
surrender to the Company at its principal offices of this Warrant Certificate
with the exercise form attached hereto completed and executed by the Registered
Holder and accompanied by payment to the Company, in cash or by check (which
shall be accepted subject to collection), of an amount equal to the aggregate
Exercise Price for the Warrants being exercised, in lawful money of Canada.
The person entitled to receive the Shares issuable upon
exercise of a Warrant or Warrants ("Warrant Shares") shall be treated for all
purposes as the holder of such Warrant Shares as of the close of business on
the Exercise Date. The Company shall not be obligated to issue any fractional
share interests in Warrant Shares issuable or deliverable on the exercise of
any Warrant or scrip or cash with respect thereto, and such right to a
fractional share shall be of no value whatsoever. If more than one Warrant
shall be exercised at one time by the same Registered Holder, the number of
full Shares which shall be issuable on exercise thereof shall be computed on
the basis of the aggregate number of full shares issuable on such exercise.
Promptly, and in any event within ten business days after the
Exercise Date, the Company shall cause to be issued and delivered to the person
or persons entitled to receive the same, a certificate or certificates for the
number of Warrant Shares deliverable on such exercise.
The Company may deem and treat the Registered Holder of the Warrants
at any time as the absolute owner thereof for all purposes, and the Company
shall not be affected by any notice to the contrary. The Warrants shall not
entitle the Registered
-2-
<PAGE> 3
Holder thereof to any of the rights of shareholders or to any dividend declared
on the Shares unless the Registered Holder shall have exercised the Warrants
and thereby purchased the Warrant Shares prior to the record date for the
determination of holders of Shares entitled to such dividend or other right.
4. Reservation of Shares and Payment of Taxes. The Company
covenants that it will at all times reserve and have available from its
authorized Common Stock such number of Shares as shall then be issuable on the
exercise of outstanding Warrants. The Company covenants that all Warrant Shares
which shall be so issuable shall be duly and validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.
The Registered Holder shall pay all documentary, stamp or
similar taxes and other government charges that may be imposed with respect to
the issuance, transfer or delivery of any Warrant Shares on exercise of the
Warrants. In the event the Warrant Shares are to be delivered in a name other
than the name of the Registered Holder of the Warrant Certificate, no such
delivery shall be made unless the person requesting the same has paid the
amount of any such taxes or charges incident thereto.
5. Registration of Transfer. The Warrant Certificates
may be transferred in whole or in part, provided any such transfer complies
with all applicable securities laws. Warrant Certificates to be transferred
shall be surrendered to the Company at its principal office. The Company shall
execute, issue and deliver in exchange therefor the Warrant Certificate or
Certificates which the Registered Holder making the transfer shall be entitled
to receive.
The Company shall keep transfer books at its principal office
which shall register Warrant Certificates and the transfer thereof. On due
presentment of any Warrant Certificate for registration of transfer at such
office, the Company shall execute, issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants. All Warrant Certificates presented
for registration of transfer or exercise shall be duly endorsed or be
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company. The Company may require payment of a sum
sufficient to cover any tax or other government charge that may be imposed in
connection therewith.
All Warrant Certificates so surrendered, or surrendered for
exercise, or for exchange in case of mutilated Warrant Certificates, shall be
promptly canceled by the Company and thereafter retained by the Company until
the Expiration Date. Prior to due presentment for registration of transfer
thereof, the Company may treat the Registered Holder of any Warrant Certificate
as the absolute owner thereof (notwithstanding any notations of ownership or
writing thereon made by anyone other
-3-
<PAGE> 4
than the Company), and the Company shall not be affected by any notice to the
contrary.
