SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant:
Filed by a Party other than the Registrant:
Check the appropriate box:
____________________________________________________________________________
Preliminary Proxy Statement Confidential, for Use of
X Definitive Proxy Statement the Commission Only (as
Definitive Additional Materials permitted by Rule 14a-
6(e)(2))
____________________________________________________________________________
Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COTTON VALLEY RESOURCES CORPORATION
____________________________________________________________________________
(Name of Registrant as Specified in Its Charter)
Not Applicable
____________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
X No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
____________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
____________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
____________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
____________________________________________________________________________
(5) Total fee paid:
____________________________________________________________________________
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
____________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
____________________________________________________________________________
(3) Filing Party:
____________________________________________________________________________
(4) Date Filed:
____________________________________________________________________________
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
3300 Bank One Center, 100 North Broadway, Oklahoma City, OK 73102
FORM OF PROXY SOLICITED BY THE
MANAGEMENT OF COTTON VALLEY RESOURCES CORPORATION
FOR USE AT THE ANNUAL AND SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD ON JANUARY 18, 2000
The undersigned shareholder(s) of COTTON VALLEY RESOURCES CORPORATION
(the "Corporation") hereby appoint(s) in respect of all of his or her shares
of the Corporation, JACK E. WHEELER, Chief Executive Officer, Chairman of
the Board and a director of the Corporation, or failing him, JAMES E. HOGUE,
a director of the Corporation, or in lieu of the foregoing _______________
as nominee of the undersigned, with power of substitution, to attend, act
and vote for the undersigned at the annual and special meeting (the
"Meeting") of shareholders of the Corporation to be held on the 18th day
of January, 2000 at the time of 10 o'clock in the forenoon (Oklahoma time),
and any adjournment or adjournments thereof, and direct(s) the nominee to
vote the shares in the manner indicated below:
1. TO VOTE FOR ( ) WITHHOLD FROM VOTING FOR ( ) on the ordinary
resolution authorizing and approving the re-appointment of Lane
Gorman Trubitt, L.L.P. as the auditors of the Corporation for the
fiscal year ended June 30, 2000, to hold such office until the
close of the next annual meeting of the shareholders of the
Corporation, and on authroizing the directors of the Corporation to
fix the remuneration of the auditors of the Corporation.
2. TO VOTE FOR ( ) WITHHOLD AUTHORITY FROM VOTING FOR ( )
all the following nominees in the election of five (5) members of
the Board of Directors to hold office until the next annual meeting
of the shareholders and until their successors are duly elected and
qualified: Jack E. Wheeler, James E. Hogue, Wayne T. Egan,
Anne Holland, Randall B. Kahn. (Instructions: To withhold authority
to vote for any individual nominee, strike a line through his name
below.)
3. TO VOTE FOR ( ) AGAINST ( ) ABSTAIN FROM ( ) an
ordinary resolution authorizing and approving the exercise of
21,230,897 special warrants, which warrants were issued on September
16, 1999 as part of the consideration in the acquisition by the
Corporation of 50% of the issued and outstanding shares of East Wood
Equity Venture, Inc.
4. TO VOTE FOR ( ) AGAINST ( ) ABSTAIN FROM ( ) an
ordinary resolution approving an amendment to the Corporation's
stock option plan to increase the maximum number of common
shares available for issuance pursuant to options granted under
the Corporation's stock option plan.
5. TO VOTE FOR ( ) AGAINST ( ) ABSTAIN FROM ( ) an
ordinary resolution authorizing the Corporation to enter into
private placement agreements with arm's length subscribers to
occur within one year of the date of the Meeting.
6. TO VOTE FOR ( ) AGAINST ( ) ABSTAIN FROM ( ) a
special resolution authorizing and approving a change of the
Corporation's name to "Aspen Group Oil & Gas Corporation", or
such other name as is acceptable to the relevant governmental
bodies.
<PAGE>
If any amendments or variations to matters identified in the Notice of
the Meeting are proposed at the Meeting or if any other matters properly
come before the Meeting, this proxy confers discretionary authority to vote
on such amendments or variations or such other matters according to the
best judgment of the person voting the proxy at the Meeting.
DATED the day of , 2000.
_____________________________
Signature of Shareholder(s)
_____________________________
Print Name
NOTES:
(1) This form of proxy must be dated and signed by the appointor or his
or her attorney authorized in writing or, if the appointor is a body
corporate, the form of proxy must be executed by an officer or
attorney thereof duly authorized. If the proxy is not dated, it will
be deemed to bear the date on which it was mailed.
(2) The shares represented by the proxy will be voted or withheld from
voting in accordance with the instructions of the shareholder on any
ballot that may be called for.
(3) A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND AND ACT FOR HIM OR HER AND ON HIS OR HER BEHALF
AT THE MEETING OTHER THAN THE PERSON DESIGNATED IN THIS FORM OF PROXY.
SUCH RIGHT MAY BE EXERCISED BY STRIKING OUT THE NAMES OF THE PERSONS
DESIGNATED IN THIS FORM OF PROXY AND BY INSERTING IN THE BLANK SPACE
PROVIDED FOR THAT PURPOSE THE NAME OF THE DESIRED PERSON OR BY
COMPLETING ANOTHER FORM OF PROXY AND, IN EITHER CASE, DELIVERING
THE COMPLETED AND EXECUTED PROXY TO THE CORPORATION AT 3300 BANK ONE
CENTER, 100 NORTH BROADWAY, OKLAHOMA CITY, OKLAHOMA, 73102, AT ANY
TIME PRIOR TO 4:00 P.M. (OKLAHOMA TIME) ON THE 17TH DAY OF JANUARY,
2000.
(4) IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY, THE PERSONS NAMED IN
THIS PROXY WILL VOTE FOR EACH OF THE MATTERS IDENTIFIED IN THIS PROXY.
(5) This proxy ceases to be valid one year from its date.
(6) If your address as shown is incorrect, please give your correct address
when returning this proxy.
(7) This proxy should be folded, stapled, stamped and mailed to one of the
two addresses set out below. Canadian and European residents should use
the Toronto address. United States residents should use the Oklahoma
address.
United States Residents
c/o Cotton Valley Resources Corporation
3300 Bank One Center, 100 North Broadway, Oklahoma City, OK 73102
Canadian and European Residents
c/o Equity Transfer Services Inc.
Richmond Adelaide Centre, Suite 420
120 Adelaide St. W., Toronto, ON M5H 4C3
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
3300 Bank One Center
100 North Broadway
Oklahoma City, OK 73102
MANAGEMENT INFORMATION CIRCULAR
and
PROXY STATEMENT
1. SOLICITATION OF PROXIES
This Management Information Circular and Proxy Statement (the "Circular") is
furnished in connection with the solicitation of proxies by the management of
COTTON VALLEY RESOURCES CORPORATION (the "Corporation") for use at the Annual
and Special Meeting of Shareholders of the Corporation (the "Meeting") to be
held at the time and place and for the purposes set forth in the attached notice
of annual and special meeting of shareholders (the "Notice"). Included with this
Circular and made a part of the proxy materials is a copy of the Annual Report
of the Corporation for the year ended June 30, 1999 as submitted to the United
States Securities and Exchange Commission ("SEC") on SEC Form 10-KSB (the "1999
Annual Report"). It is expected that the solicitation will be by mail primarily,
but proxies may also be solicited personally by telephone or otherwise by
officers or directors of the Corporation without additional compensation. The
cost of preparing, assembling and mailing the proxy material and reimbursing
brokers, nominees and fiduciaries for the out-of-pocket and clerical expenses of
transmitting copies of the proxy materials to the beneficial owners of shares
held of record by such persons will be borne by the Corporation. The proxy
materials are being mailed to shareholders of record at the close of
business on December 1, 1999. All dollar amounts in this Circular are in United
States Dollars unless otherwise designated as Canadian Dollars (Cdn$).
2. APPOINTMENT, REVOCATION AND DEPOSIT OF PROXIES
The persons named in the enclosed form of proxy are directors or officers of
the Corporation.
A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A SHAREHOLDER)
TO ATTEND AND ACT FOR HIM AND ON HIS BEHALF AT THE MEETING OTHER THAN THE
PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY. SUCH RIGHT MAY BE EXERCISED
BY STRIKING OUT THE NAMES OF THE PERSONS DESIGNATED IN THE ENCLOSED FORM OF
PROXY AND BY INSERTING IN THE BLANK SPACE PROVIDED FOR THAT PURPOSE THE NAME
OF THE DESIRED PERSON OR BY COMPLETING ANOTHER PROPER FORM OF PROXY AND, IN
EITHER CASE, DELIVERING THE COMPLETED AND EXECUTED PROXY TO THE CORPORATION
BEFORE THE TIME OF THE MEETING OR ANY ADJOURNMENT THEREOF.
<PAGE>
A shareholder forwarding the enclosed proxy may indicate the manner in which
the appointee is to vote with respect to any specific item by checking the
appropriate space. If the shareholder giving the proxy wishes to confer a
discretionary authority with respect to any item of business then the space
opposite the item is to be left blank. The shares represented by the proxy
submitted by a shareholder will be voted in accordance with the directions,
if any, given in the proxy. The giving of a proxy does not preclude the
right to vote in person should the person giving the proxy so desire.
A shareholder who has given a proxy may revoke it at any time in so far as
it has not been exercised. A proxy may be revoked, as to any matter on which
a vote shall not already have been cast pursuant to the authority conferred
by such proxy, by instrument in writing executed by the shareholder or by
his attorney authorized in writing or, if the shareholder is a body corporate,
by an officer or attorney thereof duly authorized, and deposited either at
the registered office of the Corporation at any time up to and including the
last business day preceding the day of the Meeting, or any adjournment thereof,
at which the proxy is to be used or with the Chairman of such Meeting on the
day of the Meeting or any adjournment thereof, and upon either of such deposits
the proxy is revoked. A proxy may also be revoked in any other manner permitted
by law.
3. MANNER OF VOTING AND EXERCISE OF DISCRETION BY PROXIES
The persons named in the enclosed form of proxy will vote the common shares
in respect of which they are appointed in accordance with the direction of
the shareholders appointing them. In the absence of such direction, such common
shares will be voted FOR each of the matters identified in the Notice and
described in this Circular, except that a broker non-vote will have no effect.
The enclosed form of proxy confers discretionary authority upon the persons
named therein with respect to amendments or variations to matters identified
in the Notice of Meeting, and with respect to other matters which may properly
come before the Meeting. At the time of the printing of the Circular, the
management of the Corporation knows of no such amendments, variations or
other matters to come before the Meeting other than the matters referred to
in the Notice of Annual and Special Meeting of Shareholders.
4. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The authorized capital of the Corporation consists of an unlimited number of
common shares (the "Common Shares") and an unlimited number of preference
shares. On November 1, 1999, an aggregate of 59,731,198 Common Shares and
no preference shares were issued and outstanding. In addition, on September 16,
1999, 21,230,897 Special Warrants have been issued by the Corporation, each
exercisable to acquire one common share in the capital of the Corporation.
See "Exercise of Special Warrants" below. Each Common Share entitles the holder
thereof to one (1) vote at all meetings of shareholders of the Corporation. A
simple majority of the total shares represented at the Meeting is required to
elect directors and ratify or approve the other items being voted on at this
time except for the Special Resolutions regarding the name change to Aspen
<PAGE>
North Hydrocarbons Incorporated, which must be confirmed by at least two-thirds
(2/3) of the votes cast. The presence, in person or by proxy, of two holders
of common shares of the Corporation entitled to vote is necessary to constitute
a quorum at the Meeting. Notwithstanding the record date of December, 1999,
specified above, the Corporation's stock transfer books will not be closed and
shares may be transferred subsequent to the record date. However, all votes
will be tabulated by the scrutineer appointed for the Meeting, who will
separately tabulate affirmative votes, abstentions and broker non-votes.
All holders of Common Shares of the Corporation of record as of the close of
business on December 1, 1999 are entitled either to attend and vote thereat
in person the shares held by them, or provided a completed and executed proxy
shall have been delivered to the Corporation, to attend and vote thereat by
proxy the shares held by them.
As at December 1, 1999, the only persons or companies who, to the knowledge
of the directors and senior officers of the Corporation, beneficially own,
directly or indirectly, or exercise control or direction over more than five
percent (5%) of the issued and outstanding voting shares of the Corporation
are listed below. In addition, this table includes the outstanding voting
securities beneficially owned by each of the executive officers listed in the
Summary Compensation Table and the number of shares owned by directors and
executive officers as a group.
NUMBER OF COMMON TOTAL % OF
NAME SHARES COMMON SHARES(1)
______________________________________________________________________________
Jack E. Wheeler(2) 20,000,000 24.7%
Bruce J. Scambler(3) Nil -
Ron Mercer(3) Nil -
Sam Hammons(3) Nil -
James E. Hogue(4) 5,134,333 6.3%
Anne L. Holland(5) 70,000 less than 1%
Wayne T. Egan(6) 58,000 less than 1%
Randall B. Kahn(7) Nil -
Apollo Investments Limited(8) 5,000,000 6.2%
Stillwater Gas Production
Inc.(9) 7,076,965 5.4%
Custer County Drillers Inc.(10)14,153,932 8.0%
_____________________________________________________________________________
All Directors and Executive 25,262,333 30.8%
Officers as a group (7 persons,
including Jack E. Wheeler)
_______________________________________________________________________________
<PAGE>
Notes:
(1) This assumes the exercise of the 21,230,897 outstanding Special
Warrants. See "Exercise of Special Warrants" below.
(2) Includes 20,000,000 Common Shares held by Aspen Energy Group, Inc.
which is 100% owned by Mr. Wheeler. Mr. Wheeler is Chairman of the
Board, President, Chief Executive Officer and a director of the
Corporation. The address of Mr. Wheeler is 3300 Bank One Center,
100 North Broadway, Oklahoma City, Oklahoma 73102.
(3) Messrs. Scambler, Mercer and Hammons are Vice Presidents of the
Corporation. The address of Messrs. Scambler, Mercer and Hammons
is 3300 Bank One Center, 100 North Broadway, Oklahoma City,
Oklahoma 73102.
(4) Includes 80,000 Common Shares held directly by Mr. Hogue and
1,500,000 shares held directly and through Third Coast Capital, Inc.,
and the following shares, beneficial ownership of which is disclaimed
by Mr. Hogue: 740,000 Common Shares owned by the Hogue Family Limited
Partnership and 231,000 Common Shares held by Mr. Hogue's wife and
approximately 2,000,000 Common Shares of the Corporation which may be
voted by Mr. Hogue for directors under certain agreements. See
"Statement of Executive Compensation - Section K "Voting Trusts" below.
Mr. Hogue may be deemed a promoter of the Corporation. The address
Of Mr. Hogue is 6510 Abrams Road, Suite 300, Dallas, Texas 75231.
(5) Ms. Holland is a director of the Corporation. The address of Ms.
Holland is 6510 Abrams Road, Suite 300 Dallas, Texas 75231.
(6) Mr. Egan is a director of the Corporation, and his address is Weir &
Foulds, Suite 1600, 130 King St. West, Toronto, Ontario M5X 1J5 Canada.
In addition, Mr. Egan owns employee stock options exercisable into an
additional 20,000 Common Shares of the Corporation.
(7) Mr. Kahn is a proposed director, and his address is 20 North Gore, Suite
200, St. Louis, Missouri 63119.
(8) Apollo Investments Limited is a limited liability company incorporated
in Turks and Caicos Island, British West Indies, whose principal address
is c/o Cox and McNeese, Suite 102, 3601 North Classen Blvd., Oklahoma
City, Okla. 73118. Neither it nor any of its shareholders have any
interest in any other shareholder of the Corporation. None of its
shareholders are holders of shares in the Corporation. Its principal
executive officer is the director, D.R. Cottingham.
(9) Includes 7,076,965 special warrants. Stillwater Gas Production Inc. is
a limited liability company incorporated in Turks and Caicos Island,
British West Indies, whose principal address is c/o Cox and McNeese,
Suite 102, 3601 North Classen Blvd., Oklahoma City, Okla. 73118
Neither it nor any of its shareholders have any interest in any other
shareholder of the Corporation. None of its shareholders are holders of
shares in the Corporation. Its principal executive officer is the
director, S.A. Morris.
(10) Includes 14,153,932 special warrants. Custer County Drillers Inc. is
a limited liability company incorporated in Turks and Caicos Island,
British West Indies, whose principal address is c/o Cox and McNeese,
Suite 102, 3601 North Classen Blvd., Oklahoma City, Okla. 73118
Neither it nor any of its shareholders have any interest in any other
shareholder of the Corporation. None of its shareholders are holders
of shares in the Corporation. Its principal executive officer is the
director, S.A. Morris.
Pursuant to an agreement made September 16, 1999, the Corporation acquired 50%
of the issued and outstanding shares of East Wood Equity Venture, Inc. Please
see item 7 below - Ordinary Resolution - Exercise of Special Warrants, for
details concerning the transaction.
Following closing of that transaction, Mr. Jack E. Wheeler, through his
acquisition of 20,000,000 common shares of the Corporation, acquired control
of the Corporation. Mr. Wheeler holds approximately 24.8% of the issued and
outstanding common shares of the Corporation, assuming exercise of the
21,230,897 outstanding Special Warrants. As the shares acquired by Mr. Wheeler
were issued from the Corporation's treasury, he did not acquire control from
another person.
DIRECTORS AND EXECUTIVE OFFICERS
Jack E. Wheeler was elected a Director, Chairman of the Board, President,
Chief Executive Officer in September 1999. A founding partner, and
President for the past five years, 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 an Associate degree from Lon Morris College and a Bachelor's
degree from 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. His office street address is: 3300 Bank One Center,
100 North Broadway, Oklahoma City, Oklahoma 73102.
<PAGE>
James E. Hogue was President, Chief Operating Officer and a Director of the
Corporation from July 1996 to September 1999, and President of its
primary subsidiary, Cotton Valley Energy Corporation, from February 1995
through July 1996. He currently serves solely as a Director of the
Corporation. Mr Hogue also has been a director, president and major
shareholder of Third Coast Capital, Inc., a venture company since
1988. Since 1991, Mr. Hogue has served as President of Martex Oil & 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. Mr. Hogue's office street address is 6510
Abrams Road, Suite 300, Dallas, Texas 75231.
Anne Holland has been the President of Mayco Petroleum Co., a crude oil trading
company, since 1990. Ms. Holland devotes her principal working time to her
position as President of Mayco Petroleum Co. and acts as a director of the
Corporation. Her office address is 6510 Abrams Road, Suite 300, Dallas, Texas
75231.
Wayne T. Egan is a partner of the law firm of Weir & Foulds, and practices in
the Securities Law Section. He received an LLB from Queen's University Law
School in 1988, and a Bachelor of Commerce degree from the University of Toronto
in 1985. He is a member of the Canadian Bar Association. Weir & Foulds serves
as the Corporation's corporate counsel in Ontario, Canada. Mr. Egan's office
address is Exchange Tower, Suite 1600, P.O. Box 480, 130 King Street West,
Toronto, Ontario Canada M5X 1J5.
Randall B. Kahn currently is President of Pharma Capital, a venture capital
company located in St. Louis, Missouri. From 1994 to 1999 Mr. Kahn served as
C.E.O. of Tiffany Industries, an office furniture manufacturer in St. Louis,
Missouri. Prior thereto, Mr. Kahn was a litigation attorney from 1993 to 1994
with Paule Camazine and Blumenthal, a law firm in St. Louis, Missouri, and prior
thereto a litigation attorney with Susman, Chermer, Rimmel & Shifrin, a law firm
in St. Louis, Missouri from 1989 to 1993. Mr. Kahn received a BA in English
literature from Colorado College in 1982, and received a JD, Environmental Law
honours from Northwestern School of Law, Portland, Oregon. Mr. Kahn's office
address is: 20 North Gore, Suite 200, St. Louis, Missouri 63119.
Bruce Scambler is Vice-President of the Corporation, effective September
1999. For the past five years, Mr. Scambler has provided financial and
management consulting services to private and public companies. In addition,
he served as finance and business planning manager of OGE Energy Corp. He is
a CPA with over 20 years experience of financial management in public
companies in the U.S. and the United Kingdom. Mr. Scambler trained with
KPMG in London and is a Fellow of the Chartered Institute of Management
Accountants, a Certified Public Accountant, and a member of the Hotel Catering
and Institutional Management Association. He received a degree in law from
Bristol University and an M.B.A. degree from Strathclyde Graduate
Business School, Glasgow, Scotland. Mr. Scambler's office street address is
3300 Bank One Center, 100 North Broadway, Oklahoma City, Oklahoma 73102.
<PAGE>
Ron Mercer was appointed Vice-President of the Corporation effective September
1999. He is a professional engineer with over 30 years experience in oil
and gas asset management. For the past five years, Mr. Mercer has served as
president and has been responsible for day-to-day operations of Mercer Oil
and Gas Co. and Armer LLc. He is a registered professional engineer in
Texas and Oklahoma, and a member of the Society of Professional Engineers and
Society of Petroleum Engineers. Mr. Mercer received his B.Sc. in Petroleum
Engineering from Texas Tech University. His office street address is 3300 Bank
One Center, 100 North Broadway, Oklahoma City, Oklahoma 73102.
Sam Hammons was recently appointed effective September 1999 as Vice-
President of the Corporation. He is an attorney with over 25 years experience,
and, during the past five years, served as president of the law firm of Hammons
& Vaught and as an energy consultant to several corporations. Mr. Hammons was
formerly an Assistant for Energy Natural Resources to Governor David Boren in
Oklahoma, and an administrative assistant to Governor George Nigh in Oklahoma.
Mr. Hammons is a graduate of Oklahoma Baptist University and received a J.D.
from Oklahoma University and a Masters in International Relations from Oklahoma
University. Mr. Hammons office street address is 3300 Bank One Center, 100
North Broadway, Oklahoma City, Oklahoma 73102.
5. ELECTION OF DIRECTORS
The number of directors to be elected at the Meeting is five (5). Unless
otherwise specified, the persons named in the enclosed form of proxy will
vote FOR the election of the nominees whose names are set forth below.
Management of the Corporation does not contemplate that any of the nominees
will be unable to serve as a director, but if that should occur for any
reason prior to the Meeting, the persons named in the enclosed form of proxy
reserve the right to vote for another nominee in their discretion. Each director
elected will hold office until the close of business on the day of the first
annual meeting of shareholders of the Corporation following his election unless
his office is earlier vacated in accordance with the Articles of the
Corporation.
