FORM OF
TOUCHSTONE RESOURCES USA, INC.
---------------------------------------------
Securities Purchase Agreement
---------------------------------------------
Units Comprised of
Common Stock and
Warrants
-----------------------
CONFIDENTIAL
CONFIDENTIAL INFORMATION
THE OFFEREE, BY ACCEPTING THE SECURITIES PURCHASE AGREEMENT AND THE OTHER
OFFERING DOCUMENTS RELATING TO THE COMPANY'S PROPOSED OFFERING OF UNITS
COMPRISED OF SHARES OF ITS COMMON STOCK AND WARRANTS TO ACQUIRE SHARES OF ITS
COMMON STOCK, ACKNOWLEDGES AND AGREES THAT: (I) THE OFFERING DOCUMENTS HAVE BEEN
FURNISHED TO THE OFFEREE ON A CONFIDENTIAL BASIS SOLELY FOR THE PURPOSE OF
ENABLING THE OFFEREE TO EVALUATE THE OFFERING; (II) THAT THE OFFEREE MAY NOT
FURTHER DISTRIBUTE THE OFFERING DOCUMENTS WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMPANY, EXCEPT TO THE OFFEREE'S LEGAL, FINANCIAL OR OTHER PERSONAL
ADVISORS, IF ANY, WHO WILL USE THE OFFERING DOCUMENTS ON THE OFFEREE'S BEHALF
SOLELY FOR PURPOSES OF EVALUATING THE OFFERING; (III) ANY REPRODUCTION OR
DISTRIBUTION OF THE OFFERING DOCUMENTS, IN WHOLE OR IN PART, OR THE DIRECT OR
INDIRECT DISCLOSURE OF THE CONTENTS OF THE OFFERING DOCUMENTS FOR ANY OTHER
PURPOSE WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY IS PROHIBITED; AND (IV)
THE OFFEREE SHALL BE BOUND BY ALL TERMS AND CONDITIONS SPECIFIED IN THE OFFERING
DOCUMENTS.
NOTICE TO OFFEREES
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER THE
APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THIS SECURITIES
PURCHASE AGREEMENT AND THE OTHER OFFERING DOCUMENTS DO NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
THE SECURITIES ARE BEING SOLD FOR INVESTMENT PURPOSES ONLY, WITHOUT A VIEW
TO RESALE OR DISTRIBUTION THEREOF, AND MAY NOT BE TRANSFERRED, RESOLD OR OFFERED
FOR RESALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND EFFECTIVE REGISTRATION OR QUALIFICATION UNDER THE APPLICABLE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, OR THE AVAILABILITY OF AN
EXEMPTION THEREFROM.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR THE SECURITIES
COMMISSION OR OTHER REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS SECURITIES PURCHASE AGREEMENT OR ANY OF THE OTHER OFFERING
DOCUMENTS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
i
ADDITIONAL INFORMATION
Touchstone Resources USA, Inc. (the "Company") files annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, as
amended. Reports, statements or other information that we file with the SEC are
available to the public at the SEC's Website at ▇▇▇▇://▇▇▇.▇▇▇.▇▇▇, as well as
our Website at ▇▇▇.▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇. Information contained on our Website
does not constitute part of this agreement. The following documents that we have
previously filed with the SEC are incorporated by reference into this agreement:
o Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 2005;
o Current Report on Form 8-K dated August 11, 2005;
o Current Report on Form 8-K dated July 21, 2005;
o Annual Report on Form 10-KSB for the fiscal year ended December 31,
2004 ; and
o Any reports on Form 8-K filed with the SEC after November 22, 2005
and before the date this agreement is executed.
The information incorporated by reference into this agreement is an important
part of this agreement. Any statement contained in a document incorporated by
reference into this agreement shall be deemed to be modified or superseded for
the purposes of this agreement to the extent that a statement contained herein
or in any other subsequently filed document modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this agreement.
