____________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 0-28814
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer as Specified in Its Charter)
Yukon, Canada 98-0164357
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3300 Bank One Center
100 North Broadway
Oklahoma City, OK 73102
(Address of Principal Executive Offices) (Zip Code)
(405) 606-8500
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, without par value
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the Issuer was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for the fiscal year ended June 30, 1999, were $980,966.
The Issuer had 34,198,198 shares of common stock outstanding as of
September 15, 1999.
The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the Issuer, computed by reference to the average
bid and asked prices of such common stock as of September 15,1999, was
$7,689,175.
___________________________________________________________________________
<PAGE>
1999 ANNUAL REPORT (S.E.C. FORM 10-KSB)
INDEX
Securities and Exchange Commission
Item Number and Description
PART I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II
Item 5 Market for the Company's Common Stock and Related
Stockholder Matters 17
Item 6 Management's Discussion and Analysis or Plan of
Operation 18
Item 7 Consolidated Financial Statements and Unaudited
Supplemental Information 23
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons of the Issuer; Compliance With
Section 16(a) of the Exchange Act 48
Item 10 Executive Compensation 50
Item 11 Security Ownership of Certain Beneficial Owners
and Management 51
Item 12 Certain Relationships and Related Transactions 52
PART IV AND SIGNATURES AND EXHIBIT INDEX
Item 13 Exhibits, Financial Statements and Reports on Form 8-KSB 54
Signatures 54
Exhibit Index 55
<PAGE>
PART I
ITEM 1. BUSINESS
General
Cotton Valley Resources Corporation (referred to herein as either
"Cotton Valley" or the "Company") is a development stage independent energy
company engaged in the exploration and development, acquisition and
operation of oil and gas properties with a geographic focus in major oil
and gas producing regions in the United States. The Company was
incorporated in the Province of Ontario, Canada, originally as Cotton
Valley Energy Limited, on February 15, 1995. From its inception through
June 30, 1999, the Company has been engaged principally in organization
and capitalization activities and has not generated material net 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. 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
shareholders of Arjon received 686,551 shares of Common Stock in the
amalgamation.
On April 30, 1996, the Company organized Cotton Valley Operating
Company, a Texas corporation ("CV Operating") to operate the Company's oil
and gas properties. The Company on February 25, 1997, organized Cotton
Valley Energy, Inc., an Oklahoma corporation ("CVEI") to acquire and
operate the N.E. Alden Field properties in Caddo County, Oklahoma. CVEI
commenced operations on March 3, 1997. Aspen Energy Corporation, a Nevada
corporation ("Aspen"), was an inactive subsidiary of the Company, formed
on May 1, 1996, which was used to accommodate the merger of Aspen Energy
Corporation, a New Mexico corporation ("Old Aspen") into Aspen on July
31, 1997. The principal asset of Old Aspen was its interest in the Means
Unit in Andrews County, Texas (the "Means Unit"). On May 27, 1998, Aspen
organized Cotton Valley Means, Inc. as a Texas corporation ("CV Means")
and transferred all of its interest in the Means Unit to CV Means to
facilitate a $10 million financing relating to the development of this
property. See "Business--Recent Developments; Means Unit Credit Facility."
In addition to CV Energy, CV Operating, CVEI, Aspen and CV Means,
the Company recently organized Mustang Well Servicing Company, a Nevada
corporation ("Mustang Well Servicing"), Mustang Oilfield Equipment Company,
a Nevada corporation ("Mustang Equipment"), and Mustang Horizontal
Services, Inc., a Nevada corporation ("Mustang Horizontal") (collectively,
the "Mustang Service Companies"). All of the Company's subsidiaries are
wholly owned by the Company, except for CV Means, which is a wholly-owned
subsidiary of Aspen. During December 1997 the Company sold $4.32 million
of its 7% secured convertible debentures (the "Convertible Debentures")
to a group of nine investors (the "Holders"). Approximately $1.5 million
of the proceeds were used to purchase oilfield service equipment for the
Mustang Service Companies. See "Certain Relationships and Related
Transactions."
<PAGE>
Restructuring
During the fiscal year 1999, the Company experienced a severe cash
flow shortage as a result of the steep decline in oil and gas prices as
well as the significant reduction in demand for oilfield equipment and
services. The Company was also unable to complete the effectiveness
of a registration statement under the United States Securities and
Exchange Act of 1933 (the "Exchange Act") for the securities underlying
the Convertible Debentures and remained, for much of the fiscal year,
in default under the terms of the Convertible Debentures. In response to
these conditions, the Company, during the first fiscal quarter, ceased
operations at Mustang Well Servicing Company and Mustang Horizontal Services,
Inc. and severely cut back new business at Mustang Oilfield Equipment
Company. The waterflood development project at the Means Unit was postponed
and workover and development activities at the other properties were
indefinitely suspended. Staff was reduced from over 40 employees to two
field employees on payroll plus two officers who worked throughout the year
for deferred salaries.
During January through April 1999 the Company entered into agreements
with over fifty vendors to whom it owed more than $750,000 to eliminate
the debt through the issuance of shares of Common Stock. As of June 30,
1999, the Company had issued 4,000,000 shares of Common Stock reflecting
the reduction of approximately $785,000 of liabilities and providing a
reserve for the reduction of another $215,000 of liabilities.
On March 26, 1999 the Company assigned to the holders (the "Holders")
of its then outstanding $4.22 million of Convertible Debentures, assets
(the "Transferred Assets") having a book value of approximately $11 million
in exchange for a release from all obligations, including repayment and/or
conversion, under the Convertible Debentures. The obligations under the
Convertible Debentures were assumed by Mustang Well Servicing Company ("MWSC")
and the Company's ownership interest in MWSC was transferred to an
unrelated third party. Pursuant to an agreement for conveyances in lieu
of foreclosure between the Company, its subsidiaries and the holders of
the Convertible Debentures, the Company is entitled to the return of all
remaining Transferred Assets and remaining cash from the sale of
Transferred Assets once the Holders have received $4.22 million (plus
interest and certain expenses, less revenues and less 50% of the proceeds
from sales of the Interest and Waiver Shares) from the sale of Transferred
Assets. In connection with the transaction the Company has recorded a
pre-tax loss on disposition of assets of $9,807,576. The Company is unable
to quantify the amount of the contingent receivable.
During August 1999 the Company organized a Texas corporation Aspen
Energy Group, Inc ("AEG") as a wholly-owned subsidiary. On September 16,
1999 AEG entered into an agreement to acquire 50% of the outstanding equity
shares of East Wood Equity Ventures, Inc. ("East Wood"), in exchange for
the Company issuing 25 million shares of common stock, 21.2 million
special warrants (each exercisable for one share upon approval by
shareholders) and approximately 5 million ordinary warrants. The parties
met all the conditions required for closing and as of September 30, 1999,
were waiting approval of the terms of the transaction from the Canadian
Dealing Network and the Ontario Securities Commission. On September 17,
1999 the officers of the Company resigned and the officers of East Wood
were elected officers of the Company.
<PAGE>
Risk Factors
Holders of the Common Stock and future investors in the Company should
be aware of the following factors in evaluating their investment in Cotton
Valley.
Limited Operating History; Capital Intensive Business; Need for
Additional Funds. From its inception in February 1995 through June 30,
1999, the Company was engaged principally in organization and capitalization
activities and did not generate material net revenues from operations.
The Company's business is highly capital intensive requiring continuous
development and acquisition of oil and gas reserves. In addition, capital
is required to operate and expand the Company's oil field operations and
purchase equipment. At June 30, 1999, the Company had a working capital
deficit of approximately $2.1 million. 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 issuance's of equity securities
would likely result in dilution to the Company's then existing shareholders
while the incurring of additional indebtedness would result in increased
interest expense and debt service changes. See "Management's Discussion
and Analysis or Plan of Operations".
History of Losses. The Company incurred losses before income tax
benefits of $1,298,278 and $13,324,086 for the fiscal years ended June 30,
1998 and 1999, respectively. The Company's accumulated deficit as of June
30, 1999 was $15,078,841. 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, and proceeds from the exercise of options and warrants.
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) complete the merger
with Crown; (ii) obtain the exercise of outstanding warrants; and
(iii) 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 or Plan of Operations".
Possible Contingent Liability for Violation of Securities Act. On
February 9, 1998, the Company effected a Continuance of its domicile from
the Province of Ontario to Yukon Territory (the "Yukon Continuance") in
accordance with applicable Canadian law. The Yukon Continuance was approved
by the shareholders of the Company at a meeting held on December 10, 1996,
for which proxies were solicited in accordance with applicable Canadian
laws, but the transaction was not registered under the Securities Act.
The Staff of the U.S. Securities and Exchange Commission (the "Commission")
has advised the Company that the registration of the Yukon Continuance
was required pursuant to Rule 145 and that the failure to register the
Yukon Continuance was a violation of Section 5 of the Securities
Act. As a result, the Company may have a contingent liability to certain
of its shareholders, who may sue the Company to recover the consideration
paid, if any, for shares of the Company's Common Stock, with interest
thereon from the date of the Yukon Continuance to the date of repayment
by the Company, less the amount of any income received thereon, upon
the tender of such securities, or for damages if the shareholder no longer
owns such securities. The Company intends to vigorously defend any such
shareholder lawsuit and believes that it may have valid defenses, including
the running of applicable statutes of limitations, against claims
by some or all of its shareholders. However, to the extent any of the
Company's shareholders obtain a judgment against the Company for damages,
the Company's net assets and net worth will be reduced, which in turn
could reduce the Company's ability to obtain financing for its exploration
and drilling operations and cause the Company to curtail operations. There
is no assurance that the Company will have the necessary funds or
sufficient assets to pay any such judgment obtained by any shareholder
against the Company. The Company is unable to quantify the amount of such
contingent liability, if any. See Legal Proceedings -"Yukon Continuance."
<PAGE>
Significant Capital Expenditures Necessary for Undeveloped Properties.
Almost all of the Company's oil and gas reserves are classified as Proved
Undeveloped Reserves, meaning very little production currently exists.
Recovery of the Company's Proved Undeveloped Reserves will require
significant capital expenditures. Management estimates that aggregate
capital expenditures of approximately $6 million will be required to
fully develop these reserves, of which $2 million is expected to be
incurred during the next twelve months. 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.
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 shareholders at that time. See "Management's Discussion
and Analysis or Plan of Operations".
Exploration and Development Risks; Waterflood Projects. The
Company intends to increase its development and, to a lesser extent,
exploration activities. 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.
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.
<PAGE>
Volatility of Oil and Gas Prices. The Company's revenues, profitability
and the carrying value of its oil and gas properties are substantially
dependent upon prevailing prices of, and demand for, oil and gas and the
costs of acquiring, finding, developing and producing reserves. The
Company's ability to maintain or increase its borrowing capacity, to repay
current or future indebtedness, and to obtain additional capital on
favorable terms is also substantially dependent upon oil and gas prices.
Historically, the markets for oil and gas have been volatile and are likely
to continue to be volatile in the future. Prices for oil and gas are subject
to wide fluctuations in response to: (i) relatively minor changes in the
supply of, and demand for, oil and gas; (ii) market uncertainty; and (iii)
a variety of additional factors, all of which are beyond the Company's
control. These factors include domestic and foreign political conditions,
the price and availability of domestic and imported oil and gas, the level
of consumer and industrial demand, weather, domestic and foreign
government relations, the price and availability of alternative fuels
and overall economic conditions. Furthermore, the marketability of
the Company's production depends in part upon the availability, proximity
and capacity of gathering systems, pipelines and processing facilities.
Volatility in oil and gas prices could affect the Company's ability to
market its production through such systems, pipelines or facilities.
Substantially all of the Company's gas production is currently sold to
gas marketing firms or end users either on the spot market on a month-to-
month basis at prevailing spot market prices or under long-term contracts
based on current spot market prices. The Company normally sells its
oil under month-to-month contracts with a variety of purchasers.
Accordingly, the Company's oil and gas sales expose it to the commodities
risks associated with changes in market prices.
Uncertainty of Estimates of Reserves and Future Net Cash Flows.
This Annual Report 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 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 reserve estimates in this Annual Report 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 Annual Report. 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.
The present value of future net reserves discounted at 10% (the "PV-10")
of Proved Reserves referred to in this Annual Report should not be construed
as the current market value of the estimated Proved Reserves of oil and
gas attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net cash
flows from Proved Reserves are generally based on prices and costs as of
the date of the estimate, whereas actual future prices and costs may
be materially higher or lower. Actual future net cash flows also will
be affected by: (i) the timing of both production and related expenses; (ii)
changes in consumption levels; and (iii) governmental regulations or
taxation. In addition, the calculation of the present value of the future
net cash flows using a 10% discount as required by the Commission is not
necessarily the most appropriate discount factor based on interest rates
in effect from time to time and risks associated with the Company's reserves
or the oil and gas industry in general. Furthermore, the Company's reserves
may be subject to downward or upward revision based upon actual production,
results of future development, supply and demand for oil and gas, prevailing
oil and gas prices and other factors. See "Properties--Oil and Gas Reserves"
<PAGE>
Under full cost accounting, the Company would be required to take a
non-cash charge against earnings to the extent capitalized costs of
acquisition, exploration and development (net of depletion and depreciation),
less deferred income taxes, exceed the PV-10 of its Proved Reserves and
the lower of cost or fair value of unproved properties after income tax
effects. See "Management's Discussion and Analysis or Plan of Operations."
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.
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 of 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.
Environmental Risks. 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. Noncompliance 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.
<PAGE>
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.
Dependence on Key Personnel. The Company depends to a large extent
on the services of Jack E. Wheeler, the Company's President, Chairman of
the Board and Chief Executive Officer. Bruce J. Scrambler, Senior VP and
CFO, Ron Mercer, Vice President Operations and Acquisitions and Sam
Hammons, Vice President and Corporate Counsel. 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.
Concentration of Voting Power. Upon completion of the East
Wood acquisition the Company's executive officers, directors and
their affiliates will vote for directors approximately 52% of the
Company's expected outstanding 60 million shares of Common Stock,
including rights under certain Voting Agreements to vote approximately 6
million shares of Common Stock representing approximately 10% 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 to influence
the election of directors and results of voting on all matters requiring
shareholder approval.
Conflicts of Interests. Certain officers, directors and related
parties have engaged in business transactions with the Company which were
not the result of arm's length negotiations between independent parties.
Management believes that the terms of these transactions 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.
Public Market and Possible Volatility of Securities. The Common Stock
is traded on the OTC Bulletin Board 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.
<PAGE>
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.
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.
Competition
Competition in the oil and gas industry is intense generally.
Cotton Valley believes that price is the determinative factor in competition
for drilling prospects, equipment and labor. Major and independent oil and
gas companies and syndicates actively bid for desirable oil and gas
properties and equipment and labor required to operate and develop them.
Many of Cotton Valley's competitors have substantially greater financial
resources and exploration and development budgets than those of Cotton
Valley. Cotton Valley expects difficulty in competing for future
drilling prospects.
Markets
General. Oil and gas operating revenues are highly dependent upon
prices and demand for oil and gas. Numerous factors beyond Cotton
Valley's control can impact the prices of its oil and gas. Decreases in
oil and gas prices would have an adverse effect on Cotton Valley's
proved reserves, revenues, profitability and cash flow.
Cotton Valley has not engaged in any crude oil and gas price swaps
or other hedging transactions to reduce its exposure to price
fluctuations. Pursuant to the terms of the Means Credit Facility, the
lender may initiate crude oil commodity swaps with the Company for its
production from the Means Unit. The Company may also, however, engage
in other similar transactions from time to time as management deems
advisable.
Gas Sales. During fiscal year 1999, the Company sold most of its gas
to a single purchaser.