The following table and notes thereto set out the names of management's nominees
for election as directors of the Corporation together with their positions held
with the Corporation, municipalities of residence, principal occupations for the
past five years, and the number of shares beneficially owned or over which
control or direction is exercised:
<PAGE>
Name, Current Position(s) Principal Director Shares of the Percentage
Held and Municipality of Occupation Since Corporation of Common
Residence Beneficially Shares
Owned, Outstanding(2)
Controlled or
Directed (1)
_______________________________________________________________________________
Jack E. Wheeler(3) Petroleum September 20,000,000 24.7%
Director, Chairman of the Executive 17, 1999
Board and Chief Executive
Officer, 50
Edmond, Oklahoma
James E. Hogue(4) Petroleum July, 1996 5,134,333(5)(6) 6.3%
Director, 63 Executive
Dallas, Texas
Wayne T. Egan(3)(4) Lawyer June, 1996 58,000(7) -
Director, 37
Toronto, Ontario
Anne Holland(3)(4) Petroleum N/A 70,000 -
Director, 55 Executive
Fort Worth, Texas
Randall B. Kahn(3) Venture N/A Nil -
Director, 39 Capital
St. Louis, Missouri Businessman,
Attorney
___________________________________________________________________________
The shareholders are urged to elect Management's nominees as directors.
Notes:
(1) The information as to the shares beneficially owned, directly or
indirectly, not being within the knowledge of the Corporation, has
been furnished by the respective proposed directors individually.
(2) This assumes the exercise of the 21,230,897 outstanding Special
Warrants. See "Exercise of Special Warrants" below.
(3) Member of Audit Committee. (Mr. Kahn, upon election, will be nominated
to the Audit Committee.)
(4) Member of the Compensation Committee.
(5) This figure includes 80,000 Common Shares held directly by Mr. Hogue
and 1,500,000 held directly and through Third Coast Capital, Inc.,
and the following shares, beneficial ownership of which is disclaimed
by Mr. Hogue: 740,000 Common Shares owned by the Hogue Family Limited
Partnership and 231,000 Common Shares held by Mr. Hogue's wife. In
addition, Mr. Hogue owns employee stock options exercisable into an
additional 583,333 Common Shares of the Corporation.
(6) This figure also includes approximately 2,000,000 Common Shares of the
Corporation which may be voted by Mr. Hogue for directors under certain
agreements. See "Statement of Executive Compensation - Section K
"Voting Trusts"" below.
(7) In addition, Mr. Egan owns employee stock options exercisable into an
additional 20,000 Common Shares of the Corporation.
<PAGE>
None of the Corporation's directors have been involved during the past five (5)
years in a material legal proceeding involving such person's ability or
integrity.
6. STATEMENT OF EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The following table discloses U.S. Dollars compensation paid to or awarded to
the Corporation's Chief Executive Officer and each of the other most highly paid
executive officers of the Corporation whose total salary and bonus exceeded
$67,000 (Cdn $100,000) (collectively, the "Named Executive Officers") for the
last three most recently completed financial years of the Corporation. Specific
aspects of the compensation of the Named Executive Officers are dealt with in
further detail in subsequent tables.
Annual Compensation(1) Long-Term Compensation
Awards Payouts
Restricted
Securities Shares
Other Under or All
Name Annual Options/ Restricted Other
and Compen- SARs Share LTIP Compen-
Principal Year Salary Bonus sation Granted Units Payouts sation
Position (US$) (US$) (US$) (#) (US$) (US$) (US$)
(a) (b) (c) (d) (e) (f) (g) (h) (I)
_______________________________________________________________________________
Eugene A. 1999 150,000 - - - - - -
Soltero 1998 160,000 - - 300,000 - - -
Director, 1997 120,000 - - 83,333 - - -
Chairman of
the Board,
Chief
Executive
Officer and
Chief
Financial
Officer(2)
James E. 1999 150,000 - - - - - -
Hogue, 1998 160,000 - - 300,000 - - -
Director, 1997 120,000 - - 83,333 - - -
President and
Chief
Operating
Officer(3)
Peter Lucas, 1997 110,000 - - - - - -
Senior Vice
President,
Chief
Financial
Officer(4)
<PAGE>
Notes:
(1) Certain of the Corporation's executive officers receive personal
benefits in addition to salary. The aggregate amount of these benefits,
however, do not exceed the lesser of $50,000 or 10% of the total annual
salary reported for the executives.
(2) Mr. Soltero resigned as a director and officer of the Corporation
effective August 26, 1999.
(3) Mr. Hogue was replaced as the President and Chief Operating Officer by
Jack E. Wheeler in September 1999.
(4) Mr. Lucas resigned as an officer of the Corporation effective April 15,
1997.
B. LONG-TERM INCENTIVE PLAN AWARDS (PERIOD ENDED JUNE 30, 1999)
The Corporation currently has no long-term incentive plans, other than stock
options granted from time to time by the Board of Directors under the provisions
of the Corporation's stock option plan and non-employee directors stock option
plan.
C. OPTION/SAR GRANTS (PERIOD ENDED JUNE 30, 1999)
No options were granted to Named Executive Officers under the Corporation's
stock option plan in fiscal year ended June 30, 1999.
D. AGGREGATED OPTION/SAR EXERCISES (PERIOD ENDED JUNE 30, 1999) AND FINANCIAL
YEAR-END OPTION/SAR VALUES
The following table sets forth information regarding the value of unexercised
options held by Named Executive Officers as of June 30, 1999.
<PAGE>
Value of
Unexercised
Unexercised in-the-Money
Options/SARs Options/SARs
Securities Aggregate at FY-End at FY-End
Acquired on Value (#) ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
____________________________________________________________________________
Eugene A. Soltero 0 0 583,333/0 $0/$0
James E. Hogue 0 0 583,333/0 $0/$0
E. COMPENSATION OF DIRECTORS
Each director who is not an employee of the Corporation is paid $500 per
meeting of the board of directors and $500 per committee meeting not held on
the same date as a board meeting. Directors are permitted to accept shares
in lieu of cash. Directors who are employees of the Corporation are not paid
any extra compensation for service on the board or on committees.
No directors were compensated by the Corporation during the last financial year
for services as consultants or experts, other than approximately $50,000 paid
in legal fees to Weir & Foulds, Toronto; Mr. Wayne T. Egan, a current director
of the Corporation, is a partner in said firm.
F. EMPLOYMENT AGREEMENTS
The Corporation does not have employment contracts with any of its executive
officers.
G. INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
None of the directors or senior officers of the Corporation or their respective
associates or affiliates is indebted to the Corporation.
H. COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
The Board of Directors met 8 times during the last fiscal year. The Board of
Directors has an Audit Committee comprised of four members and a Compensation
Committee comprised of three members. The Board of Directors as a whole acts
as a Nominating Committee.
<PAGE>
The Audit Committee includes all of the directors, and the Audit Committee met
one time during the last fiscal year. The Audit Committee recommends engagement
of the independent auditors, considers the fee arrangement and scope of the
audit, reviews the financial statements and the independent auditors' report,
reviews the activities and recommendations of the Corporation's internal
auditors, considers comments made by the independent auditors with respect to
the Corporation's internal control structure, and reviews internal accounting
procedures and controls with the Corporation's financial and accounting staff.
The Compensation Committee met one time during the last fiscal year. The
Compensation Committee administer the employee and directors stock option
plans and recommends executive compensation to the Board of Directors.
All directors were present at the meetings of the Board of Directors in person
or by written ratification.
I. FAMILY RELATIONSHIPS
There are no family relationships among the Corporation's directors or executive
officers.
J. COMPLIANCE WITH 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires executive officers and directors, and persons beneficially owning
more than 10% of the Corporation's stock to file initial reports of ownership
and reports of changes in ownership with the United States Securities and
Exchange Commission ("SEC") and with the Corporation. Except for events
previously disclosed in its annual reports to the SEC on Form 10KSB for the
years ended June 30, 1997 and 1998, the Corporation 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 require the filing of
any report pursuant to Section 16(a) of the Exchange Act that was not filed
with the Corporation.
K. VOTING TRUSTS
Under the terms of a Voting Trust Agreement (the "Voting Agreement"),
unaffiliated parties that transferred their interests in certain properties
to the Corporation 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 common shares held by such property contributors for the election
of directors 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 Corporation believes that as of June 30, 1999,
approximately 1 million shares remain subject to the Voting Agreement.
Liviakis Financial Communications, Inc. ("LFC") and its affiliates have agreed
that, with respect to any common shares acquired by them pursuant to the LFC
Consulting Agreement with the Corporation, LFC will vote such shares until
January 1, 2001 for directors nominated by Mr. Hogue and Mr. Soltero and
certain other matters. Approximately 2,000,000 shares are currently subject
to this voting rights covenant.
Pursuant to the terms of the definitive acquisition agreement, the four previous
shareholders of Aspen Energy Corporation agreed, for a period of five years
ending July 30, 2002, to vote their common shares for directors nominated by
Messrs. Hogue and Soltero. Approximately 1,000,000 shares are currently subject
to this voting covenant.
7. ORDINARY RESOLUTION - EXERCISE OF SPECIAL WARRANTS
The Corporation has entered into an agreement on September 16, 1999 (the
"Purchase Agreement"), with an effective date of July 1, 1999,and included
herewith as Exhibit A, pursuant to which it acquired 50% of the issued and
outstanding shares of East Wood Equity Venture, Inc. ("East Wood"). The
shareholders of East Wood who sold to the Corporation--and per cent of shares
owned prior to closing of the acquisition--were Jack E. Wheeler ("Wheeler")-25%,
Apollo Investments Limited ("Apollo")-6.3%, Stillwater Gas Production Inc.
("Stillwater")-6.2%, and Custer County Drillers Inc. ("Custer")-12.5%. The
remaining holdings prior to closing include 18% held by Farrell Kahn, the
father of director nominee Randall B. Kahn and 32% held by several smaller
shareholders, none of whom hold as much as 10%. Exhibit B contains the
unaudited financial statements for East Wood for the period ended September 30,
1999. The audited financial statements as of December 31, 1998 are presented in
Exhibit C for Crown Partners L.L.C. Minerals Division, the predecessor of East
Wood, and Exhibit D is a proforma presentation of the financial statements of
the Corporation as of June 30, 1999 as if the 50% of East Wood had been owned by
the Corporation for the entire fiscal year. Exhibit E contains the
unaudited financial statements of the Corporation, including its interest in
East Wood for the three months ended September 30, 1999. Under the terms of the
Purchase Agreement, the Corporation agreed to issue to the shareholders of East
Wood 46,230,897 common shares. As a consequence of being subject to the rules
of the Canadian Dealing Network and the Ontario Securities Commission, the
Corporation is precluded from issuing more than 25 % of its outstanding common
shares during any one year period without prior shareholder approval. However,
because the Corporation was able to issue 25,000,000 shares at the time of the
closing, pursuant to a prior approval from shareholders received at a special
meeting held June 29, 1999, the parties agreed that the remaining securities
would be issued in the form of Special Warrants. Each Special Warrant issued
under the Purchase Agreement is exercisable, for no additional consideration,
into one common share of the Corporation, but may only be exercised following
additional shareholder approval. A total of 21,230,897 Special
Warrants were issued by the Corporation under the Purchase Agreement. The
shareholders are being asked to approve the exercise of these Special Warrants,
to complete the transaction by which the Corporation acquired 50% of the issued
and outstanding shares of East Wood.
<PAGE>
The following table of per share data is summarized from Exhibit D and is based
upon the exchange ratio of shares in the transaction:
East Cotton
Wood Valley
June 30, June 30, Pro Forma
1999 1999 Consolidated
---------- --------- ------------
Book value per share (primary) $ 0.02 $ 0.35 $ 0.15
Book value per share (fully
diluted $ 0.21 $ 0.48 $ 0.32
Cash dividends per share
(primary and fully diluted) $ 0.00 $ 0.00 $ 0.00
Net income (loss) per share
from continuing operations:
(primary) $ 0.00 $ (0.44) $ (0.12)
(fully diluted) $ 0.00 $ (0.36) $ (0.10)
Under the terms of the Purchase Agreement, the Corporation acquired a 50%
interest in East Wood for consideration equal to, upon exercise of the
outstanding Special Warrants, 46,230,897 Common Shares, which were recorded on
the books of the Corporation at a value of $5,895,840, or $0.1275 per share.
This represents a 2% premium over the average of the three lowest closing bid
prices on the OTC Bulletin Board for the 15-day trading period prior the
effective date of $0.125 per share. This represented an acquisition of a 50%
interest in a company which, according to a reserve report dated
September 2, 1999 for reserves effective as of July 1, 1999 ("Reserve Report")
prepared by American Energy Advisors, Inc., had an estimated future net revenue
value, discounted at 10%, of US$11,625,451. As a result of its evaluation of
Eastwood, the Corporation issued the equivalent of 46,230,897 Common Shares
to acquire a half interest in Eastwood. The Corporation believes that the
Purchase Agreement to acquire 50% of the outstanding shares of East Wood
benefits the Corporation's operations for the following reasons: (i) the
Corporation's $40,000 per month losses will be offset by profits from East
Wood's oil and gas production and reduced by spreading overhead over more
activities; (ii) East Wood's 400 producing wells locations are more diverse,
have more potential profit and will generate positive cash flows faster than the
Corporation's proved undeveloped reserves; (iii) the closing of the first 50%
interest in East Wood gives the Corporation leverage to acquire the remaining
50% during fiscal year 2000; (iv) the Corporation obtains the services of the
East Wood management team, a group of seasoned, successful oil and gas
executives; and (v) the Corporation will be more successful in raising working
capital and investment capital for drilling additional wells to develop more
reserves.
Beginning in September 1998, the Corporation undertook a comprehensive program
directed toward merging with one or more small public or private corporations in
response to deteriorating conditions in the U.S. petroleum industry. As part
of that program, officers of the Corporation identified approximately 400 public
energy corporations whose shares are traded over-the-counter on the Electronic
Bulletin Board and/or on the Midwest, Boston, Pacific or Philadelphia Stock
Exchanges. Public filings for all these companies were downloaded from the
internet and reviewed by the Corporation against a list of merger criteria. The
Corporation then sought direct contact with senior officers of the top fifty
candidates, resulting in expressions of interest from about 40% of those
contacted. Confidentiality agreements were executed with seven or eight
of these companies and detailed data exchanged, resulting in several rounds of
detailed negotiations, but no written offers or counter-offers.
During the same time period, the Corporation retained acquisition consultants to
assist in locating other merger candidates. In addition, approximately 50
private and public company merger opportunities were brought to the attention of
management by its outside directors, former directors, major shareholders,
lawyers, institutional lenders, investor and public relations consultants, and
its independent consulting engineers. Several of these opportunities were to
merge with companies having principal focus in business areas outside the U.S.
petroleum industry, including oil and gas in Eastern Europe, telecommunications,
internet services, and aggregate rock. Confidentiality agreements were executed
and mutual due diligence undertaken with eight to ten of these candidates,
resulting in three firm written offers and two indications of offers
for consideration by the Board of Directors. Two additional opportunities were
attractive operationally to the Corporation, but negotiations and due diligence
efforts were moving very slowly and decisions regarding these two were suspended
while the Corporation focused on making a decision among the five active
opportunities.
After careful consideration, the Corporation, in February 1998, entered into an
agreement to merge with International Aggregate Corporation and National
Resource Development Corporation, respectively, an affiliate and subsidiary of
Regency Affiliates, Inc. ("Regency"), in a transaction where the management of
Regency would take over management of the merged companies. The Regency
companies own and operate approximately 100 million tons of aggregate rock which
it markets locally in the Great Lakes area and for which it is in the process of
developing national markets. The merger with the Regency companies was
conditional upon the continued listing of the Corporation's common stock on the
American Stock Exchange. Upon delisting in May 1999, Regency elected not to
complete the merger under the terms of the merger agreement and offered a set of
less favorable terms for consideration by the Corporation. The Corporation
elected not to renegotiate, but to concentrate on East Wood, one of its earliest
attractive candidates.
The Corporation was first introduced to East Wood's predecessor, Crown Partners
L.L.C., Minerals Division ("Crown") in early 1997 upon completion of its
acquisition of interests in the Alden (NE) Field, Caddo County, Oklahoma. Crown
had a small interest in several of the wells the Corporation purchased and
operated. In order to consolidate its operations in the field, the Corporation
sought to purchase as much of the minority interest as it could before
undertaking a reworking and development program, including the interests held by
Crown. By late 1997 the Crown interest was purchased and the management of the
Corporation and the management of Crown began to visit with each other on a
regular basis to look at each other's activities and consider joint acquisitions
of producing properties. As part of its merger program initiated in the
fall of 1998, the Corporation started merger discussions with Crown, but Crown
was in the middle of completing some producing property acquisitions of its own
and had no additional management time to undertake the requisite due diligence
effort. Crown also merged into, and took over, East Wood in early 1999. As it
became obvious during April and May 1999 that the Corporation would be at high
risk of being delisted from the American Stock Exchange and losing the Regency
transaction, the management of the Corporation and the management of East Wood
began detailed due diligence of each other. After the delisting came about, the
Board of Directors determined that a merger with East Wood on the preliminary
terms being discussed was preferable to renegotiating with Regency or pursuing
one of the previous written offers.
The major concern of the Board of Directors was to arrive at a merger on terms
no worse than fair to the shareholders of the Corporation, with an objective of
arriving at a transaction with terms favorable to the Corporation's
shareholders. Inasmuch as the management of the Corporation were large
shareholders and had most of their personal net worth in their holdings, the
management's objectives in a merger were aligned with the shareholders'
objectives in seeking the highest possible value for the Corporation in a merger
transaction. It was also clear from the beginning of the merger program that
the highest value for the Corporation would be in a situation where the
management of the merger candidate would be able to take control. So not only
was the Board of Directors looking for good economic conditions relating to a
transaction, it had to be concerned about the capabilities of the surviving
management, and it concluded that a transaction with East Wood met the test and
the Corporation entered into a letter of intent with Crown and the majority
holders of East Wood for a merger of Crown into Cotton Valley during June 1999.
During the drafting of definitive merger documents, it became clear to the
shareholders of East Wood that initial acquisition by the Corporation of all or
a portion of East Wood would be preferable to merger of all or part of Crown
into the Corporation. Accordingly, the Corporation evaluated East Wood for
merger with the Corporation. A merger of a public company and a private company
presents interesting evaluation problems. On the one hand, the share price in
the public market indicates the value by market capitalization of the public
company, and valuation by an independent appraiser of "fair market value" could
indicate the value of the private company. This could provide an excellent
foundation for a "fairness opinion" by an investment banker. However, during
the summer of 1999, oil prices were at their lowest (adjusted for inflation)
since the Depression and the market for oil and gas property acquisitions was in
disarray. The Corporation's reserves report by independent engineers had been
most recently completed as of June 30, 1998 and East Wood's reserves report by
independent engineers had been most recently completed in December 1998 and
March 1999. In addition to the timing differences, the Corporation's report
contained both "proved developed" and "proved undeveloped" reserves while
the East Wood reports were only for Crown and contained only "proved developed"
reserves.
The management of the Corporation and East Wood determined that the fairest
method of combination would be based upon analysis of the relative present
values of the proved developed reserves of the two companies, adjusted for
balance sheet items to be remaining at closing, and providing the shareholders
of the Corporation a negotiated premium for being a public company.
Comparing the present value (using a negotiated price schedule) of 100% of the
developed reserves, adjusted for retained balance sheet items, the companies
arrived at figures which indicated East Wood to have a present value more than
ten times that of the Corporation. This would mean a merger of the two
companies would result in the Corporation's shareholders
retaining 10% of the combined companies and the East Wood shareholders retaining
90%. In order to compensate the Corporation's shareholders for being public and
to partially offset the uncertainties associated with East Wood's undrilled
locations, the companies negotiated an exchange ratio of 27% to the
Corporation's shareholders and 73% to the shareholders of East Wood, subject
to the following conditions: (i) the Corporation's elimination of approximately
$1,800,000 of liabilities through the issuance of common shares prior to
closing; and (ii) completion of engineering reports by an acceptable third party
engineer as of June 30, 1999 and or July 1, 1999 to confirm present values of
Corporation's proved reserves and East Wood's proved developed reserves as of
those dates. The first requirement was satisfied by the Corporation though the
issuance of a total of approximately 8.2 million common shares at an average
price of $0.22 per share to pay and/or satisfy approximately $1.8 million of
liabilities. The second was satisfied by the completion of engineering reports
by AEA, as described in this Circular and in the Annual Report. A fairness
opinion from a financial advisor was not solicited due the use of an
independent petroleum engineering firm for confirmation of reserves used in the
allocation calculations.
Upon completion of the conditions precedent, holders of 50% of East Wood,
including Mr. Farrell Kahn, elected not to participate in the closing. The
Corporation elected to complete the transaction for 50% who were willing to
close at that time and assume management control of the Corporation. The non
selling shareholders have orally informed the Corporation that they intend to
negotiate the sale of their 50% interest in East Wood to the Corporation once
the annual and special meeting is over and the shareholders have approved all
the resolutions contained in this Circular. There can be no assurance that the
Corporation will be successful in obtaining any portion of the outstanding
interest in East Wood at all, or if attained, on the same or better terms than
the initial 50%.
It was contemplated by all parties to the Purchase Agreement, that the
Corporation would promptly ask the shareholders for authorization of additional
common shares to effect the exercise of the Special Warrants. It is the belief
of the Corporation that the principal reason the non-selling shareholders
elected not to participate in the Purchase Agreement was because the Corporation
was unwilling to provide recission or financial guarantees that the
Corporation's shareholders would approve the authorization with respect to any
Special Warrants they might have received in the proposed transaction.
The exercise of the Special Warrants will dilute the voting, but not the equity,
interests of all shareholders of the Corporation. This comes about because the
accounting treatment considers the Special Warrants a form of non-voting equity.
If the conversion of the warrants is approved, the current shareholders will
hold approximately 74% of the voting rights of the Corporation and the holders
of the common shares received in exchange for the Special Warrants will hold
approximately 26% of the voting rights. If the exercise of the Special Warrants
is not approved, there will be no adverse consequences under the terms of the
Purchase Agreement. However, in that case the Corporation believes that it
would lose access to acquire the remaining 50% interest in East Wood.
The acquisition of the 50% interest in East Wood under the Purchase Agreement
is accounted for a purchase, and there are no U.S. federal income tax
consequences as a result of the acquisition, being an acquisition
of a 50% interest in a corporate entity in exchange for the issuance by the
Corporation of common shares for value.