6. Loss or Mutilation. On receipt by the Company of evidence
satisfactory as to the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate, the Company shall execute and deliver,
in lieu thereof, a new Warrant Certificate representing an equal aggregate
number of Warrants. In the case of loss, theft or destruction of any Warrant
Certificate, the individual requesting issuance of a new Warrant Certificate
shall be required to indemnify the Company in a form and amount satisfactory to
the Company. In the event a Warrant Certificate is mutilated, such Certificate
shall be surrendered and canceled by the Company prior to delivery of a new
Warrant Certificate. Applicants for a new Warrant Certificate shall also comply
with such other regulations and pay such other reasonable charges as the
Company may prescribe.
7. Adjustment of Shares. The number and kind of securities
issuable upon exercise of a Warrant shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
(a) Stock Splits, Stock Combinations and Certain
Stock Dividends. If the Company shall at any time subdivide or
combine its outstanding Shares, or declare a dividend in
Shares or other securities of the Company convertible into or
exchangeable for Shares, a Warrant for the same Exercise Price
shall, after such subdivision or combination or after the
record date for such dividend, be exercisable for that number
of Shares and other securities of the Company that the
Registered Holder would have owned immediately after such
event with respect to the Shares and other securities for
which a Warrant may have been exercised immediately before
such event had the Warrant been exercised immediately before
such event. Any adjustment under this Section 7(a) shall
become effective at the close of business on the date the
subdivision, combination or dividend becomes effective.
(b) Adjustment for Reorganization, Consolidation,
Merger. In case of any reorganization of the Company (or any
other corporation the stock or other securities of which are
at the time receivable upon exercise of a Warrant) or in case
the Company (or any such other corporation) shall merge into
or with or consolidate with another corporation or convey all
or substantially all of its assets to another corporation or
enter into a business combination of any form as a result of
which the Shares or other securities receivable upon exercise
of a Warrant are converted into other stock or securities of
the same or another corporation, then and in each such case,
the Registered Holder of a Warrant, upon exercise of the
purchase right at any time after the consummation of such
reorganization, consolidation, merger, conveyance or
combination, shall for the
-4-
<PAGE> 5
same Exercise Price be entitled to receive, in lieu of the
Shares or other securities to which such Registered Holder
would have been entitled had he exercised the purchase right
immediately prior thereto, such stock and securities which
such Registered Holder would have owned immediately after such
event with respect to the Shares and other securities for
which a Warrant may have been exercised immediately before
such event had the Warrant been exercised immediately prior to
such event.
In each case of an adjustment in the Shares or other
securities receivable upon the exercise of a Warrant, the Company shall
promptly notify the Registered Holder of such adjustment. Such notice shall set
forth in reasonable detail the facts upon which such adjustment is based.
8. Reduction in Exercise Price at Company's Option. The Company's
Board of Directors may, at its sole discretion, reduce the Exercise Price of
the Warrants in effect at any time either for the remaining life of the
Warrants or any shorter period of time determined by the Company's Board of
Directors. The Company shall promptly notify the Registered Holders of any such
reduction in the Exercise Price.
9. Registration Rights.
(a) If, at any time during the Exercise Period and the three (3)
years following any exercise hereunder, the Company proposes to file a
registration statement with respect to any class of securities (other than
pursuant to a registration statement on Forms S-4 or S-8 or any successor form)
under the Securities Act, the Company shall notify the Registered Holder at
least twenty (20) days prior to the filing of such registration statement and
will offer to include in such registration statement all or any portion of the
Warrant Shares. In a written notice to be delivered to the Company within
twenty (20) days after receipt of any such notice from the Company, the
Registered Holder shall state the number of Warrant Shares that it wishes to
register for resale and distribution publicly under the proposed registration
statement. The Company will use its best efforts, through its officers,
directors, auditors and counsel in all matters necessary or advisable, to file
at least one (1) such registration statement by November 30, 1997. The Company
will also use its best efforts, through its officers, directors, auditors and
counsel in all matters necessary or advisable, to include within the coverage
of each such registration statement (except as hereinafter provided) the
Warrant Shares that Registered Holder has advised the Company that Registered
Holder wishes to register pursuant to such registration statement for resale
and distribution, to prosecute each such registration statement diligently to
effectiveness, to cause such registration statement to become effective as
promptly as practicable, and to register or qualify the securities so being
registered under such state and provincial securities or "blue sky" laws as the
Registered Holder may reasonably request. In that regard, the
-5-
<PAGE> 6
Company makes no representations or warranties as to its ability to have any
registration statement declared effective.