The Company will provide to each person to whom this agreement is sent,
upon the written or oral request of such person, a copy of any or all of the
documents referred to above that have been incorporated by reference into this
agreement but not delivered with this agreement. You may make such requests at
no cost to you by writing or telephoning us at the following address or number:
Touchstone Resources USA, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇
You should rely only on the information contained in this agreement or
incorporated by reference into this agreement. The Company has not authorized
anyone to provide you with different information. You should not assume that the
information in this agreement is accurate as of any date other than the date
this agreement is sent to you for review or that the information incorporated by
reference into this agreement is accurate as of any date other than the date set
forth on the front of the document containing such information.
ii
CONFIDENTIAL
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated ____________,
200_, by and between TOUCHSTONE RESOURCES USA, INC., a Delaware corporation (the
"Company"), and the purchaser or purchasers identified on the signature page
hereof ("Purchaser").
R E C I T A L S:
WHEREAS, Purchaser desires to purchase and the Company desires to sell
units comprised of shares of common stock and warrants to acquire shares of
common stock on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises hereof and the agreements
set forth herein below, the parties hereto hereby agree as follows:
1. The Offering.
(a) Private Offering. The securities offered by this Agreement are
being offered in a private offering (the "Offering") of up to 28,000,000 shares
("Shares") of common stock, $.001 par value per share ("Common Stock"), and
warrants ("Warrants") to acquire up to 14,000,000 shares of Common Stock. The
Shares and Warrants will be sold in units ("Units") comprised of two (2) shares
of Common Stock and one (1) Warrant. Up to 14,000,000 Units will be sold in the
Offering; provided, however, that in the event of any over-allotments of Units
during the offering period, the Company reserves the right to sell in excess of
14,000,000 Units to cover such over-allotments. The Units will be sold on a
reasonable "best efforts" basis at a purchase price of $1.80 per Unit ("Purchase
Price") pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and/or Rule 506 of Regulation D thereunder. The Units are
being offered solely to a limited number of "accredited investors" as that term
is defined in Rule 501(a) of the Securities Act during an offering period that
commenced on July 11, 2005, and terminates at the sole discretion of the
Company. Each Warrant is initially exercisable into one (1) share of Common
Stock at an exercise price of $1.50 per share, subject to adjustment. The terms
of the Warrants are set forth in the Form of Warrant, attached hereto and made a
part hereof as Exhibit A. The Shares, Warrants and shares of Common Stock
issuable upon exercise of the Warrants are hereinafter referred to collectively
as the "Securities."
(b) Use of Proceeds. Assuming all 14,000,000 Units are sold, the net
proceeds to the Company are estimated to be approximately $23,134,030 (after
deducting offering expenses payable by the Company estimated at $20,000 and
assuming payment of the maximum amount of placement agent and finders fees of up
to $2,016,000). The Company intends to use the net proceeds for general working
capital purposes and other general corporate purposes which may include the
repayment of up to $3,050,000 principal amount of outstanding indebtedness.
1
(c) Placement Agent and Finders Fees. The Company reserves the right
to pay cash fees to agents, brokers, dealers and finders in connection with the
sale of the Securities in an amount equal to up to eight percent (8%) of the
Purchase Price of such Securities and to issue warrants to such persons to
purchase shares of Common Stock equal to up to eight percent (8%) of the number
of Shares included in the Units issued hereunder at an exercise price of $1.50
per share which terminate three years after the date of issuance.
(d) Status of Offering; Summary Memorandum. Between August 22, and
November 22, 2005, the Company has sold 3,161,111 Units to a limited number of
investors, realized aggregate gross proceeds of $5,690,001, paid placement agent
fees of $357,200 to Legend Merchant Group. Inc, and Mid-South Capital, Inc.,
broker dealers registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and members of the National Association of Securities
Dealers, Inc., and issued warrants to Legend Merchant Group, Inc. to purchase
147,111 shares of Common Stock at an exercise price of $1.50 per share in
payment of additional placement agent fees. The Company intends to offer the
remaining 10,838,889 Units until the Offering is terminated. Attached hereto and
made a part hereof as Exhibit A, is a Summary Investment Memorandum describing
among other things, certain material risks factors applicable to the Company and
the Offering (the "Summary Investment Memorandum").