<PAGE>
The Corporation's shares are quoted for trading through the facilities of The
Canadian Dealing Network ("CDN") in Toronto, Canada, and on the OTC Bulletin
Board ("OTCBB") in the United States. During 1999, trading has been active
on the OTCBB and very inactive on CDN, where there are weeks without a single
trade on CDN. Therefore the Corporation feels that any presentation of CDN
trading or price data is insignificant and would be misleading to its
shareholders and only presents data from the OTCBB. In conjunction with the
transaction, the Corporation sought and received approval from CDN for the
issuance of 25,000,000 shares pursuant to the terms of the Purchase Agreement
and the issuance of the 21,230,897 Special Warrants. In addition, the
Corporation received confirmation from the Ontario Securities Commission that
the properties of East Wood as described in the Reserve Report represented a
property of determinate value, and thus could be utilized for the issuance of
the securities by the Corporation under the terms of the Purchase Agreement, in
compliance with relevant regulatory policies. During the 45 days preceding the
date on which the Purchase Agreement was completed, the shares of the
Corporation did not trade on CDN. The trading price of the common shares 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 Corporation's
securities.
The following table sets forth the high and low transaction information for
the common shares of the Corporation in U.S. currency as reported on the
Electronic OTC Bulletin Board since June 2, 1999.
High Low
June 2 - June 30, 1999 US$0.31 US$0.13
July 1 - September 23, 1999 US$0.55 US$0.09
There are no past, present or proposed contracts between the parties involved
in the transaction under the Purchase Agreement. On September 22, 1999, the day
before the announcement of the signing of the Purchase Agreement, the
Corporation's high and low prices for transactions on the Electronic OTC
Bulletin Board were $0.2656 and $0.2344, respectively. Representatives
Of the principal accountants for the current year and the most recently
Completed fiscal year are expected to either be at the Meeting or will be
available by telephone to respond to appropriate questions.
Following closing of the transaction under the Purchase Agreement, Mr. Jack E.
Wheeler, through his acquisition of 20,000,000 common shares of the Corporation,
acquired control of the Corporation. Mr. Wheeler holds approximately 24.8% of
the issued and outstanding common shares of the Corporation, assuming exercise
of the 21,230,897 outstanding Special Warrants. As the shares acquired by
Mr. Wheeler were issued from the Corporation's treasury, he did not acquire
control from another person.
To be approved, the ordinary resolution must be passed by a majority of the
votes cast by the "disinterested" shareholders at the Meeting in respect of this
resolution, where the "disinterested" shareholders are defined as those
shareholders who do not directly, indirectly or beneficially own any Special
Warrants. Unless otherwise specified, the persons name in the enclosed form of
Proxy will vote FOR the resolution attached to this Circular as Schedule "1".
No holders of the Special Warrants, or any affiliates thereof, will vote any
common shares held by such persons in the Corporation in respect of this
matter at the Meeting.
<PAGE>
8. INFORMATION ABOUT COTTON VALLEY RESOURCES CORPORATION
General
The Corporation's annual report to the Securities and Exchange Commission on
Form 10-KSB for the year end June 30, 1999 (the "Annual Report") is enclosed
herewith. The Annual Report should be read in conjunction with this
Circular. The audited financial statements of the Corporation for same period
are included in the Annual Report. The information which follows summarizes and
updates information provided in the Annual Report.
Cotton Valley Resources Corporation (referred to herein as either "Cotton
Valley" or the "Corporation") 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 Corporation 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
Corporation has been engaged principally in organization and capitalization
activities and has not generated material net revenues from operations.
<PAGE>
On June 30, 1995 in a one-for-one share and warrant exchange, the Corporation
acquired all the issued and outstanding shares of Cotton Valley Energy
Corporation ("CV Energy"), a Nevada corporation. On June 14, 1996, the
Corporation completed an amalgamation with Arjon Enterprises, Inc. ("Arjon"),
a Province of Ontario, Canada corporation. As a result of the Arjon
amalgamation, the Corporation's name was changed to Cotton Valley Resources
Corporation and its common shares 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 Corporation organized Cotton
Valley Operating Corporation, a Texas corporation ("CV Operating") to operate
the Corporation's oil and gas properties. The Corporation 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 Corporation,
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
Corporation recently organized Mustang Well Servicing Corporation, a Nevada
corporation ("Mustang Well Servicing"), Mustang Oilfield Equipment Corporation,
a Nevada corporation ("Mustang Equipment"), and Mustang Horizontal Services,
Inc., a Nevada corporation ("Mustang Horizontal") (collectively, the "Mustang
Service Companies"). All of the Corporation's subsidiaries are wholly owned by
the Corporation, except for CV Means, which is a wholly-owned subsidiary of
Aspen. During December 1997 the Corporation 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 Corporation 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
Corporation 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 Corporation, during
the first fiscal quarter, ceased operations at Mustang Well Servicing
Corporation and Mustang Horizontal Services, Inc. and severely cut back new
business at Mustang Oilfield Equipment Corporation. The water flood development
project at the Means Unit was postponed and work over and development activities
at the other properties were indefinitely suspended. The Means Unit waterflood
development project consists of reworking old wells and drilling new wells in an
existing field such that water can be injected in half the total wells to
increase reservoir pressure and oil mobility to increase total field oil
production from the remaining wells. 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 Corporation
entered into agreements with over fifty vendors to whom it owed more
than $750,000 to eliminate the debt through the issuance of common shares. As
of June 30,1999, the Corporation had issued 4,000,000 common shares at $0.25 per
share reflecting the reduction of approximately $785,000 of liabilities and
providing a reserve for the reduction of another $215,000 of liabilities. The
common shares reflecting the $215,000 reserve were placed in escrow for the
benefit of vendors in negotiation with the Corporation who had not completed
negotiations as of June 30, 1999. As of December 1, 1999, vendors holding
approximately $25,000 of additional receivables of the Corporation had completed
the relevant agreements, leaving $180,000 of shares remaining in escrow. Any
shares remaining in escrow on December 31, 1999 (unless such date is extended by
the Corporation) will be returned to the treasury of the Corporation and
canceled.
On March 26, 1999 the Corporation 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 transferred assets included:
(A) two well servicing rigs and related equipment; (B) horizontal drilling tools
and related equipment; (C) pickup trucks and other transportation equipment; (D)
100% of the Corporation's oil and gas leasehold interests in: (i) the Alden
(NE) Field, Caddo County, Oklahoma; (ii) two Mabry wells in Latimer County,
Oklahoma; and (iii) one well in East Texas; and (E) 80% of the Corporation's
interest in oil and gas leases in the Cheneyboro Field, Navarro County, Texas.
The obligations under the Convertible Debentures were assumed by Mustang Well
Servicing Corporation ("MWSC") and the Corporation's ownership interest in MWSC
was transferred to Pinnacle Reef Limited Partnership, an inactive Nevada
limited partnership having no other liabilities or assets. Although the Holders
released the Corporation and its remaining subsidiaries from any obligations
under the Convertible Debentures, the Convertible Debentures were not canceled,
but remain in force and effect so that the Holders can retain their priority
statutory liens on the Transferred Assets until they are all sold.
Pursuant to an agreement for conveyances in lieu of foreclosure between the
Corporation, its subsidiaries and the holders of the Convertible Debentures, the
Corporation is entitled to receive back any remaining Transferred Assets or cash
from their sale once the Convertible Debentures are repaid. The repayment
amount includes the outstanding principal of $4.22 million plus interest and
certain expenses, less revenues received by the Holders from the Transferred
Assets before being sold and less 50% of the proceeds from sales of
approximately 1.9 million common shares previously issued the Holders in payment
of interest and waiver fees. In connection with the transaction the Corporation
has recorded a pre-tax loss on disposition of assets of $9,807,576. The
Corporation is unable to quantify the amount of the contingent receivable.
<PAGE>
During August 1999 the Corporation organized a Texas corporation Aspen Energy
Group, Inc ("AEG") as a wholly-owned subsidiary. On September 16, 1999 the
Corporation, partially through 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 Corporation issuing 25 million common shares, 21.2 million
Special Warrants (each exercisable for one share upon approval by shareholders).
The parties met all the conditions required for closing and received 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 Corporation
resigned and the officers of East Wood were elected officers of the Corporation.
One of the conditions of the negotiations between the Corporation and East Wood
was change in management control of the Corporation. Based on the relative
values of 27% for the Corporation's shareholders and 36.5% for the 50% of East
Wood being acquired, it was reasonable for East Wood management to be in
control.
<PAGE>
Risk Factors
Limited Operating History; Capital Intensive Business; Need for Additional
Funds. From its inception in February 1995 through June 30, 1999, the
Corporation was engaged principally in organization and capitalization
activities and did not generate material net revenues from operations. The
Corporation'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 Corporation's oil field operations and
purchase equipment. At June 30, 1999, the Corporation had a working capital
deficit of approximately $2.1 million. The Corporation 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 Corporation could be required
to seek additional financing sooner than currently anticipated. Although the
Corporation is currently negotiating with private investors and lenders with
respect to additional financing, the Corporation has no commitments to obtain
any additional debt or equity financing ana there can be no assurance that
additional funds will be available, when required, on terms favourable to the
Corporation. Any future issuances of equity securities would likely result in
dilution to the Corporation's then existing shareholders while the incurring of
additional indebtedness would result in increased interest expense and debt
service changes.
History of Losses. The Corporation 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 Corporation's accumulated deficit as of June 30, 1999 was
$15,078,841. The Corporation does not have a bank line of credit. The
Corporation 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 Corporation in obtaining the necessary capital resources to fund future
costs associated with its operations and expansion plans is dependent upon the
Corporation's ability to: (i) integrate the acquisition of East Wood; (ii)
obtain the exercise of outstanding warrants; and (iii) obtain asset based
commercial financing. However, even if the Corporation 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.
Significant Capital Expenditures Necessary for Undeveloped Properties.
A significant portion of the Corporation's oil and gas reserves are
classified as Proved Undeveloped Reserves, meaning very little production
currently exists. Recovery of the Corporation'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
Corporation'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 Corporation'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.
<PAGE>
No Assurance of Additional Financing. Development of the Corporation's
properties will require additional capital resources. Although the Corporation
is presently negotiating with private lenders and investors with respect to
sources of additional financing, the Corporation 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 favourable terms
to the Corporation. The inability to obtain additional financing would have a
material adverse effect on the Corporation, including requiring the Corporation
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 Corporation's shareholders at
that time.
Exploration and Development Risks; Waterflood Projects. The Corporation 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 Corporation'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 Corporation'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.
Volatility of Oil and Gas Prices. The Corporation'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 Corporation's ability
to maintain or increase its borrowing capacity, to repay current or future
indebtedness, and to obtain additional capital on favourable 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 Corporation'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,
<PAGE>
domestic and foreign government relations, the price and availability of
alternative fuels and overall economic conditions. Furthermore, the
marketability of the Corporation'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
Corporation's ability to market its production through such systems,
pipelines or facilities. Substantially all of the Corporation'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 Corporation normally sells
its oil under month-to-month contracts with a variety of purchasers.
Accordingly, the Corporation'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. The
Corporation's Annual Report contains estimates of the Corporation'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 Corporation's control. The
reserve estimates in the Corporation's 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 the Corporation's Annual Report. Additionally, the Corporation's reserves may
be subject to downward or upward revision base upon actual production
performance, results of future development and exploration, prevailing oil and
gas prices and other factors, many of which are beyond the Corporation's
control.
The present value of future net reserves discounted at 10% (the "PV-10") of
Proved Reserves referred to in the Corporation's Annual Report should not be
construed as the current market value of the estimated Proved Reserves of oil
and gas attributable to the Corporation's properties. In accordance with
applicable requirements of the SEC, the estimated discounted future net
cashflows 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 SEC is not necessarily the most
appropriate discount factor based on interest rates in effect from time to
time and risks associated with the Corporation's reserves or the oil and gas
industry in general. Furthermore, the Corporation'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.
Under full cost accounting, the Corporation 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.
<PAGE>
Certain Relationships and Related Transactions
In February 1995, the Corporation issued a total of 560,001 shares of Common
Stock to the wives of Eugene A. Soltero, then Chairman of the Board and Chief
Executive Officer, and James E. Hogue, then President and Chief Operating
Officer, for pre-incorporation services valued at $1,401. Shortly after
incorporation, the Corporation issued 2,100,000 special shares to family
partnerships of Messrs. Soltero and Hogue which were substantially
exchanged for 1,440,000 shares of Common Stock of the Corporation valued at
$5,832.
In December 1995, the Corporation 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 Corporation 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 Corporation 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 Corporation has received advances from these two companies which
totalled $139,710 at June 30, 1997. As of June 30, 1998, $119,710 of the
advances remained outstanding. During fiscal year 1999 Messrs Soltero and Hogue
paid their own travel, out of pocket and office supply expenses on behalf of the
Corporation in the amount of $80,920, which were advanced by their family
corporations. The advances were unsecured, without interest and repayable
directly back to the two family corporations. During August 1999 the two
corporations were paid a total of 1,250,000 common shares priced at $0.16
per share in settlement of the aggregate of $400,000 owed to the two family
corporations.
During each of the years ended June 30, 1999, 1998 and 1997, the Corporation
paid to Weir & 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 Corporation, who both at the time were
members of Weir & Foulds. Messrs. Lachcik and Egan each received in fiscal year
1997 options to purchase 50,000 common shares at $1.83 per share. The
Corporation believes that the legal fees it pays to Weir & Foulds are
comparable to legal fees charged by unaffiliated law firms.
In November 1996, the Corporation 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 Corporation in matters
concerning corporate finance and to represent the Corporation in investor
communications and public relations with existing shareholders, brokers and
other investment professionals. As consideration for LFC undertaking the
engagement, the Corporation issued and delivered to LFC an aggregate of
1,490,000 common shares as non-forfeitable compensation. The stock issuance was
recorded at $1,087,800 based on the Corporation's stock price at the date of the
LFC Consulting Agreement. The non-forfeitable compensation was a risk taken by
the Corporation in that the Corporation had specifically agreed not to seek
return of any of the common shares in the event LFC did not perform its duties
under the agreement. LFC did, however, perform its duties under its agreement.
<PAGE>
In connection with LFC undertaking the consulting engagement, the Corporation
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
common share and one stock purchase warrant("LFC Warrant") which entitled the
holder thereof to purchase a common share 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 common
shares 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 Corporation agreed to pay LFC a fee in the
event that LFC introduces the Corporation, or its nominees, to a lender or
equity purchaser, not already having a pre-existing relationship with the
Corporation and such financing is ultimately consummated. In connection with the
sale by the Corporation of its Convertible Debentures in December 1997, LFC
received a cash fee of $108,000. Additionally, in December 1997,
the Corporation 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
Corporation in completing acquisitions and other financings during calendar
1997. LFC directed the Corporation to issue 25,000 of the Mustang Warrants to
Robert B. Prag, an officer of LFC.
On June 24, 1997, the Corporation issued to LFC a 9% Convertible Secured
Promissory Note (the "LFC Note") for a $579,000 loan. On December 3, 1997,
the Corporation 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 common shares ($1.67 per share). As additional consideration for the
loan, the Corporation issued to LFC warrants (the "Liviakis Warrants") expiring
April 3, 2002 to purchase 161,351 common shares at an exercise price of $2.08
per share. Leon A. Romero, Senior Vice President, Chief Financial Officer and a
director of the Corporation received 977,771 net common shares from the
Corporation 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 Corporation's independent directors who did not have an interest in the
transactions and who had access, at the Corporation's expense, to available
material information and to the Corporation's independent counsel.
Any future transactions between the Corporation and its affiliates will be
approved by a majority of disinterested directors and will be on terms no less
favourable to the Corporation than those which could be obtained from unrelated
third parties. Any forgiveness of loans must be approved by a majority of the
Corporation's independent directors who do not have an interest in the
transactions and who have access, at the Corporation's expense, to either
the Corporation's or their own independent legal counsel.
For further details concerning the business of East Wood, please see "East Wood
Equity Venture, Inc." below.
<PAGE>
9. ACQUISITION OF 50% OF EAST WOOD EQUITY VENTURE, INC.
In order to provide the shareholders of the Corporation with sufficient
information to evaluate the resolution authorizing the exercise of the
Special arrants issued under the Purchase Agreement, management of the
Corporation has prepared the following description of the
principal business and undertaking of East Wood Equity Venture, Inc.
10. INFORMATION ABOUT EAST WOOD EQUITY VENTURE, INC.
General
East Wood Equity Venture, Inc. ("East Wood") was formed under the laws of the
State of Colorado by a Statement of Merger merging Crown Partners, LLC.,
Minerals Division ("Crown Partners") with East Wood Equity Venture, Inc.
effective on January 2, 1999. The registered office
of East Wood is located at 122 E. Reds Road, P.O. Box 7665, Aspen, Colorado
81611 and the principal executive office is located at 3300 Bank One Center,
100 North Broadway, Oklahoma City, OK 73102.
Prior to the merger, East Wood was a private company which merged with Crown
Partners, a company active in the oil and gas industry. References to East Wood
include, especially with regard to the business of East Wood, the business
previously carried on principally by Crown Partners.
Business of East Wood and Description of East Wood Properties
East Wood operates in the oil and gas industry in various states throughout the
United States and owns interests in approximately 400 producing oil and gas
properties located in Alabama, Arkansas, California, Louisiana, Mississippi,
Montana, Oklahoma, Texas and Wyoming (collectively, the "East Wood Properties").
East Wood owns a working interest in the majority of these wells, however, it
does have a mineral owner royalty interest in 8 wells and an overriding royalty
interest in 79 wells. The main concentration of properties is in Oklahoma with
337 wells and Texas with 30 wells. Working interests derive from oil and gas
leasehold estates and carry the obligation to bear costs incurred in drilling
and production. Overriding royalty interests derive from the oil and gas
leasehold estates and carry no obligation to bear any costs in drilling
and production. Mineral owner royalty interests derive from the mineral
estates, are perpetual unless limited by contract when sold, and have no cost
burden. Working interests and overriding royalty interests terminate when the
related leasehold estates are terminated, which is usually the latter of the
expiration of primary term or cessation of production of oil and gas in
commercial quantities.
Approximately 81% of the East Wood Properties are gas wells while the remaining
19% are oil wells. East Wood has working interests and royalty interests
ranging from less than 1% to 43% 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 15 to 20 wells per year. Based on the most recent reserve
reports, East Wood's interest in the East Wood Properties have undiscounted
estimated proved net reserves of 290,950 barrels of oil and condensate
and 11,858,677 Mcf gas.
<PAGE>
Competition
Competition in the oil and gas industry is intense generally. East Wood
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 East Wood's competitors
have substantially greater financial resources and exploration and development
budgets than those of East Wood. East Wood, however, is a joint interest owner
with several major oil companies and large independent producers. With its
large inventory, East Wood expects little 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 East Wood's control can impact
the prices of its oil and gas. Decreases in oil and gas prices would
have an adverse effect on East Wood's proved reserves, revenues, profitability
and cash flow.
East Wood has not engaged in any crude oil and gas price swaps or other hedging
transactions to reduce its exposure to price fluctuations. However East Wood
will from time to time make forward sales of gas for periods of up to
six months at fixed prices. East Wood may also, however, engage in other
similar transactions from time to time as its management deems advisable.
Gas Sales. During the nine months ended September 30, 1999, the Company sold
its gas to multiple purchasers, one of which accounted for more than 10% of
total oil and gas sales, Aurora Natural Gas, L.L.C., at 26% of total oil and gas
sales.
Oil Sales. East Wood 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 East Wood's oil. During fiscal year 1999, the Company sold its oil to
multiple purchasers, no single one of which accounted for more than 10% of total
oil and gas sales.
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 East Wood's cost of doing business and affect its profitability.
Regulation of oil and gas activities has changed many times. Consequently, East
Wood is unable to predict the future cost or impact of complying with such laws.
The primary states where East Wood has production require drilling permits and
bonds and operating reports and impose other burdens relating to oil and gas
exploration and production. Most of these states also require conservation
measures, including pooling of oil and gas properties, establishing maximum
production rates from oil and gas wells, and spacing, plugging and abandoning
wells. In some cases state laws limit the rate at which oil and gas can be
produced from East Wood's properties.
The transportation and sale of gas in interstate commerce is regulated by United
States law and the Federal Energy Regulatory Commission.
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. East Wood'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. East Wood 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 East Wood 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 East Wood.
<PAGE>
Employees
At December 1, 1999, East Wood had 4 part-time management and two full-time
administrative employees. East Wood has experienced no work stoppages and
management considers its relations with employees to be good. East Wood uses
contract services in its field operations and employs independent consultants,
as needed, to evaluate prospects, reserves and other oil and gas assets for
potential acquisitions.
Research and Development
East Wood does not conduct any research and development studies.
Facilities
East Wood occupies approximately 6,000 square feet of office space on a sharing
basis with Cotton Valley at 100 North Broadway, Suite 3300, Oklahoma City, OK
73102 under a five-year lease that expires on September 30, 2004. Monthly
basic rent is $4,000 for East Wood's share.
Legal Proceedings
East Wood is not a party to any legal proceedings and has received no notice or
claim which might lead to any legal proceeding, except those regulatory
proceedings relating to oil and gas drilling and production which are normal for
its day-to-day business and which in the aggregate, if decided against East
Wood, would not have a material adverse effect on the financial performance of
East Wood.
Estimate of Proved Developed Oil and Gas Reserves
Pursuant to a report (the "Report") dated September 2, 1999 from American Energy
Advisors, Inc. ("AEA"), the proved developed reserves and future revenues
attributable to East Wood's interest in the East Wood Properties have been
quantified. AEA prepared the Report, signed by Kendell V. Tholstrom, P.Eng.,
and Stephen A. Lieberman, P.E. of AEA. Mr. Tholstrom is a graduate of the
Montana School of Mines (1968) and also has a Bachelor of Science degree in
Petroleum Engineering and a Masters of Science in Petroleum Engineering from
the Montana School of Mines (1970). He is a registered professional engineer
in Colorado (Registration No. 23120) since 1985. Mr. Lieberman received a B.Sc.
degree in Petroleum and Natural Gas Engineering from Pennsylvania State
University in June 1974. He is a member of the Society of Petroleum Engineers.
AEA were selected to issue the Report based primarily on their qualification to
issue qualifying reserve reports for both U.S. and Canadian oil and gas
properties. No material relationship previously existed between East Wood
and AEA prior to this Report. The proved developed reserves in the Report
were estimated pursuant to the guidelines of the United States Securities
and Exchange Commission, using constant prices effective as of July 1, 1999.
