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:
____________________________________________________________________________
x Preliminary Proxy Statement Confidential, for Use of
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 DECEMBER ______, 1999
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 ________ day
of December, 1999 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 ( ) 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 FROM VOTING ( ) in the election of
directors.
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 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.
completed effective September 16, 1999.
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 North Hydrocarbons Incorporated", 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 , 1999.
_____________________________
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 _______ DAY OF DECEMBER,
1999.
(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 (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"). 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 November *, 1999.
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 November *, 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 November *, 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 November 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) The domicile of Apollo Investments Limited is Turks and Caicos Island,
British West Indies.
(9) Includes 7,076,965 special warrants. The domicile of Stillwater Gas
Production Inc. is Turks and Caicos Island, British West Indies.
(10) Includes 14,153,932 special warrants. The domicile of Custer County
Drillers Inc., is Turks and Caicos Island, British West Indies.
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.
PARTICULARS OF MATTERS TO BE ACTED UPON
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 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 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.
<PAGE>
Except for events previously disclosed, 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, 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"). 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.
Under the terms of the Purchase Agreement, the Corporation agreed to issue to
the shareholders of East Wood 46,230,897 Common Shares. However, because
the Corporation was unable to issue more than 25,000,000 shares at the time
of the closing, pursuant to an 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 upon 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>
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. This represented an
acquisition of a 50% interest in a company which, according to a reserve
report dated September 2, 1999 ("Reserve Report") prepared by American
Energy Advisors, Inc., had an estimated future net revenue value,
discounted at 10%, of US$16,257,188. As a result, the Corporation issued
the 46,230,897 Common Shares to acquire half of that value, or
approximately US$8.125 million. In addition, East Wood owns proved
undeveloped reserves with respect to more than 600 undrilled oil and gas
locations, the values of which have not yet been confirmed by outside
third party engineers. The Corporation entered into the Purchase
Agreement to acquire 50% of the outstanding shares of East Wood because it
was in a position where substantially all of its reserves were undeveloped
without income being generated, and was losing approximately US$40,000 per
month. By acquiring a 50% interest in East Wood, the Corporation would
have a viable business from currently producing oil and gas wells, with
positive cash flows, as well as adding significantly to its undeveloped
reserves. As a result, the Corporation entered into the Purchase
Agreement. By the terms of the Purchase Agreement, the Corporation is
obligated to ask the shareholders for approval to exercise the Special
Warrants. The exercise of the Special Warrants will dilute the interests
of all shareholders of the Corporation. If the exercise of the Special
Warrants is not approved, then the Corporation cannot carry out its
obligations under the terms of the Purchase Agreement, and it could lose
access to the full 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 in the United States. 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. There have been discussions
between the Corporation and the owner of the remaining 50% in East Wood, which
is at arm's length to the vendors under the Purchase Agreement, to acquire the
remaining 50% of East Wood, but no agreement has been reached to date.
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 shareholders at the Meeting in respect of this resolution.
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>
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 is enclosed herewith and
incorporated herein by reference. The audited financial statements of the
Corporation for same period are included therein. The information which
follows summarizes and updates information provided in the Form 10-KSB.
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. 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
reflecting the reduction of approximately $785,000 of liabilities and
providing a reserve for the reduction of another $215,000 of liabilities.
On March 26, 1999 the 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 obligations under the
Convertible Debentures were assumed by Mustang Well Servicing Corporation
("MWSC") and the Corporation's ownership interest in MWSC was transferred
to an unrelated third party. 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 the return of
all remaining Transferred Assets and remaining cash from the sale of
Transferred Assets once the Holders have received $4.22 million (plus interest
and certain expenses, less revenues and less 50% of the proceeds from sales of
the Interest and Waiver Shares) from the sale of Transferred Assets. In
connection with the transaction the 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. 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 shares of common stock, 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.
<PAGE>
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 cancelled 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 the two companies paid
travel, out of pocket and office supply expenses on behalf of the Corporation
in the amount of $80,920. The advances are unsecured and without interest.
During each of the years ended June 30, 1999, 1998 and 1997, the 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.
<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>
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.
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.
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 over 290,950 barrels of oil and condensate
and 11,857,677 Mcf gas.