All registrations requested pursuant to this Section 9(a) are referred
to herein as "Piggyback Registrations." In the event the Company is advised by
the staff of the Securities and Exchange Commission, Nasdaq Stock Market or any
self-regulatory or state securities agency that the inclusion of the Warrant
Shares will prevent, preclude or materially delay the effectiveness of a
registration statement filed, the Company, in good faith, may amend such
registration statement to exclude the Warrant Shares without otherwise
affecting the Registered Holder's rights to any other registration statement
herein.
(i) Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of the
Company, and if the underwriter thereof advises the Company in writing
that in its opinion the number of Warrant Shares requested to be
included in such registration statement exceeds the number that can be
sold in such offering without materially adversely affecting the
distribution of such securities by the Company, then the Company will
include in such registration statement first, the securities that the
Company proposes to sell and second, the securities requested to be
included in such registration statement by selling security holders,
such rights to inclusion being apportioned pro rata among the
Registered Holder and the other holders of any other securities
requesting registration according to the market value of Warrant
Shares and other securities requested to be registered.
Notwithstanding the above, if any such underwriter
shall advise the Company in writing that the distribution of the
Warrant Shares being included in the registration statement
concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the
Company, then the Registered Holder shall delay its offering and sale
for such period ending on the earliest of (a) one hundred eighty (180)
days following the effective date of the Company's registration
statement, (b) the earliest date that, in the opinion of such
underwriter, such adverse effect would no longer be caused, or (c)
such date as the Company, managing underwriter and Registered Holder
shall otherwise agree. In the event of such delay, the Company shall
file such supplements and post-effective amendments and take any such
other actions as may be necessary or appropriate to permit such
Registered Holder to make its proposed offering and sale for a period
of at least ninety (90) days commencing immediately following the end
of such period of delay. If any party
-6-
<PAGE> 7
disapproves of the terms of any such underwriting, it may elect to
withdraw therefrom by written notice to the Company, the underwriter
and the Registered Holder. Notwithstanding the foregoing, the Company
shall not be required to include Warrant Shares within the coverage of
a registration statement being filed pursuant to this Section 9(a)(i)
if, in the opinion of counsel for both the Company and Registered
Holder, all of the Warrant Shares proposed to be registered may be
immediately transferred pursuant to the provisions of Rule 144 under
the Securities Act.
(ii) Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of
holders of securities of the Company, and the underwriter thereof
advises the Company in writing that in its opinion the number of
Warrant Shares requested to be included in such registration statement
exceeds the number which can be sold in such offering without
materially adversely affecting the distribution of such securities,
then the Company will include in such registration statement the
securities requested to be included in such registration statement by
selling securityholders on a pro rata basis, with such rights to
inclusion being apportioned among the Registered Holder and the other
holders of any other securities requesting registration according to
the market value of Warrant Shares and other securities requested by
them, respectively, to be registered. Notwithstanding the foregoing,
the Company shall not be required to include Warrant Shares within the
coverage of a registration statement being filed pursuant to this
Section 9(a)(ii) if, in the opinion of counsel for both the Company
and Registered Holder, all of the Warrant Shares proposed to be
registered may be immediately transferred pursuant to the provisions
of Rule 144 under the Securities Act.