The summary of the proved developed reserves and future revenue net to East
Wood's interests in the East Wood Properties as at July 1, 1999 are estimated
as follows:
ESTIMATED ESTIMATED
CONSTANT PRICES NET RESERVES FUTURE NEW REVENUE
Oil and Gas Not Discounted
Condensate (Mcf) Discounted At 10%
Reserve Category (Barrels) ($) ($)
___________________________________________________________________________
Total Proved
Developed 290,950 11,858,677 22,910,321 11,625,451
____________________________________________________________________________
<PAGE>
The oil reserves shown include oil and condensate. Oil volumes are expressed in
barrels, one of which is equivalent to 42 United States gallons. Gas volumes
are expressed in thousands of standard cubic feet ("Mcf") and are evaluated at
the appropriate temperature and pressure base.
The reserves and future revenue estimated in the Report are for proved developed
reserves. These estimates do not include any value for probable or possible
reserves which might exist for these properties, or any value which might be
attributable to interests in undeveloped acreage or reserves.
In preparing the Report, American Energy Advisors, Inc. were not retained to
provide an estimate of proved undeveloped reserves. The Report shall be made
available for inspection and copying at the principal executive officers of
East Wood during regular business hours by any interested shareholder.
Financial Statements
The unaudited interim financial statements of East Wood for the period
ended September 30, 1999 are included as Exhibit B. Exhibit C is the audited
financial statements of Crown Partners, predecessor of East Wood, as at
December 31, 1998. Exhibit D contains proforma financial statements for
the combination of the Corporation and the acquired portion of East Wood as
of June 30, 1999.
<PAGE>
Management Discussion and Analysis of Financial Condition and Results of
Operation
As East Wood was created pursuant to a recent merger on January 2, 1999, it has
not completed a fiscal period. Prior to the merger, one of the predecessor
companies of East Wood, East Wood Equity Venture, Inc., was not carrying on an
active business. As a result, management of East Wood has not undertaken an
analysis of its financial condition or results of operation for the year
ended December 31, 1998.
The following discussion and analysis of the financial condition and operations
of Crown Partners and East Wood should be read in conjunction with its financial
statements and related notes thereto set out at Exhibits B and C of this
Circular.
East Wood expects to change its next fiscal year to end June 30, 2000 in order
to be consistent with the Corporation. For the remainder of the fiscal year
East Wood expects to participate in the drilling of ten to twenty development
wells. The capital required for those expenditures will come from cash flow.
The management of East Wood is committed to completing its merger with the
Corporation during the current fiscal year. With the very recent increases in
crude oil prices the outlook for the combined companies is very favorable. The
East Wood concentration on gas reserves in Oklahoma is balanced by the
Corporation's oil reserves in Texas. This will allow the combined companies to
be responsive to anticipated volatility in oil and gas prices over the next few
years. For the long term, the combined companies expect oil and demand to
exceed supply and a period of less price volatility should come about. In
anticipation of such trends, the combined companies will continue to focus on
the acquisition of producing oil and gas properties with development potential,
seeking to increase its proved reserves and stockpile drillable prospects and
leasehold interests for the future, while maintaining a low overhead structure
by concentrating on properties operated by other fully staffed efficient
operators.
Results of Operations of Crown Partners and East Wood
(i) Year Ended December 31, 1998 (Audited) - Crown Partners.
For the year ended December 31, 1998, Crown Partners experienced a net
income of $251,707 based on total revenues of $1,165,018 and total expenses
of $913,311. These results reflect an overall decrease from the previous
year's net income of $587,973 based on total revenues of $1,473,149 and
total expenses of $885,176. Revenues and income were down as a result of
decreasing oil and gas prices. Expenses were up because Crown Partners had
interests in more wells.
The total revenues of $1,165,018 was derived primarily from oil and gas sales.
The total expenses of $913,311 were primarily comprised of oil and gas
production costs of $419,544, depreciation depletion and amortization of
$169,598, general and administrative expenses of $125,936 and interest of
$212,082. Sundry income earned from other sources was $13,894. Crown
Partner's is taxed as a partnership so no provision has been made for
Federal income taxes.
(ii) Nine Months Ended September 30, 1999 (Unaudited) - East Wood.
For the nine months ended September 30, 1999, East Wood experienced a net
income of $412,227 based on total revenues of $1,598,971 and total expenses
of $846,733. These results reflect an overall improvement from Crown
Partner's 1998 first three quarters net income of $235,365 based on total
revenues of $996,409 and total expense of $626,783.
East Wood's total revenues during the nine month periods ended September 30,
1999 and 1998 were derived primarily from oil and gas sales. For nine months of
1999 East Wood sold 14,329 barrels of oil at and average price of $14.50 per
barrel and 737,046 Mcf of gas for an average price of $1.89 per Mcf. In the
first nine months of 1998 East Wood sold 9,800 barrels of oil at an average
price of $13.20 per barrel and 478,978 Mcf of gas at an average price of $1.81
per Mcf.
The total expenses during first nine months of 1999 were primarily comprised of
oil and gas production costs of $496,748, depreciation, depletion and
amortization of $120,743, general and administrative expenses of $229,242 and
interest of $298,011. Sundry income earned from other sources was $0 and East
Wood reserved a provision for income taxes in the amount of $42,000.
Liquidity and Capital Resources of Crown Partners and East Wood
(i) Year Ended December 31, 1998 (Audited) - Crown Partners.
As at December 31, 1998, Crown Partners had total assets of $4,716,171
comprised of Cash and Trade receivable working capital of $259,321
and Oil and Gas Properties fixed and other assets of $4,456,850, compared
to December 31, 1997 total assets of $2,780,870. Crown Partners' cash balance
and Securities was $13,555 and its accounts receivable were $245,766. The
proved oil and gas properties, were valued (using full cost method) at
$4,288,656, net of accumulated depreciation of $350,541.
Current liabilities at December 31, 1998 were $2,033,51, long term debt was
$1,462,000 and members' equity was $1,221,120, compared to December 31, 1997
figures of $561,445, $1,444,000 and $775,425, respectively.
(ii) Nine Month Period-Ended September 30, 1999 (Unaudited) - East Wood As of
September 30, 1999, East Wood had total assets of $6,344,262 comprised of
current assets of $506,408 and oil and gas properties and other assets of
$5,837,854. East Wood's cash balance was $73,206 and its accounts receivable
were $433,202, up from Crown Partner's 1998 third quarter sum of $101,059 and
$331,313, respectively. Proved oil and gas properties, were valued (using full
cost method) at $5,822,106 net of accumulated depreciation of $468,840. East
Wood's current liabilities on September 30, 1999, were $1,191,726, long term
Debit was $3,262,966 and total equity was $1,889,570.
<PAGE>
Directors and Officers
The board of directors of East Wood consists of three (3) members. The
following table sets forth the name, the municipality of residence, the office
held and the principal occupation of each officer and director of East Wood:
Name and Municipality of Residence Office Principal Occupation
______________________________________________________________________________
Jack E. Wheeler Director, Oil and gas
Edmond, Oklahoma President and Chief businessperson
Executive Officer
Farrell Kahn Director and Chairman Oil and gas
Aspen, Colorado businessperson
Patrice Kahn Director and Secretary Oil and gas
Aspen, Colorado businessperson
______________________________________________________________________________
Indebtedness of Directors and Senior Officers
There has been no outstanding indebtedness to East Wood by any officer or
director of East Wood or any associate of such person since the merger
forming East Wood on January 2, 1999.
Capitalization
The following sets out the capitalization of East Wood as of September 30,
1999 :
Share Capital
1,000 Common Shares $1,221,120
Additional Paid In Capital 256,223
Retained Earnings $ 412,228
------------------ ------------------
Total Capitalization $1,889,570
Escrowed Shares
No shares of East Wood are held in escrow.
Share Capital
East Wood's authorized capital consists of 1,000 common shares, of which 1,000
common shares are currently issued and outstanding.
Share Attributes
The following is a summary of the material provisions attaching to the common
shares and is subject to the detailed provisions of the constating documents of
East Wood (its articles of incorporation, by-laws, charter and related
documents) describing the rights, privileges, restrictions and conditions of
such shares:
The holders of the common shares of East Wood are entitled to:
(i) receive notice of any meeting of shareholders of East Wood and to attend
and vote at any such meeting on the basis of one vote for each share held;
(ii) have restrictions imposed upon the transfer of any common shares by
East Wood, provided that such restrictions as made from time to time be so
imposed or notice of the substance thereof must be set forth upon the face or
back of the certificates representing such common shares; and
(iii) pre-emptive rights to acquire unissued shares of East Wood.
Principal Holders of Voting Shares
According to the register of shareholders of East Wood, the following
shareholders hold 10% or more of the issued and outstanding common shares in the
capital of East Wood.
Shareholder Number of Shares %of Outstanding
Shares
________________________________________________________________________
Cotton Valley Resources
Corporation 500 50%
Farrell Kahn 188 18.8%
<PAGE>
Previous Issuances of Common Shares of East Wood
Brief
Number and Net Amount Description
Class of Price Realized by East of Utilization
Date Method of Sale Shares Per Share Wood of Funds
________________________________________________________________________________
January 2, Corporate 2 Common U.S.$1.00 U.S.$2.00 Corporate
1999 Organization- Shares organization
Merger merger
January 4, Subscription 998 Common See Note(1) Acquisition of N/A
1999 Shares Crown Partners,
LLC assets
_________________________________________________________________________
Note (1): The 998 common shares were issued to the shareholders of Crown
Partners, LLC, which was merged with East Wood Equity Venture, Inc. to form
East Wood on January 2, 1999.
Interest of Management and Others in Material Transactions
Other than as described below or elsewhere in this Circular, no officer or
director of East Wood, and no person or company holding more than 10% of the
issued and outstanding common shares of East Wood, or any associate or affiliate
thereof, has any material beneficial interest in any transaction completed since
the merger forming East Wood effective on January 2, 1999, or in any
proposed transaction, which has materially affected or will materially affect
East Wood.
Material Contracts
The only material contracts entered into by East Wood, copies of which are
available for inspection at the offices of East Wood at 122 E. Reds Road, P.O.
Box 7665, Aspen, Colorado 81611 by contacting Farrell Kahn, Chairman of East
Wood, are as hereinafter described:
1. Purchase Agreement
East Wood is party to an agreement made on September 16, 1999 (the
"Purchase Agreement"), with an effective date from July 1, 1999, pursuant
to which Cotton Valley Resources Corporation acquired 50% of the issued and
outstanding shares of East Wood from four vendor shareholders of East Wood.
Under the terms of the Purchase Agreement, Cotton Valley Resources
Corporation agreed to issue to the shareholders of East Wood 46,230,897
common shares.
2. Various Agreements Relating to East Wood Properties
For each of the producing properties comprising the East Wood Properties, there
exists separate operating agreements, title opinions and division orders
(directing to whom and manner in which all proceeds are to be distributed)
(collectively, "Operating Agreements"). No single Operating Agreement
constitutes a material contract of East Wood.
Auditors, Transfer Agent and Registrar
The accountants of East Wood are Lederer & Co., P.C. of Aspen, Colorado. East
Wood acts as its own transfer agent and registrar.
<PAGE>
11. ORDINARY RESOLUTION - AMENDMENT TO STOCK OPTION PLAN
The Corporation has in place a 1997 stock compensation plan for directors,
officers, employees and consultants approved by the shareholders at a meeting
held February 10, 1997 (the "Plan"). Section 2 of the Plan provides that the
maximum aggregate number of shares reserved for issuance and which may be
purchased upon the exercise of all options granted under the Plan shall not
exceed 1,400,000 common shares, representing approximately ten percent (10%) of
the common shares of the Corporation issued and outstanding on the date
the Plan was authorized and approved. As stated elsewhere in this Circular, as
at the date of this Circular there are 59,731,198 common shares and 21,230,897
Special Warrants of the Corporation issued and outstanding. Management of the
Corporation is proposing that the maximum number of common shares of the
Corporation eligible to be issued pursuant to the grant of options under the
Plan be further increased to 8,000,000 (representing approximately
10% of the aggregate 80,962,095).
To maximize the utility of the Plan, it is the view of the board of directors of
the Corporation that it is desirable to increase the number of common shares
eligible for issuance pursuant to the grant of options thereunder to the maximum
of 8,000,000. Pursuant to applicable securities regulations, however,
shareholder approval is required for any such amendment to the Plan.
Accordingly, shareholders of the Corporation will be asked at the Meeting to
consider and, if thought advisable, to authorize and approve by means
of an ordinary resolution, an amendment to the Plan, increasing the maximum
number of common shares of the Corporation issuable pursuant to the grant of
options thereunder to 8,000,000. The resolution shareholders will be asked to
approve is attached to this Circular as Schedule "2".
To be approved, the ordinary resolution must be passed by a majority of the
votes cast by the shareholders at the Meeting in respect of this resolution.
Unless such authority is withheld, the persons named in the enclosed Proxy
intend to vote FOR the amendment to the Option Plan of the Corporation attached
to this Circular as Schedule "2".
12. ORDINARY RESOLUTION - APPROVAL OF FUTURE PRIVATE PLACEMENTS
Management is of the view that potential acquisitions and additional funding of
the Corporation's operations may be required in the future and as a result
shareholder approval for additional issuances of the Corporation's securities
may be required. The directors of the Corporation are of the view that it would
be prudent for the shareholders of the Corporation to pass a resolution
authorizing the Corporation to negotiate acquisitions or to secure
additional funds by way of the issuance of additional securities.
Shareholders are being asked to pass a resolution authorizing additional private
placements or share issuances for acquisitions which would take place within one
(1) year of the date of this Circular. Such future private placements or share
issuances for acquisitions will be subject to the following terms:
1. All of the private placement financing or share issuances for
acquisitions will be carried out in accordance with the applicable securities
laws and regulations.
2. Such future private placements or share issuances for acquisitions
would not result in additional shares of the Corporation being issued in an
amount exceeding 100% of the sum of: (i) the current number of issued and
outstanding common shares of the Corporation; and (ii) the shares authorized by
the shareholders for conversion of Special Warrants.
3. Any of the future private placements or share issuances for
acquisitions would be substantially at arm's length (as acceptable to CDN) and
the price of the shares being issued would not be below the market price, less
discounts acceptable to CDN and/or OSC.
4. Any of the future private placements or share issuances for
acquisitions would require the consent of at least seventy-five (75%) of
the directors of the Corporation.
<PAGE>
The resolution with respect to share issuances for acquisitions or private
placement financing requires confirmation by a majority of the votes cast
thereon at the Meeting.
Shareholders are advised that, if approved, this resolution will give the Board
of Directors considerable latitude to issue additional common shares without
having to bring details to the shareholders for discussion and approval. This
could be a disadvantage to shareholders if the marketplace considers additional
amounts authorized (even though unissued) when potential dilution of earnings
and cash flows.
Unless otherwise specified, the persons named in the enclosed form of proxy will
vote FOR the resolution. The text of the resolution to be submitted to the
shareholders at the Meeting is attached to this Circular as Schedule 3.
13. SPECIAL RESOLUTION - CHANGE IN NAME
Management of the Corporation believes that it would be advantageous to change
the name of the Corporation to one which more accurately reflects the business
direction of the Corporation. It is therefore being proposed to change the name
of the Corporation to Aspen Group Oil & Gas Corporation (or to such other
name as may be approved by the Board of Directors and as may be acceptable to
the appropriate regulatory authorities).
Proxies received in favour of management will be voted FOR the approval of the
proposed special resolution, unless a shareholder has specified in the proxy
that his shares are to be voted against such special resolution. The proposed
name change requires approval by a special resolution which is defined as a
resolution of the shareholders confirmed by at least two-thirds (2/3) of the
votes cast at a special meeting called for such purpose. An affirmative
vote of at least two-thirds (2/3) of the votes cast at the Meeting will
accordingly be required to approve the proposed special resolution. A copy of
the proposed special resolution is annexed to this Circular as Schedule "4".
Notwithstanding approval of the special resolution concerning the amendment to
the Articles to change the name of the Corporation, management of the
Corporation may determine that it is not in the best interest of the Corporation
to file Articles of Amendment in respect thereof or may choose an alternative
name.
14. FINANCIAL STATEMENTS AND RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
Attached hereto are the audited consolidated financial statements of the
Corporation for the financial period ended June 30, 1999, together with the
auditors' report thereon. The directors will lay before the Meeting the said
audited financial statements and auditors' report. For the current year, the
Board of Directors will recommend that the shareholders approve Lane Gorman
Trubitt, L.L.P. as the Corporation's principal auditors. Lane Gorman Trubitt,
L.L.P. served in that capacity for the year ended June 30, 1999. Representatives
of Lane Gorman Trubitt, L.L.P. are not expected to be at the Meeting; however,
if questions arise which require their comments, arrangements have been made to
solicit their response.
Proxies received in favour of management will be voted FOR the reappointment of
Lane Gorman Trubitt, L.L.P., as auditors of the Corporation unless a shareholder
has specified in the proxy that his shares are to be voted against such
resolution.
<PAGE>
15. GENERAL
Except as otherwise indicated, information contained herein is given as of
November 1, 1999. Management knows of no other matters to come before the
Meeting of Shareholders. However, if any other matters which are not now known
to Management should come properly before the Meeting, the proxy will be voted
on such matters in accordance with the best knowledge of the person voting it.
16. SHAREHOLDERS PROPOSALS FOR NEXT ANNUAL MEETING
Shareholders' proposals intended to be presented at the Annual Meeting for the
year 2000 must be received by the Corporation no later than July 1, 2000 for
inclusion in the Corporation's proxy statement and form of proxy for that
meeting. Proposals may not exceed 500 words.
17. DIRECTORS APPROVAL
The contents and the sending of this Circular to the shareholders of the
Corporation have been approved by the Board of Directors of the Corporation.
DATED at Oklahoma City, Oklahoma this [ ] day of December, 1999.
BY ORDER OF THE BOARD
JACK E. WHEELER
Chief Executive Officer
<PAGE>
SCHEDULE "1"
ORDINARY RESOLUTION RE: EXERCISE OF SPECIAL WARRANTS
WHEREAS the Corporation has issued 21,230,897 special warrants (the
"Special Warrants") pursuant to a share purchase agreement made effective
July 1, 1999 (the "Purchase Agreement") for the acquisition of 500 of the
issued and outstanding shares of East Wood Equity Venture, Inc. ("East Wood");
AND WHEREAS each Special Warrant is, subject to certain conditions,
exercisable into one (1) common share of the Corporation;
AND WHEREAS pursuant to the terms of the Purchase Agreement, the
Corporation agreed to issue the Special Warrants, on the condition that
each such Special Warrant may only be exercised into one common share of
the Corporation following shareholder approval;
AND WHEREAS the Corporation is requesting shareholder approval to
permit the exercise of the Special Warrants into common shares of the
Corporation;
AND WHEREAS in order to complete all matters relating to the acquisition
of 50% of the issued and outstanding shares of East Wood, it is necessary and
desirable for the Corporation to authorize the exercise of the Special Warrants
into common shares of the Corporation;
NOW THEREFORE BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1. The issuance of the Special Warrants by the Corporation is hereby
ratified, confirmed and approved;
2. The exercise of these Special Warrants into 21,230,897 common shares
of the Corporation be and the same are hereby authorized and approved,
and 21,230,897 common shares of the Corporation be and the same are
hereby reserved and set aside for issuance upon the exercise of the
Special Warrants according to the provisions contained therein; and
3. Any one director or officer of the Corporation be and is hereby authorized
to take all steps and proceedings necessary or desirable to implement,
carry out and give effect to the provisions of this resolution and to
execute and deliver all such documents, agreements and other instruments
in furtherance thereof with full power and authority to amend, modify
and change such documents as he or she may approve, such approval to be
conclusively evidenced by his or her signature thereon.
<PAGE>
SCHEDULE "2"
ORDINARY RESOLUTION RE: AMENDMENT TO STOCK OPTION PLAN
WHEREAS the maximum number of shares eligible for issuance pursuant to
the grant of options under the 1997 stock compensation plan of the Corporation,
as amended from time to time (the "Plan"), is 1,400,000;
AND WHEREAS as of the date of the Circular to which this resolution is
attached, an aggregate of 80,962,095 common shares and Special Warrants
were issued and outstanding and, as a result, management proposes that the
maximum number of common shares eligible for issuance under stock options
granted under the Plan be increased to 8,000,000 (approximately 10% of the
aggregate [80,962,095]);
AND WHEREAS the Corporation desires to maximize the utility of the Plan
by increasing the number of common shares eligible for issuance pursuant to
the grant of options under the Plan to the maximum permitted under applicable
securities laws and regulations;
AND WHEREAS applicable securities laws and regulations require shareholder
approval to any amendments to the Plan, including amendments increasing the
maximum number of shares reserved for issuance under a particular plan as
contemplated herein;
NOW THEREFORE BE IT RESOLVED THAT:
1. An amendment to the Plan increasing the maximum aggregate number of
common shares reserved by the Corporation for issuance pursuant to
options granted under the Plan from 1,400,000 to 8,000,000 is hereby
authorized, approved and confirmed.
2. Any one director or officer of the Corporation be and he is hereby
authorized and directed to execute under the corporate seal or otherwise
all such deeds, documents, instruments and assurances, and do all such
acts and things as in his opinion may be necessary or desirable to give
effect to this resolution.
<PAGE>
SCHEDULE "3"
ORDINARY RESOLUTION RE: FUTURE SHARE ISSUANCES
FOR ACQUISITIONS OR PRIVATE PLACEMENTS
NOW THEREFORE BE IT RESOLVED THAT:
1. The directors of the Corporation be and they are hereby authorized and
directed to arrange from time to time share issuances in the capital
of the Corporation for acquisitions or private placements subject to
the following terms:
a. All share issuances for acquisitions or private placement financing
will be carried out by the Corporation in accordance with the
applicable laws and regulations.
b. The future share issuances for acquisitions or private placements
will not result in additional shares of the Corporation being issued
in an amount exceeding the current number of issued and outstanding
shares in the aggregate of the Corporation.
c. Any of the future share issuances for acquisitions or private
placements would be substantially at arm's length.
d. Any of the future private placements would require the consent of
at least seventy-five (75% ) of the directors of the Corporation.
2. Any one director or officer of the Corporation be and he is hereby
authorized and directed to execute and deliver under the corporate seal
or otherwise all such deeds, documents, instruments and assurances and
to do all such acts and things as in his opinion may be necessary or
desirable to give effect to this resolution.