Oil Sales. Cotton Valley sells its oil production under short-term
arrangements at prices no less than the purchaser's posted prices for
the respective areas less standard deductions. Management believes that
numerous buyers are available for Cotton Valley's oil. During fiscal year
1999, the Company sold its oil to six different purchasers, one of which,
National Cooperative Refinery Association, accounted for more than 10% of
the Company's gross revenues.
Oilfield Equipment Sales. Cotton Valley sells its oilfield equipment
and supplies to numerous retail and wholesale customers located in several
states and Canada. During fiscal year 1999 no single customer accounted
for more than 10% of the Company's gross revenues.
Regulation
Oil and gas exploration, production and related operations are
heavily regulated by federal and state authorities. Failure to comply
with applicable law can result in substantial penalties. The cost of
regulatory compliance will increase Cotton Valley's cost of doing business
and affect its profitability. Regulation of oil and gas activities has
changed many times. Consequently, Cotton Valley is unable to predict the
future cost or impact of complying with such laws. Texas requires
drilling permits and bonds and operating reports and imposes other
burdens relating to oil and gas exploration and production. Texas also
requires conservation measures, including pooling of oil and gas
properties, establishing maximum production rates from oil and gas wells,
and spacing, plugging and abandoning wells. These laws limit the rate at
which oil and gas can be produced from Cotton Valley's properties.
The transportation and sale of gas in interstate commerce is
regulated by United States law and the Federal Energy Regulatory Commission.
<PAGE>
Operating Hazards and Uninsured Risks
The acquisition, development, exploration for, and production,
transportation and storage of, crude oil, gas liquids and gas involves
a high degree of risk, which even a combination of experience, knowledge
and careful evaluation may not be able to overcome. Cotton Valley's
operations are subject to all of the risks normally incident to drilling
gas and oil wells, operating and developing gas and oil properties,
transporting, processing, and storing gas, including encountering
unexpected formations or pressures, premature reservoir declines, blow-outs,
equipment failures and other accidents, craterings, sour gas releases,
uncontrollable flows of oil, gas or well fluids, adverse weather
conditions, pollution, other environmental risks, fires and spills.
Oil production requires high levels of investment and has particular
economic risks, such as retaining wall failure, fires, explosions,
gaseous leaks, spills and migration of harmful substances, any of which
can cause personal injury, damage to property, equipment and the
environment, and result in the interruption of operations.
Cotton Valley is also subject to deliverability uncertainties related
to the proximity of its reserves to pipeline and processing facilities and
the inability to secure space on pipelines that deliver oil and
gas to commercial markets. Although Cotton Valley maintains insurance
in accordance with customary industry practice, it is not fully insured
against all of these risks, nor are all such risks insurable. Losses
resulting from the occurrence of these risks could have a material
adverse impact on Cotton Valley.
Employees
At September 15, 1999, the Company had 2 full-time employees of which
2 were management. The Company has experienced no work stoppages and
management considers its relations with employees to be good. The Company
uses contract services in its field operations and employs independent
consultants, as needed, to evaluate Company prospects, reserves and other
oil and gas assets for potential acquisitions.
Facilities
The Company occupies approximately 7,132 square feet of office space
at 6510 Abrams Road, Suite 300, Dallas, Texas 75231 under a five-year lease
that expires on April 30, 2003. Monthly basic rent is $7,430.
Approximately half the space has been sublet to April 30, 2001. The
Company leases a storage yard in Mineral Wells, Texas.
Recent Developments
Cancellation of Convertible Debentures Obligations. On December 30,
1997, the Company completed the private placement of the 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 rebuilt well service rigs and related equipment ("the
Equipment). The remaining funds were used for the acquisition
and development of oil and gas properties, purchase of oil field equipment
and working capital.
The Convertible Debentures were due December 31, 2001 and were secured
by the Equipment and other assets of the Company including oil and gas
leasehold interests in Navarro County, Texas and Caddo County, Oklahoma.
The Convertible Debentures were convertible into shares of the Company's
Common Stock and Debenture Warrants, subject to adjustment upon certain
events. Under the terms of the Convertible Debentures, the Company was
obligated to obtain on or before May 30, 1998 an effective registration
statement covering the shares of Common Stock to be issued upon
conversion of the Convertible Debentures and exercise of the Debenture
Warrants. The Company was not successful in obtaining the effectiveness
of the registration statement.
During October 1998, the Company and each Convertible Debentureholder
agreed to certain amendments to the Convertible Debentures and related
documents, including a waiver of the prospective event of default. As
consideration for the waiver, the Company issued a total of 400,000 shares
(the "Waiver Shares") on a pro rata basis to each Convertible
Debentureholder. The Waiver Shares were valued by the board of directors at
approximately $0.23 per share when issued to the Convertible
Debentureholders. Additionally, the Company issued and delivered to
the Convertible Debenture holders approximately 1.5 million shares of
common stock in lieu of accrued interest of approximately $302,000 on
the Convertible Debentures for December 30, 1997 through December 31,
1998.
<PAGE>
On March 26, 1999 the Company assigned to the Holders the Equipment
and certain oil and gas leases (the "Transferred Assets") having a book value
of approximately $11 million in exchange for a release from all obligations,
including repayment and/or conversion, under the Convertible Debentures. The
obligations under the Convertible Debentures were assumed by Mustang Well
Servicing Company ("MWSC") and the Company's ownership interest in
MWSC was transferred to an unrelated third party. The Company and its
remaining subsidiaries were released from any and all obligations relating
to repayment, registration and or conversion of the Convertible Debentures.
Pursuant to an agreement for conveyances in lieu of foreclosure between
the Company, its subsidiaries and the holders of the Convertible
Debentures, the Company is entitled to the return of all remaining
Transferred Assets and remaining cash from the sale of Transferred Assets
once the Holders have received $4.22 million (plus interest and certain
expenses, less revenues and less 50% of the proceeds from sales of the
Interest and Waiver Shares) from the sale of Transferred Assets. In
connection with the transaction the Company has recorded a pre-tax loss
on disposition of assets of $9,807,576. The Company is unable to
quantify the amount of the contingent receivable.
Means Credit Facility. On June 12, 1998, CV Means entered into a
credit agreement with Triassic Energy Partners, L.P. ("Triassic"), an
affiliate of Cambrian Capital Corporation whereby CV Means could borrow
up to $10,000,000 on a multiple-advance, non-revolving basis (the "Means
Credit Facility"). Repayment of amounts advanced under the Means Credit
Facility is guaranteed by the Company and all its subsidiaries.
Under the Means Credit Facility, up to $1,000,000 may be advanced for
new project development working capital purposes. The remaining $9,000,000
may be advanced for the development of the Company's Means (Queen Sand)
Unit in Andrews County, Texas (the "Means Unit"). As of September 15, 1999,
the Company an aggregate obligation of approximately $900,000 to Triassic
for advances and accrued interest. A $10,000,000 promissory note dated June
12, 1998 with interest at the prime rate of Citibank N.A., New York, New
York plus 2% was issued to Triassic by CV Means in accordance with the terms
of the Means Credit Facility. Until the maturity date, May 31, 2002, the
Company will deliver to Triassic each month a percentage of the revenues
from the Means Unit to be applied to accrued interest and payment of
principal of the note. On the maturity date, the accrued interest and
outstanding principal balance of the note is due and payable. As security
for the Means Credit Facility, CV Means granted a security interest in
substantially all the assets of CV Means, including the Means Unit and
all income generated thereby. As further security for the Means Credit
Facility, Aspen, the sole shareholder of CV Means, pledged all the
outstanding shares of CV Means to Triassic.
As further consideration for the Means Credit Facility, CV Means assigned
a net profits overriding royalty interest in the Means Unit to Cambrian
Capital Partners, L.P. ("Cambrian") and also entered into a commodities
swap agreement with Triassic. The Company also issued a Unit Purchase Option
to Cambrian which allows Cambrian to purchase up to 100,000 units of the
Company for $1.75 per unit. Each unit consists of 1.085 shares of the Company's
Common Stock and one warrant, which grants to the warrantholder the right
to purchase two shares of Common Stock at an exercise price of $2.02
per share. All shares issuable under this Unit Purchase Option are subject
to a registration rights agreement that requires the Company to register
such shares under certain circumstances.
As of September 23, 1999 the Company was in default under the terms of
the Means Credit facility for non-payment of interest. The new management
has begun negotiations to resolve the default, although there can be
assurance that such negotiations will bring a successful cure to the
default. Since September 1998, the Company has been unable to draw
development funds under the Means Credit facility and consequently severely
curtailed its efforts at the Means Unit.
<PAGE>
Vendor Agreements. During January through April 1999 the Company
entered into agreements with over fifty vendors to whom it owed more than
$750,000 to eliminate the debt through the issuance of shares of Common
Stock. As of June 30, 1999, the Company had issued 4,000,000 shares of
Common Stock reflecting the reductions of approximately $785,000
of liabilities and providing a reserve for the reduction of another $215,000
of liabilities.
American Stock Exchange. During May 1999 the Company ceased trading
its shares of Common Stock on the American Stock Exchange and began trading
over the counter on the Electronic Bulletin Board under the symbol "KTNV".
East Wood Acquisition. During August 1999 the Company organized a
Texas corporation Aspen Energy Group, Inc. ("AEG"). On September 16, 1999
AEG entered into an agreement to acquire 50% of the outstanding equity shares
of East Wood Equity Venture, Inc. ("East Wood"), in exchange for the Company
issuing 25 million shares of common stock, 21.2 million special warrants
(each exercisable for one share upon approval by shareholders) and
approximately 5 million ordinary warrants. The parties met all the
conditions required for closing and as of September 23, 1999, were
awaiting approval of the terms of the transaction from the Canadian
Dealing Network and the Ontario Securities Commission. On September 17,
1999 the officers of the Company resigned and the officers of East Wood
were elected officers of the Company.
East Wood owns interests in approximately four hundred producing oil
and gas wells located in Alabama, Arkansas, California, Louisiana,
Mississippi, Montana, Oklahoma, Texas and Wyoming. East Wood owns a working
interest in the majority of these wells, however, it does have a royalty
interest in eight of the wells and an overriding interest in seventy-nine
wells. The main concentration of properties is in Oklahoma with 335 wells
and Texas with 30 wells.
Approximately eighty-one percent are gas wells and nineteen percent are
oil wells. East Wood has working interests and overriding royalty
interests ranging from less than one percent to forty-three percent in
wells ranging in depths from 5,200' to 23,650'.
East Wood has a very active development program and participates in an
average of fifteen to twenty wells per year. Based on the most recent
reserve reports, East Wood's interest in its producing properties have
undiscounted estimated proved net producing reserves of over 475,000 barrels
and 20 billion cubic feet of gas. The proved undeveloped reserves have
been estimated by engineers and geologists to contain more than 60 billion
cubic feet of gas and almost 1,500,000 barrels of oil.
ITEM 2. PROPERTIES
List of Properties
Means (Queen Sand) Unit. The Cotton Valley Means (Queen Sand)
Unit consists of approximately 2,600 acres on six leases in north
central Andrews County, Texas. Production began in 1954 and development
followed rapidly. By 1960, when a secondary project of water injection
was initiated, there were 41 total wells in the Means Unit. Most wells
were completed in casing, perforated and fractured with a large number
flowing initially. The best wells flowed more than 400 barrels of oil per
day (Bopd") initially and the initial potentials of 32 of the 41 wells (78%)
exceeded 100 Bopd.
Primary production peaked in 1957 at 1096 Bopd from 41 wells. By 1960,
the production was down to 327 Bopd, a decline of more than 70%.
Secondary response was rapid in some wells and peak secondary production
occurred from 1961 through 1964, with almost flat production, at slightly
above 833 Bopd. The original waterflood used 21 injection wells and 20
producers, for an overall spacing of 50 acres per well, and an injection
to producing well ratio of approximately 1 to 1. However, during the period
of greatest production decline, starting in 1968, several injection wells
were down for extended periods of time because of severe corrosion of the
tubing strings. This was the result of not using protected tubing
(plastic coated, fiberglass or cement lined) in the injection wells. Also,
several of the injection wells had severe injectivity losses due to
plugging problems (scale and iron-sulfide) partly caused by being at the far
end of the Exxon Means Injection System. As a result, less water than needed
to properly flood the reservoir was used.
Old Aspen purchased the leases in 1996 for the purpose of instituting a
20-acre infill redevelopment program. Several redevelopments have been
completed since 1988 in other Queen Sand fields in Andrews County and
adjacent Gaines County and all of the redevelopments designed with
adequate injection support have been very successful. A study of 11
offset redevelopment waterfloods in the Means, McFarland and Magutex
fields indicated that 35.3% of the original oil in place had been produced
on average for these units. The cumulative production to date (both primary
and secondary) in the Company's initial 2096 acre Means Unit has been
4.136 million barrels of oil, which is equal to 16.2% of the original
oil in place. If the property produces at the average of the other
eleven projects, it will have 2.5 million barrels of additional
reserves.
<PAGE>
An engineering report, as of June 30, 1999, prepared by an independent
firm of petroleum engineers for Cotton Valley estimates that the Means
(Queen Sand) Unit contains net proved undeveloped reserves of 3,128,000
million barrels of oil. The Company estimates that it will require a
capital investment of approximately $9.2 million to develop this
property. During fiscal year 1999 the Company purchased, and delivered
to the Means Unit, or the nearby city of Odessa, Texas, approximately
$600,000 of equipment to be used in the waterflood project.
Cheneyboro Field. Cotton Valley owns approximately 1,300 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. Cotton Valley has entered into an Area of Mutual Interest
("AMI") Agreement with a number of unaffiliated parties covering
approximately 33,000 acres in and around the Cheneyboro Field. Cotton
Valley has the right to acquire up to a 15% 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 Bbl of oil, representing an average of
approximately 90,000 Bbl per well. Some of the vertical wells have
produced over 200,000 Bbl, indicating better drainage where the wells
penetrated the fracture system. In 1987, the Tarrant County Water Authority
expropriated approximately 12,000 acres of this field. Producing wells
were plugged and abandoned to permit construction of the Richland/Chambers
Creek Reservoir, a water supply project for Tarrant County and the City of
Fort Worth, Texas.
The Cotton Valley Lime reservoir at Cheneyboro is highly fractured.
The primary objective reservoir rock is an oolitic carbonate grainstone
of Jurassic age that was deposited on a Paleozoic shelf break. Subsequent
pullout of the deeper Louann Salt caused extensive fracturing. The salt
withdrawal left the residual field structure as simple regional dip.
Hydrocarbon trapping occurs as a result of the high degree of fracture
density bounded by areas of non-permeability. Core and log analysis
indicate the presence of 2.5 to 4.5% oil saturated matrix porosity in the
field. Vertical wells in this reservoir produce 42 degree API oil.
Cotton Valley believes that horizontal drilling techniques will lead
to higher initial rates and better recovery efficiencies than those
experienced in the original vertical well completions. Since 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.
In connection with the cancellation of Convertible Debenture
indebtedness the Company assigned approximately 70% of its interest in
the Cheneyboro Field to the Holders N.E. Alden Field. On March 3, 1997,
Cotton Valley purchased all of the interests held by the Homestake
Companies and certain other parties in the N.E. Alden Field, Caddo County,
Oklahoma. In connection with the cancellation of Convertible Debenture
indebtedness the Company assigned its interest in this field to the Holders.
Sears Ranch Prospect. In October 1997, the Company, through
its subsidiary, CV Energy, completed the acquisition of a 100% working
interest in approximately 6,200 acres in the Sears Ranch area of Nolan
and Fisher Counties, Texas (the "Sears Ranch Prospect") for cash and
other considerations. The assets received by the Company included
pooling rights, existing contracts related to the Sears Ranch Prospect and
all personal property (including equipment) located on or used in
connection with the Sears Ranch Prospect. The primary purpose of this
acquisition was to acquire oil field equipment, including pumpjacks,
tank batteries, injection pumps, separators, tubing and casing.