(b) If at any time after June 18, 1997 and prior to the
third (3rd) anniversary of the earlier of the Expiration Date and the exercise
of the final Warrant represented hereby and the Warrant Shares issued or
issuable upon exercise of the Warrants represented hereby are not then
registered under one or more Piggyback Registrations and then covered by a
prospectus complying with the requirements of the Securities Act, the
Registered Holder may by written notice to the Company require the Company to
file a registration statement under the Securities Act covering such Warrant
Shares as the Registered Holder may specify in such notice. A Registered Holder
shall be entitled so to require the Company to file a registration statement
pursuant to this Section 9(b) on only one (1) occasion. The Company will file
such a registration statement within ninety (90) days of receipt of such
notice; and thereafter will prosecute such registration statement diligently to
effectiveness; will cause such registration statement to become effective as
promptly as practicable; will promptly file all such
-7-
<PAGE> 8
supplements and post-effective amendments to such registration statement and
take any such other actions as may be necessary or appropriate to make
available to Registered Holder on as continuous a basis as is practicable a
prospectus meeting the requirements of the Securities Act through the earliest
of (a) the date on which the final Warrant Shares have been sold and
distributed by Registered Holder, (b) the date on which, in the opinion of
counsel for both the Company and Registered Holder, all of the Warrant Shares
which Registered Holder then holds may be immediately transferred pursuant to
the provisions of Rule 144 under the Securities Act, and (c) April 30, 2002;
and will register or qualify the securities so being registered under such
state and provincial securities or "blue sky" laws as the Registered Holder may
reasonably request. In that regard, the Company makes no representations or
warranties as to its ability to have any registration statement or
post-effective amendment thereto declared effective.
(c) In the event of any registration of a security
pursuant to this Section 9, the Company shall indemnify the Registered Holder
and its officers, directors and other controlling persons against all losses,
claims, damages and liabilities caused by any untrue statement or alleged
untrue statement of a material fact contained in any registration statement or
prospectus (and as amended or supplemented) relating to such registration, or
caused by any omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they are made unless such statement or
omission was made in reliance upon and in conformity with information furnished
to the Company by the Registered Holder expressly for use therein. The
Registered Holder shall also indemnify the Company, its officers and directors
and each underwriter of the Warrant Shares so registered with respect to
losses, claims damages and liabilities caused by any untrue statement or
omission made in reliance upon and in conformity with information furnished by
the Registered Holder to the Company in writing expressly for use in such
registration statement or prospectus.
(d) All expenses of any registration referred to in this
Section 9, except the fees and disbursements of counsel to the Registered
Holder, underwriting commissions or discounts and any transfer or other taxes
applicable to the transfer of Warrant Shares by the Registered Holder, shall
be borne by the Company.
(e) Following the exercise of Warrants hereunder and the
disposition of Warrant Shares, the Registered Holder shall promptly advise the
Company when Registered Holder no longer holds any Warrant Shares acquired
through the exercise of Warrants hereunder, and upon the request of the
Company, the Registered Holder shall advise the Company from time to time of
the number of Warrant Shares then held by Registered Holder.
(f) The registration rights granted hereunder to the
Registered Holder with respect to Warrant Shares shall also apply to any other
shares of the Company's
-8-
<PAGE> 9
Common Stock or other securities issued by the Company other than Warrants
which are then held by the Registered Holder and constitute "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act, on the same basis as if such securities were Warrant Shares.
10. Notices. All notices, demands, elections, or requests
(however characterized or described) required or authorized
hereunder shall be deemed given sufficiently if in writing and
sent by registered or certified mail, return receipt requested
and postage prepaid, or by facsimile or telegram to the
Company, at its principal executive office, and to the
Registered Holder, at the address of such holder as set forth
on the books maintained by the Company.
11. General Provisions. This Warrant Certificate shall be
construed and enforced in accordance with, and governed by, the laws of the
Province of Ontario. Except as otherwise expressly stated herein, time is of
the essence in performing hereunder. The headings of this Warrant Certificate
are for convenience in reference only and shall not limit or otherwise affect
the meaning hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the 24th day of June, 1997.