<PAGE>
SCHEDULE "4"
SPECIAL RESOLUTION RELATING TO:
CHANGE OF NAME
WHEREAS it is considered advisable to change the name of the Corporation
as hereinafter provided;
NOW THEREFORE BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. The name of the Corporation be changed to Aspen North Hydrocarbons
Incorporated, or such other name as may be approved by the Board of
Directors of the Corporation and as may be satisfactory to the Director
appointed under the Business Corporations Act (Yukon); and
2. Any director or officer of the Corporation be and they are hereby
authorized on behalf of the Corporation to deliver Articles of Amendment
to the Yukon government and to execute all documents and do all things
necessary or advisable in connection with the foregoing; provided,
however, that the directors of the Corporation are hereby authorized to
revoke or amend the foregoing special resolution in whole or in part
without further approval of the shareholders of the Corporation at any
time prior to the endorsement by the Director under the Business
Corporations Act (Yukon) of the Certificate of Amendment of Articles.
<PAGE>
Exhibit A
SHARE PURCHASE AGREEMENT
THIS AGREEMENT made as of the 16th day of September, 1999.
AMONG:
JACK E. WHEELER, of the City of Edmond, in the State of
Oklahoma.
(hereinafter referred to as "Wheeler")
OF THE FIRST PART
- and -
APOLLO INVESTMENTS LIMITED, a corporation
incorporated and formed under the laws of Turks and Caicos
Islands, British West Indies.
(hereinafter referred to as "Apollo")
OF THE SECOND PART
- and -
STILLWATER GAS PRODUCTION INC., a corporation
incorporated and formed under the laws of Turks and Caicos
Islands, British West Indies.
(hereinafter referred to as "Stillwater")
OF THE THIRD PART
- and -
CUSTER COUNTY DRILLERS INC., a corporation
incorporated and formed under the laws of Turks and Caicos
Islands, British West Indies.
(hereinafter referred to as "Custer")
OF THE FOURTH PART
<PAGE>
(hereinafter each of Wheeler, Apollo, Stillwater and Custer
also individually referred to as a "Vendor" and collectively as
the "Vendors")
- and -
COTTON VALLEY RESOURCES CORPORATION, a
Yukon Territory corporation.
(hereinafter referred to as the "Purchaser")
OF THE FIFTH PART
- and -
ASPEN ENERGY GROUP, INC., a Texas corporation.
(hereinafter referred to as "Aspen")
OF THE SIXTH PART
- and -
EAST WOOD EQUITY VENTURE, INC., a corporation
incorporated under the laws of the State of Colorado.
(hereinafter referred to as "East Wood")
OF THE SEVENTH PART
WHEREAS each Vendor beneficially held an interest in Crown Partners
LLC Minerals Division, a Colorado limited liability company, which in
aggregate represented 50% of the issued and outstanding members' interests
in Crown Partners;
AND WHEREAS pursuant to a merger between East Wood and Crown Partners
made effective January 2, 1999, the Vendors received a 50% interest of all
the issued and outstanding shares in the capital of East Wood, which the
Vendors wish to sell to the Purchaser pursuant to the terms of this
agreement;
AND WHEREAS the Purchasers will acquire the interest of the Vendors in
East Wood through its wholly-owned subsidiary, Aspen;
<PAGE>
AND WHEREAS the Purchaser wishes to purchase the said issued and
outstanding shares in East Wood owned by the Vendors, all upon and subject
to the terms and conditions hereinafter set forth;
NOW THEREFORE THIS AGREEMENT WITNESSES that for good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged
by each of the parties hereto) the parties make the agreements and
acknowledgments hereinafter set forth:
ARTICLE I
INTERPRETATION
1.1 Definitions - Whenever used in this Agreement, unless there is something
in the subject matter or context inconsistent therewith, the following words
and terms shall have the respective meanings ascribed to them as follows:
(1) "Agreement" means this Share Purchase Agreement and all instruments
supplemental hereto or in amendment or confirmation hereof; "hereof",
"hereto", and "hereunder" and similar expressions mean and refer to
this Agreement and not to any particular Article or Section;
"Article", "Section", "paragraph" or "clause" means and refers to
the specified article, section, paragraph or clause of this
Agreement;
(2) "Business" means the business presently and heretofore carried on
by East Wood consisting of oil and gas property operations;
(3) "Business Day" means a day other than a Saturday, Sunday or any
other day on which the principal commercial banks located at the
City of Toronto are not open for business during normal banking
hours;
(4) "Closing" means the completion of the sale and purchase of the
Purchased Members Interest hereunder by the transfer and delivery
of documents of title thereto and the payment of the purchase
price therefor as contemplated herein;
(5) "Closing Date" means September 16, 1999, or such other date as
the parties hereto may agree as to the date upon which the Closing
shall take place;
(6) "Closing Time" means 3:00 o'clock in the afternoon on the Closing
Date or such other time on the Closing Date as the parties hereto
may agree as to the time on the Closing Date which the Closing
shall take place;
(7) "Cotton Valley Properties" means the Cotton Valley Properties as
defined in Section 5.1(h);
<PAGE>
(8) "Cotton Valley Shares" means the 25,000,000 common shares in the
capital stock of the Purchaser to be issued to the Vendors in
payment and satisfaction of the Purchase Price pursuant to
subsection 2.1(c) of this Agreement;
(9) "East Wood Properties" means the East Wood Properties as set forth
on Schedule 1.1(i) hereto;
(10) "Effective Date" means July 1, 1999.
(11) "Purchase Price" has the meaning ascribed to it in subsection 2.1(a)
of this Agreement; and
(12) "Purchased Shares" means Five Hundred (500) shares representing
fifty (50%) percent of the issued and outstanding common shares in
East Wood owned by the Vendors in the following numbers:
Wheeler - 250 shares
Apollo - 63 shares
Stillwater - 62 shares
Custer - 125 shares
(13) "Warrants" means 21,230,897 special warrants of Cotton Valley
issuable to Stillwater and Custer as consideration, having the
terms and conditions attached as Schedule 2.1(c).
1.2 Headings - The division of this Agreement into Articles and Sections and
the insertion of headings are for the convenience of reference only and shall
not affect the construction or interpretation of this Agreement.
1.3 Number - In this Agreement and unless the context otherwise requires,
words importing the singular number only shall include the plural and vice
versa, words importing the neuter gender shall include the masculine and
feminine genders and vice versa and words importing persons shall include
individuals, partnerships, associations, trusts, unincorporated
organizations and corporations and vice versa.
1.4 Joint and Several - Whenever in this Agreement the word "Vendors" is
used, the same shall extend to include and obligate jointly and severally
each of Wheeler, Apollo, Stillwater and Custer and their respective
successors and assigns.
1.5 Currency - All payments required hereunder to be made and all currency
mentioned herein shall be in and refer to U.S. dollars.
<PAGE>
1.6 Reference to Statutes - All references contained in this Agreement to
a statute shall be deemed to be made to such statute as now enacted or as
the same may from time to time be amended, re-enacted or replaced, and in
the case of any such amendment, re-enactment or replacement, such reference
herein to a provision of such statute shall be read as a reference to
such amended, re-enacted or replaced provision.
ARTICLE II
PURCHASE AND SALE
1.7 Action by Vendors and Purchaser - Subject to the terms and conditions
of this Agreement, at the Closing Time:
(1) Purchase Price - The Vendors shall sell and the Purchaser shall
purchase the 500 shares of East Wood for 25,000,000 shares of
the Purchaser plus the 21,230,897 Warrants.
(2) Delivery of Certificates, etc. - The Vendors shall deliver to
the Purchaser at the Closing certificates or documents of title
or other evidences of ownership of the Purchased Shares to be sold
and purchased hereunder duly endorsed for transfer, or accompanied
by irrevocable security transfer powers of attorney duly executed
in blank, in either case by the holders of record thereof, all in
form and substance sufficient to permit the recording or registration
of the Purchaser, to be held by its wholly-owned subsidiary Aspen,
as the new owner of record of the Purchased Shares in compliance
with all applicable requirements, provisions and procedures relating
to the recording or registration of such ownership. The Vendors
shall also deliver to the Purchaser certified copies of the
resolutions of the board of directors, shareholders or members of
East Wood, as the case may be, required to approve the transfer of
the Purchased Shares by the Vendors to the Purchaser through its
wholly-owned subsidiary Aspen.
(3) Payment to the Vendors - The Purchaser shall pay the Purchase Price
on Closing by the issuance to each Vendor of the Cotton Valley Shares
and Warrants in the following numbers:
Wheeler - 20,000,000 common shares
Apollo - 5,000,000 common shares
Stillwater - 7,076,965 Warrants
Custer - 14,153,932 Warrants
<PAGE>
Notwithstanding the foregoing, in the case of payment to the Vendors
Wheeler and Apollo of the Cotton Valley Shares, the 5,000,000 Cotton Valley
Shares issuable to Apollo will be issued in the name of Apollo, and the
20,000,000 Cotton Valley Shares issuable to Wheeler will be issued to Aspen,
which shares shall be held by Aspen subject to the terms and conditions
attaching to the Class A common shares of Aspen. The Class A
shares of Aspen ("Aspen Shares") shall have the terms and conditions attached
hereto as Schedule 2.1(c). A total of 20,000,000 Aspen Shares will be issued
to Wheeler. Each Aspen Share, according to the terms and conditions attaching
thereto as set out in Schedule 2.1(c), will have the right to vote the
underlying Cotton Valley Shares on a one-for-one basis, to the extent that
such Aspen Shares are outstanding. Each holder of an Aspen Share shall have
the right, at the holder's option, to convert or redeem such Aspen Share for a
Cotton Valley Share, on the basis of one Cotton Valley Share for each Aspen
Share so converted or redeemed.
2.2 Effective Date - The acquisition of the Purchased Shares and the
ownership in East Wood shall, upon Closing, be effective from the Effective
Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE VENDORS
1.8 Unless specifically stated that a Vendor is making a covenant,
representation or warranty severally, the Vendors hereby covenant, represent
and warrant jointly to the Purchaser that:
(1) Right to Sell - The Purchased Shares constitute in the aggregate
fifty (50%) percent of the issued and outstanding shares in East Wood,
and each Vendor severally covenants, represents and warrants that
such Vendor is the sole registered and beneficial owner of those
Purchased Shares set out beside such Vendor's name in Subsection
1.1(k), free and clear of all liens, charges, pledges, security
interests, demands, adverse claims, rights, or other
encumbrances whatsoever and no person, firm or corporation now has
or at Closing will have any right, option, agreement or arrangement
capable of becoming an agreement for the acquisition of any of the
Purchased Shares or any interest therein from such Vendor.
(2) Due Authorization, etc. - Each Vendor severally covenants, represents
and warrants that he has all necessary power, authority and capacity
to enter into this Agreement and the agreements and other instruments
contemplated herein and the consummation of the transactions
contemplated hereunder and thereunder.
<PAGE>
(3) Valid and Binding Obligation - This Agreement constitutes and the
agreements and other instruments contemplated herein when executed
will constitute valid and binding obligations of each Vendor
enforceable against each of them in accordance with the terms
hereof and thereof subject, however, to limitations with respect
to enforcement imposed in connection with laws affecting the
rights of creditors generally including, without limitation, applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws
and to the extent that equitable remedies such as specific performance
and injunction are in the discretion of the court from which they are
sought.
(4) No Violation - The disposition of the Purchased Shares and the
entering into and performance of this Agreement and the agreements
and other instruments contemplated herein will not violate, contravene,
breach or offend against or result in any default under any security
agreement, indenture, mortgage, lease, order, undertaking, licence,
permit, agreement, instrument, charter or by-law provision, resolution
of shareholders or directors, statute, regulation, judgment, decree
or law to which East Wood is a party or by which it may be bound or
affected; each Vendor hereby severally covenants, represents and
warrants that the disposition by such Vendor of those Purchased Shares
set out beside his or its name in Subsection 1.1(k) of this Agreement
and the entering into and performance of this Agreement and the
agreements and other instruments contemplated herein will not
violate, contravene, breach or offend against or result in any
default under any security agreement, indenture, mortgage, lease,
order, undertaking, licence, permit, agreement, instrument,
charter or by-law provision, resolution of shareholders or directors,
statute regulation, judgment, decree or law to which such Vendor is
a party or by which such Vendor may be bound or affected; and neither
the Vendors nor East Wood are, or will be at Closing, party to or
subject to or bound by the terms of any unanimous shareholder
agreement that restricts the transfer of shares in the capital of
East Wood. No licenses, agreements or other instruments or documents
will terminate or require assignment as a result of the entering into
of this Agreement or the consummation of the transactions contemplated
hereby.
(5) Organization, Standing and Power - East Wood is a Colorado corporation
duly organized, validly existing and in good standing under the laws
of the State of Colorado, having all requisite power and authority
to own and operate oil and gas properties, including the East Wood
Properties, and to carry on their business as now being conducted.
<PAGE>
(6) Issued Shares - Of the authorized capital of East Wood One Thousand
(1,000) common shares (and no more) have been duly and validly issued
and are outstanding as fully paid and non-assessable common shares
in East Wood. The certificates evidencing such shares, including
the Purchased Shares do not contain any reference to a restriction
on the transfer of the Purchased Shares (other than set out in the
Articles of Incorporation) a unanimous shareholder agreement or a
lien in favour of East Wood and bear no restrictive legends. Neither
the constating documents or by-laws of East Wood nor any agreement
contain or provide for restrictive legends thereto.
(7) No Options - No options, warrants, convertible obligations or other
rights to purchase or acquire the Purchased Shares or other securities
of East Wood have been authorized, allotted or agreed to by the
Vendors.
(8) Residence of the Vendor - Each Vendor severally covenants, represents
and warrants that such Vendor is a non-resident of Canada for the
purposes of Section 116 of the Income Tax Act (Canada).
(9) Merger with Crown Partners LLC - Each Vendor severally covenants,
represents and warrants to the Purchaser that the merger effective
January 2, 1999 between East Wood and Crown Partners LLC (the
"Merger") was done in full compliance with applicable laws, and
make the following specific representations and warranties concerning
the Merger:
(1) that they will provide within ninety (90) days of the Closing Date
an audit of the East Wood financial statements at December 31,
1998;
(2) that the financial information contained in the Crown Partners LLC
financial statements at December 31, 1998 are not impacted in a
material way as a result of the Merger with East Wood;
(3) that East Wood, prior to the Merger, was a shell corporation which
had not carried on business in any manner or incurred any material
liabilities whatsoever; and
(4) each Vendor personally indemnifies Cotton Valley and Aspen for
any damages or losses caused as a result of a misrepresentation
contained in this section concerning the Merger, and the
representations and warranties made concerning East Wood and
Crown Partners LLC.
<PAGE>
(10) Full Disclosure - None of the foregoing representations and statements
of fact contains any untrue statement of material fact or omits to
state any material fact necessary to make any such statement or
representation not misleading to a prospective purchaser of the
Purchased Shares seeking full information as to the Vendors and the
Purchased Shares. The Vendors have no information or knowledge of
any facts relating to the Business or to the Purchased Shares which
the Vendors have not disclosed to the Purchaser and which are not
within the public domain and which in the aggregate would have a
material adverse effect on the financial condition or prospects of
East Wood.
1.9 Reliance - The Vendors hereby expressly acknowledge that the Purchaser and
Aspen are relying upon the covenants, representations and warranties of the
Vendors contained in this Agreement or in any agreement, certificate or other
document delivered pursuant hereto in connection with the purchase of the
Purchased Shares hereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF EAST WOOD
1.10 East Wood hereby covenants, represents and warrants to the Purchaser that:
(1) Organization, Standing and Power - East Wood is a Colorado corporation
duly organized, validly existing and in good standing under the laws
of the State of Colorado, having all requisite power and authority to
own and operate, and does own and operate, oil and gas properties,
including the East Wood Properties, and to carry on its business as
now being conducted. The Merger completed with Crown Partners LLC
effective January 2, 1999 was done in compliance with all applicable
laws, and does not affect the valid existence of East Wood.
(2) Authority and Enforceability - This Agreement is the valid and binding
obligation of East Wood, has been duly and validly authorized by all
necessary corporate action on the part of East Wood and is enforceable
against it in accordance with its terms. Neither the execution and
delivery by East Wood of this Agreement nor the consummation of the
transactions contemplated hereby, nor compliance of them with any
of the provisions hereof, will
<PAGE>
(1) conflict with or result in a breach of any provision of any East
Wood operating agreement;
(2) result in a default (with due notice or lapse of time or both) or
give rise to any right or termination, cancellation or acceleration
under any of the terms, conditions or provisions of any material
note, bond, mortgage, indenture, license or agreement to which
East Wood is a Party or by which East Wood or any of its properties
or assets may be bound.
(3) violate any order, writ, injunction, judgment, decree, statute,
rule or regulation applicable to them or any of their properties
or assets, except for violations which will not have a material
adverse effect on their business or properties ("Material Adverse
Effect"); or
(4) require the consent, approval, authorization or permit of, or
filing with or notification to any governmental authority or
any other person, except as set forth in Schedule 4.1(b) hereof.
(3) Absence of Changes - Except as disclosed in writing to Cotton Valley
prior to Closing, there have been no material adverse changes in the
condition of the Business or the East Wood Properties.
(4) Agreements - Cotton Valley acknowledges that East Wood is in the
business of acquiring, exploring and developing oil and gas interests
and in the course of carrying on such business, either executes (or
assumes) and makes applicable to its interests various agreements
of the types generally experienced in the oil and gas industry.
The contractually binding arrangements to which East Wood and the
oil and gas leases owned by East Wood are subject are of the type
generally found in the oil and gas industry, do not (individually or
in the aggregate) contain unusual or unduly burdensome provisions
which may operate in a materially adverse manner with respect to
the East Wood Properties and is in the form and substance considered
conventional within the oil and gas industry.
<PAGE>
(5) Capitalization of East Wood - 1,000 shares of common stock and 4
promissory notes for debt totalling approximately $4.6 million.
(6) Consents - No consents for East Wood to enter into this Agreement
and consummate the actions contemplated by this Agreement are
required.
(7) Environmental Matters - Except as set forth on Schedule 4.1(g)
hereto, with respect to the Properties owned by East Wood now or in
the past, (collectively the "East Wood Properties"):
(1) To its knowledge, at no time during Crown Partner's ownership
have the East Wood Properties been used by them, or by anyone
else, for the generation, storage or disposal of a Hazardous
Substance (as hereinafter defined) or as a landfill or other
waste disposal site, except in compliance with Environmental
Laws (as hereinafter defined) and East Wood has not received
any notification of violation of said laws, except as previously
disclosed in writing to Cotton Valley. To the knowledge of East
Wood, there are no Hazardous Substances currently on the Land,
except in compliance with Environmental Laws. "Hazardous
Substance" means any substance now or hereafter defined as a
"hazardous substance" under Section 101 of the Comprehensive
Environmental Response, Compensation and Liability
Act, 42 U.S.C.A. 9601(14). "Environmental Laws" means all
laws, statutes, regulations and judicial interpretations of the
United States and the State of Texas or either of them, or any
other governmental or quasi-governmental authority having
jurisdiction, that relate to the prevention, abatement or
elimination of pollution, or the protection of the environment,
including the Federal Comprehensive Environmental Response,
Compensation and Liability Act, the Resource Conservation and
Recovery Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substance Control Act, the Hazardous Materials
Transportation Act and all state statutes serving similar or
related purposes;
(2) East Wood has not entered into, and, no predecessor to it has
entered into, or is subject to, any agreements, consent orders,
decrees, judgments, license or permit conditions, or, other
directives of governmental authorities in existence at this
time based on any Environmental Laws that relate to the future
use of any of the East Wood Properties or that require any
change in the present conditions of any of the East Wood
Properties;
<PAGE>
(3) There are no actions, suits, claims or proceedings seeking money
damages, injunctive relief, remedial action, or other remedy,
pending or threatened, against any of the East Wood Properties
or against East Wood from its ownership or operation of the
East Wood Properties and relating to the violation of, or
noncompliance with, an Environmental Law; the disposal, discharge,
or release of any Hazardous Substance; or the exposure of any
person to any other solid waste, pollutant, chemical substance,
noise or vibration;
(4) Neither the execution of this Agreement nor the consummation of
the transactions contemplated by this Agreement will violate any
Environmental Law or require the consent or approval of any agency
charged with enforcing any Environmental Law.
(8) Governmental Rules. East Wood has not received any notice of a default
under or violation of:
(1) any law, order, writ, injunction, rule, regulation or degree of
any governmental body, agency or court or of any commission or
other administrative agency except for violations that will not
have a Material Adverse Effect, or
(2) any material agreement or obligation to which it is a party or
by which it is bound or to which it may be subject except for
violations that will not have a Material Adverse Effect.
(9) Liability for Brokers' Fees. East Wood will not directly or indirectly
incur any liability or expense as a result of any undertakings or
agreements of East Wood for brokerage fees, finder's fees, agent's
commissions or other similar forms of compensation in connection
with this Agreement or any agreement or transaction contemplated
hereby, except as disclosed to Cotton Valley with regard to Dominick
& Dominick Securities Inc.
(10) Liabilities and Taxes. Except as reflected on the attached Schedule
4.1(j), all liabilities, franchise taxes, federal income taxes, state
income taxes, ad valorem taxes (based on 1999 rates), real property,
personal property, production, severance, excise and other all other
material taxes and liabilities for which East Wood may be liable for
periods of time ending prior to September 14, 1999 have been duly
and timely paid or accrued.
<PAGE>
(11) Litigation. Except as reflected on the attached Schedule 4.1(k),
there are no actions, suits, claims, proceedings, agency enforcement
actions or investigations by any person or entity or by any
administrative agency or governmental body and no legal, administrative
or arbitration proceeding pending or threatened against or affecting
East Wood or any of its assets or which has affected or could affect
its ability to consummate the transactions contemplated by this
Agreement.
(12) No Demands. East Wood has received no notice of any claimed defaults,
offsets or demands with respect to its properties and there is no
default existing with respect to any contracts that would have a
Material Adverse Effect.
(13) No Liens or Encumbrances. The interests of the members of East Wood
and all of the assets and properties of East Wood, which are the
subject hereof, are free and clear of all liens and encumbrances except
as reflected on the attached Schedule 4.1(m).
(14) Non-Foreign Representation. East Wood is not a Non-Resident Alien
Foreign Corporation, Foreign Partnership, Foreign Trust or Foreign
Estate (as those terms are defined in the Internal Revenue Code and
Income Tax Regulations).
(15) Payments. All payments of any kind required to be made by East Wood
to Third Parties under any existing contract or agreement, with regard
to its properties, have been or will be properly and timely paid for
or provided for.
(16) Qualification. East Wood is an experienced and knowledgeable investor
in natural resource properties and has the financial and business
expertise to evaluate the merits and risks of the transactions
contemplated by this Agreement. In entering into this Agreement, East
Wood has relied solely on its independent investigation of, and
judgment with respect to, the Cotton Valley Properties and the advice
of its own legal, tax, economic, environmental, engineering, geological
and geophysical advisors and not on any comments or statements of any
representatives of, or consultants or advisors engaged by Cotton
Valley.