<PAGE>
During fiscal year 1999, the remaining salvageable equipment was mostly
removed, and the field and remaining equipment were sold to another operator.
Title of Properties
Cotton Valley follows industry practice when acquiring undeveloped
properties on minimal title investigation. A title opinion is obtained
before drilling begins on the properties. Title opinions cover most of
Cotton Valley's properties. Cotton Valley's properties are subject to
royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens that Cotton Valley believes do not
materially interfere with their use or value. Cotton Valley may incur
additional expenses in obtaining titles or doing remedial work on the
titles, but in the opinion of management these expenses would not be
material.
Oil and Gas Reserves
Cotton Valley's reserves consist primarily of proved and probable
reserves located in Texas. Reserve estimates were made using industry-
accepted methodology including extrapolation of performance trends,
volumetrics, material balance and statistical analysis of analogs.
The evaluator's professional judgment and experience were used to select
the most appropriate method and to determine the reasonableness of the
results. The estimates were made in accordance with oil and gas reserve
definitions promulgated by the U.S. Securities and Exchange Commission
(the "SEC").
The following table summarizes Cotton Valley's estimated net proved
oil and gas reserves as of June 30, 1999 as estimated by American Energy
Advisors, Inc.
TOTAL RESERVES(1)
ITEM
RESERVES
Proved producing
Oil (Bbl) 36,141
Proved undeveloped
Oil (Bbl) 3,092,001
-------------
Total Proved
Oil (Bbl) 3,128,142
ESTIMATED FUTURE NET REVENUES BEFORE INCOME TAXES
Proved producing $ 236,012
Proved undeveloped 24,025,404
--------------
Total $ 24,261,416
ESTIMATED FUTURE NET REVENUES BEFORE INCOME TAXES
DISCOUNTED AT 10%
Proved producing $ 132,725
Proved undeveloped 10,842,457
--------------
Total $ 10,975,182
- - Prices based on $17.00 per Bbl of oil.
The reserve data set forth in this Annual Report is only an estimate.
Numerous uncertainties are inherent in estimating oil and gas reserves
and their values, including many factors beyond the control of the producer.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and
judgment. As a result, estimates of different engineers often vary.
In addition, estimates of reserves are subject to revision by the results
of later drilling, testing and production. Accordingly, reserve estimates
often differ from the quantities of oil and gas ultimately recovered.
The meaningfulness of estimates is highly dependent upon the accuracy of
the assumptions upon which they are based.
In general, oil and gas production declines as reserves are depleted.
Except to the extent that Cotton Valley acquires proven reserves or succeeds
in exploring and developing its own reserves, or both, Cotton Valley's proven
reserves will decline as they are produced. Cotton Valley's future oil and
gas production is, therefore, highly dependent upon its ability to acquire
or develop additional reserves.
<PAGE>
DRILLING ACTIVITY
The Company did not drill any wells during the two fiscal years ended
June 30, 1997. During the year ended June 30, 1998, the Company
participated for a 12.5% working interest in a single exploratory well
which was a dry hole. The Company also successfully completed the drilling
of a horizontal water injection well in which its working interest is
100%. The Company drilled no wells during the fiscal year ended June 30, 1999.
OIL AND GAS WELLS
The following table sets forth the number of productive oil and gas
wells in which the Company had a working interest at June 30, 1999.
During fiscal year 1999, the average price received for oil and gas sales
was $9.10 per Boe, and the average cost of production was $7.39 per Boe,
where Boe is defined as the barrel of oil equivalent using 6 Mcf of gas
to one barrel of oil. The full cost pool was amortized at the rate of
$5.20 per Boe.
PRODUCTIVE WELLS
________________________________ _________________________
Gross (1) Net (2)
_______ _______ _____ ______ ______ _______
Location Oil Gas Total Oil Gas Total
Texas... 10 0 10 8 0 8
====================================================
- - The number of gross wells is the total number of wells in which a
working interest is owned.
- - The number of net wells is the sum of fractional working interests
owned in gross wells expressed as whole numbers and fractions thereof.
OIL AND GAS ACREAGE
The following table summarizes the Company's developed and undeveloped
leasehold acreage at June 30, 1998.
_________________________________________
DEVELOPED UNDEVELOPED
_______ _______ _______ ______
Location Gross(1) Net(2) Gross(1) Net(2)
Texas...... 2,920 2,664 5,220 1,246
========================================
- - The number of gross acres is the total number of acres in which a
working interest is owned.
- - The number of net acres is the sum of fractional working interests
owned in gross acres expressed as whole numbers and fractions thereof.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Yukon Continuance
On December 10, 1996, the Company's shareholders of record as of
November 4, 1996, approved the continuance of domicile from the Province
of Ontario to Yukon Territory (the "Continuance"). The Company mailed
proxy solicitation materials to its shareholders on November 8, 1996.
The Company has received an opinion of its Canadian counsel that the
Notice, Information Circular and Proxy delivered to its shareholders
complied in all material respects with applicable corporate and securities
laws of the Province of Ontario. A total of 1,791,195 shares voted for
the Yukon Continuance (19.5% of the 9,204,318 shares then outstanding),
with 86 shares voting against. No shareholder exercised his dissenter's
rights under Ontario law. On February 9, 1998, the Company filed Articles
of Continuance with the Registrar of Yukon Territory, changing the domicile
of the Company from the Province of Ontario to the Yukon Territory.
At the time of the December 10, 1996 meeting of shareholders, the
Company believed it to be in the best interest of its shareholders to
continue its domicile into the Yukon Territory because under Yukon Territory
law the Company's Board of Directors need not be comprised of a majority
of Canadian residents as required under Ontario law. The Company
believed that since its principal executive office, management and principal
properties were located in the United States, it would be advantageous to
both its U.S. and Canadian shareholders to have a majority of its Board
of Directors comprised of U.S. residents. The Company's Charter and bylaws
were not changed as a result of the Yukon Continuance. The Company
has been advised by its Canadian counsel that there are no significant
differences in corporate law concerning shareholder rights between the
Province of Ontario and Yukon Territory except for the allowance of a
majority of U.S. residents as directors under Yukon law. The Company
intended to eventually reincorporate into the United States after completion
of the Yukon Continuance since its future business activities would primarily
be in the United States.
On November 27, 1996, the Company filed with the Commission a
Registration Statement on Form SB-2 (the "1996 Registration Statement") for
the purpose of registering securities to be offered in an underwritten
public offering. On or about February 6, 1997, the Staff of the Commission
orally advised the former Chief Financial Officer of the Company
that the Yukon Continuance, as approved by the shareholders on December 10,
1996, involved a transaction which would require registration under the
Securities Act. As a result of the Staff's position, the 1996 Registration
Statement was amended to state that the Company would not proceed with the
Yukon Continuance until after the filing of a registration
statement covering the Yukon Continuance under the Securities Act. The
1996 Registration Statement was never declared effective and was
subsequently withdrawn by the Company.
On February 10, 1997 and as a result of the Staff's advice to the
Company, the Company filed with the Commission a Current Report on Form 8-K
which stated that the Company's continuance from Ontario to the Yukon Territory
would require registration under the Securities Act and would be delayed until
after such registration had been effected and further shareholder approval
had been sought.
<PAGE>
During the Staff's review of the Company's 1996 Registration Statement
(November 1996 through June 1997), the Company's principal officer and
liaison with the Staff was the Company's former Chief Financial Officer and
it was with him in February 1997 that the Staff discussed by telephone the
applicability of Rule 145 to the Yukon Continuance. In October 1997, the
Chief Financial Officer resigned his position as an officer of the Company.
Unfortunately, during the review process of the Company's 1996 Registration
Statement by the Staff, the significance and materiality of the Yukon
Continuance registration issue was not effectively communicated to current
management of the Company.
In December 1997, management of the Company was advised by its Canadian
counsel that the Company should initiate the process of filing its Articles
of Continuance with the Registrar of the Yukon Territory prior to the end
of 1997 or it could be necessary to again seek shareholder approval of the
Yukon Continuance. Current management, without the knowledge of the
significance of the previous discussions between the Staff of the Commission
and the Company's former Chief Financial Officer regarding the Yukon
Continuance issue, decided that it would be in the Company's best interest
to complete the Yukon Continuance as directed and approved by its
shareholders at the December 10, 1996 meeting. The Yukon Continuance
was effected in conformity with applicable Canadian law on February 9, 1998.
YUKON CONTINUANCE MAY HAVE VIOLATED SECURITIES ACT
On March 16, 1998, the Company filed with the Commission a Registration
Statement on Form SB-2 (the "March 1998 Registration Statement") for the
purpose of registering up to 10,891,184 shares of the Company's Common Stock
for sale by certain shareholders of the Company, including approximately
5.7 million shares to be issued upon exercise of outstanding warrants
and conversion of the Convertible Debentures. On May 1, 1998, the Company
received a letter of comments from the Staff of the Commission (the "May
1998 Staff Comment Letter") relating to the March 1998 Registration
Statement. In the May 1998 Staff Comment Letter, the Staff advised the
Company that it should have registered the Yukon Continuance under the
Securities Act. The Yukon Continuance was not registered under the
Securities Act.
The Company in its supplemental response on May 26, 1998 to the Staff's
May 1998 Comment Letter contended, with the concurrence of Jackson Walker
L.L.P., the Company's U.S. securities counsel, that the Yukon Continuance
was a transaction not subject to the registration requirements of Section
5 of the Securities Act. The Staff has advised the Company that is does
not agree with the Company and its U.S. securities counsel's conclusion
regarding the Yukon Continuance.
Assuming the Yukon Continuance violated Section 5 of the Securities
Act because it was required to be but was not registered thereunder,
shareholders of the Company would have a cause of action against the Company
for damages under Section 12(a) of the Securities Act. Section 12(a) of
the Securities Act provides in relevant part as follows:
"Section 12(a) In General. Any person who:
- Offers or sells a security in violation of Section 5.
- ...shall be liable, subject to subsection (b), to the person
purchasing such security from him, who may sue either at law
or in equity in any court of competent jurisdiction, to
recover the consideration paid for such security with interest
thereon, less the amount of any income received thereon, upon
the tender of such security, or for damages if he no longer owns
the security."
<PAGE>
The Company, therefore, may have a contingent liability to certain of
its shareholders, who may sue the Company to recover the consideration paid,
if any, for shares of the Company's Common Stock, with interest thereon,
from the date of the Yukon Continuance to the date of repayment by the
Company less the amount of any income received thereon, upon
tender of such securities, or for damages if the shareholder no longer
owns such securities. The Company intends to vigorously defend any such
shareholder lawsuit and believes that it may have valid defenses, including
the running of applicable statutes of limitations, against claims by some or
all of its shareholders. However, to the extent that any of the
Company's shareholders obtain a judgment for damages against the Company,
the Company's net assets and net worth will be reduced, which in turn could
reduce the Company's ability to obtain financing for its exploration and
drilling operations and cause the Company to curtail operations. The Company
is unable to quantify the amount of such contingent liability. Nothing
herein should be construed as an admission by the Company that it has violated
any provision of the Securities Act. See "Risk Factors - Possible Contingent
Liability for Violation of Securities Act."
The Company contends that in the Yukon Continuance transaction, the
"consideration" given by the shareholders was stock in an Ontario corporation
in exchange for stock in a Yukon Territory corporation. Thus one of the
remedies of a shareholder under Section 12(a) would be for the Company to
rescind the Yukon Continuance and offer to exchange with its shareholders
shares of common stock of an Ontario corporation. Under Canadian law such
action would require a vote of the present shareholders and would give them
dissenters' rights under Yukon law. If Rule 145 were deemed applicable,
the continuance back to Ontario would require registration under the
Securities Act with the attendant costs and delays. The Company believes
this would be an impractical and expensive solution, and would be
inconsistent with the Company's shareholders' approval of the Yukon
Continuance at the December 10, 1996 meeting. The Company does not intend
to make such a rescission offer or any other rescission offer to its
shareholders regarding the Yukon Continuance. Further, the Company does
not believe that its shareholders suffered any monetary loss or other damages
as a result of the Yukon Continuance.
OTHER LEGAL PROCEEDINGS.
The Company is not currently party to any other legal proceedings
which would have material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In a special shareholders meeting on June 29, 1999 the shareholders of
the Company passed the following resolutions.
"The issuance by the Corporation of up to fifteen million (15,000,000)
Common Shares during fiscal years 1999 and 2000 in connection with one or
more private placements for cash to be sought out and negotiated by
management of the Corporation with the approval of the board of directors
of the Corporation with a view to enhancing shareholder value, be and the
same is hereby authorized, approved and consented to.
The issuance by the Corporation of up to twenty-five million
(25,000,000) Common Shares during fiscal years 1999 and 2000 in connection
with one or acquisitions or mergers to be sought out and negotiated by
management of the Corporation with the approval of the board of directors
of the Corporation with a view to enhancing shareholder value, be and the
same is hereby authorized, approved and consented to."
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INVESTMENTS.
The Common Stock began trading through the Canadian Dealing Network
("CDN") on June 24, 1996, under the symbol "CVZC". From June 24, 1996,
through June 30, 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
December 31, 1998, one Canadian dollar was worth $0.72 U.S. Since
December 31, 1997, there have been no significant trades on the Canadian
Dealing Network.
High Low
June 24-30, 1996 $2.80 $2.50
July 1 - September 30, 1996 $2.60 $1.20
October 1 - December 31, 1996 $1.90 $0.75
January 1 - March 31, 1997 $3.45 $1.45
April 1 - June 30, 1997 $2.55 $1.50
July 1 - September 30, 1997 $6.50 $1.95
October 1 - December 31, 1997 $4.17 $3.91
The Company's Common Stock began trading through the NASD Electronic
Bulletin Board on January 14, 1997 under the symbol "CTVYF". On July 1,
1997, the Company's symbol was changed to "CTVY". The following table
sets forth the high and low bid information for the Company's Common Stock
in U.S. currency as reported on the NASD Electronic Bulletin Board since
January 14, 1997. The table reflects inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions. The Company's Common Stock was not traded through the
NASD Electronic Bulletin Board after October 17, 1997 until it resumed on
June 2, 1999 as described below
High Low
January 14 - March 31, 1997 $2.20 $1.00
April 1 - June 30, 1997 $1.81 $1.12
July 1 - September 30, 1997 $4.81 $1.38
October 1-17, 1997 $3.45 $3.12
<PAGE>
On October 17, 1997, the Common Stock was listed on the American Stock
Exchange under the symbol "KTN". On May 21, 1999 the American Stock Exchange
ceased trading the Common Stock. The following table sets forth the high
and low sales prices for the Common Stock for the period October 17, 1997
through May 21, 1999
High Low
October 17 - December 31, 1997 $6.00 $2.12
January 1 - March 31, 1998 $2.94 $1.38
April 1 - June 30, 1998 $1.75 $0.88
July 1 - September 30, 1998 $1.19 $0.50
October 1 - December 31, 1998 $0.63 $0.22
January 1 - March 30, 1999 $0.38 $0.15
April 1 - May 21, 1999 $0.40 $0.16
One June 2, 1999 the Common Stock returned to trading on the NASD
Electronic Bulleting Board under the symbol "KTNV". The following table sets
forth the high and low transaction information for the Common Stock in U.S.
currency as reported on the Electronic Bulletin Board since June 2, 1999.
High Low
June 2 - June 30, 1999 $0.31 $0.13
July 1 - September 23, 1999 $0.55 $0.09
Holders. As of June 30, 1998, there were approximately 1,000 record
holders of the Company's Common Stock.
DIVIDENDS.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Fiscal Year 1999 as Compared to Fiscal Year 1998
During the fiscal year ended June 30, 1999, the Company had a net loss
of $11,479,086 on revenues of $980,966 as compared with a net loss of
$830,600 on revenues of $1,825,852 for the fiscal year ended June 30, 1998.