COTTON VALLEY RESOURCES CORPORATION, an
Ontario, Canada corporation
By: /s/ E. A. SOLTERO
-------------------------
Name: E. A. Soltero
Title: CEO
-9-
<PAGE> 10
COTTON VALLEY RESOURCES CORPORATION
The following abbreviations, when used in the inscription on the face
of this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
TEN ENT - as tenants by the entireties Custodian
JR TEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts
tenants in common to Minors Act ______
(State)
Additional abbreviations may also be used though not in the above list.
FORM OF ASSIGNMENT
(To be Executed by the Registered Holder if He
Desires to Assign Warrants Evidenced by the
Within Warrant Certificate)
FOR VALUE RECEIVED _____________________________________________
hereby sells, assigns and transfers unto ________________________________(____)
Warrants, evidenced by the within Warrant Certificate, and does hereby
irrevocably constitute and appoint ___________________________________Attorney
to transfer the said Warrants evidenced by the within Warrant Certificates on
the books of the Company, with full power of substitution.
Dated:_______________________ Signature ____________________________________
Notice: The above signature must correspond with the name as written upon the
face of the Warrant Certificate in every particular, without alteration
or enlargement or any change whatsoever.
Signature Guaranteed: _________________________________________________
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
-10-
<PAGE> 11
FORM OF ELECTION TO PURCHASE
(To be Executed by the Holder if he Desires to Exercise
Warrants Evidenced by the Warrant Certificate)
To Cotton Valley Resources Corporation:
The undersigned hereby irrevocably elects to exercise
_________________________________ (_____) Warrants, evidenced by the within
Warrant Certificate for, and to purchase thereunder, ________________
___________________________ (________) full shares of Common Stock issuable
upon exercise of said Warrants and delivery of C$_________ and any applicable
taxes.
The undersigned requests that certificates for such shares be issued
in the name of:
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
- ------------------------------------------------------------------------
(Please print name and address)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
If said number of Warrants shall not be all the Warrants evidenced by
the within Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercised by issued in the name of
and delivered to:
- ------------------------------------------------------------------------
(Please print name and address)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
(SIGNATURES CONTINUED ON FOLLOWING PAGE)
-11-
<PAGE> 12
Dated: ______________________ Signature: _______________________________
NOTICE: The above signature must correspond with the name as
written upon the face of the within Warrant
Certificate in every particular, without alteration
or enlargement or any change whatsoever. If signed by
any other person, the Form of Assignment hereon must
be duly executed by the registered holder in favor of
the person so signing, and if the certificate
representing the shares or any Warrant Certificate
representing Warrants not exercised is to be
registered in a name other than that in which the
within Warrant Certificate is registered, the
signature of the holder hereof must be guaranteed.
Signature Guaranteed:
_______________________________________________________
ANY SIGNATURE GUARANTY REQUIRED MUST BE PROVIDED BY A COMMERCIAL BANK OR MEMBER
FIRM OF ONE OF THE FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC
COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
- --------------------------------------------------------------------------------
ADDENDUM TO WARRANT CERTIFICATE
The 161,351 Common Stock Purchase Warrants herein correspond to
$579,000 of secured indebtedness of The Company to Liviakis pursuant to a note
and security agreement for $1,000,000 dated June 24, 1997.
At each time The Company makes an approved additional draw against the
note, The Company will issue a Warrant Certificate in the form of the Warrant
Certificate to which this addendum is attached in the amount of 0.283 warrants
for each additional dollar (over the first $579,000) drawn against the note.