(17) Reports. From June 1, 1996 until January 2, 1999 Crown Partners has,
and from January 3, 1999 until the date hereof, East Wood has, filed
all reports, registrations and statements, together with any required
amendments thereto, that it was required to file with the State of
Colorado (collectively, the "East Wood Reports"). As of their
respective dates (but taking into account any amendments filed prior
to the date of this Agreement), the East Wood Reports complied in all
material respects with all the rules and regulations promulgated by
the State of Colorado and did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
financial statements of East Wood included in the East Wood Reports
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with U.S. generally
accepted accounting principles consistently applied during the periods
presented (except, as noted therein, or, in the case of the unaudited
statements, as permitted by Form 10-KSB of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal audit
adjustments) the financial position of East Wood as of the date
thereof and the results of its operations and its cash flows for the
periods then ended.
<PAGE>
(18) Royalties - All royalties and other payments due from or in connection
with sales from the East Wood' Properties for all periods of time prior
to Closing have been or will be properly and correctly paid by them.
(19) Notice of Breach of Representations or Warranties - East Wood will
immediately notify Cotton Valley upon the discovery that any
representation or warranty of East Wood becomes or will become untrue
on the Closing Date.
(20) Survivability - All representations and warranties contained in this
Article IV shall survive the Closing.
1.11 Reliance - East Wood hereby expressly acknowledges that the Purchaser and
Aspen are relying upon the covenants, representations and warranties of the East
Wood contained in this Agreement or in any agreement, certificate or other
document delivered pursuant hereto in connection with the purchase of the
Purchased Shares hereunder.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND ASPEN
1.12 The Purchaser and where applicable Aspen hereby covenant, represent and
warrant to the Vendors and to East Wood as follows:
(1) Organization, Standing and Power. The Purchaser is a Yukon Territory
Corporation duly organized, validly exiting and in good standing under
the laws of the Yukon Territory, Canada, having all requisite power
and authority to carry on their business as now being conducted.
Aspen is a Texas corporation duly organized, validly existing and
in good standing under the laws of the State of Texas, having all
requisite power and authority to carry on their business as now being
conducted.
(2) Authority and Enforceability. This Agreement is a valid and binding
obligation of each of the Purchaser and Aspen, has been duly and
validly authorized by all necessary corporate action on the part of
each of the Purchaser and Aspen and is enforceable against each in
accordance with its terms. Neither the execution and delivery by
the Purchaser or Aspen of this Agreement nor the consummation of the
transactions contemplated hereby, nor compliance of it with any of the
provisions hereof, will:
(1) conflict with or result in a breach of any provision of the
Purchaser's or Aspen's certificate of organization,
(2) result in a default (with due notice of lapse of time or both)
or give rise to any right of termination, cancellation or
acceleration under any of the terms, conditions or provisions
of any material note, bond, mortgage, indenture, license or
agreement to which either is a party or by which any of its
properties or assets may be bound,
(3) violate any order, writ, injunction, judgment, decree, statute,
rule or regulation applicable to them or any of their properties
or assets, except for violations which will not have a material
adverse effect on either party's business or properties ("Material
Adverse Effect"); or
(4) require the consent, approval, authorization or permit of, or
filing with or notification to any governmental authority or any
other person, except as set forth in Schedule 5.1(b) hereof.
<PAGE>
(3) Absence of Changes. Except as disclosed in writing to East Wood and
the Vendors prior to Closing, there have been no material adverse
changes in the condition of the Purchaser's business or properties.
(4) Agreements. East Wood and the Vendors acknowledge that the Purchaser
is in the business of acquiring, exploring and developing oil and gas
interests and in the course of carrying on such business, either
executes (or assumes) and makes applicable to its interests various
agreements of the types generally experienced in the oil and gas
industry. The contractually binding arrangements to which the
Purchaser and the oil and gas leases owned by the Purchaser are
subject are of the type generally found in the oil and gas
industry, do not (individually or in the aggregate) contain unusual
or unduly burdensome provisions which may operate in a materially
adverse manner with respect to the Purchaser and are in form and
substance considered conventional within the oil and gas industry.
(5) Capitalization of the Purchaser and Aspen. Of the authorized capital
of Cotton Valley, no preference shares and 34,198,198 common shares
(and no more) have been duly and validly issued and are outstanding
as fully paid and non-assessable shares in the capital of the
Purchaser. At Closing, exclusive of the Cotton Valley Shares, there
shall be 34,198,198 common shares of Cotton Valley outstanding. Upon
consummation of the transactions contemplated hereby and the issuance
and delivery of certificates representing the 5,000,000 Cotton Valley
Shares to Apollo and the 20,000,000 Cotton Valley Shares to Aspen, to
be held by Aspen for issuance to Wheeler pursuant to the terms of the
Aspen Shares, all as more particularly described in Schedule 2.1(c)
hereof, such shares will be duly authorized, validly issued, fully
paid and non-assessable. Other than the Warrants, there are no
other warrants, options, convertible debentures or any other form
of securities of the Purchaser issued or outstanding, except as
reflected on the attached Schedule 5.1(e).
Of the authorized capital of Aspen, no Class A common shares and
1,000 common shares (and no more) have been duly and validly issued
and are outstanding as fully paid and non-assessable shares in the
capital of Aspen at Closing. Upon consummation of the transactions
contemplated hereby and the issuance and delivery of certificates
representing the 20,000,000 Class A common shares of Aspen
previously defined as the Aspen Shares, with the attributes attached
as Schedule 2.1(c), such shares will be duly authorized, validly
issued, fully paid and nonassessable. There are no other warrants,
options, convertible debentures or any other form of securities of
Aspen issued or outstanding, except as reflected on the attached
Schedule 5.1(e).
<PAGE>
(6) Cotton Valley and Aspen Common Stock. The Cotton Valley Shares will
be authorized and issued common stock of the Purchaser, with no par
value, held by Aspen in the case of the 20,000,000 shares for issuance
to Wheeler, in accordance with the terms, conditions and rights
attaching to the Aspen Shares.
The Aspen Shares will be issued as fully paid, non-assessable Class
A common shares in the capital of Aspen, with the exchange rights
and voting rights attached thereto as set out in Schedule 5.1(f).
[Schedule 5.1(f) to contain exchange rights and process, along with
confirmation that individuals holding Aspen Shares have irrevocable
rights to vote shares in Cotton Valley.]
(7) Cotton Valley Warrants. The Warrants issued hereunder to the Vendors,
as described in Schedule 2.1(c), will be duly issued by the Purchaser
and exercisable for common shares of Cotton Valley according to the
terms and conditions contained therein. The common shares of Cotton
Valley issuable on the due exercise of the Warrants (which may only
occur following Cotton Valley shareholder approval) will be issued
as fully paid, non-assessable shares in the capital of Cotton Valley.
(8) Consents. No consents for the Purchaser or Aspen to enter into this
Agreement and consummate the actions contemplated by this Agreement
are required.
(9) Environmental Matters. Except as set forth in Schedule 5.1(i)
attached hereto, with respect to the properties owned by the Purchaser
now or in the past, (collectively the "Cotton Valley Properties"):
<PAGE>
(1) To its knowledge, at no time during the Purchaser's ownership
have the Cotton Valley Properties been used by them, or by anyone
else, for the generation, storage or disposal of a Hazardous
Substance (as hereinafter defined below) or as a landfill or
other waste disposal site, except in compliance with Environmental
Laws (as hereinafter defined) and the Purchaser has not received
any notification of violation of said laws, except as previously
disclosed in writing to East Wood. To the knowledge of the
Purchaser, there are no Hazardous Substances currently on the
Land, except in compliance with Environmental Laws. "Hazardous
Substance" means any substance now or hereafter defined as a
"hazardous substance" under Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42
U.S.C.A. 9601(14). "Environmental Laws" means all laws,
statutes, regulations and judicial interpretations of the
United States and the State of Texas or either of them, or
any other governmental or quasi-governmental authority having
jurisdiction, that relate to the prevention, abatement or
elimination of pollution, or the protection of the environment,
including the Federal Comprehensive Environmental Response,
Compensation and Liability Act, the Resource Conservation and
Recovery Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substance Control Act, the Hazardous Materials
Transportation Act and all state statutes serving similar or
related purposes.
(2) The Purchaser has not entered into, and, no predecessor to it
has entered into, or is subject to, any agreements, consent
orders, decrees, judgments, license or permit conditions, or,
other directives of governmental authorities in existence at
this time based on any Environmental Laws that relate to the
future use of any of the properties or that require any change
in the present conditions of any of the properties.
(3) There are no actions, suits, claims or proceedings seeking
money damages, injunctive relief, remedial action, or other
remedy, pending or threatened, against any of the properties
or against the Purchaser from its ownership or operation of
the properties and relating to the violation of, or
noncompliance with, an Environmental Law; the disposal,
discharge, or release of any Hazardous Substance; or the
exposure of any person to any other solid waste, pollutant,
chemical substance, noise or vibration.
(4) Neither the execution of this Agreement nor the consummation of
the transactions contemplated by this Agreement will violate any
Environmental law or require the consent or approval of any
agency charged with enforcing any Environmental Law.
<PAGE>
(10) Governmental Rules. The Purchaser has not received any notice of a
default under or violation of:
(1) any law, order, writ, injunction, rule, regulation or decree of
any governmental body, agency or court of any commission of other
administrative agency except for violations that will not have a
Material Adverse Effect, or
(2) any material agreement or obligation to which it is a Party or
by which it is bound or to which it may be subject except for
violations that will not have a Material Adverse Effect.
(11) Liability for Brokers' Fees. The Purchaser or Aspen will not
directly or indirectly incur any liability or expense as a result
of any undertakings or agreements of the Purchaser for brokerage
fees, finder's fees, agent's commissions or other similar forms
of compensation in connection with this Agreement or any agreement
or transaction contemplated hereby, other than pursuant to the
agreement with Dominick & Dominick Securities Inc.
(12) Liabilities and Taxes. Except as reflected on the attached Schedule
5.1(l), all liabilities, franchise taxes, federal income taxes,
state income taxes, ad valorem taxes (based on 1999 rates), real
property, personal property, production, severance, excise and all
other material taxes and liabilities for which the Purchaser may be
liable for periods of time ending prior to [September 14,] 1999
have been duly and timely paid or accrued.
(13) Litigation. Except as reflected on the attached Schedule 5.1(m),
there are no actions, suits, claims, proceedings, agency enforcement
actions or investigations by any person or entity or by any
administrative agency or governmental body and no legal,
administrative or arbitration proceeding pending or threatened
against or affecting the Purchaser or any of its assets or which
has affected or could affect its ability to consummate the
transactions contemplated by this Agreement.
(14) No Demands. The Purchaser has received no notice of any claimed
defaults, offsets or demands with respect to its properties and
there is no default existing with respect to any contracts that
would have a Material Adverse Effect.
(15) No Liens or Encumbrances. The shares of the Purchaser and Aspen
and all of the assets and properties of each of the Purchaser and
Aspen which are the subject hereof, are free and clear of all liens
and encumbrances except as reflected on the attached Schedule 5.1(o).
(16) Non-Foreign Representation. Neither the Purchaser nor Aspen is a Non-
Resident Alien Foreign Corporation, Foreign Partnership, Foreign
Trust or Foreign Estate (as those terms are defined in the Internal
Revenue Code and Income Tax Regulations).
(17) Payments. All payments of any kind required to be made by the
Purchaser to Third Parties under any existing contract or agreement,
with regard to their properties, having been or will be properly
and timely paid or provided for.
(18) Qualification. The Purchaser is an experienced and knowledgeable
investor in natural resource properties and has the financial and
business expertise to evaluate the merits and risks of the
transactions contemplated by this Agreement. In entering into
this Agreement, the Purchaser has relied solely on its independent
investigation of, and judgment with respect to, the East
Wood Properties and the advice of its own legal, tax, economic,
environmental, engineering, geological and geophysical advisors
and not on any comments or statements of any representatives of,
or consultants or advisors engaged by East Wood.
(19) Receipt of Cotton Valley Reports. East Wood has been furnished
with and had the opportunity to review all Cotton Valley Reports
(hereinafter defined) filed with the U.S. Securities and Exchange
Commission ("SEC") through the Closing Date.
(20) Reports. From January 1, 1996 until the date hereof, the Purchaser
has filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file with
the SEC, including, but not limited to any Forms 10-KSB, Forms
10-QSB, Forms 8-KSB, Forms 20-F and proxy statements (collectively,
"Cotton Valley Reports"). As of their respective dates (but taking
into account any amendments filed prior to the date of this
Agreement), the Cotton Valley Reports complied in all material
respects with all the rules and regulations promulgated by the SEC
and did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading.
<PAGE>
The financial statements of the Purchaser included in the Cotton
Valley Reports comply as to form in all material respects with
applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, having been prepared in
accordance with U.S. generally accepted accounting principles
consistently applied during the periods presented (except, as noted
therein, or, in the case of the unaudited statements, as permitted
by Form 10-QSB of the SEC) and fairly present (subject, in the case
of the unaudited statements, to normal audit adjustments) the
financial position of the Purchaser as of the date thereof and the
results of its operations and its cash flows for the periods then
ended.
(21) Royalties. All royalties and other payments due from or in connection
with sales from the Cotton Valley's Properties for all periods of time
prior to Closing have been or will be properly and correctly paid by
them.
ARTICLE VI
CONDITIONS PRECEDENT TO THE PERFORMANCE BY THE PURCHASER
AND THE VENDORS OF THEIR OBLIGATIONS UNDER THIS AGREEMENT
1.13 Purchaser's Conditions - The obligation of the Purchaser to complete the
purchase of the Purchased Shares hereunder shall be subject to the satisfaction
of, or compliance with, at or before the Closing Time, each of the following
conditions precedent (each of which is hereby acknowledged to be inserted for
the exclusive benefit of the Purchaser and may be waived by the Purchaser in
whole or in part):
(1) Truth and Accuracy of Representations of Vendors and East Wood at
Closing Time - All of the representations and warranties of the
Vendors and of East Wood made in or pursuant to this Agreement
(including the Schedules hereto) or in agreement, certificate or
other document delivered or given pursuant to this Agreement,
including, without limitation, the representations and warranties
set forth in Article IV hereof, shall be true and correct in all
material respects as at the Closing Time and with the same effect as
if made at and as of the Closing Time (except as such representations
and warranties may be affected by the occurrence of events or
transactions expressly contemplated and permitted hereby).
<PAGE>
(2) Legal Matters - The due creation and issuance of the Purchased Shares,
the title of the Vendors to the Purchased Shares, the form of and
documentation relating to the transfer of the Purchased Shares by the
Vendors to the Purchaser, and all corporate proceedings of East Wood,
its shareholders, members and directors, and all matters which in the
reasonable opinion of counsel for the Purchaser are material in
connection with the transactions herein contemplated shall be
completed and all relevant documents, records and information shall
be supplied by the Vendors to such counsel for that purpose.
1.14 Vendors' Conditions - The obligation of the Vendors to complete the sale
of the Purchased Shares hereunder shall be subject to the satisfaction of or
compliance with, at or before the Closing Time, each of the following
conditions precedent (each of which is hereby acknowledged to be inserted
for the exclusive benefit of the Vendors and may be waived by the Vendors in
whole or in part):
(1) Truth and Accuracy of Representations of Purchaser at Closing Time-
All of the representations and warranties of the Purchaser and Aspen
made in or pursuant to this Agreement or in any agreement, certificate
or other document delivered or given pursuant to this Agreement,
including without limitation the representations and warranties set
forth in Article V hereof, shall be true and correct in all material
respects as at the Closing Time and with the same effect as if made at
and as of the Closing Time.
(2) Performance of Obligations - The Purchaser shall have complied with
and performed in all respects all its obligations, covenants and
agreements herein.
1.15 Non-Performance of Conditions for the Benefit of the Purchaser - In the
event that any of the conditions set forth in Section 6.1 shall not be
fulfilled and/or performed at or before the Closing Time, the Purchaser
may terminate this Agreement by notice in writing to the Vendors, and the
Purchaser shall thereupon be released from all obligations under this
Agreement and the Vendors shall also be released from all obligations under
this Agreement, provided any of the said conditions may be waived in whole or
in part by the Purchaser at any time without prejudice to its right of
termination in the event of a non-fulfilment and/or non-performance of any
other condition or conditions, any such waiver to be binding upon the
Purchaser only if the same is in writing.
<PAGE>
1.16 Non-Performance of Conditions for the Benefit of the Vendors - In the
event that any of the conditions set forth in Section 6.2 shall not be
fulfilled and/or performed at or before the Closing Time, the Vendors may
terminate this Agreement by notice in writing to the Purchaser, and the
Vendors shall thereupon be released from all obligations under this
Agreement and the Purchaser shall also be released from all obligations
under this Agreement, provided any of the said conditions may be waived in
whole or in part by the Vendors at any time without prejudice to its right
of termination in the event of a non-fulfilment and/or non-performance of
any other condition or conditions, any such waiver to be binding upon the
Vendors only if the same is in writing. Each Vendor acknowledges and
agrees that a notice in writing to the Purchaser by fewer than all of the
Vendors to terminate this Agreement and any waiver in whole or in part by
fewer than all of the Vendors of any of the said conditions pursuant to
this Section 6.4 shall be conclusively deemed not to be a notice to
terminate or waiver, as the case may be, for purposes of this Agreement,
including this Section 6.4.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS, WARRANTIES
AND COVENANTS OF THE VENDORS AND PURCHASER
1.17 Survival of Representations, Warranties and Covenants of the Vendors -
The representations, warranties and covenants of the Vendors and of East
Wood contained in this Agreement or in any agreement, certificate or any
other document delivered or given pursuant to this Agreement shall survive
the completion of the transactions contemplated by this Agreement and,
notwithstanding such completion or any investigation made by or on behalf
of the Purchaser, shall continue in full force and effect for the benefit of
the Purchaser.
1.18 Survival of Representations, Warranties and Covenants of the Purchaser -
The covenants, representations and warranties of the Purchaser contained in
this Agreement or in any agreement, certificate or any other document
delivered or given pursuant to this Agreement shall survive the completion
of the transactions contemplated by this Agreements and, notwithstanding
such completion or any investigation made by or on behalf of the Vendors,
shall continue in full force and effect for the benefit of the Vendors.
ARTICLE VIII
CLOSING
1.19 The Closing - The sale and purchase of the Purchased Shares hereunder
shall be completed at the Closing Time at the offices of Weir & Foulds or
at such other location as may be mutually agreed upon by the parties
hereto.
<PAGE>
1.20 Tender - Any tender of documents hereunder may be made upon the
parties hereto or their respective counsel.
ARTICLE IX
GENERAL
1.21 Expenses - All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
1.22 Time - Time shall be of the essence of this Agreement and of every
part hereof and no extension or variation of this Agreement shall operate as
a waiver of this provision.
1.23 Notices - All payments and communications which may be or are required
to be given by either party to the other herein, shall (in the absence of
any specific provision to the contrary) be in writing and delivered or sent
by prepaid registered mail or telecopier to the parties at their following
respective addresses:
For: Jack E. Wheeler
2101 W. Coffee Creek Road
Edmond, Oklahoma 73003
Apollo Investments Limited
c/o Cox and McNeese
Suite 102
3601 North Classen Blvd.
Oklahoma City, Okla. 73118
Stillwater Gas Productions Inc.
c/o Cox and McNeese
Suite 102
3601 North Classen Blvd.
Oklahoma City, Okla. 73118
Custer County Drillers Inc.
c/o Cox and McNeese
Suite 102
3601 North Classen Blvd.
Oklahoma City, Okla. 73118
<PAGE>
For: Cotton Valley Resources Corporation
6510 Abrams Road
Suite 300
Dallas, Texas 75231
Attention: Mr. James Hogue
Facsimile: (214) 221-6510
with a copy to: Aspen Energy Group, Inc.
c/o 6510 Abrams Road
Suite 300
Dallas, Texas 75231
Attention: President
Facsimile: (214) 221-6510
with a copy to: Weir & Foulds
Barristers and Solicitors
130 King Street West
Suite 1600
Toronto, ON M5X 1J5
Attention: Mr. Wayne Egan
Facsimile: (416) 365-1876
For: East Wood Equity Ventures Inc.
5900 Mosteller Drive
Suite 1900
Oklahoma City, Oklahoma 73112
Attention: President
Facsimile: (415) 512-2479
<PAGE>
and if any such payment or communication is sent by prepaid registered
mail, it shall, subject to the following sentence, be conclusively
deemed to have been received on the third business day following the
mailing thereof and, if delivered or telecopied, it shall be conclusively
deemed to have been received at the time of delivery or transmission.
Notwithstanding the foregoing provisions with respect to mailing, in
the event that it may be reasonably anticipated that, due to any strike,
lock-out or similar event involving an interruption in postal service,
any payment or communication will not be received by the addressee by
no later than the third (3rd) Business Day following the mailing thereof,
then the mailing of any such payment or communication as aforesaid shall
not be an effective means of sending the same but rather any payment or
communication must then be sent by an alternative means of transportation
which it may reasonably be anticipated will cause the payment or
communication to be received reasonably expeditiously by the addressee.
Either party may from time to time change its address hereinbefore set
forth by notice to the other of them in accordance with this section.
1.24 Governing Law - This Agreement and the rights and obligations and
relations of the parties hereto shall be governed by and construed in
accordance with the laws of the Ontario (but without giving effect to any
conflict of laws rules). The parties hereto agree that the Courts of Ontario
shall have jurisdiction to entertain any action or other legal proceedings
based on any provisions of this Agreement. Each party hereto does hereby
attorn to the jurisdiction of the Courts of the Ontario.
1.25 Headings - The index to and headings in this Agreement and in the
Schedules hereto are inserted solely for convenience of reference and do
not affect the interpretation thereof or define, limit or construe the
contents of any provision of this Agreement.
1.26 Assignment - Neither this Agreement nor any rights or obligations
hereunder shall be assignable by any party hereto without the prior written
consent of each of the other parties, which consent may be unreasonably
withheld. Subject thereto, this Agreement shall enure to the benefit of and
be binding upon the parties hereto and their respective successors
(including any successor by reason of amalgamation of any party hereto)
and permitted assigns.