The impairment results from a loss on disposal of assets of $9,807,576
in connection with release of liabilities under the Convertible
Debentures, a write-down of $1,262,000 against the remaining oil and
gas properties and significantly lower oil and gas sales due to lower oil
and gas prices during fiscal year 1999. In fiscal 1998 the Company had a
gain from the purchase and sale of a Canadian property.
<PAGE>
Oil and gas sales decreased 68% from 835,684 for the fiscal year ended
June 30, 1998 to $266,232 for the fiscal year ended June 30, 1999, reflecting
lower oil and gas prices and volume. Oil and gas production costs decreased
65% for the fiscal year ended June 30, 1998, reflecting reduced staffing
and maintenance costs.
Equipment sales for the fiscal year ended June 30, 1999 were $683,708
as compared to $987,811 sales for the fiscal year ended June 30, 1998.
Equipment purchase and refurbishing expenses were $602,832 for the fiscal
year ended June 30, 1999 as compared to expenses of $660,373 for the
comparable period ended June 30, 1998.
General and administrative costs were $1,498,795 for the fiscal year
ended June 30, 1999, an increase of $168,434 or 12.7% more that the
$1,330,361 incurred for the fiscal year ended June 30, 1998. A substantial
portion of the increase was due to increased penalties with respect to
non-registration of the Convertible Debentures. In addition, the
Company allocated that portion of its general and administrative expenses
that were directly associated with oil and gas acquisition and
development activities during the fiscal year ended June 30, 1998 to oil
and gas properties. Only a small amount of such costs were allocated during
the fiscal year ended June 30, 1999 because the Company had limited such
activities during the period.
The Company recognized an income tax benefit of $1,845,000 for the
fiscal year ended June 30, 1999 as compared to recognition of an income
tax benefit of $467,678 for the fiscal year ended June 30, 1998. This
is directly related to the size of the loss before income taxes during
such periods, except that the amount for the period ended June 30, 1999
is limited to the amount of deferred income taxes carried by the Company
on its balance sheet as of June 30, 1998.
FISCAL YEAR 1998 AS COMPARED TO FISCAL YEAR 1997
During the fiscal year ended June 30, 1998, the Company had a net loss
of $830,600 on revenues of $1,825,852 as compared with a net loss of
$2,006,878 on revenues of $272,243 for the fiscal year ended June 30, 1997.
The improvement results from the first used equipment sales by the Company's
subsidiary, Mustang Oilfield Equipment Company, oil and gas production
beginning March 1997 from the N.E. Alden Field and August 1997 from the
Aspen properties, oil and gas production beginning November 1997 from the
Sears Ranch Prospect, and continued production from the Company's
Cheneyboro properties, as well as reductions in general and administrative
costs, and gain from the purchase and sale of a Canadian property, which
were offset by costs associated with the financing and development of
the Company.
Oil and gas sales increased 207% from $272,243 for the fiscal year
ended June 30, 1997 to $835,684 for the fiscal year ended June 30, 1998,
reflecting the addition of the Aspen, N.E. Alden and Sears Ranch
acquisitions. Oil and gas production costs increased 144% for the fiscal
year ended June 30, 1998, reflecting the addition of oil and gas properties
and continued remedial work required at the N.E. Alden Field. The Company
did not have any significant oil and gas production costs for the fiscal
year ended June 30, 1997.
<PAGE>
Equipment sales for the fiscal year ended June 30, 1998 were $987,811
as compared to no sales for the fiscal year ended June 30, 1997.
Equipment purchase and refurbishing expenses were $660,373 for the fiscal
year ended June 30, 1998 as compared to zero expenses for the comparable
period ended June 30, 1997.
General and administrative costs were $1,330,361 for the fiscal year
ended June 30, 1998, a decrease of $1,495,317 or 53% less than the
$2,825,678 incurred for the fiscal year ended June 30, 1997. A
substantial portion of the decrease was due to the expiration of the
investor relations contract with LFC and an administrative cost
reduction program instituted by management in mid-June 1997. In addition,
the Company allocated that portion of its general and administrative
expenses that were directly associated with oil and gas acquisition and
development activities during the fiscal year ended June 30, 1998 to oil
and gas properties. No such costs were allocated during the fiscal year
ended June 30, 1997 because the Company was primarily involved in fund
raising activities during that time period.
The Company will recognize an income tax benefit of $467,678 for the
fiscal year ended June 30, 1998 as compared to recognition of an income
tax benefit of $919,000 for the fiscal year ended June 30, 1997. This
is directly related to the size of the profit or loss before income taxes
during such periods.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
During the fiscal year ended June 30, 1997, the Company incurred a net
loss of $2,006,878 as compared to a loss of $712,360 for fiscal 1996. This
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.
Oil and gas production costs were $252,272 in 1997 as compared to none
in 1996. These costs primarily relate to the N.E. Alden Field and
particularly to rehabilitation costs which were not capitalized. The
Company initially acquired its interest in the N.E. Alden Field in December
1996 for $390,000 of which $35,000 was paid in December 1996 and
$355,000 was paid upon closing on March 3, 1997. Oil and gas sales from
the N.E. Alden Field in fiscal 1997 were approximately $200,000.
Rehabilitation work on two wells in the Cheneyboro Field in the fourth
quarter of fiscal 1996 resulted in oil and gas sales of $74,473 during
fiscal 1997.
The Company recognized an income tax benefit of $919,000 in fiscal
1997 compared to $387,000 in fiscal 1996. This is directly related to the
size of the loss before income taxes during such periods.
During fiscal 1996, the Company issued 300,000 shares to two former
officers of the Company for services which was recorded at $446,950.
Other expenses during this period were $657,796 which includes $138,970
in interest expense and officers and staff compensation. The loss before
income tax benefit of $387,000 was $1,099,360 during fiscal 1996.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had a working capital deficit of
$2,102,941 calculated by subtracting current liabilities of $2,262,696
from current assets of $159,755. Approximately $840,000 of the current
liabilities is attributable to advances under the $10 million working
capital and development credit facility provided to the Company by
Triassic Energy Partners, L.P. ("Triassic"), under which the Company is
in default of certain principal and interest repayment obligations, and
which is secured by the Company's interest in its Means Field property,
Andrews County, Texas. In cooperation with Triassic, the Company is
attempting to sell a portion of its interest in the Means Field to third
parties to satisfy its current obligations to Triassic. The Company and
Triassic continue to discuss other ways in which the obligations
may be satisfied and development activities resumed at Means Field.
During March 1999, the Company closed a transaction with the Holders
(the "Holders") of the Company's 7% Convertible Debentures (the "Debentures")
to release the Company from any obligations to repay or convert their total
outstanding amount of $4.22 million in long-term debt in exchange for the
transfer and assignment of the Holder's collateral (well servicing
equipment, horizontal drilling equipment and certain oil and gas leases)
plus an additional 40% working interest in the Company's Cheneyboro leases
in Navarro County, Texas.
Over the next few months, the Holders will seek buyers for the
transferred assets, and the Company will have the right of first refusal
to repurchase any of the major assets assigned to the Holders. The assets
to be transferred have a book value which exceeds the amount of the
outstanding Debentures by approximately $9 million. Upon completion of the
transaction, the Company has taken a one-time charge of approximately $9
million relating to the transaction. The Holders will refund to the Company
any amount of sales proceeds which exceeds: (i) $4.2 million plus interest
from January 1, 1999 at 7% per annum; less (ii) 50% of the proceeds the
Holders receive from sale of the 2 million shares of common stock the
Holders received in November 1998 in payment of interest and waiver and
penalty fees. The market value of any cash or assets returned will be
recorded as a gain on sale of assets in the period returned. Any
deficiency which may arise from the sale of the assets and shares will be
borne by the Holders.
The Company, with the assistance of its Canadian securities counsel,
developed a program for the orderly repayment of trade debt during calendar
1999 through the issuance and sale in Canada of shares of common stock.
Approximately 50 creditors accounting for approximately $785,000 of accounts
and notes payable participated in the program during the fourth quarter
of fiscal year 1999.
The Company, upon completion of its exchange with the Holders and
initiation of the trade payables program, entered into a merger agreement
with Crown Partners, L.L.C. Minerals Division. In connection therewith,
during August and September, 1999 the Company raised $518,750 cash in a
private placement and paid $300,000 of accrued salaries, $200,000 of
advances from related parties and $90,000 of accumulated payables through
the issuance of shares of Common Stock.
For fiscal year 2000 the Company intends to further its development
activities with the proceeds from private placements, exercise of
warrants, traditional bank debt and institutional mezzanine reserves
based financing. No assurance can be given that the Company will be
successful in these efforts.
YEAR 2000 ISSUES
The "Year 2000 Problem" arose because many existing computer programs
use only the last two digits to refer to a year. Cotton Valley has
purchased all its computer programs and computers since January 1, 1995, all
of which have been certified as "Year 2000 Compliant." Most of Cotton
Valley's principal suppliers and customers have also certified
to Cotton Valley that their computer systems are "Year 2000 Compliant."
Therefore, the Company has determined that the "Year 2000 Problem" is not
likely to have any material effect on the Company.
OTHER MATTERS
In 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits ("SFAS 132"), and SFAS 133,
Accounting for Derivative Instruments and Hedging Activities." SFAS 132
is effective for fiscal years beginning after December 15, 1997, and SFAS
133 is effective for fiscal years beginning after June 15, 1999. The
Company does not anticipate a material impact to its consolidated financial
statements upon adoption of these standards.
ESTIMATED RESERVES
The carrying value of Cotton Valley's oil and gas properties is
supported almost entirely by proved undeveloped reserves. Cotton Valley
emphasizes that reserve estimates of new discoveries or undeveloped
properties are more imprecise than those of producing oil and gas
properties. Accordingly, these estimates are expected to change materially
as future information becomes available.
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND INDEPENDENT AUDITOR'S REPORT
JUNE 30, 1999
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
AND SUBSIDIARIES
CONTENTS
Page
Independent Auditor's Report 24
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet 25
Consolidated Statements of Operations 26
Consolidated Statement of Changes in Stockholders' Equity 27 - 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 33 - 46
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Cotton Valley Resources Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Cotton
Valley Resources Corporation and subsidiaries (a development stage company)
as of June 30, 1999 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the two years
in the period ended June 30, 1999 and the period from February 15,
1995 (date of incorporation) to June 30, 1999. 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
Cotton Valley Resources Corporation and subsidiaries as of June 30, 1999
and the results of their operations and their cash flows for each
of the two years in the period ended June 30, 1999 and the period from
February 15, 1995 (date of incorporation) to June 30, 1999 in conformity
with generally accepted accounting principles.
The carrying value of the Company's oil and gas properties is supported
primarily by proved undeveloped reserves.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 10 to
the financial statements, the Company has suffered recurring losses
from operations. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 10. The financial statements
do not include any adjustments that might result from the outcome of
this uncertainty.
LANE GORMAN TRUBITT L.L.P.
/s/ LANE GORMAN Trubitt L.L.P.
Dallas, Texas
August 26, 1999
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED BALANCE SHEET
June 30, 1999
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash $ 9,083
Accounts receivable 53,022
Materials and supplies inventory 97,650
-----------
Total current assets 159,755
-----------
Proved Oil & Gas Properties (full cost method) 10,975,182
net of accumulated depletion of $298,427
Office Furniture and Equipment
net of accumulated depreciation of $31,724 117,245
Other Assets 89,469
-----------
Total Assets $ 11,341,651
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 716,487
Accrued expenses 61,036
Accrued interest 63,516
Accrued salaries 381,539
Advances from related parties 200,000
Note payable 840,118
----------
Total current liabilities 2,262,696
----------
Stockholders' Equity:
Preferred stock, no par value, authorized-unlimited,issued,
one issued-none -
Common stock, no par value, authorized-unlimited,
Issued, 27,173,198 shares 23,548,537
Less subscriptions for 857,744 shares (214,436)
Warrants and beneficial conversion feature 823,695
Deficit accumulated in development stage (15,078,841)
-----------
Total stockholders' equity 9,078,955
-----------
Total Liabilities and Stockholders' Equity $ 11,341,651
===========
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Period From
February 15, 1995
Year Ended June 30, to
1999 1998 June 30, 1999
------ ------- -----------------
<S> <C> <C> <C>
REVENUE:
Oil and gas sales $ 266,232 $ 835,684 $ 1,374,159
Equipment sales 683,708 987,811 1,671,519
Other income 31,026 2,357 33,383
---------- ---------- -----------------
Total revenues 980,966 1,825,852 3,079,061
EXPENSES:
Oil and gas production 216,234 615,162 1,083,668
Cost of equipment sold 281,850 542,864 824,714
Operating expenses 320,982 117,509 438,491
General and administrative 1,498,795 1,330,361 6,680,716
Depreciation and depletion 159,329 378,920 580,060
Other expenses 971 1,566 2,537
---------- ----------- -----------------
Total expenses 2,478,161 2,986,382 9,610,186
---------- ----------- -----------------
LOSS FROM OPERATIONS (1,497,195) (1,160,530) (6,531,125)
OTHER INCOME (EXPENSES):
Interest and financing
expense (399,289) (814,845) (1,450,262)
Gain (loss) on disposal
of assets (9,807,576) 629,660 (9,177,916)
Provision for inventory
losses (359,664) - (359,664)
Provision for oil & gas
property loss (1,262,000) - (1,262,000)
Interest income 159 47,437 56,969
Other income 1,479 - 1,479
----------- ---------- ---------------
Total other (11,826,891) (137,748) (12,191,394)
---------- ----------- ---------------
LOSS BEFORE INCOME TAXES (13,324,086) (1,298,278) (18,722,519)
INCOME TAX BENEFIT 1,845,000 467,678 3,643,678
NET LOSS $ (11,479,086) $ (830,600) $ (15,078,841)
=========== ========== ==============
NET LOSS PER SHARE $ (.57) $ (0.05) $ (1.09)
WEIGHTED AVERAGE SHARES 20,036,818 16,301,723 13,735,266
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
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 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 -
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 - - - -
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
WARRANTS DEFICIT
AND ACCUMULATED
BENEFICIAL IN DEVELOPMENT
CONVERSION STAGE
FEATURES TOTAL
--------- -------------- -----------
<S> <C> <C> <C>
Issued upon incorporation
to officers
($.003 per share) - - $ 1,409
Issued March 10, 1995
for the acquisition of
subsequently abandoned
oil and gas properties
(621,600 shares issued
and 310,800 shares
canceled $.003 per
share) - - 777
Issued March 10, 1995
for the acquisition
of oil and gas
properties ($1.82 per
share) - - 7,072,914
Issued June 1, 1995
for cash ($1.00 per
share) - - 10,000
Net loss - (49,917) (49,917)
------------- ------------ -------------
BALANCES, June 30, 1995 - (49,917) 7,035,183
Issued July - December
1995 in connection
with notes payable
($1.49 per share) - - 160,008
Repayment and conversion
to equity of notes payable,
net of amortized discount - - (72,000)
Issued December 29, 1995
to officers upon conversion
of special shares ($.004
per share) - - 5,832
Issued December 29, 1995
as advance for stock
offering costs ($1.49
per share) - - 506,409
Issued December 29, 1995
to officers for services
($1.49 per share) - - 446,950
Sale of shares for cash