-12-
<PAGE> 1
EXHIBIT 11
Cotton Valley Resources Corporation
Exhibit 11 - Computation of Loss per Share
Year ended June 30, 1997
Basic loss per share
- ---------------------------------
Net loss for the year (2,006,878)
Divided by weighted average shares outstanding 9,901,000
Loss per share (0.20)
Computation of weighted average shares
- -------------------------------------------
<TABLE>
<CAPTION>
Dates issued shares days o/s yr o/s
- ------------- -------------------------------------------------
<S> <C> <C> <C> <C>
balance 6/30/96 9,191,596 365 1 9,191,596
8/13/96 6,667 321 0.879 5,863
8/19/96 8,334 315 0.863 7,192
1/7/97 200,000 174 0.477 95,342
1/14/97 8,334 167 0.458 3,813
1/22/97 172,332 159 0.436 75,071
1/23/97 61,000 158 0.433 26,405
2/5/97 48,980 145 0.397 19,458
3/7/97 25,000 115 0.315 7,877
3/24/97 6,667 98 0.268 1,790
2/27/97 - 6/3/97 266,667 76 0.208 55,525
11/20 - 11/26/97 100,000 219 0.600 60,000
7/96 4,388 350 0.959 4,208
12/96 1,490,000
11/96 166,667 228 0.625 104,110
12/96 136,250 197 0.540 73,538
12/96-3/97 375,000 150 0.411 154,110
6/97 302,191 15 0.041 12,419
5/97 20,400 45 0.123 2,515
---------------- --------------
12,590,473 9,900,832
================ ==============
Rounded 9,901,000
==============
</TABLE>
Diluted loss per share
- -------------------------------------------------
<TABLE>
<CAPTION>
Assumed exercise of options and warrants:
<S> <C> <C>
outstanding at beginning of year 2,735,220
average exercise price 1.73
assumed proceeds ----------------
stock price 4,731,931
Assumed number of shares repurchased 2.00
-------------
2,365,965
=============
Current year warrants and options
net of those exercised 1,512,894
Average exercise price 1.27
assumed proceeds ----------------
stock price 1,921,375
Assumed number of shares repurchased 2.00
-------------
960,688
=============
Recap:
Net loss (2,006,878)A
Actual weighted average shares 9,901,000
Assumed exercised warrants and options:
beginning of yr. 2,735,220
granted during yr. 1,512,894
Less assumed purchased for treasury with proceeds (3,326,653)
--------------
10,822,461 B
==============
Diluted loss per share A/B (0.19)
</TABLE>
<PAGE> 1
EXHIBIT 21
(i) Cotton Valley Energy Corporation, a Nevada corporation.
(ii) Cotton Valley Operating Company, a Texas corporation.
(iii) Cotton Valley Energy, an Oklahoma corporation.
(iv) Aspen Energy Corporation, a Nevada corporation.
(v) Mustang Well Servicing Company, a Nevada corporation.
(vi) Mustang Oilfield Equipment Company, a Nevada corporation.
(vii) Mustang Horizontal Services, Inc., a Nevada corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference of our name in the Registration
Statement on Form SB-2 of Cotton Valley Resources, Inc. (the "Company") dated
March 16, 1998, to which this consent is an exhibit.
K&A ENERGY CONSULTANTS, INC.
/s/ K&A ENERGY CONSULTANTS, INC.
Tulsa, Oklahoma
March 16, 1998
<PAGE> 1
EXHIBIT 23.2
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation of Ryder Scott Company, Petroleum
Engineers by reference in this Registration Statement on Form SB-2 of Cotton
Valley Resources, Inc. dated March 16, 1998, relating to the estimated
quantities of proved reserves of oil and gas attributable to certain interests
of Cotton Valley Resources, Inc.
/s/ RYDER SCOTT COMPANY
/s/ PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Calgary, Alberta
March 16, 1998
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in 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
March 13, 1998
Dallas, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 405,430
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,942,023
<PP&E> 19,721,091
<DEPRECIATION> 83,618
<TOTAL-ASSETS> 26,767,925
<CURRENT-LIABILITIES> 1,322,798
<BONDS> 0
0
0
<COMMON> 21,689,357
<OTHER-SE> (425,000)
<TOTAL-LIABILITY-AND-EQUITY> 26,767,925
<SALES> 1,148,911
<TOTAL-REVENUES> 1,157,985
<CGS> 485,498
<TOTAL-COSTS> 1,085,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,888
<INCOME-PRETAX> 72,537
<INCOME-TAX> 18,134
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,403
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