<PAGE>
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, with price escalation. 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
ESCALATED PRICING NET RESERVES FUTURE NEW REVENUE
Oil and Gas Not Discounted
Condensate (Mcf) Discounted At 10%
Reserve Category (Barrels) ($) ($)
___________________________________________________________________________
Proved Developed
Producing 277,998 11,092,750 32,225,711 15,470,792
Proved Developed
Non-Producing 6,272 449,715 1,302,153 786,396
_____________________________________________________________________________
Total Proved Developed 284,270 11,542,465 33,527,864 16,257,188
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
producing and proved developed non-producing 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 (all amounts are in U.S. $).
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.
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 $13,494. 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 $315,568 based on total revenues of $1,549,858 and total expenses
of $1,239,290. These results reflect an overall improvement from Crown
Partner's 1998 third quarter net loss of $185,520 based on total revenues
of $1,009,844 and total expense of $1,196,364.
East Wood's total revenues during this nine month period was derived
primarily from oil and gas sales. The total expenses during the same
period, were primarily comprised of oil and gas production costs of
$598,852, depreciation depletion and amortization of $135,294, general and
administrative expenses of $228,402 and interest of $271,742. Sundry income
earned from other sources was $0. East Wood is taxed as a C corporation,
however no provision has been made for Federal income taxes due to the
acquisition by Cotton Valley and accumulated losses there in.
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. As at December 31,
1997, its cash balance was $41,764 and its accounts receivables were $272,018,
while proved oil and gas properties were valued at $243,572, net of accumulated
depreciation of $688,631.
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 at September 30, 1999, East Wood had total assets of $6,289,985
comprised of Current Assets of $466,680 and Oil and Gas Properties and other
assets of $5,823,305, which compares to 1998 third quarter figures of total
assets of $5,652,725, comprised of Current Assets of $470,159 and Oil and Gas
Properties fixed and other assets of $5,182,566. East Wood's cash balance was
$61,701 and its accounts receivable were $404,979, up from Crown Partner's 1998
third quarter sum of $101,059 and $369,100, respectively. Proved oil and
gas properties, were valued (using full cost method) at $5,805,111, net of
accumulated depreciation of $485,835. Crown Partner's proved oil and gas
properties were valued on September 30, 1998 at $5,157,429, net of accumulated
depreciation of and depletion of $1,208,497.
<PAGE>
East Wood's current liabilities on September 30, 1999 were $1,591,201,
long term debt was $3,162,096 and members' equity was $1,536,688, compared to
its third quarter ended September 30, 1998 figures of $973,440,$2,375,000 and
$2,304,284 respectively.
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 at September 30, 1999
[note to draft - confirm]:
Outstanding as at
Number Authorized September 30, 1999
----------------- ------------------
Share Capital
Common Shares 1,000 $104,788
(1,000 shares)
Retained Earnings - $1,206,457
------------------ ------------------
Total Capitalization - $1,311,245
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 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 4 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>
8. 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".
9. 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 current number of issued and outstanding shares
and Special Warrants(in the aggregate) of the Corporation.
3. Any of the future private placements or share issuances for
acquisitions would be substantially at arm's length.
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.
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.
10. 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 North Hydrocarbons Incorporated (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.
11. 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>
12. 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.
13. 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.
14. 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 November, 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-QSB 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.
BALANCE SHEET
September 30, 1999
(unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
CASH $ 61,701
RECEIVABLES-TRADE 404,979
--------------
TOTAL CURRENT ASSETS $ 466,680
OIL AND GAS PROPERTIES
PROPERTIES BEING AMORTIZED 6,290,946
LESS ACCUMULATED DEPRECIATION & DEPLETION (485,835)
--------------
NET OIL AND GAS PROPERTIES $ 5,805,111
OTHER ASSETS
OTHER PROPERTY & EQUIPMENT LESS ACCUMULATED 18,194
DEPRECIATION OF $6,254 18,194
--------------
TOTAL OTHER ASSETS $ 6,289,985
==============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE-TRADE $ 265,126
ROYALTIES PAYABLE 256,223
CURRENT PORTION OF LONG-TERM DEBT 1,069,852
--------------
TOTAL CURRENT LIABILITIES $ 1,591,201
--------------
LONG-TERM DEBT (NET OF CURRENT PORTION OF $1,063,696) $ 3,162,096
MEMBERS' EQUITY $ 1,536,688
-------------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 6,289,985
==============
</TABLE>
<PAGE>
East Wood Equity Venture, Inc.