during April - June
1996 ($1.64 per share) - - 2,089,872
Issued June 14, 1996 upon
conversion of debentures
($1.48 per share) - - 426,474
Issued June 14, 1996 to
former Arjon shareholders
($.21 per share) - - 146,300
Share issuance costs - - (915,785)
Net loss - (712,360) (712,360)
------------- ------------ --------------
BALANCES, June 30, 1996 - (762,277) 9,116,883
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
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 - - - -
--Continued--
Issuance of shares in May
1997 for services ($1.84
per share) 20,400 37,500 - - - -
Cash received in June 1997
as prepayment for
subsequent exercise of
warrants ($2.00 per
share) - - 52,000 104,000 - -
Issuance of shares in June
1997 for conversion of
notes payable ($1.16 per
share) 302,191 349,000 - - - -
Estimated fair value of
warrants issued for
services in November
1996 and as discount on
note payable in June
1997 - - - - - -
Net loss - - - - - -
--------- --------- ------- ------- ------ -------
BALANCES, June 10,
1997 12,590,473 $12,707,063 177,000 $197,750 - $ -
BALANCES, June 30,
1997 12,590,473 12,707,063 177,000 197,750 - -
Issuance of shares in
July for Aspen Energy
acquisition ($1.87 per
share) 2,511,287 4,700,000 - - - -
WPM Group private
placement in August
1997 ($1.667 per
share) 272,700 454,500 - - - -
Shares issued in July
1997 against prior
subscription
agreement 177,000 197,750 (177,000) (197,750) - -
Shares issued for employee
in August 1997 ($1.06
per share) 45,000 47,813 - - - -
Shares issued in September
1997 for purchase of
property ($3.70 per
share) 9,447 35,000 - - - -
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
WARRANTS DEFICIT
AND ACCUMULATED
BENEFICIAL IN DEVELOPMENT
CONVERSION STAGE
FEATURES 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 warrant
($1.47 per share) - - 55,791
Issued during March 1997
for exercise of warrants
($1.64 per share) - - 52,014
Sale of shares from
December 1996 through
March 1997 for cash,
including shares
subscribed but not issued
($.75 per share) - - 375,000
Sale of shares for cash
during February - June
1997 ($1.51 per share) - - 402,527
--Continued--
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 10,
1997 $ 323,000 (2,769,155) $10,458,658
BALANCES, June 30,
1997 323,000 (2,769,155) 10,458,658
Issuance of shares in
July for Aspen Energy
acquisition ($1.87 per
share) - - 4,700,000
WPM Group private
placement in August
1997 ($1.667 per
share) - - 454,500
Shares issued in July
1997 against prior
subscription agreement - - -
Shares issued for employee
in August 1997 ($1.06
per share) - - 47,813
Shares issued in September
1997 for purchase of
property ($3.70 per
share) - - 35,000
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
Common Stock
Common Stock Subscribed Special Shares
Shares Amount Shares Amount Shares Amount
-------- ---------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Warrants issued in connection
with $125,000 note placement
in September 1997 - - - - - -
Warrants exercised July-
October 1997 ($1.85
per share) 1,610,674 3,017,812 - - - -
Exercised of warrants in
December 1997 ($1.22
per share) 66,667 81,419 - - - -
Discount for beneficial
conversion feature of
$4,320,000 of convertible
debentures issued in
December, 1998 - - - - - -
Issuance of shares in
February 1998 for
conversion of convertible
note 60,000 100,000 - - - -
Cancellation of shares in
March 1998 for debt
in Aspen acquisition (269,970) (425,000) - - - -
Issuance of shares for
services in May 1998
($1.1875 per share) 150,000 178,125 - - - -
Issuance of shares for
property option ($.50
per share) 50,000 25,000 - - - -
Net loss - - - - - -
--------- -------- ------ ----- ----- -----
BALANCES, June 30,
1998 17,273,278 21,119,482 - - - -
</TABLE>
- -- Continued--
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
WARRANTS DEFICIT
AND ACCUMULATED
BENEFICIAL IN DEVELOPMENT
CONVERSION STAGE
FEATURES TOTAL
--------- -------------- -----------
<S> <C> <C> <C>
Warrants issued in connection
with $125,000 note placement
in September 1997 21,533 - 21,533
Warrants exercised July-
October 1997 ($1.85
per share) - - 3,017,812
Exercised of warrants in
December 1997 ($1.22
per share) - - 81,419
Discount for beneficial
conversion feature of
$4,320,000 of convertible
debentures issued in
December, 1998 479,162 - 479,162
Issuance of shares in
February 1998 for
conversion of convertible
note - - 100,000
Cancellation of shares in
March 1998 for debt
in Aspen acquisition - - (425,000)
Issuance of shares for
services in May 1998
($1.1875 per share) - - 178,125
Issuance of shares for
property option ($.50
per share) - - 25,000
Net loss - (830,600) (830,600)
------------- ------------- -------------
BALANCES, June 30,
1998 823,695 (3,599,755) 18,343,422
</TABLE>
- -- Continued--
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
Common Stock
Common Stock Subscribed Special Shares
Shares Amount Shares Amount Shares Amount
-------- ---------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares in
September and November
1998 for services
($.50 per share) 132,889 66,445 - - - -
Issuance of shares in
September 1998 for
services ($.25 per
share) 30,000 7,500 - - - -
Conversion of debenture
in September 1998
($.2334 per share) 428,366 100,000 - - - -
Issuance of shares in
October 1998 to
debenture holders in
payment of interest
penalty and waiver
fees ($.2479 per
share) 1,994,840 494,555 - - - -
Issuance of shares in
November 1998 for services
($.25 per share) 130,000 32,500 - - - -
Issuance of shares in
November for services
($.25 per share) 140,000 35,000 - - - -
Issuance of shares in
December 1998 for
compensation ($.25 per
share) 205,000 51,250 - - - -
Issuance of shares in
January 1999 for services
($.15/$.25 per share) 650,000 112,500 - - - -
Issuance of shares in
March 1999 for service
($.75/$.25 per share) 120,000 80,000 - - - -
Issuance of shares and
warrants in private
offering which closed
March 1999 ($.21875
per share) 1,628,825 356,305 - - - -
Issuance of shares in
June 1999 in connection
with sale of Sears Ranch
Property ($.25 per
share) 100,000 25,000 - - - -
Issuance of shares in June
1999 for services
$.20 per share) 340,000 68,000 - - - -
Issuance of shares in June
1999 for notes and
accounts payable ($.25
per share) 4,000,000 1,000,000 - - - -
Common stock subscriptions
receivable ($.25 per
share) - - 857,744 (214,436) - -
Net loss - - - - - -
--------- ---------- ------- -------- ------ -----
BALANCES, June 30,
1999 27,173,198 $23,548,537 857,744$(214,436) - -
========== ========== ======= ========= ===== =====
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1999
<TABLE>
WARRANTS DEFICIT
AND ACCUMULATED
BENEFICIAL IN DEVELOPMENT
CONVERSION STAGE
FEATURES TOTAL
--------- -------------- -----------
<S> <C> <C> <C>
Issuance of shares in
September and November
1998 for services
($.50 per share) - - 66,445
Issuance of shares in
September 1998 for
services ($.25 per
share) - - 7,500
Conversion of debenture
in September 1998
($.2334 per share) - - 100,000
Issuance of shares in
October 1998 to
debenture holders in
payment of interest
penalty and waiver
fees ($.2479 per share) - - 494,555
Issuance of shares in
November 1998 for services
($.25 per share) - - 32,500
Issuance of shares in
November 1998 for services
($.25 per share) - - 35,000
Issuance of shares in
December 1998 for
compensation ($.25 per
share) - - 51,250
Issuance of shares in
January 1999 for services
($.15/$.25 per share) - - 112,500
Issuance of shares in
March 1999 for service
($.75/$.25 per share) - - 80,000
Issuance of shares and
warrants in private
offering which closed
March 1999 ($.21875
per share) - - 356,305
Issuance of shares in
June 1999 in connection
with sale of Sears Ranch
Property ($.25 per
share) - - 25,000
Issuance of shares in June
1999 for services
$.20 per share) - - 68,000
Issuance of shares in June
1999 for notes and
accounts payable ($.25
per share) - - 1,000,000
Common stock subscriptions
receivable ($.25 per
share) - - (214,436)
Net loss - (11,479,086) (11,479,086)
------------- -------------- ---------------
BALANCES, June 30,
1999 $ 823,695 $ (15,078,841) $ 9,078,955
============= ============== ===============
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Period From
Year Ended June 30, 02/15/95 to
1999 1998 06/30/99
__________ __________ ______________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,479,086) $ (830,600) $ (15,078,841)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Deferred income tax
benefit (1,845,000) (467,678) (3,643,678)
Depreciation and depletion 159,329 378,920 580,060
Amortization 143,041 633,632 864,673
Common stock and warrants
issued for services
and other expenses 947,750 69,346 2,857,859
Loss on disposal of assets 9,807,576 - 9,807,576
Provision for inventory losses 359,664 - 359,664
Provision for oil & gas
property loss 1,262,000 - 1,262,000
Change in accounts receivable
and prepaid expenses 562,487 (341,430) 110,260
Change in accounts payable
and accrued liabilities 136,335 878,770 1,708,142
Change in materials and
supplies inventory 434,045 (891,359) (457,314)
Other (55,785) (33,685) (81,438)
----------- ---------- ------------
Net cash provided by
(used in) operating
activities 432,356 (604,084) (1,711,037)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 12,500 - 12,500
Additions to oil and gas
properties (1,152,384) (6,600,175) (9,441,939)
Acquisition of office
furniture and equipment (31,883) (61,673) (149,018)
------------ ----------- ------------
Net cash used by
investing activities (1,171,767) (6,661,848) (9,578,457)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and
exercise of warrants 381,305 3,553,731 7,479,691
Issuance of convertible
debentures - 4,320,000 4,746,474
Issuance of note payable
subsequently converted into
convertible debentures - - 146,300
Payment of liability related
to oil and gas property - - (500,000)
Costs related to sale of stock
and issuance of notes payable (247,102) (557,528) (1,214,006)
Issuance of note payable 451,518 513,600 1,794,118
Repayment of notes payable
and long-term debt - (1,104,000) (1,354,000)
Advances from (repayments to)
related parties 77,011 (16,721) 200,000
----------- ----------- -----------
Net cash provided by
financing activities 662,732 6,709,082 11,298,577
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (76,679) (556,850) 9,083
CASH - Beginning of period 85,762 642,612 -
CASH - End of period $ 9,083 $ 85,762 $ 9,083
------------ ---------- ------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest 315,215 $ 169,973 $ 560,257
Conversion of debt and
other liabilities to
common stock 100,000 100,000 1,014,712
Liabilities incurred in
acquisition of oil and
gas properties - 300,000 1,386,049
Retirement of debenture
upon merger with Arjon - - 146,300
Oil and gas property option
acquired with payable - - 230,000
Oil and gas properties acquired
with common stock - 4,335,000 11,407,914
Issuance of common stock for
stock offering costs - - 506,409
Transfer of account payable
and related property option - - 230,000
Prepaid expenses acquired with
common stock - 178,125 178,125
Beneficial conversion feature
on convertible debentures - 479,162 479,162
Extinguishment of convertible
debentures 4,220,000 - 4,220,000
Issuance of common stock
for notes and accounts payable
net of subscriptions
receivable of $214,436 785,564 - 785,564
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Company was incorporated under the laws of Ontario as Cotton Valley
Energy Limited (CVEL) on February 15, 1995. It acquired all of the
shares of Cotton Valley Energy Corporation (CVEC), a Nevada corporation,
on June 30, 1995 in a one-for-one share and warrant exchange. CVEC was
also incorporated in February 1995. CVEL had no substantive activity,
so the acquisition of CVEC was accounted for as a recapitalization of
CVEL with the net assets of CVEC. These consolidated financial
statements have been prepared as if the Company had acquired CVEC at the
Company's inception.
On June 14, 1996, the Company merged with Arjon Enterprises, Inc.
("Arjon"), an Ontario corporation and reporting issuer in Ontario. As
a result of that merger the Company's name was changed to Cotton Valley
Resources Corporation and a new capital structure was established.
Transactions in the accompanying financial statements are reflected as if
the resulting capital structure was in existence since inception. Arjon
had no business activities and its only asset consisted of convertible
debentures of the Company in the principal amount of $146,300. The
Company accounted for the transaction as an issuance of stock for the
net monetary assets of Arjon accompanied by a recapitalization. Former
Arjon shareholders received 686,551 common shares (representing
approximately 7.5% of the then outstanding common shares) of the Company.
On April 30, 1996, the Company organized Cotton Valley Operating
Company, a Texas corporation ("CV Operating") to operate the Company's
oil and gas properties. The Company on February 25, 1997, organized
Cotton Valley Energy, Inc., an Oklahoma corporation ("CVEI") to acquire
and operate the N.E. Alden Field properties in Caddo County, Oklahoma.
CVEI commenced operations on March 3, 1997. Aspen Energy Corporation,
a Nevada corporation ("Aspen"), was an inactive subsidiary of the
Company, formed on May 1, 1996, which was used to accommodate the
merger of Aspen Energy Corporation, a New Mexico corporation ("Old
Aspen") into Aspen on July 31, 1997. The principal asset of Old Aspen
was its interest in the Means Unit in Andrews County, Texas (the "Means
Unit"). On May 27, 1998, Aspen organized Cotton Valley Means, Inc. as
a Texas corporation ("CV Means") and transferred all of its interest
in the Means Unit to CV Means to facilitate a $10 million financing
relating to the development of this property.
In addition to CV Energy, CV Operating, CVEI, Aspen and CV Means,
the Company organized Mustang Well Servicing Company, a Nevada
corporation ("Mustang Well Servicing"), Mustang Oilfield Equipment
Company, a Nevada corporation ("Mustang Equipment"), and Mustang
Horizontal Services, Inc., a Nevada corporation ("Mustang Horizontal")
(collectively, the "Mustang Service Companies"). All of the Company's
subsidiaries are wholly owned by the Company, except for CV Means which
is a wholly-owned subsidiary of Aspen.
The Company is in the development stage and has not had material
revenues from operations through June 30, 1999. Although it commenced
sales, the Company incurred losses due to its efforts to raise capital
for its development. The Company's planned principal business activity
is to acquire, explore, and develop oil and gas properties, including
trading in used oil field equipment.
The recoverability of amounts capitalized for oil and gas properties
is dependent upon the identification of economically recoverable
reserves, together with obtaining the necessary financing to
exploit such reserves and the achievement of profitable operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and
gas properties. Accordingly, all costs associated with acquisition,
exploration and development of oil and gas reserves, including directly
related overhead costs, are capitalized into a "full-cost pool". A
separate full cost pool is established for U.S. and non-U.S. properties.
<PAGE>
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-
production method using estimates of proved reserves. Costs directly
associated with the acquisition and evaluation of unproved properties
are excluded from the amortization base until the related properties
are evaluated. Such unproved properties are assessed periodically
and a provision for impairment is made to the full-cost amortization
base when appropriate. Sales of oil and gas properties are credited to
the full-cost pool unless the sale would have a significant effect on
the amortization rate. See Note 9. Abandonment's of properties are
accounted for as adjustments to capitalized costs with no loss recognized.
Oil and gas drilling and workover equipment used primarily on the Company's
properties are included in the full cost pool.
The net capitalized costs are subject to a "ceiling test" which limits
such costs to the aggregate of the estimated present value of future net
revenues from proved reserves discounted at ten percent based on current
economic and operating conditions.
Revenue Recognition
Revenue is accrued and recognized in the month the oil and gas is produced
and sold.
Office Furniture and Equipment
Office equipment is recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from
three to ten years.
Foreign Currency Translation
The Company's assets and principal activities are in the United States
and its functional currency is the U.S. dollar. The effects of exchange
rate changes on transactions denominated in Canadian dollars or other
currencies are charged to operations. Foreign exchange gains or losses
were insignificant for all periods presented.
Income Taxes
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due, if any,
plus net deferred taxes related primarily to differences between the
bases of assets and liabilities for financial and income tax reporting.
Deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred tax assets include recognition of operating losses that are
available to offset future taxable income and tax credits that are
available to offset future income taxes. Valuation allowances are
recognized to limit recognition of deferred tax assets where appropriate.