2. Sale and Purchase of Securities.
(a) Sale and Purchase of Securities. Subject to the terms and
conditions hereof, the Company agrees to sell, and Purchaser irrevocably
subscribes for and agrees to purchase, the number of Units set forth on the
signature page of this Agreement at a purchase price of $1.80 per Unit. The
aggregate purchase price for the Units shall be as set forth on the signature
page hereto (the "Purchase Price") and shall be payable upon execution hereof by
check or wire transfer of immediately available funds.
(b) Subscription Procedure. In order to purchase Units, Purchaser
shall deliver to the Company, at its principal executive office identified in
Section 16 hereof: (i) one completed and duly executed copy of this Agreement;
and (ii) immediately available funds, or a certified check or bank check, in an
amount equal to the Purchase Price. Execution and delivery of this Agreement
shall constitute an irrevocable subscription for that number of Units set forth
on the signature page hereto. The minimum investment that may be made by a
Purchaser is 15,000 Units for a purchase price of $27,000, although the Company
may, in its sole discretion, accept subscriptions for a lesser number of Units.
Payment for the Securities may be made by wire transfer to:
Frost National Bank
Houston, TX
ABA # 114 000 093
Credit to: Touchstone Resources USA, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇. ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Account #: 5400 15822
2
or by check made payable to: Touchstone Resources USA, Inc., ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇. Receipt by the Company of funds wired, or deposit
and collection by the Company of the check tendered herewith, will not
constitute acceptance of this Agreement by the Company. The Units subscribed for
will not be deemed to be issued to, or owned by, Purchaser until the Company has
executed this Agreement. All funds tendered by Purchaser will be held by the
Company pending acceptance or rejection of this Agreement by the Company and the
closing of Purchaser's purchase of Units. This Agreement will either be accepted
by the Company, in whole or in part, in its sole discretion, or rejected by the
Company as promptly as practicable. If this Agreement is accepted only in part,
Purchaser agrees to purchase such smaller number of Units as the Company
determines to sell to Purchaser. If this Agreement is rejected for any reason,
including the termination of the Offering by the Company, this Agreement and all
funds tendered herewith will be promptly returned to Purchaser, without interest
or deduction of any kind, and this Agreement will be void and of no further
force or effect.
(c) Closing. Subscriptions will be accepted by the Company in its
sole discretion. Upon the Company's execution of this Agreement, the
subscription evidenced hereby, if not previously rejected by the Company, will,
in reliance upon Purchaser's representations and warranties contained herein, be
accepted, in whole or in part, by the Company. If Purchaser's subscription is
accepted only in part, this Agreement will be marked to indicate such fact, and
the Company will return to Purchaser the portion of the funds tendered by
Purchaser representing the unaccepted portion of Purchaser's subscription,
without interest or deduction of any kind. Upon acceptance of this Agreement in
whole or in part by the Company, the Company will issue certificates for the
Shares to Purchaser, together with a copy of Purchaser's executed Agreement
countersigned by the Company and a Warrant ("Warrant Certificate") executed by
the Company.
3. Representations and Warranties of Purchaser. Purchaser represents and
warrants to the Company as follows:
(a) Organization and Qualification.
(i) If Purchaser is an entity, Purchaser is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, with the corporate or other entity power and authority to own and
operate its business as presently conducted, except where the failure to be or
have any of the foregoing would not have a material adverse effect on Purchaser,
and Purchaser is duly qualified as a foreign corporation or other entity to do
business and is in good standing in each jurisdiction where the character of its
properties owned or held under lease or the nature of their activities makes
such qualification necessary, except for such failures to be so qualified or in
good standing as would not have a material adverse effect on it.
(ii) If Purchaser is an entity, the address of its principal
place of business is as set forth on the signature page hereto, and if Purchaser
is an individual, the address of its principal residence is as set forth on the
signature page hereto.