STATEMENT OF INCOME
Nine Months Ended September 30, 1999
<TABLE>
<S> <C>
REVENUES
OIL AND GAS REVENUES $ 1,549,858
------------
TOTAL REVENUES $ 1,549,858
EXPENSES
LEASE OPERATING COSTS & PRODUCTION TAXES 598,852
DEPRECIATION, DEPLETION & AMORTIZATION 135,294
INTEREST 271,742
GENERAL & ADMINISTRATIVE 228,402
------------
$ 1,234,290
------------
NET INCOME (LOSS) $ 315,568
============
</TABLE>
<PAGE>
East Wood Equity Venture, Inc.
STATEMENT OF CASH FLOWS
For The Nine Months Ended September 30, 1999
(unaudited)
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES
NET INCOME (LOSS) FOR THE YEAR $ 315,568
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
AMORTIZATION, DEPRECIATION AND DEPLETION 135,294
(INCREASE) IN ACCOUNTS RECEIVABLE (159,213)
(DECREASE) IN ACCOUNTS PAYABLE -TRADE (18,798)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 272,851
CASH FLOW FROM INVESTING ACTIVITIES
ADDITIONS TO OIL AND GAS INTEREST (1,651,749)
ADDITIONS TO OTHER FIXED ASSETS 150,000
---------------
NET CASH UTILIZED BY INVESTING ACTIVITIES $ (1,501,749)
CASH FLOW FROM FINANCING ACTIVITIES
REPAYMENT OF LONG-TERM DEBT (423,052)
DECREASE IN ACQUISITION FEE PAYABLE 1,700,096
MEMBERS' DISTRIBUTIONS -
---------------
NET CASH UTILIZED BY FINANCING ACTIVITIES $ 1,277,044
NET INCREASE IN CASH 48,146
CASH AT JANUARY 1, 1999 13,555
---------------
CASH AT September 30, 1999 $ 61,701
==============
</TABLE>
<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, 19098, 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 sets forth certain information with respect to the oil
and gas producing activities of the Company:
<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 an 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. The Company's independent petroleum
engineer also prepared a reserve report using prices received by the
Company at March 31,1999 of $14.00 per barrel of oil and $1.90 per mcf
of gas, which resulted in an increase in reserve quantities at December
31, 1998 of 88,000 barrels of oil and 2,582,000 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
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEETS
Including Acquisition of 50% Equity Interest in East Wood Equity Venture, Inc.
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Cotton Combined
East Wood 50% Equity Valley ProForma
6/30/99 6/30/99 6/30/99 6/30/99
-------- -------- --------- --------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash 66,816 33,408 9,083 42,491
Accounts receivable 245,766 122,883 53,022 175,905
Materials and supplies inventory - - 97,650 97,650
--------- -------- --------- --------
Total Current Assets 312,582 156,291 159,755 316,046
PROVED OIL AND GAS PROPERTIES (full cost method)
Net of Accumulated depletion 5,792,671 2,896,336 10,975,182 13,871,518
OFFICE FURNITURE AND EQUIPMENT
Net of Accumulated depreciation 18,194 9,097 117,245 126,342
OTHER ASSETS - - 89,469 89,469
--------- --------- ----------- --------
Total Assets 6,123,447 3,061,724 11,341,651 14,403,375
========= ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade 268,438 134,219 716,487 850,706
Accounts payable-related parties 256,223 128,112 - 128,112
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 1,240,811 620,406 840,118 1,460,524
---------- --------- --------- ---------
Total Current Liabilities 1,765,472 882,736 2,262,696 3,145,432
LONG TERM DEBT 2,962,096 1,481,048 - 1,481,048
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value
Common Stock, no par value - - 23,334,101 23,334,101
Members equity 1,395,879 697,940 - 697,940
Warrants and beneficial
conversion feature - - 823,695 823,695
Deficit accumulated in
development stage - - (15,078,841)(15,078,841)
Accumulated earnings (loss) - - - -
--------- -------- ---------- ---------
Total Stockholders' Equity 1,395,879 697,940 9,078,955 9,776,895
--------- -------- ---------- ---------
Total Liabilities and
Stockholders' Equity 6,123,447 3,061,724 11,341,651 14,403,375
========= ========= ========== ==========
</TABLE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Including Acquisition of 50% Equity Interest in East Wood Equity Venture, Inc.