Such allowances may be reversed when circumstances provide evidence
that the deferred tax assets will more likely than not be realized.
Deferred Site Restoration
A provision is established for estimated future costs of site restoration
of oil and gas production interests, including the removal of production
facilities at the end of their useful life. Costs are based on
management's estimates of the anticipated method and extent of site
restoration. The annual charge is determined on the same basis as the
depletion and amortization of the underlying asset.
Net Loss Per Share
Per share information is based on the weighted average number of common
stock and common stock equivalent shares outstanding. As required by
the Securities and Exchange Commission rules, all warrants, options,
and shares issued within a year prior to the initial filing of a
registration statement are assumed to be outstanding for each year
presented for purposes of the loss per share calculation.
Cash Flow Statement
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
<PAGE>
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 - Accounting for
Stock-Based Compensation (SFAS 123), which was effective for the
Company beginning with its 1997 fiscal year, requires recognition of
compensation expense for grants of stock, stock options, and other
equity instruments based on fair value. If the grants are to employees,
companies may elect to disclose only the pro forma effect of such grants
on net income and earnings per share in the notes to financial statements
and continue to account for the grants pursuant to APB Opinion No. 25,
"Accounting for Stock Issued to Employees". The Company has elected
the pro forma disclosure alternative for employee grants.
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company to make estimates and assumptions that affect the amounts reported
in these financial statements and accompanying notes. Actual results
could differ from those estimates. Significant assumptions are
required in the valuation of proved oil and gas reserves, which as
described above may affect the amount at which oil and gas properties
are recorded. It is at least reasonably possible those estimates could
be revised in the near term and those revisions could be material.
Inventories
Inventories, which consist primarily of oilfield equipment and supplies
held for resale, are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Debenture Financing Costs
Debenture financing costs are being amortized ratably over the life
of the related debenture.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts
and transactions of consolidated subsidiaries have been eliminated in
consolidation.
Reclassifications
Certain reclassifications have been made to the prior years financial
statements to conform to the current year presentation.
Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (" SFAS 133"). SFAS 133 is effective
for fiscal years beginning after June 15, 1999. The Company does not
anticipate a material impact to its consolidated financial
statements upon adoption of this standard.
3. OIL AND GAS PROPERTIES
Cheneyboro Field
The Company acquired approximately 5,000 net acres of oil and gas leases
in the Cheneyboro Field of Navarro County, Texas during fiscal years 1995
and 1996. The Company issued 3,252,533 common shares, granted 406,567 Class
A warrants (see Note 5), and paid $500,000 in cash and a promissory note
of $586,049 as consideration. The stock was recorded at $5,935,281, based
on the estimated fair value of the properties. The Company determined fair
value by reference to an independent engineering firm's reserve report.
Since inception, the Company has invested approximately $9,512,000 on this
property, including the aforementioned acquisition costs. Effective March
26, 1999 the Company, in connection with the cancellation of its obligation
to repay or convert its 7% Convertible Debentures, assigned to the
nominee of the holders of the Convertible Debentures, Palisades Asset
Holding Company, LLC ("Palisades") an 80% working interest in approximately
4,000 acres of remaining leases.
<PAGE>
Alden Properties, Caddo County, OklahomaIn fiscal year 1997, the Company
acquired an interest in the Alden
properties for $390,000. In fiscal year 1998, the Company acquired
additional interests in the Alden properties for cash and common stock.
In March 1999, in connection with the cancellation of convertible
debenture indebtedness, the Company assigned its interest in Alden
properties to Palisades.
Aspen Energy Corporation
On July 31, 1997, effective June 30, 1997, the Company acquired 100% of
Aspen Energy Corporation, an oil and gas company, for $200,000 in cash,
a $300,000 promissory note which was paid in two installments through
January 1998 and 2,511,317 shares of the Company's common stock. The
transaction was recorded for as a purchase. The stock was recorded at
$4,700,000. In March 1998 the shareholders of Aspen to delivered 269,870
of the shares they received in the transaction back to Aspen in satisfaction
of obligations owed by such shareholders to Aspen in the amount of
$425,000.
Well Servicing and Drilling Equipment
During fiscal year 1998, the Company purchased $2,756,296 of well servicing
and horizontal drilling equipment. Most of this equipment was "tooled out"
and put into service during January, February and March 1998, and has for
the remainder of fiscal year 1998 worked only on development of the
Company's properties. All the costs associated with purchase, tooling out
and operations have been capitalized in the full cost pool. Subsequent to
June 30, 1998 some of the equipment has been rented to third parties and
the proceeds therefore have been treated as a credit to the full cost
pool. In March 1999, in connection with the cancellation of convertible
debenture indebtedness, the Company assigned virtually all of its well
servicing and drilling equipment to Palisades.
4. NOTES PAYABLE AND LONG-TERM DEBT
The Company had a $579,000 convertible 9% note payable at June 30, 1997
to a company that provided investor relations services to the Company and
owns stock in the Company. Warrants to purchase 161,351 shares at $2.08
through April 30, 2002 were also granted in connection with this transaction.
The estimated fair value of the warrants at the time of grant of $124,000
was accounted for as a discount to the note. During February 1998, $100,000
of the note was converted into 60,000 shares of common stock and the
remaining principal and accrued interest was paid.
The Company had a 12% promissory note payable totaling $200,000 at June
30, 1997, for the unpaid purchase price of the Cheneyboro oil and gas
properties (see Note 3). The note was paid in November 1997.
Sale of Convertible Debentures
On December 30, 1997, the Company completed the private placement of
the $4,320,000 Convertible Debentures to a group of nine institutional
investment firms. Approximately $1 million of the cash proceeds and
$220,000 of Convertible Debentures were used to purchase equipment.
The remaining funds have been used for the acquisition and development
of oil and gas properties, purchase of oil field equipment and working
capital.
The Convertible Debentures were due December 31, 2001 and were secured
by equipment and other assets of the Company. Interest was payable
annually at 7%. The Convertible Debentures were convertible into shares
of the Company's Common Stock and Debenture Warrants, subject to adjustment
upon certain events. Under the terms of the Convertible Debentures, the
Company was obligated to obtain on or before May 30, 1998 an effective
registration statement covering the shares of Common Stock to be issued
upon conversion of the Convertible Debentures and exercise of the
Debenture Warrants. The Company was not successful in obtaining the
effectiveness of the registration statement which was an event of default
under the Convertible Debentures.
<PAGE>
A beneficial conversion feature was recognized and measured by allocating
a portion of the proceeds equal to the intrinsic value of that feature
to stockholders' equity. The estimated fair value of $479,162 has been
recorded as a discount to the note and was amortized from the issue date
to the date the debenture was scheduled to become convertible.
During October 1998, the Company and each Convertible Debentureholder
agreed to certain amendments to the Convertible Debentures and related
documents, including a waiver of the event of default. As consideration
for the waiver, the Company issued a total of 400,000 shares on a pro
rata basis to each Convertible Debentureholder. Additionally, the Company
issued and delivered to the Convertible Debentureholders approximately
1.6 million shares of common stock in lieu of accrued interest and
penalties of approximately 400,000 on the Convertible Debentures for
December 30, 1997 through December 31, 1998.
On March 26, 1999 the Company assigned to the holders (the "Holders")
of its then outstanding $4.22 million of Convertible Debentures, assets
(the "Transferred Assets") having a book value of approximately $11 million
in exchange for a release from all obligations, including repayment and/or
conversion, under the Convertible Debentures. The obligations under the
Convertible Debentures were assumed by Mustang Well Servicing Company
("MWSC") and the Company's ownership interest in MWSC was transferred
to an unrelated third party. Pursuant to an agreement for conveyances
in lieu of foreclosure between the Company, its subsidiaries and the
holders of the Convertible Debentures, the Company is entitled to the
return of all remaining Transferred Assets (well servicing equipment,
horizontal drilling equipment, certain oil and gas leases plus an additional
40% working interest in the Company's Cheneyboro leases in Navarro County,
Texas) and remaining cash from the sale of Transferred Assets once the
Holders have received $4.22 million (plus interest and certain expenses,
less revenues and less 50% of the proceeds from sales of certain shares
of common stock) from the sale of the Transferred Assets. In connection
with the transaction the Company has recorded a pre-tax loss on disposition
of assets of approximately $9,808,000. The Company is unable to quantify
the amount of the contingent receivable.
Means Credit Facility
On June 12, 1998, CV Means entered into a credit agreement with Triassic
Energy Partners, L.P. ("Triassic"), an affiliate of Cambrian Capital
Corporation whereby CV Means could borrow up to $10,000,000 on a multiple-
advance, non-revolving basis (the "Means Credit Facility"). Repayment of
amounts advanced under the Means Credit Facility is guaranteed by the
Company and all its subsidiaries.
Under the Means Credit Facility, up to $1,000,000 may be advanced for
new project development working capital purposes. The remaining $9,000,000
may be advanced for the development of the Company's Means (Queen Sand)
Unit in Andrews County, Texas (the "Means Unit"). As of June 30, 1999,
the Company had drawn down $451,518 for working capital and $388,600 for
Means Unit property development purposes. A $10 million promissory note
dated June 12, 1998 with interest payable monthly at the prime rate of
Citibank N.A., New York, New York plus 2% was issued to Triassic by CV Means
in accordance with the terms of the Means Credit Facility. Until the
maturity date, May 31, 2002, the Company will deliver to Triassic each
month a percentage of the revenues from the Means Unit to be applied to
accrued interest and payment of principal of the note. On the maturity
date, the accrued interest and outstanding principal balance of the note
is due and payable. As security for the Means Credit Facility, CV Means
granted a security interest in substantially all the assets of CV Means,
including the Means Unit and all income generated thereby. As further
security for the Means Credit Facility, Aspen, the sole shareholder of
CV Means, pledged all the outstanding shares of CV Means to Triassic.
As further consideration for the Means Credit Facility, CV Means assigned
a net profits overriding royalty interest in the Means Unit to Cambrian
Capital Partners, L.P. ("Cambrian") and also entered into a crude oil
commodities swap agreement with Triassic. The Company also issued a
Unit Purchase Option to Cambrian which allows Cambrian to purchase up to
100,000 units of the Company for $1.75 per unit. Each unit consists of
1.085 shares of the Company's Common Stock and one warrant, which grants
to the warrantholder the right to purchase two shares of Common Stock
at an exercise price of $2.02 per share. All shares issuable under this
Unit Purchase Option are subject to a registration rights agreement that
requires the Company to register such shares under certain circumstances
<PAGE>
At June 30, 1999, the Company was in default under the terms of the Means
Credit Facility. As a result, Triassic has terminated its obligation to
make loans under the Means Credit Facility and has demanded payment of the
note payable and accrued interest at the default rate of 11.75%.
Accordingly, the entire amount of the note payable, $840,118, has been
included in current liabilities.
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, 1999.
If the shares were to be issued, holders of the Preferred Stock would be
entitled to two votes per share on all matters submitted to a vote of
the Company's shareholders.
In addition, such holders would be entitled to receive cumulative dividends
at the rate of 8% per annum, payable at the election of the Company in cash
or in shares of common stock. Holders of the Preferred Stock would have a
liquidation preference, limited to $6.00 per share of Preferred Stock;
and each outstanding share of Preferred Stock would be convertible at any
time by the holder into two shares of common stock.
Shortly after incorporation, the Company issued 2,100,000 special shares
for total cash consideration of $8.00 to officers, which were subsequently
exchanged for 1,440,000 common shares of the Company. The special shares
were issued in exchange for preferred stock which had been issued upon
incorporation of CVEC and subsequently canceled.
In connection with the acquisition of oil and gas properties, including
a property abandoned following its acquisition, the Company granted
518,345 Class A warrants. In connection with the issuance of notes payable
and debentures, the Company granted 112,390 Class A warrants. The Company
also issued 636,250 Class A warrants in conjunction with a private placement
of common shares. Each Class A warrant is a right to purchase one common
share for $2.00 until December 31, 1997, which was extended to June 30,
1998. During fiscal year 1998 all Class A warrants, except for
approximately 32,000, had been exercised. The remaining 32,000 Class
A Warrants expired on June 30, 1998.
Effective January 31, 1996, each 2.5 outstanding shares of the Company's
common stock were consolidated into one share and the previously authorized
unlimited number of special shares were canceled. The financial statements
reflect the consolidation of common shares as if it occurred on inception
of the Company.
In December 1995, the Company issued a total of 300,000 shares of common
stock to three officers in exchange for services performed from June
1995 through December 1995. The shares were recorded at $446,950, which
represented the estimated value of the services.
During the year ended June 30, 1996, the Company granted to senior
employees options that enable the employees to purchase 800,000 shares of
the Company's common stock for $1.83 per share until July 1, 2000. In
fiscal year 1997, options to purchase an additional 330,000 shares were
granted directors and employees under substantially the same
terms. The Company is authorized to issue shares of common stock under
its employee stock option plan to employees, officers, directors,
consultants and other service providers, provided that insiders must not
in the aggregate hold options exceeding 10% of the outstanding shares.
280,000 of the director and employee options were exercised during fiscal
year 1998.
<PAGE>
The Company has granted to the placement agent of the debenture and
private placement offerings that occurred in fiscal year 1996 three-year
options to purchase up to 10% of the common shares issued upon conversion
of the debentures at a price equal to the conversion price. As a result,
the agent has the right to buy 37,741 common shares at $1.48 per share
until August 31, 1998; 73,739 common shares at $2.00 per share until
December 31, 1997; and 125,000 common shares at $1.64 per share until
April 30, 1998. Certain of these options were exercised in fiscal year
1997, and the remainder during fiscal year 1998.
In conjunction with the merger with Arjon, a total of 431,755 common
shares are issuable to former Arjon shareholders for Arjon warrants in
existence prior to the merger. These shares are issuable as follows:
333,334 common shares until December 31, 1998 at an exercise price of
$0.48 per share and 98,421 common shares at an exercise price of $1.64
per share until December 31, 1997. Certain of these warrants were exercised
in fiscal year 1997, and the remainder during fiscal year 1998.
In November 1996, the Company entered into an agreement to obtain
certain investor relations services. The other party was granted
1,490,000 shares of the Company's common stock as non-forfeitable
compensation. The stock was recorded at $1,087,700, based on the Company's
stock price at the date of the agreement. The other party was required
to acquire 500,000 units, with each unit consisting of one share of the
Company's common stock and a warrant to purchase one share for $0.80
through November 2001, for $375,000. As of June 30, 1997, the Company
had received payment for the units, but 140,000 of the shares remained
unissued. This has been recorded as common stock subscribed in the June 30,
1997 financial statement. The shares were issued in October 1997. None
of the warrants had been exercised as of June 30, 1999 The estimated fair
value of the warrants at the time of grant of $199,000 was
recorded in fiscal year 1997 as general and administrative expense.
During the year ended June 30, 1999, the Company initiated a private
placement of its common stock, with warrants attached. The Company sold
1,628,825 shares and 1,628,825 warrants exercisable for $0.22 per share
until March 31, 2002 for net proceeds of $356,305.
In fiscal year 1999, additional options and warrants were granted as set forth
below. None of these options or warrants
had been exercised as of June 30, 1999.
__ Warrants to acquire 1,628,825 shares for $.22 per share through
March 31, 2002 were granted in connection with a private placement.
__ Option to acquire 150,000 shares for $.25 per share through December
31, 2001 were granted to certain non-employee directors.
In fiscal year 1998, additional warrants were granted as set forth below.
None of these warrants had been exercised as of June 30, 1999.