(b) Authority; Validity and Effect of Agreement.
3
(i) If Purchaser is an entity, Purchaser has the requisite
corporate or other entity power and authority to execute and deliver this
Agreement and perform its obligations under this Agreement. The execution and
delivery of this Agreement by Purchaser, the performance by Purchaser of its
obligations hereunder and all other necessary corporate or other entity action
on the part of Purchaser have been duly authorized by its board of directors or
similar governing body, and no other corporate or other entity proceedings on
the part of Purchaser is necessary for Purchaser to execute and deliver this
Agreement and perform its obligations hereunder.
(ii) This Agreement has been duly and validly authorized,
executed and delivered by Purchaser and, assuming it has been duly and validly
executed and delivered by the Company, constitutes a legal, valid and binding
obligation of Purchaser, in accordance with its terms.
(c) No Conflict; Required Filings and Consents. Neither the
execution and delivery of this Agreement by Purchaser nor the performance by
Purchaser of its obligations hereunder will: (i) if Purchaser is an entity,
conflict with Purchaser's articles of incorporation or bylaws, or other similar
organizational documents; (ii) violate any statute, law, ordinance, rule or
regulation, applicable to Purchaser or any of the properties or assets of
Purchaser; or (iii) violate, breach, be in conflict with or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or permit the termination of any provision of, or result in the
termination of, the acceleration of the maturity of, or the acceleration of the
performance of any obligation of Purchaser under, or result in the creation or
imposition of any lien upon any properties, assets or business of Purchaser
under, any material contract or any order, judgment or decree to which Purchaser
is a party or by which it or any of its assets or properties is bound or
encumbered except, in the case of clauses (ii) and (iii), for such violations,
breaches, conflicts, defaults or other occurrences which, individually or in the
aggregate, would not have a material adverse effect on its obligation to perform
its covenants under this Agreement.
(d) Accredited Investor. Purchaser is an "accredited investor" as
that term is defined in Rule 501(a) of Regulation D under the Securities Act. If
Purchaser is an entity, Purchaser was not formed for the specific purpose of
acquiring the Securities, and, if it was, all of Purchaser's equity owners are
"accredited investors" as defined above.
(e) No Government Review. Purchaser understands that neither the
United States Securities and Exchange Commission ("SEC") nor any securities
commission or other governmental authority of any state, country or other
jurisdiction has approved the issuance of the Securities or passed upon or
endorsed the merits of the Securities or this Agreement, the Warrant Certificate
or any of the other documents relating to the proposed Offering (collectively,
the "Offering Documents"), or confirmed the accuracy of, determined the adequacy
of, or reviewed this Agreement, the Warrant Certificate or the other Offering
Documents.
(f) Investment Intent. The Securities are being acquired for the
Purchaser's own account for investment purposes only, not as a nominee or agent
and not with a view to the resale or distribution of any part thereof, and
Purchaser has no present intention of selling, granting any participation in or
otherwise distributing the same. By executing this Agreement, Purchaser further
represents that Purchaser does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participation to such
person or third person with respect to any of the Securities.
4
(g) Restrictions on Transfer. Purchaser understands that the
Securities are "restricted securities" as such term is defined in Rule 144 under
the Securities Act and have not been registered under the Securities Act or
registered or qualified under any state securities law, and may not be, directly
or indirectly, sold, transferred, offered for sale, pledged, hypothecated or
otherwise disposed of without registration under the Securities Act and
registration or qualification under applicable state securities laws or the
availability of an exemption therefrom. In any case where such an exemption is
relied upon by Purchaser from the registration requirements of the Securities
Act and the registration or qualification requirements of such state securities
laws, Purchaser shall furnish the Company with an opinion of counsel stating
that the proposed sale or other disposition of such securities may be effected
without registration under the Securities Act and will not result in any
violation of any applicable state securities laws relating to the registration
or qualification of securities for sale, such counsel and opinion to be
satisfactory to the Company. Purchaser acknowledges that it is able to bear the
economic risks of an investment in the Securities for an indefinite period of
time, and that its overall commitment to investments that are not readily
marketable is not disproportionate to its net worth.