1.27 Entire Agreement - With respect to the subject matter of this
Agreement, this Agreement (a) sets forth the entire agreement between
the parties hereto and any persons who have in the past or who are now
representing either of the parties hereto, (b) supersedes all
prior understandings and communications between the parties hereto or any
of them, oral or written, and (c) constitutes the entire agreement between
the parties hereto. Each party hereto acknowledges and represents that
this Agreement is entered into after full investigation and that no party
is relying upon any statement or representation made by any other which is
not embodied in this Agreement. Each party hereto acknowledges that he or
it shall have no right to rely upon any amendment, promise, modification,
statement or representation made or occurring subsequent to the execution
of this Agreement unless the same is in writing and executed by each of the
parties hereto.
<PAGE>
1.28 Further Assurances - The parties hereto shall with reasonable diligence
do all such things and provide all such reasonable assurances as may be
required to consummate the transactions contemplated hereby, and each
party hereto shall provide such further documents or instruments required by
the other party as may be reasonably necessary or desirable to effect the
purpose of this Agreement and carry out its provisions whether before, at
or after the Closing Time.
1.29 Counterparts - This Agreement may be executed in any number of
counterparts and all such counterparts shall for all purposes constitute
one agreement, binding on the parties hereto, provided each party hereto
has executed at least one counterpart, and each shall be deemed to be an
original, notwithstanding that all parties are not signatory to the same
counterpart.
1.30 Waiver - The failure of any party to this Agreement to enforce at any
time any of the provisions of this Agreement or any of its rights in respect
thereto or to insist upon strict adherence to any term of this Agreement will
not be considered to be a waiver of such provision, right or term or in any
way to affect the validity of this Agreement or deprive the applicable party
of the right thereafter to insist upon strict adherence to that term or any
other term of this Agreement. The exercise by any party to this Agreement of
any of its rights provided by this Agreement will not preclude or prejudice
such party from exercising any other right it may have by reason of this
Agreement or otherwise, irrespective of any previous action or proceeding
taken by it hereunder. Any waiver by any party hereto of the performance of
any of the provisions of this Agreement will be effective only if in writing
and signed by a duly authorized representative of such party.
1.31 Negotiation - This Agreement has been negotiated and approved by counsel
on behalf of all parties hereto and, notwithstanding any rule or maxim of
construction to the contrary, any ambiguity or uncertainty will not be
construed against any party hereto by reason of the authorship of any of
the provisions hereof.
IN WITNESS WHEREOF the parties hereto have hereunto duly executed this
Agreement as of the day and year first above written.
<PAGE>
_____________________________ ___________________________
Witness: Jack E. Wheeler
APOLLO INVESTMENTS LIMITED
Per:
Name:
Title:
STILLWATER GAS PRODUCTIONS INC.
Per:
Name: *
Title: *
CUSTER COUNTY DRILLERS INC.
Per:
Name:
Title:
COTTON VALLEY RESOURCES
CORPORATION
Per:
Name: James E. Hogue
Title: Chief Executive
Officer
ASPEN ENERGY GROUP, INC.
Per:
Name:
Title:
<PAGE>
EAST WOOD EQUITY VENTURE, INC.
Per:
Name: Jack E. Wheeler
Title: President
<PAGE>
SCHEDULE 1.1(c)
East Wood Properties
<PAGE>
SCHEDULE 2.1(c)
Special Warrants of Cotton Valley Resources Corporation
Each special warrant issuable pursuant to the terms of this Share
Purchase Agreement shall be exercisable, at the option of the holder, into
one (1) common share in the capital of Cotton Valley Resources Corporation.
Notwithstanding the foregoing, the exercise of the special warrants may
only occur upon approval by the shareholders of Cotton Valley Resources
Corporation a duly convened shareholders meeting in order to be exercisable.
In the event that shareholder approval is not obtained, then the special
warrants may not be exercised until such time as shareholder approval may
be obtained, or the special warrants are otherwise exercisable as a result
of the issued and outstanding shares in the capital of Cotton Valley
Resources Corporation.
The terms and conditions attaching to the special warrants shall be in
the form of a special warrant certificate, which certificate shall contain
the commercial and reasonable terms attaching to such a convertible security.
In particular, the special warrant certificates shall provide these special
warrants may only be exercised following shareholder approval or the exercise
thereof, and that until such exercise occurs, the holder of a special warrant
certificate and the special warrants represented thereby has no rights
whatsoever as a shareholder of Cotton Valley Resources Corporation.
<PAGE>
SCHEDULE 4.1(b(
East Wood Authority and Enforceability
Nil
<PAGE>
SCHEDULE 4.1(g)
Environmental Matters respecting East Wood Properties
None
<PAGE>
SCHEDULE 4.1 (j)
East Wood Liabilities and Taxes
None
<PAGE>
SCHEDULE 4.1 (k)
East Wood Litigation
None
<PAGE>
SCHEDULE 4.1 (m)
East Wood Liens or Encumbrances
None
<PAGE>
SCHEDULE 5.1(b)
Cotton Valley and Aspen Authority and Enforceability
Nil
<PAGE>
SCHEDULE 5.1(e)
Capitalization of the Purchaser and Aspen
Cotton Valley 34,198,198
Aspen 1,000 common
<PAGE>
SCHEDULE 5.1(i)
Cotton Valley Environmental Matters
NIL
<PAGE>
SCHEDULE 5.1(l)
Cotton Valley Liabilities and Taxes
U.S. Federal Income Tax Liability for Aspen Energy Corporation for the
periods 1994-1999 has not been paid and is subject to revision and
restatement (for carry back loss provisions) after the 1998 tax calculations
are completed.
Canadian income tax liability (if any) for fiscal years 1998 and 1999
has not been determined.
Andrews, Dallas and Navarro County taxes as set forth in Accounts
Payable Schedule attached hereto.
<PAGE>
SCHEDULE 5.1(m)
Cotton Valley Litigation
1. Stewart & Stevenson Power, Inc. v. Cotton Valley Resources Corporation
claims $29,185.03 for past services to Mustang Well Servicing, Inc. Cotton
Valley alleges a credit is due of $10,000 to $15,000 for possession
of an engine. Schedule 5.1(l) includes the full claim amount without
adjustment for the engine credit.
2. Technical Manufacturing, Inc. v. Cotton Valley Resources Corporation
alleges indebtedness of $26,338 for a skid unit held in possession of Cotton
Valley and $64,225 for a second skid unit held in possession by
Technical Manufacturing. Technical Manufacturing has offered to return the
second unit and settle all claims for $25,000. Cotton Valley claims it paid
the full amount for the first unit to the purchase agent. Schedule 5.1(l)
includes $17,063 which is the $26,338 claimed for Cotton Valley's skid less
the $9,275 Cotton Valley paid down against the second skid.
3. Several vendor lawsuits under $25,000 each and in the aggregate not
material to the financial condition of Cotton Valley are included in
Schedule 5.1(l).
<PAGE>
SCHEDULE 5.1(o)
Cotton Valley and Aspen Liens and Encumbrances
Cotton Valley's interest in the Means Field, Andrews County, Texas is subject
to liens and encumbrances in favour of an Affiliate of Cambrian Capital
Corporation in amounts set for in the audit financial statements of Cotton
Valley dated as of June 30, 1999.
Means Field Materialmen and Mechanics Liens and Encumbrances as set forth on
the following page.
<PAGE>
Exhibit "B"
EAST WOOD EQUITY VENTURE, INC.
AND PREDECESSOR - CROWN PARTNERS, L.L.C., MINERALS DIVISION
BALANCE SHEET
September 30, 1999
(unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
CASH $ 73,206
RECEIVABLES-TRADE 433,202
--------------
TOTAL CURRENT ASSETS $ 506,408
OIL AND GAS PROPERTIES
PROPERTIES BEING AMORTIZED $ 6,290,946
LESS ACCUMULATED DEPRECIATION & DEPLETION (468,840)
--------------
NET OIL AND GAS PROPERTIES $ 5,822,106
OTHER ASSETS
OTHER PROPERTY & EQUIPMENT LESS ACCUMULATED
DEPRECIATION $ 15,748
--------------
TOTAL OTHER ASSETS $ 15,748
--------------
TOTAL ASSETS $ 6,344,262
==============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE-TRADE $ 154,474
ACCRUED EXPENSES 68,270
CURRENT PORTION OF LONG-TERM DEBT 968,982
--------------
TOTAL CURRENT LIABILITIES $ 1,191,726
--------------
LONG-TERM DEBT (NET OF CURRENT PORTION) $ 3,262,966
-------------
COMMON STOCK $ 1,221,120
ADDITIONAL PAID IN CAPITAL 256,222
CURRENT PERIOD EARNINGS 412,228
-------------
TOTAL EQUITY $ 1,889,570
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 6,344,262
==============
</TABLE>
See accompanying notes to these financial statements
<PAGE>
EAST WOOD EQUITY VENTURE, INC.
AND PREDECESSOR - CROWN PARTNERS, L.L.C., MINERALS DIVISION
STATEMENT OF OPERATIONS
For Nine Months Ended September 30,
(Unaudited)
<TABLE>
1999 1998
<S> <C> <C>
REVENUES
OIL AND GAS REVENUES $1,598,971 $ 996,409
----------- ------------
TOTAL REVENUES $1,598,971 $ 996,409
EXPENSES
LEASE OPERATING COSTS &
PRODUCTION TAX $ 496,748 $ 391,740
DEPRECIATION, DEPLETION &
AMORTIZATION 120,743 127,198
GENERAL & ADMINISTRATIVE 229,242 107,845
----------- ------------
TOTAL EXPENSE $ 846,733 $ 626,783
INCOME FROM OPERATIONS $ 752,238 $ 369,626
----------- ------------
INTEREST EXPENSE $ (298,011) $ (134,261)
----------- ------------
INCOME BEFORE TAXES $ 454,227 $ 235,365
----------- ------------
PROVISION FOR INCOME TAXES $ (42,000) $ -
----------- ------------
NET INCOME (LOSS) $ 412,227 $ 235,365
----------- ------------
</TABLE>
See accompanying notes to these financial statements
<PAGE>
EAST WOOD EQUITY VENTURE, INC.
AND PREDECESSOR - CROWN PARTNERS, L.L.C., MINERALS DIVISION
STATEMENT OF CASH FLOWS
For The Nine Months Ended September 30,
(unaudited)
<TABLE>
1999 1998
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
NET INCOME FOR THE YEAR $ 412,227 $ 235,365
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
AMORTIZATION, DEPRECIATION AND DEPLETION 120,743 127,198
(INCREASE) IN ACCOUNTS RECEIVABLE (187,435) (159,794)
(DECREASE) IN ACCOUNTS PAYABLE -TRADE (61,180) 40,494
OTHER - (6,627)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 284,355 $ 236,636
CASH FLOW FROM INVESTING ACTIVITIES
ADDITIONS TO OIL AND GAS INTEREST $(1,651,749) $(1,488,341)
ADDITIONS TO OTHER FIXED ASSETS 150,000 -
------------- -----------
NET CASH UTILIZED BY INVESTING ACTIVITIES $(1,501,748) $(1,488,341)
CASH FLOW FROM FINANCING ACTIVITIES
REPAYMENT OF LONG-TERM DEBT $ (423,052) $ (170,000)
PROCEEDS FROM LONG-TERM DEBT $ 1,700,096 $ 1,381,000
------------- -----------
NET CASH UTILIZED BY FINANCING ACTIVITIES $ 1,277,044 $ 1,211,000
NET INCREASE (DECREASE) IN CASH $ 59,651 $ (40,705)
CASH AT JANUARY 1, 1999 AND 1998 $ 13,555 $ 41,764
------------- ------------
CASH AT SEPTEMBER 30, 1999 AND 1998 $ 73,206 $ 1,059
============= ============
SUPPLEMENTAL DISCLOSURES
INTEREST PAID IN CASH $ 298,011 $ 134,261
</TABLE>
See accompanying notes to financial statements
<PAGE>
East Wood Equity Venture, Inc.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
East Wood Equity Venture, Inc. (the Company) was incorporated under the laws of
Colorado and began operations on January 2, 1999 as a result of a merger with
Crown Partners, L.L.C. Minerals Division, a Colorado Limited Liability
Company ("Crown"). The stock-for-stock transaction has been accounted for as a
pooling of interests. The Company is engaged in the acquisition, exploration
and development of oil and gas properties, which are located in several states,
primarily Oklahoma and Texas.
The financial statements of the Company included herein have been prepared by
the Company without audit. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, since the Company
believes that the disclosures included are adequate to make the information
presented not misleading. In the opinion of management, the financial
statements include all adjustments consisting of normal recurring adjustments
necessary to present fairly the financial position, results of operations, and
cash flows as of the dates and for the periods presented. These financial
statements should be read in conjunction with the financial statements of Crown
and the notes thereto included for the year ended December 31, 1998.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents
Oil and Gas Producing Operations
The Company uses the full cost method of accounting for its oil and gas
properties. The Company's properties are all located in the continental United
States, and therefore, its costs are capitalized in one cost center. Under the
full cost method, all costs related to the acquisition, exploration or
development of oil and gas properties are capitalized into the "full cost
pool". Such costs include those related to lease acquisitions, drilling and
equipping of productive and non-productive wells, delay rentals, geological and
geophysical work and certain internal costs directly associated with the
acquisition, exploration or development of oil and gas properties. Upon the
sale or disposition of oil and gas properties, no gain or loss is recognized,
unless such adjustments of the full cost pool would significantly alter the
relationship between capitalized costs and proved reserves.
Under the full cost method of accounting, a "full cost ceiling test" is required
wherein net capitalized costs of oil and gas properties cannot exceed the
present value of estimated future net revenues from proved oil and gas reserves,
discounted at 10%, less any related income tax effects.
Revenue Recognition
Revenue is accrued and recognized in the month the oil and gas is produced and
sold.
Office Furniture and Equipment
Office furniture and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets which range
from five to seven years.
<PAGE>
East Wood Equity Venture, Inc.
NOTES TO FINANCIAL STATEMENTS
2. OIL AND GAS PROPERTIES
In January 1999, the Company acquired a group of oil and gas properties for
$1,650,000, before closing adjustments. Closing adjustments included credits of
approximately $105,000, representing primarily net revenues received prior to
closing from the respective effective date of October 1, 1998 and title defects.
3. ACQUISITION EVENT
On September 16, 1999 Cotton Valley Resources Corporation ("CVRC") entered into
a "Share Purchase Agreement," whereby CVRC delivered 20,000,000 shares of its
common stock, no par value, ("CVRC Common Stock") to its wholly owned
subsidiary, Aspen Energy Group, Inc. ("AEG"), as a capital contribution, and in
return was issued 20,000,000 shares of the common stock of AEG ("AEG Common
Stock"). CVRC also agreed to acquire 500 shares of the common stock
(being 50% of the amount outstanding) of East Wood Equity Venture, Inc. ("East
Wood Common Stock") through the delivery to Mr. Jack E. Wheeler of the
20,000,000 shares of AEG Common Stock and the issuance and delivery to unrelated
third parties of 5,000,000 shares of CVRC Common Stock and 21,230,897 special
warrants (the "Special Warrants") where each Special Warrant is convertible into
one share of CVRC Common Stock immediately upon authorization from the
stockholders of CVRC for the issuance of such additional shares of CVRC Common
Stock. Effective October 11, 1999 notice of the final approval for the
transaction was received from the regulatory authorities and all documents and
shares where delivered from escrow to the appropriate parties.
<PAGE>
Exhibit C
CROWN PARTNERS L.L.C. MINERALS DIVISION
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE>
INDEPENDENT AUDITOR'S REPORT
August 16, 1999
The Members
Crown Partners L.L.C. Minerals Division
Oklahoma City, Oklahoma
We have audited the accompanying balance sheets of Crown Partners L.L.C.
Minerals Division as of December 31, 1998, and the related statements
of operations, changes in members' equity and cash flows for the years
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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 financial statements referred to above present fairly, in
all material respects, the financial position of Crown Partners L.L.C.
Minerals Division as of December 31, 1998, and the results of its operations
and its cash flows for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
"Hein & Associates LLP"
Certified Public Accountants
<PAGE>
CROWN PARTNERS L.L.C. MINERALS DIVISION
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 13,555
Trade accounts receivable 245,766
---------------
Total current assets 259,321
OIL AND GAS PROPERTIES, net of accumulated depletion of
$350,541 (full cost method) 4,288,656
---------------
OTHER ASSETS, net 168,194
---------------
Total assets $ 4,716,171
===============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,492,904
Accounts payable and accrued expenses 283,924
Payable to related party 256,223
---------------
Total current liabilities 2,033,051
LONG-TERM DEBT, net of current portion 1,462,000
MEMBERS' EQUITY 1,221,120
---------------
Total liabilities and members' equity $ 4,716,171
===============
</TABLE>
<PAGE>
CROWN PARTNERS L.L.C. MINERALS DIVISION
STATEMENTS OF OPERATIONS
<TABLE>
YEARS ENDED DECEMBER 31,
1998 1997
<S> <C> <C>
OIL AND GAS SALES $ 1,165,018 $1,473,149
------------ ----------
COSTS AND EXPENSES:
Production expense 419,544 430,110
Depletion and depreciation 169,598 140,376
General and administrative 125,936 147,212
------------ -----------
Total costs and expenses 715,078 717,698
INCOME FROM OPERATIONS 449,940 755,451
OTHER (INCOME) EXPENSE:
Interest expense, net 212,082 180,972
Other (13,849) (13,494)
------------ -----------
Total other expense 198,233 167,478
NET INCOME $ 251,707 $ 587,973
=========== ===========
</TABLE>
<PAGE>
CROWN PARTNERS L.L.C. MINERALS DIVISION
STATEMENT OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C>
MEMBERS' EQUITY, January 1, 1997 $ 891,841
Net income 587,973
------------
Members' distributions (514,226)
MEMBERS' EQUITY, December 31, 1997 965,588
Net income 251,707
-------------
Members' contributions 125,000
Members' contributions (121,175)
MEMBERS' EQUITY, December 31, 1998 $1,221,120
===========
</TABLE>
<PAGE>
CROWN PARTNERS L.L.C. MINERALS DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
YEARS ENDED DECEMBER 31,
1998 1997
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 251,707 $ 587,973
Adjustment to reconcile to net cash from
operating activities:
Depletion and depreciation 169,598 140,376
Changes in accounts receivable 26,252 160,100
Changes in accounts payable and
accrued expenses 201,321 (43,321)
Other (17,953) (30,197)
----------- -------------
Net cash provided by operating
activities 630,925 814,931
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (1,633,959) (239,997)
Additions to other assets (150,000) -
Proceeds from sales of assets - 34,518
------------ ------------
Net cash used by investing
Activities (1,783,959) (205,479)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,400,000 326,000
Repayments of long-term debt (279,000) (384,000)
Member contributions 125,000 -
Member distributions (121,175) (514,226)
------------- ------------
Net cash provided (used) by
financing activities 1,124,825 (572,226)
NET INCREASE (DECREASE) IN CASH (28,209) 37,226
CASH, beginning of the year 41,764 4,538
------------- -----------
CASH, end of the year $ 13,555 $ 41,764
============= ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest $ 200,784 $ 180,972
============= ===========
</TABLE>
<PAGE>
CROWN PARTNERS L.L.C. MINERALS DIVISION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Crown Partners, L.L.C. Minerals Division (the "Company" or "Crown Partners") was
organized as a Colorado Limited Liability Company in August, 1996. As a Limited
Liability Company, the members' liability is limited as provided by the laws of
the State of Colorado. The Company's Articles of Organization provide for a
period of duration until December 31, 2026, or until sooner dissolved. The
Company is engaged in the acquisition, exploration and development of oil and
gas properties, which are located in several states, primarily Oklahoma and
Texas.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
OIL AND GAS PRODUCING OPERATIONS
The Company uses the full cost method of accounting for its oil and gas
properties. The Company's properties are all located in the continental
United States, and therefore, its costs are capitalized in one cost center.
Under the full cost method, all costs related to the acquisition, exploration
or development of oil and gas properties are capitalized into the "full cost
pool". Such costs include those related to lease acquisitions, drilling and
equipping of productive and non-productive wells, delay rentals, geological
and geophysical work and certain internal costs directly associated with the
acquisition, exploration or development of oil and gas properties. Upon the
sale or disposition of oil and gas properties, no gain or loss is recognized,
unless such adjustments of the full cost pool would significantly alter the
relationship between capitalized costs and proved reserves.
Under the full cost method of accounting, a "full cost ceiling test" is
required wherein net capitalized costs of oil and gas properties cannot exceed
the present value of estimated future, net revenues from proved oil and gas
reserves, discounted at 10%, less any related income tax effects.
Capitalized amounts attributable to proved oil and gas properties are depleted
by the unit-of-production method based on estimates of proved reserves.
Depreciation and depletion expense for oil and gas producing property and
related equipment was $169,598 and $140,376 for the years ended December 31,
1998 and 1997, respectively.
INCOME TAXES
As a Limited Liability Company, Crown Partners is taxed as a partnership and
no provision has been made for federal income taxes. The Company's members
will report the Company's Federal taxable income or loss in their individual
income tax returns.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as all changes in members' equity, exclusive
of transactions with owners, such as capital investments. Comprehensive income
includes net income or loss, changes in certain assets and liabilities that
are reported directly in equity such as translation adjustments on investments
in foreign subsidiaries, and certain changes in minimum pension liabilities.
The Company's comprehensive income was equal to its net income for the years
ended December 31, 1998 and 1997.
<PAGE>
USE OF ESTIMATES AND CERTAIN SIGNIFICANT ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the estimation 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.
2. OIL AND GAS PROPERTIES
Upon formation of the Company, a member contributed oil and gas properties,
which were recorded at his historical cost basis of approximately $750,000.
In October 1996, the Company acquired a group of oil and gas properties for
approximately $2,048,000, before closing adjustments. In September 1998,
the Company acquired a group of oil and gas properties for approximately
$1,400,000, before closing adjustments. Closing adjustments included credits
of $243,000 and $74,000 in the respective acquisitions, representing net
revenues received prior to closing from the respective effective dates of
July 1, 1996 and July 1, 1998. Net revenues earned prior to the closing
dates were recorded as reductions in the costs of the properties. Additional
properties were acquired in 1999 as described in Note 7.
3. RELATED PARTY TRANSACTIONS
The Company had an agreement with its Managing Member to pay him a commission
of 5% of the cost of properties acquired under his direction. No amounts had
been paid under this arrangement and the amount due at December 31, 1998 was
$256,223.