__ Warrants to acquire 160,000 shares for $3.50 per share through
December 31, 2000 were granted in connection with an acquisition;
__ Warrants to acquire 260,000 shares for $1.75 per share through
July 8, 2000 were granted as compensation for assisting in exercise
of the Company's Class A Warrants outstanding;
__ Warrants to acquire 355,200 shares for $2.08 per share through
April 3, 2002 were issued in connection with a private placement;
<PAGE>
The following table summarizes the option and warrant activity for the years
ended June 30, 1999 and 1998:
June 30, 1999 June 30, 1998
--------------------- ---------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- --------- --------- --------
Outstanding,
beginning of year 3,908,975 1.87 4,248,114 $ 1.83
Granted to:
Employees, officers
and directors 150,000 .25 674,000 1.65
Others 1,628,825 .22 775,200 2.33
Expired/canceled (124,000) 2.60 (177,665) 1.75
Exercised - - (1,610,674) 1.87
--------- ---------- ----------- --------
Outstanding, end
of year 5,563,800 1.10 3,908,975 1.87
All outstanding warrants and options, except for 125,000 options, were
exercisable at June 30, 1999 If not previously exercised, warrants and
options outstanding at June 30, 1999 will expire as follows:
Weighted
Average
Number Exercise
Year Ending June 30, of Shares Price
------------------- ---------- --------
2000 566,666 $ .76
2001 890,000 1.95
2002 3,507,134 .84
2003 600,000 1.65
----------
Total 5,563,800
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 1999 and
1998:
1999 1998
____________________________ __________________________
Number Exercise Market Number Exercise Market
of Shares Price Price of Shares Price Price
---------- ------- ------ --------- ------- ------
Fair value equal
to exercise
price 1,778,825 $ .22 $ .22 934,000 $ 1.69 $ 1.69
Fair value greater
than exercise
price - $ - $ - - $ - $ -
Exercise price greater
than fair value - $ - $ - 515,200 $ 2.52 $ 2.10
Fair value of warrants granted in connection with short term debt
transactions during the year ended June 30, 1998 was determined using the
Black-Scholes option pricing model. Significant assumptions included a
risk-free interest rate of 5.5%, expected volatility of 87%, and that no
dividends would be declared during the expected term of the options.
The weighted average contractual term of the warrants was approximately
4.5 years compared to a weighted average expected term of 2 years. The
estimated fair value of warrants described above amounted to $21,533 which
is recorded as an expense in the statement of operations.
<PAGE>
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. The fair values generated by the Black-Scholes
model may not be indicative of the future benefit, if any, that may be
received by the option or warrant holder.
Year Ended June 30,
1999 1998
Net loss applicable to common stockholders:
As reported (11,479,086) $ (830,600)
Pro forma (11,499,526) $ (1,337,440)
Net loss per common share:
As reported (.57) $ (.05)
Pro forma (.57) $ (.08)
The fair value of each non employee option granted in
1999 and each employee option and warrant granted in
1998 was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted
average assumptions:
Year ended June 30,
---------------------------------
1999 1998
------------- -------------
Expected volatility 99% 87%
Risk-free interest rate 5.5% 5.5%
Expected dividends - -
Expected terms (in years) 5.0 5.0
6. RELATED PARTY TRANSACTIONS
During the period from February 15, 1995 to June 30, 1996, the Company
paid management fees in lieu of salaries to two corporations controlled
by senior officers of the Company, aggregating $210,000. In addition,
the Company has received advances from these two companies and officers,
net of repayments, totaling $200,000. The advances are unsecured,
without interest and are due on demand. See Note 5 for other transactions
with related parties.
7. INCOME TAXES
The Company's deferred tax assets (liabilities) consist of the following:
JUNE 30,
------------------
1999 1998
----------- ------------
Deferred tax liabilities:
Difference in bases of oil and gas
properties acquired $(1,598,000) $(3,643,000)
Costs capitalized for books and deducted
for tax (759,000) (397,000)
------------ ------------
Total deferred tax liabilities (2,357,000) (4,040,000)
------------ ------------
Deferred tax asset (net operating loss
carryforwards) 5,204,000 2,195,000
Less valuation allowance (2,847,000) -
------------ ------------
Net deferred tax liability $ - $ (1,845,000)
============ ============
<PAGE>
The difference from the expected income tax benefit for the year ended
June 30, 1999 at the statutory federal tax rate of 34% and the actual
income tax benefit is primarily the result of deferred tax assets which
more likely than not, will not be realized. The difference from the
expected income tax benefit for the year ended June 30, 1998 at the
statutory federal tax rate of 34% and the actual income tax benefit is
primarily the result of payroll tax penalties and entertainment
expenses, which are not deductible for income tax purposes.
At June 30, 1999, the Company has available net operating loss carryforwards
of approximately $15,304,000 to reduce future taxable income. These
carryforwards expire from 2001 to 2019.
8. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and accounts receivable. The
Company maintains its cash with banks primarily in Dallas, Texas. The
term of these deposits are on demand to minimize risk. The Company has
not experienced any losses related to these cash deposits
and believes it is not exposed to any significant credit risk.
Accounts receivable consist of uncollateralized receivables from domestic
and international customers primarily in the oil and gas industry. To
minimize risk associated with international transactions, all sales are
denominated in U.S. currency. The Company routinely assesses the financial
strength of it customers. The Company consider accounts receivable to be
fully collectible; accordingly, no allowance for doubtful accounts is required.
If amounts become uncollectible, they will be charged to operations when that
determination is made.
Fair value of financial instruments are estimated to approximate the
related book value, unless otherwise indicated, based on market information
available to the Company.
9. ZAMA LAKE PROPERTY SALE.
In January 1998, the Company completed the purchase of substantially all
of the oil and gas interests in the Zama Lake area in Alberta, Canada
(the "Zama Property") owned by two Canadian independent oil and gas
producers. The purchase price was approximately $6.9 million. Shortly
after the purchase of the Zama Property, the Company sold all of its
interests to Phillips Petroleum Resources, Ltd. and certain of its
affiliates for approximately $7.5 million. The Zama property was the only
property in the non-U.S. full cost pool. Proceeds of the sale exceeding
the basis in the full cost pool were $629,660 and were accounted for as a
gain on sale of assets.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space that requires monthly payments aggregating
$89,160, $90,050, $95,392, and $83,210 for fiscal years ending June 30,
2000, 2001,2002 and 2003, respectively. Rent expense for fiscal 1999 and
1998 for office space was approximately $89,000 and $54,000, respectively.
The Company also leases equipment. Rent expense for equipment for fiscal
1999 and 1998 was approximately $2,000 and $52,000, respectively. There
are no future commitments for equipment leases.
Potential Securities Act Violation
On March 16, 1998, the Company filed with the Commission a Registration
Statement on Form SB-2 (the "March 1998 Registration Statement") for the
purpose of registering up to 10,891,184 shares of the Company's Common Stock
for sale by certain shareholders of the Company, including approximately
5.7 million shares to be issued upon exercise of outstanding warrants and
conversion of the Convertible Debentures. On May 1, 1998, the Company
received a letter of comments from the Staff of the Commission (the "May
1998 Staff Comment Letter") relating to the March 1998
Registration Statement. In the May 1998 Staff Comment Letter,
the Staff advised the Company that it should have
registered the Yukon Continuance under the Securities Act. The Yukon
Continuance was not registered under the Securities Act.
<PAGE>
The Company in its supplemental response on May 26, 1998 to the Staff's May
1998 Comment Letter contended, with the concurrence of the Company's U.S.
securities counsel, that the Yukon Continuance was a transaction not subject
to the registration requirements of Section 5 of the Securities Act. The
Staff has advised the Company that is does not agree with the Company and
its U.S. securities counsel's conclusion regarding the Yukon Continuance.
The Company, therefore, may have a contingent liability to certain of its
shareholders, who may sue the Company to recover the consideration paid,
if any, for shares of the Company's Common Stock, with interest thereon,
from the date of the Yukon Continuance to the date of repayment by the
Company less the amount of any income received thereon, upon tender of
such securities, or for damages if the shareholder no longer owns such
securities. The Company intends to vigorously defend any such shareholder
lawsuit and believes that it may have valid defenses, including the running
of applicable statutes of limitations, against claims by some or all of its
shareholders. However, to the extent that any of the Company's shareholders
obtain a judgment for damages against the Company, the Company's net assets
and net worth will be reduced, which in turn could reduce the Company's
ability to obtain financing for its exploration and drilling operations and
cause the Company to curtail operations. The Company is unable to quantify
the amount of such contingent liability.
Litigation
The Company, in the normal course of business, is a party to a number of
lawsuits and other proceedings. The Company's management does not expect
that the results in these lawsuits and proceedings will have a material adverse
effect on the financial position or results of operations of the Company.
Liquidity and Capital Resources
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company
has sustained substantial operating losses in recent years. Further,
at June 30, 1999, current liabilities exceed current assets by $2,102,941.
During 1999, Triassic demanded immediate payment of the outstanding principal
balance of $840,118, plus accrued interest on a note payable because Triassic
claims that the Company violated certain provisions of the loan agreement.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to meet
its financing requirements, and the success of its future operations.
Successful development of the Company's oil and gas properties and,
ultimately, the attainment of profitable operations is dependent upon
future events, including adequate financing to fulfill its development
activities and achieving a level of revenue adequate to support the
Company's cost structure. Management believes that the Company's future
success will be achieved by the development of its oil and gas properties.
While management believes the Company is well positioned for future
profitability, there can be no assurance of future success. Management is
aware of the need for additional cash resources to be obtained for the
continuance of operations and anticipates such financial resources will
primarily come from placements of the Company's stock and revenues
generated from its oil and gas properties. Management believes that the
cash provided by operations and financing activities will be sufficient
for its needs and provide the opportunity for the Company to continue as a
going concern.
On June 17, 1999, the Company and an unrelated company Crown Partners LLC
signed a letter of intent. Crown Partners LLC was acquired by East Wood
Equity Ventures, Inc. This transaction, which is subject to the
completion of a definitive agreement will result in East Wood Equity
Ventures, Inc. merging with and into Cotton Valley Resources Corporation
or one of its subsidiaries. In order to consummate this merger, it is
the intent of the parties to secure investments of $7,500,000, but not
less than $1,300,000 to retire all or a portion of the existing debt of
the parties.
The Company, with the assistance of its Canadian securities counsel, has
developed a program for the orderly repayment of trade debt during calendar
1999 through the issuance and sale in Canada of shares of common stock.
Creditors accounting for approximately $786,000 of accounts and notes
payable have agreed to participate in the program.
<PAGE>
Year 2000
The Company presently believes that year 2000 issues will not pose
significant operational problems for the Company directly or as a result
of any year 2000 issues of suppliers or customers.
11. EMPLOYEE BENEFIT PLAN
The Company sponsored a defined contribution 401(k) Plan prior to its
termination, effective August 20, 1998, to which both the Company and
eligible employees may contribute. Company contributions are voluntary
and at the discretion of the board of directors. There were no Company
contributions for the periods presented.
12. SUPPLEMENTAL INFORMATION (UNAUDITED)
Costs incurred by the Company with respect to its oil and gas producing
activities are set forth below.
FOR THE PERIODS ENDED
JUNE 30,
---------------------
1999 1998
Exploration activities $ 26,500 $ 85,000
Proved property acquisition cost 81,874 8,093,083
Development costs 677,501 1,012,012
Drilling & well service equipment
acquisition cost - 2,756,296
Drilling & well service equipment
tooling out cost - 441,581
------------- ------------
Total $ 785,875 $12,387,972
13. 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.
<PAGE>
The following table sets forth proved oil and gas reserves at June 30, 1999,
1998, 1997, 1996 and 1995 together with changes therein:
OIL AND NATURAL
CONDENSATE GAS
(BBLS) (MCF)
--------------- ----------------
Balance at February 15, 1995 - -
Purchase of minerals in place 4,294,000 12,882,000
------------- -----------
Balance at June 30, 1995 and 1996 4,294,000 12,882,000
------------- -----------
Purchase of minerals in place 523,000 5,222,000
Production (12,000) (34,200)
Revision of prior estimates (19,000) (8,000)
------------ -----------
Balance at June 30, 1997 4,786,000 18,062,000
------------ -----------
Purchase of minerals in place 1,560,000 468,000
Production (28,000) (181,000)
Revision of prior estimates (548,000) (5,588,000)
------------ -----------
Balance at June 30, 1998 5,770,000 12,761,000
------------ -----------
Purchase of minerals in place - -
Production (12,000) (106,000)
Sales/disposal of minerals in
place (506,000) (4,629,000)
Revision of prior estimates (2,124,000) (8,026,000)
------------ -----------
Balance at June 30, 1999 3,128,000 -
============ ===========
Proved developed reserves at June 30:
1996 93,000 280,000
============ ===========
1997 423,000 1,787,000
============ ===========
1998 355,000 998,000
============ ===========
1999 36,000 -
============ ===========
The standardized measure of discounted future net cash flows at June 30,
1999, 1998 and 1997 relating to proved oil and gas reserves is set forth
below. The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and as such, do not
necessarily reflect the Company's expectations of actual revenues to be
derived from those reserves nor their present worth. The limitations
inherent in the reserve quantity estimation process described above are
equally applicable to the standardized measure computations since
these estimates are the basis for the valuation process.
Standardized measure of discounted future net cash flows relating to
proved reserves:
AT JUNE 30,
----------------------------------------
1999 1998 1997
------------- ------------ -------------
Future cash inflows $ 53,178,000 $101,128,000 $ 129,610,000
Future production costs (17,657,000) (19,923,000) (18,826,000)
Future development costs (11,260,000) (26,064,000) (13,915,000)
------------- ------------- -------------
Future net cash flows, before
income tax 24,261,000 55,141,000 96,869,000
Future income tax expenses (7,278,000) (16,542,000 (31,526,000)
------------- ------------ -------------
Future net cash flows 16,983,000 38,599,000 65,343,000
10% discount to reflect
timing of net cash flows (5,661,000) (12,866,000) (22,543,000)
------------- ------------- -------------
Standardized measure of
discounted future
net cash flows $ 11,322,000 $ 25,733,000 $ 42,800,000
============= ============== =============
<PAGE>
Changes in standardized measure of discounted future net cash flows relating
to proved reserves:
FOR THE PERIOD ENDED JUNE 30,
1999 1998 1997
-------------- ------------- -------------
Standardized measure,
beginning of period $ 25,733,000 $ 42,800,000 $ 40,444,000
Net change in sales price,
net of production costs (2,007,000) (17,591,000) (5,288,000)
Accretion of discount (7,205,000) ( 9,677,000) 4,044,000
Purchases of reserves in-place - 432,000 6,687,000
Production (118,000) (221,000) (21,000)
Change in timing of production
and other - - (2,581,000)
Net changes in income taxes (5,081,000) 9,990,000 (485,000)
Standardized measure, end of
period $ 11,322,000 $ 25,733,000 $ 42,800,000
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are not and have not been any disagreements between the Company
and its accountants on any matter of accounting principles or practices or
financial statement disclosure. The Company's accountants for fiscal 1997,
Hein & Associates LLP declined to stand for re-election for fiscal 1998.
They were replaced with Lane Gorman Trubitt, L.L.P. Form 8-K was filed on
August 5, 1998 which described the transition.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
OF THE ISSUER; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT DIRECTORS AND EXECUTIVE OFFICERS
The following is a list of the names and ages of each of the Company's
directors and executive officers:
Name Age Position
Jack E. Wheeler 50 Chairman of the Board,
President, Chief Executive Officer and Director
Bruce J. Scambler 42 Senior Vice-President, Chief financial Officer
Ron Mercer 52 Vice-President, Operations and Acquisitions
Sam Hammons 46 Vice-President, General Counsel
James E. Hogue 63 Director, Acting Chief Executive Officer
Wayne T. Egan(1) 34 Director
Anne L. Holland 58 Director
(1) Member, Audit Committee, Compensation Committee
Jack E. Wheeler was elected a director, Chairman of the Board, President,
Chief Executive Officer in September 1999. A founding partner of Crown
Partners L.L.C. Minerals Division (the predecessor to East Wood), Mr. Wheeler
has more than 25 years experience managing oil and gas property acquisition,
exploration and development. He is a former vice-president of business
development and assistant general counsel of Sonat Exploration Company where
he was responsible for the acquisition of over $1.6 billion of oil and gas
property acquisitions. As a vice president of the St. Paul Companies,
Mr. Wheeler had primary responsibility of developing, overseeing and later
divesting St. Paul's $70 million oil and gas investment portfolio. Mr.