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Cotton Combined
Crown East Wood 50% Equity Valley ProForma
6 months 6 months 12 months 12 months 12 months
ended ended ended ended ended
12/31/98 6/30/99 6/30/99 6/30/99 6/30/99
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
REVENUE:
Oil and gas sales 582,509 802,007 692,258 266,232 958,490
Equipment Sales - - - 683,708 683,708
Other Income - - - 31,026 31,026
-------- ------- ------- -------- --------
Total Revenue 582,509 802,007 692,258 980,966 1,673,224
EXPENSES:
Oil and gas production 209,772 276,585 243,179 216,234 459,413
Cost of equipment sold - - - 281,850 281,850
Operating expenses - - - 320,982 320,982
General and
administrative 62,968 89,8803 76,424 1,498,795 1,575,219
Depreciation and
Depletion 84,799 90,196 87,498 159,329 246,827
Other expenses - - - 971 971
------- ------- -------- --------- ---------
Total Expenses 357,539 456,661 407,100 2,478,161 2,885,261
PROFIT (LOSS) FROM
OPERATIONS 224,970 345,346 285,158 (1,497,195) (1,212,037)
OTHER INCOME (EXPENSES):
Interest and financing
expense (106,041) (170,587) (138,314) (399,289) (537,603)
Loss on sale 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 6,925 - 3,462 1,638 5,100
-------- --------- -------- --------- -----------
Total Other (99,117) (170,587) (134,852)(11,826,891)(11,961,743)
------- --------- ------- ---------- ----------
PROFIT (LOSS) BEFORE
INCOME TAXES 125,854 174,759 150,306 (13,324,086)(13,173,780)
INCOME TAX BENEFIT
(PROVISION) - - - 1,845,000 1,845,000
------- ------- ------- ---------- ----------
NET PROFIT (LOSS) 125,854 174,759 150,306 (11,479,086)(11,328,780)
======= ======= ======= ========== ==========
</TABLE>
<PAGE>
COTTON VALLEY RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Cotton Combined
Crown East Wood 50% Equity Valley ProForma
6 months 6 months 12 months 12 months 12 months
ended ended ended ended ended
12/31/98 6/30/99 6/30/99 6/30/99 6/30/99
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net profit (loss) 125,854 174,759 150,306 (11,479,086)(11,328,780)
Adjustments to reconcile
net loss to net cash used
by operating activities:
Deferred income tax
provision (benefit) - - - (1,845,000) (1,845,000)
Depreciation and
depletion 84,799 90,196 87,498 159,329 246,827
Amortization - - - 143,041 143,041
Common stock issued
for expenses - - - 947,750 947,750
Change in accounts
receivable 13,236 - 6,618 562,487 569,105
Change in accounts
payable 100,566 (15,486) 42,540 136,335 178,875
Change materials and
supplies inventory - - - 434,045 434,045
Provision for inventory
loss - - - 359,664 359,664
Provision for oil & gas
property loss - - - 1,262,000 1,262,000
Loss on sale of assets
& other - - - 9,807,576 9,807,576
Other (8,977) - (4,488) (55,785) (60,273)
--------- -------- -------- ---------- ----------
Net Cash Provided by
Operating Activities 315,478 249,469 282,473 432,356 714,829
CASH FLOWS FROM
FINANCING ACTIVITIES:
Advances from
related parties - - - 77,001 77,011
Sale of common stock - - - 381,305 381,305
Issuance of notes payable - - - 451,518 451,518
Proceeds from
long-term debt 700,000 1,500,096 1,100,048 - 1,100,048
Repayment of long-
term debt (139,500) (252,093) (195,797) - (195,797)
Member contributions/
distributions 1,913 - 956 - 956
Costs related to sale
of stock and notes - - - (247,102) (274,102)
--------- -------- -------- --------- ----------
Net Cash Provide by
Financing Activities 562,413 1,248,003 905,208 662,732 1,567,940
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to oil and
gas properties (891,980) (1,444,211)(1,168,095)(1,139,884) (2,307,979)
Additions to office
furniture and
equipment - - - (31,883) (31,883)
---------- -------- --------- ---------- ----------
Net Cash Used by
Investing
Activities (891,980) (1,444,211)(1,168,095)(1,171,767) (2,339,862)
INCREASE (DECREASE)
IN CASH (14,090) 53,261 19,586 (76,679) (57,093)
CASH - Beginning
of period 27,645 13,555 20,600 85,762 106,362
CASH - End of period 13,555 66,816 40,186 9,083 49,269
========== ========== ========= ========== ==========
SUPPLEMENTAL INFORMATION
Cash paid for interest 100,392 170,587 135,490 315,215 450,705
Conversion of debt to
common stock 100,000 100,000
Extinguishment of
convertible debentures 4,220,000 4,220,000
Issuance of common stock
for accounts payable
net of subscriptions
receivable 785,564 785,564
</TABLE>