4. LONG-TERM DEBT
Long-term debt at December 31, 1998 consisted of the following:
Revolving line of credit with a bank used for
acquisitions of oil and gas properties; interest
payments at the bank's base rate plus 1.5% are
due monthly; principal of $32,000 is due each
month with the remaining balance payable on
April 1, 2002. The debt is collateralized by certain
oil and gas properties and guaranteed by a
member of the Company. $ 1,814,000
Term loan with a bank used for acquisition of oil
and gas properties; interest at Wall Street Journal
prime rate due monthly; principal due in monthly
installments equal to the greater of $25,000 or 80%
of net revenues applicable to certain oil and gas
properties, with the remaining balance due
September, 1999. $ 1,140,904
-------------
Total 2,954,904
Less current portion (1,492,904)
Long-term debt $ 1,462,000
<PAGE>
Scheduled maturities of long-term debt as of December 31, 1998 are as follows:
Year Ended December 31,
1999 $ 1,492,904
2000 384,000
2001 384,000
2002 694,000
------------
$ 2,954,904
The revolving line of credit agreement includes certain covenants, the most
restrictive of which limit the general and administrative expenses the
Company may incur and provide for certain minimum levels of net worth and
ratio of cash-flow to debt service.
5. ENVIRONMENTAL MATTERS
The Company is engaged in oil and gas exploration and production and may become
subject to certain liabilities as they relate to environmental clean up of well
sites or other environmental restoration procedures as they relate to the
drilling of oil and gas wells and the operation thereof. Although an
environmental assessment was conducted on all the purchased properties, in
the Company's acquisition of existing or previously drilled well bores, the
Company may not be aware of what environmental safeguards were taken at the
time such wells were drilled or during such time the wells were operated.
Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
could fall upon the Company. No claim has been made, nor is the Company aware
of any liability which it may have, as it relates to any environmental clean
up, restoration or the violation of any rules or regulations relating thereto.
6. CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of trade accounts receivable. The receivables are primarily
from oil and gas and gas marketing companies. The Company does not require
collateral. The Company believes no allowance for doubtful accounts is
necessary at December 31, 1998.
The Company had one customer that accounted for approximately 12% and 10% of
oil and gas sales revenue in 1998 and 1997, respectively. Additionally, one
customer accounted for a total of 13% of trade accounts receivable as of
December 31, 1998.
7. SUBSEQUENT EVENTS
In January 1999, the Company closed an acquisition of oil and gas properties
for $1,650,000, before closing adjustments. Closing adjustments included a
credit of $59,000, representing net revenues earned from the properties from
the October 1998 effective date through closing. The acquisition was financed
primarily with bank debt.
8. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following table, based on information prepared by American Energy Advisors,
Inc., with respect to 1998 and Benton Engineering Company, with respect to 1997,
Independent petroleum engineers, summarizes changes in the estimates of the
Company's net interest in total proved reserves of crude oil and condensate and
natural gas, all of which are domestic reserves:
<PAGE>
YEARS ENDED DECEMBER 31,
1998 1997
Costs incurred in oil and gas producing
activities:
Acquisition of properties $1,447,121 $ 29,443
Exploration costs 186,838 135,237
Development costs - 75,317
------------- ------------
Total costs incurred $1,633,959 $239,997
The following table, based on information prepared by American Energy Advisors,
Inc., with respect to 1998 and ____ with respect to 1997, independent petroleum
engineer, summarizes changes in the estimates of the Company's net interest
in total proved reserves of crude oil and condensate and natural gas, all of
which are domestic reserves:
Oil Gas
(Barrels) (MCF)
Balance, January 1, 1997 224,000 7,676,000
Purchase of minerals in place 43,000 1,075,000
Extensions and discoveries 1,000 192,000
Production (21,000) (477,000)
------------ ------------
Balance, December 31, 1997 247,000 8,466,000
Purchase of minerals in place 47,000 935,000
Extensions and discoveries - 207,000
Production (16,000) (490,000)
------------ -----------
Balance, December 31, 1998 278,000 9,118,000
------------ -----------
Balances at December 31, 1998 using
March 31, 1999 prices (a) 366,000 11,700,000
============ ===========
The Company's reserves are all classified as proved developed.
a. The foregoing reserve quantities were determined based on prices
being received by the Company at December 31, 1998 of $9.25 per barrel
of oil and $1.84 per mcf of gas.
<PAGE>
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate and natural gas which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
oil and gas reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. The above
estimated net interests in proved reserves are based upon subjective
engineering judgments and may be affected by the limitations inherent in such
estimation. The process of estimating reserves is subject to continual revision
as additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.
9. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The standardized measure of discounted future net cash flows at December 31,
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 are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation process.
YEARS ENDED DECEMBER 31,
1998 1997
Future cash inflows $20,194,000 $23,252,000
Future production and development
costs (5,905,000) (5,718,000)
Future net cash flows 14,289,000 17,534,000
10% annual discount (7,083,000) (8,692,000)
--------------- --------------
Standardized measure of discounted
future net cash flows $ 7,206,000 $ 8,842,000
Standardized measure of discounted
future net cash flows (using)
prices at March 31, 1999)(a) $10,008.000
a. As described in Note 8, the foregoing information for 1998 was
determined using prices in existence at December 31, 1998. If prices
received at March 31, 1999 were used, the standardized measure of
discounted future net cash flows at December 31, 1998 would have
increased by approximately $2,802,000.
The following are the principal sources of change in the standardized measure of
discounted future net cash flows:
YEARS ENDED DECEMBER 31,
1998 1997
Balance, beginning of year $8,842,000 $12,965,000
Sales of oil and gas produced, net
of production costs (746,000) (1,043,000)
Purchase of minerals in place 846,000 895,000
Extensions and discoveries 168,000 127,000
Net changes in prices and
production costs (2,715,000) (5,402,000)
Revisions and other (73,000) -
Accretion of discount 884,000 1,300,000
------------ ---------------
Balance, end of year $7,206,000 $8,842,000
<PAGE>
Exhibit D
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1999
(Expressed in U.S. Dollars)
<TABLE>
Cotton
East Wood Valley Pro Forma Pro Forma
6/30/99 6/30/99 Adjustments Consolidated
-------- -------- --------- --------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash 66,816 9,083 - 75,899
Accounts receivable 374,850 53,022 - 427,872
Materials and supplies inventory - 97,650 - 97,650
Prepaid expenses - - - -
--------- -------- --------- --------
Total Current Assets 441,666 159,755 - 601,421
PROVED OIL AND GAS PROPERTIES (full cost method)
Net of Accumulated depletion 5,804,002 10,975,182 4,976,289(a)21,755,473
OFFICE FURNITURE AND EQUIPMENT
Net of Accumulated depreciation 15,748 117,245 - 132,993
OTHER ASSETS - 89,469 - 89,469
--------- --------- ----------- --------
Total Assets 6,261,416 11,341,651 4,976,289 22,579,356
========= ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade 464,104 716,487 - 1,180,591
Accounts payable-related parties 42,000 - - 42,000
Accrued expenses - 61,036 - 61,036
Accrued interest - 63,516 - 63,516
Accrued salaries - 381,539 - 381,539
Advances from related parties - 200,000 - 200,000
Notes payable and current
portion LTD 968,981 840,119 - 1,809,099
---------- --------- --------- ---------
Total Current Liabilities 1,475,085 2,262,696 - 3,737,781
LONG TERM DEBT, net of 3,233,926 - - 3,233,926
current maturities
MINORITY INTEREST - - 776,203(b) 776,203
STOCKHOLDERS' EQUITY:
Preferred Stock - - - -
Common Stock 1,221,120 23,548,537 1,967,138(c)26,736,795
Less subscriptions - (214,436) - (214,436)
Additional paid-in capital 256,223 - (256,223)(c) -
Special warrants - - 2,707,583 (c)2,707,583
Warrants and beneficial
conversion feature - 823,695 - 823,695
Retained earnings (deficit) 75,062 (15,078,841) (218,412)(c)(15,22,191)
--------- -------- ---------- ---------
Total Stockholders' Equity 1,552,405 9,078,955 4,200,086 14,831,446
--------- -------- ---------- ----------
Total Liabilities and
Stockholders' Equity 6,261,416 11,341,651 4,976,289 22,579,356
========= ========== ========== ==========
</TABLE>
Notes: (a) Includes additional depletion of $143,350 reflecting additional
expenses if properties had been recorded at fair value.
(b) In accordance with FAS 94, the companies are being consolidated
because Cotton Valley controls East Wood.
(c) Reflects allocation of difference between East Wood book value and
fair market value in the transaction.
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30, 1999
(Expressed in U.S. Dollars)
<TABLE>
Cotton
East Wood Valley
Year Year
ended ended Pro Forma Pro Forma
6/30/99 6/30/99 Adjustments Consolidation
-------- -------- --------- ------------
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas sales 1,537,674 266,232 - 1,803,906
Equipment Sales - 683,708 - 683,708
Other Income - 31,026 - 31,026
---------- -------- -------- ---------
Total Revenue 1,537,674 980,966 - 2,518,640
EXPENSES:
Oil and gas production 674,829 216,234 - 891,063
Cost of equipment sold - 281,850 - 281,850
Operating expenses - 320,982 - 320,982
General and
administrative 157,848 1,498,795 - 1,656,643
Depreciation and
depletion 166,109 159,329 143,350(a) 468,788
Other expenses - 971 - 971
------- -------- --------- ----------
Total Expenses 998,786 2,478,161 143,350 3,620,297
EARNINGS (LOSS) FROM
OPERATIONS 538,888 (1,497,195) (143,350) (1,101,657)
OTHER INCOME (EXPENSES):
Interest and financing
expense (302,897) (399,289) - (702,168)
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)
Other income 6,925 1,638 - 8,563
--------- ---------- --------- -----------
Total Other (295,972)(11,826,891) - (12,122,863)
--------- ---------- ---------- ----------
EARNINGS (LOSS) BEFORE
INCOME TAXES
AND MINORITY INTEREST 242,916 (13,324,086) (143,350) (13,224,520)
INCOME TAX BENEFIT
(PROVISION) (42,000) 1,845,000 - 1,845,000
------- --------- ---------- ----------
NET EARNINGS (LOSS)
BEFORE MINORITY INTEREST 200,916 (11,479,086) (143,350) (11,421,520)
MINORITY INTEREST - - (100,458) (100,458)
-------- ---------- ---------- -----------
NET EARNINGS (LOSS) 200,916 (11,479,086) (243,808) (11,521,978)
======= ========== ========== ==========
</TABLE>
Note: (a) Additional depletion of $143,350 reflecting additional expenses
if properties had been recorded at fair value.
<PAGE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSENSED CONSIOLIDATED PER SHARE DATA
JUNE 30, 1999
<TABLE>
East Cotton
Wood Valley
June 30, June 30, Pro Forma Pro Forma
1999 1999 Adjustments Consolidated
<S> <C> <C> <C> <C>
Common shares outstanding
(primary) 27,173,198
Less subscription common
shares (857,744)
-----------
71,149,190 (a) 26,315,454 97,464,644
Common shares--exercise of
warrants & options 15,042,867 (a) 5,563,800 20,606,667
---------- ---------- ----------
Equivalent common shares
outstanding (fully diluted)86,192,057 (a) 31,879,254 118,071,311
Total stockholders' equity
(primary) $ 1,552,405 $ 9,078,955 $4,200,086 $14,831,446
Book value per share
(primary) $ 0.02 $ 0.35 $ 0.15
Additions to stockholder's
equity from warrant
exercises $16,498,429 $ 6,102,159 $22,600,588
Total stockholder's equity
(fully diluted) $18,050,834 $15,181,114 $37,432,034
Book value per share
(fully diluted) $ 0.21 $ 0.48 $ 0.32
Cash dividends per share
(primary and fully
diluted) $ 0.00 $ 0.00 $ 0.00
Net Income (loss) from
continuing operations $ 200,916 $(11,479,086)$ (243,808)$(11,521,978)
Net Income (loss) per share
from continuing operations:
(primary) $ 0.00 $ (0.44) $ (0.12)
(fully diluted) $ 0.00 $ (0.36) $ (0.10)
Notes: (a) Common share amounts equated to the respective common shares of
Cotton Valley
</TABLE>
<PAGE>
EXHIBIT "E"
__________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSBA
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-28814
COTTON VALLEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
Yukon, Canada 98-0164357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Bank One Center
100 North Broadway
Oklahoma City, Oklahoma 73102
(Address of principal executive offices)
Telephone Number (405) 606-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No __
As of September 30, 1999 there were 59,198,537 shares of the Registrant's
Common Stock outstanding.
___________________________________________________________________________
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1999 3
Condensed Consolidated Statements of
Operations for the three months ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flow
for the three months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8K 8
Signatures 8
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1999
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 272,571
Accounts receivable 487,091
Materials and supplies inventory 88,490
----------------
Total Current Assets $ 848,152
PROVED OIL and GAS PROPERTIES (full cost method)
Net of accumulated depletion of $597,528 22,233,148
OFFICE FURNITURE and EQUIPMENT
Net of accumulated depreciation of $45,749 127,668
OTHER ASSETS 7,930
-----------------
Total Assets $ 23,216,898
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 711,450
Accrued expenses 81,547
Accrued interest 114,188
Notes payable and current long term debt 1,809,100
----------------
Total Current Liabilities $ 2,716,285
----------------
LONG TERM DEBT 3,262,966
MINORITY INTEREST 944,785
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited,
none issued -
Common Stock, no par value, authorized-unlimited,
59,731,198 issued $ 27,988,097
Special Warrants, 21,230,897 issued 2,707,583
Less subscriptions for 400,601 shares (214,436)
Warrants and beneficial conversion 823,695
Deficit accumulated in development stage (15,012,077)
----------------
Total Stockholders' Equity $ 16,292,862
----------------
Total Liabilities and Stockholders' Equity $ 23,216,898
================
</TABLE>
See accompanying notes to these financial statements
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Period from Period from
July 1, 1999 to July 1, 1998 to
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 657,584 $ 97,090
Equipment sales 19,913 456,933
Other income - 25,253
----------------- --------------
Total Revenue $ 677,497 $ 579,276
----------------- --------------
EXPENSES:
Oil and gas production $ 43,201 $ 67,947
Equipment purchase and rework 9,160 237,660
Equipment operations 786 102,761
General and administrative 214,380 439,529
Depreciation and depletion 49,067 54,278
--------------- -------------
Total Expenses $ 316,594 $ 902,175
--------------- -------------
INCOME (LOSS) FROM OPERATIONS $ 360,903 $ (322,899)
Interest and financing expense (125,556) (165,053)
--------------- -------------
INCOME (LOSS) BEFORE TAXES $ 235,347 $ (487,952)
INCOME TAX (None, due to application
of prior loss)
--------------- --------------
NET INCOME (LOSS) BEFORE $ 235,347 $ (487,952)
MINORITY INTEREST --------------- --------------
MINORITY INTEREST $ 168,583
--------------- --------------
NET INCOME (LOSS) $ 66,764 $ (487,952)
--------------- --------------
NET INCOME (LOSS) PER SHARE $ (0.00) $ (0.03)
=============== ==============
WEIGHTED AVERAGE SHARES 35,449,501 17,377,278
=============== ==============
</TABLE>
See accompanying notes to these financial statements
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Period from Period from
July 1, 1999 July 1, 1998 to
to September 30, 1999 September 30, 1998
--------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 66,764 $ (487,952)
Adjustments to reconcile net
cash used by operating activities:
Depreciation and depletion 49,067 54,278
Amortization - 35,468
Common stock issued for services - 21,000
Changes in operating assets and
liabilities
Accounts payable and
accrued liabilities (352,195) 157,438
Materials and supplies inventory 9,160 286,959
Accounts receivable and
other prepaids (59,219) 163,792
Other 18,291 (9,553)
---------------- --------------
Net cash provided (used)
by operating activities $ (268,132) $ 221,430
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties $ - $ 3,279
Sale of common stock and
exercise of warrants 518,750 142,500
Issuance of notes payable - 350,000
Conversion of trade payables to
long term debt - 278,291
Conversion of debenture to common stock - 100,000
Conversion of accounts payables
to common stock - 44,000
Proceeds from Long Term Debt 200,000
Cash obtained in acquisition of
East Wood Energy Venture, Inc. 66,816
Costs related to sale of stock
and notes (39,448) (86,666)
Repayment of notes payable (170,960) -
---------------- --------------
Net cash provided (used)
by financing activities $ 575,158 $ 831,404
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties $ (43,538) $ (891,878)
Additions to office furniture and equipment (19,839)
---------------- --------------
Net cash (used) by
investing activities $ (43,538) $ (911,717)
---------------- --------------
INCREASE (DECREASE) IN CASH $ 263,488 $ 141,117
CASH - Beginning of period 9,083 85,762
---------------- --------------
CASH - End of period $ 272,571 $ 226,879
================ ==============
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 88,020 $ 4,472
Oil and gas properties acquired
with common stock
and special warrants 5,895,840
Acquisition consulting fees
paid in stock 272,000
Related party advances and accrued
salaries paid in stock 500,000
Conversion of debt to
Common Stock 144,000
</TABLE>
See accompanying notes to these financial statements
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
(1) Nature of Business and Basis of Preparation and Presentation
Cotton Valley Resources Corporation (the "Company") has its primary business
focus in the acquisition of ownership interests in, and the production of oil
and gas from, existing oil and gas fields that indicate a potential for
increased production through development.
The condensed consolidated financial statements of Cotton Valley Resources
Corporation and subsidiaries (collectively "Cotton Valley") included herein have
been prepared by Cotton Valley without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
since Cotton Valley believes that the disclosures included are adequate to make
the information presented not misleading. In the opinion of management,
the condensed consolidated financial statements include all adjustments
consisting of normal recurring adjustments necessary to present fairly the
financial position, results of operations, and cash flows as of the dates and
for the periods presented. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included for the fiscal year ended June 30, 1999.
(2) Common Stock
During the three months ended September 30, 1999, the Company issued 25,000,000
shares of common stock and 21,230,897 special warrants as consideration for oil
and gas properties valued at $5,895,840; the Company issued 1,700,000 shares of
common stock valued at $272,000 for consulting services in connection with the
acquisition of oil and gas properties; the Company issued 2,200,000 shares and
1,000,000 warrants exercisable at $0.21875 per share for three years in private
placements to two investors for $518,750 in cash less $39,448 in costs related
to the sale of the common stock; the company issued 3,125,000 shares of common
stock in settlement of $500,000 of accrued salaries and advances from related
parties; and the Company issued 339 shares of common stock to balance
certain shareholder accounts.
(3) Yukon Continuance Contingent Liability
Potential Securities Act Violation
On March 16, 1998, the Company filed with the Commission a Registration
Statement on Form SB-2 (the "March 1998 Registration Statement") for the purpose
of registering up to 10,891,184 shares of the Company's Common Stock for sale by
certain shareholders of the Company, including approximately 5.7 million shares
to be issued upon exercise of outstanding warrants and conversion of the
Convertible Debentures. On May 1, 1998, the Company received a letter of
comments from the Staff of the Commission (the "May 1998 Staff Comment Letter")
relating to the March 1998 Registration Statement. In the May 1998 Staff
Comment Letter, the Staff advised the Company that it should have registered the
Yukon Continuance under the Securities Act. The Yukon Continuance was not
registered under the Securities Act.
The Company in its supplemental response on May 26, 1998 to the Staff's May 1998
Comment Letter contended, with the concurrence of the Company's U.S. securities
counsel, that the Yukon Continuance was a transaction not subject to the
registration requirements of Section 5 of the Securities Act. The Staff has
advised the Company that is does not agree with the Company and its U.S.
securities counsel's conclusion regarding the Yukon Continuance. The Company,
therefore, may have a contingent liability to certain of its shareholders, who
may sue the Company to recover the consideration paid, if any, for shares of the
Company's Common Stock, with interest thereon, from the date of the Yukon
Continuance to the date of repayment by the Company less the amount of any
income received thereon, upon tender of such securities, or for damages if the
shareholder no longer owns such securities. The Company intends to vigorously
defend any such shareholder lawsuit and believes that it may have valid
defenses, including the running of applicable statutes of limitations, against
claims by some or all of its shareholders. However, to the extent that any of
the Company's shareholders obtain a judgment for damages against
the Company, the Company's net assets and net worth will be reduced, which in
turn could reduce the Company's ability to obtain financing for its exploration
and drilling operations and cause the Company to curtail operations.
The Company is unable to quantify the amount of such contingent liability.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
First Three Months Fiscal 2000 and First Three Months Fiscal 1999
During the three months ended September 30, 1999, Cotton Valley earned a net
income of $66,764 which compares to a loss of $487,952 during the first three
months of fiscal 1999. The increase in earnings is a result production from
newly purchased oil and gas properties.
Oil and gas sales increased to $657,584 during the three months ended September
30, 1999. This increase reflects the results of oil and gas properties acquired
during this period. The properties which are located in Alabama, Arkansas,
California, Louisiana, Mississippi, Montana, Oklahoma, Texas and Wyoming
represent interests in approximately 400 producing oil and gas properties.
Equipment sales decreased $437,018 or 96% to $19,913 during the three
months ended September 30, 1999. The decrease reflects the discontinuance of
equipment operations.
General and administrative expenses decreased approximately 50% to $214,380
during the three months ended September 30, 1999. The decrease reflects the
discontinuance of equipment operations and the reduction in the number of
administrative employees.
Liquidity and Capital Resources
As of September 30, 1999, Cotton Valley has a working capital deficit of
$1,868,133 calculated by subtracting current liabilities of $2,716,285 from
current assets of $ 848,152. Cotton Valley intends to finance its development
activities with the proceeds from private placements, exercise of warrants and
traditional bank debt. 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this filing, there are no legal proceedings pending
against Cotton Valley, which would have a material adverse effect.
Item 5. Other Information
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995:
Certain statements in this filing, and elsewhere (such as in other filings
by Cotton Valley with the Commission, press releases, presentations by Cotton
Valley or its management and oral statements) constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Cotton Valley to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among other things, (i) significant
variability in Cotton Valley's quarterly revenues and results of operations as
a result of variations in the Cotton Valley's production in a particular quarter
while a significant percentage of its operating expenses are fixed in advance,
(ii) changes in the prices of oil and gas, (iii) Cotton Valley's ability to
obtain capital, (iv) other risk factors commonly faced by small oil and gas
companies.
Item 6. Exhibits and Reports on Form 8K
On September 7, 1999, the Company filed Form 8-K disclosing that Eugene A.
Soltero resigned as an Officer and Director and that John M. Haley resigned as
a Director.
SIGNATURES
Pursuant to the requirement 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.
Dated: December 9, 1999
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
/s/ Jack E. Wheeler
Jack E. Wheeler
Chief Executive Officer
<PAGE>
(Financial schedule doesn't have to go on this exhibit. Only on the original
file to the SEC)