Wheeler received bachelor's degrees from Lon Morris College and Texas A&M
University, a Master's degree from the University of Colorado and Juris
Doctorate from the University of Houston. He served with the Fifth Special
Forces in Vietnam. Twice nominated for the Congressional Medal of Honor, Mr.
Wheeler was awarded the Silver Star, Purple Heart, Vietnamese Cross of
Gallantry, Soldiers Medal, Bronze Star for Valor, Army Commendation
Medal for Valor, the Air Medal and the Combat Infantryman's Badge.
Bruce J. Scambler was elected Senior Vice-President and Chief Financial
Officer in September 1999. He has over 20 years experience in financial
management of public companies in the US and UK. As the finance and business
planning manager of OGE Energy Corp, Mr. Scambler coordinated development of
a strategic program in 1995 which achieved the #1 ranking in the US for least
and highest value provider for one of OGE's coal fired electric generation
plants. He has also served as business information manager with the UK's
national Grid Company, as financial controller of the Consumers
Association and finance director of High Advantage PLC. After early
training with KPMG London, Mr. Scambler held the positions of finance manager
of Kingsway Ventures Ltd. and financial controller of Ecico International
Group. A certified public accountant, Mr. Scambler is a Fellow of the
Chartered Institute of Management Accountants.
Ron Mercer was elected Vice President for Operations and Acquisitions
in September 1999. With more than 28 years oil and gas operations experience,
Mr. Mercer has most recently been responsible for the formation and day-to-day
operations of Mercer Oil and Gas Co. and Armer L.L.C. He also founded Oklahoma
Oil and Gas Management, Inc., which operated over 300 wells. Mr. Mercer has
served as contract property manager for The Ram Group and vice president for
property management for Continental Illinois Bank. He was also vice president
for contract drilling and drilling manager for Santa Fe Minerals, and one of
its acquisitions, Andover Oil Company. Mr. Mercer holds a Bachelor of Science
degree in petroleum engineering from Texas Tech University and is a registered
professional engineer in Texas and Oklahoma.
<PAGE>
James E. Hogue became President, Chief Operating Officer and a director
of Cotton Valley in July 1996 and he served as Chairman of CV Energy from
February 1995 to January 1996 and Chairman of CV Trading from May 1995 to
January 1996. He became President of CV Energy and CV Operating in January
1996. Mr. Hogue also has been director, President and major shareholder of
Third Coast Capital, Inc., a venture capital company, since 1988. Since 1991,
Mr. Hogue has served as President of Martex Oil and Gas, Inc. In 1983, Mr.
Hogue formed Mayco Petroleum, Inc., for which he served as President until
1988. Early in his career, Mr. Hogue served as a driller for Leatherwood
Company and as a core engineer for Sargent Diamond Bit, Inc. Subsequently,
Mr. Hogue became President and major shareholder of a diamond bit
manufacturing company. In the late 1970s, Mr. Hogue served for four years as
President of Union Crude Oil Company, an exploration and drilling company,
and for two years as Vice President of Independent Producers Marketing
Company, a crude oil supply and transportation company. Mr. Hogue has
participated in drilling or furnishing services for over 3,000 wells in
Texas, Oklahoma, New Mexico, Louisiana and Colorado.
Sam Hammons was elected Vice President and General Counsel in September
1999. He has served two Oklahoma Governors as an administrative assistant,
the assistant for energy and natural resources, director of the Oklahoma
State Department of Energy, and for six years as Oklahoma's official
representative to the Interstate Oil Compact Commission. He also served as
chairman of the Energy Council of the Oklahoma State Chamber of Commerce and
chairman of the 17-state Southern States Energy Board. Mr. Hammons was a
partner of the Ram Group, acting as director of gas contracts, as well as
the founder of Clinton Gas Transmission, Inc. He also served as president
of the law firm of Hammons & Vaught. Mr. Hammons graduated from Oklahoma
Baptist University and holds a Masters in International Relations and Juris
Doctorate from Oklahoma University.
Wayne T. Egan is a partner in the law firm of Weir and Foulds and serves
in the securities law section of said firm. He holds an L.L.B. from Queen's
University and a Bachelor of Commerce from the University of Toronto, and
is a member of the Canadian Bar Association. Weir and Foulds serves as
the Company's Canadian Securities Counsel.
Anne L. Holland is a co-founder, and, since 1982, President of Mayco
Petroleum Company. Mayco Petroleum is a crude oil purchasing and marketing
company and the exclusive marketing arm of the Great Western Drilling of Ft.
Worth. Anne Holland has been associated with the oil and gas industry for over
20 years, and with the crude marketing, drilling and
exploration business.
DIRECTOR COMPENSATION
Directors who are not Cotton Valley employees receive $500 per meeting
of the board and $500 per committee meeting not held on the same date as a
board meeting. Directors are permitted to accept stock in lieu of cash.
Employee directors receive no extra compensation for service on the board.
FAMILY RELATIONSHIPS
There are no family relationships among the Company's directors or
executive officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the Company's directors or executive officers have been
involved during the past five years in any legal proceedings material
to an evaluation of such persons ability or integrity.
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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
a director of the Company, failed to file a Form 3 C Initial Statement of
Beneficial Ownership of Securities, which filing was due in December 1996,
and Form 4's C 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 interests and related transactions
in the Company's Common Stock for the noted periods.
Except for the events described in the foregoing paragraph, the Company
is not aware of any transactions in its outstanding securities by or on
behalf of any director, executive officer or 10% holder of the Common
Stock, which would require the filing of any report pursuant to Section
16(a) that was not filed with the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or to be paid
to Cotton Valley's executive officers, directly or indirectly, for services
rendered in all capacities for the period from inception to June 30, 1995,
fiscal 1996, fiscal 1997, fiscal 1998, and fiscal 1999.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation(1) Compensation
Name and Principal Position Year Other Annual Restricted
Salary Compensation Stock Awards(2)
____________________________________________________________________________
Eugene A. Soltero, Chairman
of the Board,
Chief Executive
Officer (3) 1999 $150,000 $0
1998 $160,000 $0
1997 $120,000 $0 $60,000
1996 $115,000 $0
1995 $ 25,000 $0
James E. Hogue, President
and Chief
Operating
Officer (4) 1999 $150,000 $0
1998 $160,000 $0
1997 $120,000 $0 $60,000
1996 $115,000 $0
1995 $ 25,000 $0
Leon A. Romero, Senior Vice
President and
Chief Financial
Officer (5) 1999 $ 30,000 $0
1998 $ 40,000 $0
Patty Dickerson, Vice President,
Corporate Affairs
/Investor Relations
and Secretary (6)
1999 $ 60,000 $0 $50,000
1998 $ 50,000 $0 $50,000
1997 $ 37,500 $0
_________________________
(1) Certain of Cotton Valley's executive officers receive personal benefits
in addition to salary. The aggregate amounts of these benefits,
however, do not exceed the lesser of $50,000 or 10% of the
total annual salary reported for the executives.
(2) During fiscal 1997 each of Messrs. Soltero and Hogue received
warrants to purchase 83,333 shares of Common Stock
at a per warrant exercise price of $.72. The warrants expire
December 31, 1999. Ms. Dickerson received a stock bonus
award during fiscal year 1998 of 25,000 common shares.
(3) Mr. Soltero resigned as an officer and director in August 1999.
(4) Mr. Hogue resigned as an officer in September 1999, effective
upon filing this Form 10KSB.
(5) Mr. Romero resigned as an officer and director in October 1998.
(6) Ms. Dickerson resigned as an officer in December 1998.
Employment Agreements
Cotton Valley does not have employment contracts with any of its
executive officers.
Options
The following table sets forth information regarding the value of
unexercised options held by executive officers as of June 30, 1999.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Name Exercisable/Unexercisable Exercisable/Unexercisable
__________________________________________________________________________
Eugene A. Soltero 500,000/0 $0/$0
James E. Hogue 500,000/0 $0/$0
Wayne Egan 70,000/0 $0/$0
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of September 15, 1999,
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.
Amount and
Nature of Percentage
Beneficial of
Name Ownership Ownership
_________________________________________________________________________
Jack E. Wheeler (1) 0 *
Bruce J. Scambler (1) 0 *
Ron Mercer (1) 0 *
Sam Hammons (1) 0 *
James E. Hogue (1) 5,176,833(4) 14.91
Wayne T. Egan (3) 28,000(5) *
Anne L. Holland 70,000 *
Liviakis Financial Communications, Inc. 2,969,851(6) 8.53
All directors and executive officers as a group
(seven persons) 5,324,833(7) 15.32
*Less than 1%.
(1) Mr. Wheeler is Chairman of the Board, President, Chief Executive
Officer and a director of the Company. Mr. Scambler is Senior vice
President of the Company, and Messrs. Mercer and Hammons are Vice
Presidents of the Company. The Address of Messrs Wheeler, Scambler,
Mercer and Hammons is 3300 Bank One Center, 100 North Broadway,
Oklahoma City, Ok 73102.
(2) Mr. Hogue and Ms. Holland are directors of the Company. Hogue may
be deemed a promoter of the Company. The address of Mr. Hogue and
Ms. Holland is 6510 Abrams Road, Suite 300, Dallas, Texas 75231.
(3) Mr. Egan is a director of the Company. The address of Mr. Egan is
Weir & Foulds, Exchange Tower, Suite 1600, 130 King Street West,
Toronto, Ontario, Canada M5X 1J5
(4) Includes 583,333 shares of Common Stock subject to employee stock
options and warrants 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 2,000,000 shares of Common Stock,
which represents 50% of the 4,000,000 shares owned by others subject to
a voting trust agreement and voting covenants under certain agreements.
See "Voting Agreements," below.
(5) Includes 20,000 shares of Common Stock subject to director stock
options.
(6) 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".
(7) Includes 2,000,000 shares subject to a voting trust agreement and voting
covenants under certain agreements.
Voting Agreements
Under the terms of a Voting Trust Agreement (the "Voting Agreement"),
unaffiliated parties that transferred their interests in certain properties
to the Company in 1995 in exchange for securities provided a power of
attorney to Eugene A. Soltero and James E. Hogue to vote approximately
3.28 million shares of Common Stock held by such property contributors
until January 1, 2001. The Voting Agreement expires with respect to any
of the shares of Common Stock transferred to an unaffiliated third party by
such shareholder. The Company believes that as of June 30, 1999,
approximately 1 million shares of Common Stock were subject to the
Voting Agreement. See "Principal Shareholders."
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 Shareholders."
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 for directors nominated by Messrs.
Hogue and Soltero. Approximately 1,000,000 shares are currently subject to
this voting covenant.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1995, the Company issued a total of 560,001 shares of
Common Stock to the wives of 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 family
partnerships of Messrs. Soltero and Hogue which were subsequently
exchanged for 1,440,000 shares of Common Stock of the Company valued at
$5,832.
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 warrants to purchase 83,333 shares of
Common Stock at $0.73 per share and employee 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 June 30, 1998,
$119,710 of the advances remained outstanding. During fiscal year 1999 the
two companies paid travel, out of pocket and office supply expenses in
the amount of $80,920. The advances are unsecured and without interest.
During each of the years ended June 30, 1999, 1998 and 1997, the
Company paid to Weir and Foulds more than $50,000 in legal fees. Most of
the legal services were provided by Richard J. Lachcik and Wayne T. Egan,
respectively, former director and director of the Company, who both at the
time were members of Weir and 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. The Company believes that the legal fees it pays to Weir
& Foulds are comparable to legal fees charged by unaffiliated law firms.
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
investor communications and public relations with existing shareholders,
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, an aggregate
of 500,000 units (the "Units") for $375,000 or $0.75 per Unit. Each Unit
consisted of one share of the Common Stock and one stock purchase warrant
("LFC Warrant") which entitled the holder thereof to purchase a share of
Common Stock at an exercise price of $0.80 through November 7, 2001.
The estimated value of the LFC Warrants of $199,000 was recorded as an
expense. 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 accordance with the terms and conditions of the voting rights
covenant contained therein. The LFC Consulting Agreement expired on
January 2, 1998.
As further compensation to LFC, the Company agreed to pay LFC 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. Additionally, in December 1997, the
Company agreed to issue 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 25,000 of the Mustang
Warrants to Robert B. Prag, an officer of LFC.
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 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
Common Stock at an exercise price of $2.08 per share. 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
shareholders of Old Aspen.
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 available
material information and to the Company's 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 either the Company's or their own independent legal counsel.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-KSB
(a)(1) Financial Statements: See Index to Consolidated Financial
Statements on page 19.
(a)(2) Exhibits: See Exhibit Index on page 49.
(b) Reports on Form 8-KSB: No reports on Form 8-KSB were filed
during the last quarter of fiscal 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on October 4, 1998.
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
By: /s/ James E. Hogue
James E. Hogue
Acting Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated:
Signature Title Date
/s/ James E. Hogue Acting Chief Executive Officer and
Director October 4, 1999
James E. Hogue
/s/ Anne Holland Director October 4, 1999
Anne Holland
/s/ Wayne T. Egan Director October 4, 1999
Wayne T. Egan
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
EXHIBITS INDEX
Exhibit
Number Description
--------- ----------------------------
3(a)* Articles of Amalgamation
3(b)* Bylaws
4* Description of the Common Stock
21 Subsidiaries
23 Consent of American Energy Advisors
27 Financial Data Schedule
*Previously filed and incorporated by reference herein.
EXHIBIT 21
SUBSIDIARIES
(i) Cotton Valley Energy Corporation, a Nevada corporation.
(ii) Cotton Valley Operating Company, a Texas corporation.
(iii) Mustang Oil Field Equipment Company, a Nevada corporation.
(iv) Cotton Valley Energy, Inc., an Oklahoma corporation.
(v) Aspen Energy Corporation, a Nevada corporation.
(vi) Mustang Horizontal Company, a Nevada Corporation.
(vii) Cotton Valley Means, Inc., a Texas Corporation, which is a
subsidiary of Aspen Energy Corporation
(viii) Aspen Energy Group, Inc., a Texas Corporation
EXHIBIT 23
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference of our name in the Annual report on Form
10-KSB of Cotton Valley Resources Corporation for the year ended June 30,
1999, to which this consent is an exhibit.
/s/ American Energy Advisors
American Energy Advisors
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONDENSED CONSOLIDATED BALANCE
SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH JUNE 1999 10-KSB
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 9,083
<SECURITIES> 0
<RECEIVABLES> 53,022
<ALLOWANCES> 0
<INVENTORY> 97,650
<CURRENT-ASSETS> 159,755
<PP&E> 11,422,578
<DEPRECIATION> 330,151
<TOTAL-ASSETS> 11,341,651
<CURRENT-LIABILITIES> 2,262,696
<BONDS> 0
0
0
<COMMON> 23,548,537
<OTHER-SE> (14,469,582)
<TOTAL-LIABILITY-AND-EQUITY> 11,341,651
<SALES> 980,966
<TOTAL-REVENUES> 980,966
<CGS> 819,066
<TOTAL-COSTS> 2,478,161
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,429,240
<INTEREST-EXPENSE> 399,289
<INCOME-PRETAX> (13,324,086)
<INCOME-TAX> (1,845,000)
<INCOME-CONTINUING> (913,380)
<DISCONTINUED> 0
<EXTRAORDINARY> (10,565,706)
<CHANGES> 0
<NET-INCOME> (11,479,086)
<EPS-BASIC> (.57)
<EPS-DILUTED> 0