(h) Investment Experience. Purchaser has such knowledge,
sophistication and experience in financial, tax and business matters in general,
and investments in securities in particular, that it is capable of evaluating
the merits and risks of this investment in the Securities, and Purchaser has
made such investigations in connection herewith as it deemed necessary or
desirable so as to make an informed investment decision without relying upon the
Company for legal or tax advice related to this investment. In making its
decision to acquire the Securities, Purchaser has not relied upon any
information other than information provided to Purchaser by the Company or its
representatives and contained herein and in the other Offering Documents.
(i) Access to Information. Purchaser acknowledges that it has had
access to and has reviewed all documents and records relating to the Company,
including, but not limited to, the Company's Quarterly Report on Form 10-QSB for
the fiscal quarter ended September 30, 2005 and the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2004, that it has deemed
necessary in order to make an informed investment decision with respect to an
investment in the Securities; that it has had the opportunity to ask
representatives of the Company certain questions and request certain additional
information regarding the terms and conditions of such investment and the
finances, operations, business and prospects of the Company and has had any and
all such questions and requests answered to its satisfaction; and that it
understands the risks and other considerations relating to such investment.
(j) Reliance on Representations. Purchaser understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of the federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Purchaser's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the availability of such exemptions and the eligibility of such
Purchaser to acquire the Securities. Purchaser represents and warrants to the
Company that any information that Purchaser has heretofore furnished or
furnishes herewith to the Company is complete and accurate, and further
represents and warrants that it will notify and supply corrective information to
the Company immediately upon the occurrence of any change therein occurring
prior to the Company's issuance of the Securities. Within five (5) days after
receipt of a request from the Company, Purchaser will provide such information
and deliver such documents as may reasonably be necessary to comply with any and
all laws and regulations to which the Company is subject.
5
(k) No General Solicitation. Purchaser is unaware of, and in
deciding to participate in the Offering is in no way relying upon, and did not
become aware of the Offering through or as a result of, any form of general
solicitation or general advertising including, without limitation, any article,
notice, advertisement or other communication published in any newspaper,
magazine or similar media, or broadcast over television or radio or the
internet, in connection with the Offering.
(l) Placement and Finder's Fees. No agent, broker, investment
banker, finder, financial advisor or other person acting on behalf of Purchaser
or under its authority is or will be entitled to any broker's or finder's fee or
any other commission or similar fee, directly or indirectly, in connection with
the Offering, and no person is entitled to any fee or commission or like payment
in respect thereof based in any way on agreements, arrangements or understanding
made by or on behalf of Purchaser.
(m) Investment Risks. Purchaser understands that purchasing
Securities in the Offering will subject Purchaser to certain risks, including,
but not limited to, those set forth in the Summary Investment Memorandum and
each of the following:
(i) The Company's business of exploring for and producing oil
and gas involves a substantial risk of investment loss. The Company's oil and
gas operations are subject to the economic risks typically associated with
exploration, development and production activities, including the necessity of
incurring significant expenditures to locate and acquire properties and to drill
exploratory ▇▇▇▇▇. Drilling oil and gas ▇▇▇▇▇ involves the risk that the ▇▇▇▇▇
may be unproductive or that, although productive, the ▇▇▇▇▇ may not produce oil
or gas in economic quantities. No assurance can be given that the Company will
be able to find and develop or acquire additional reserves on acceptable terms,
or that commercial quantities of oil and gas deposits will be discovered
sufficient to enable the Company to recover its exploration and development
costs or sustain its business.
(ii) The offering price of the Securities offered hereby has
been determined solely by the Company and does not necessarily bear any
relationship to the value of the Company's assets, current or potential earnings
of the Company, or any other recognized criteria used for measuring value, and
therefore, there can be no assurance that the offering price of the Units is
representative of the actual value of the underlying Securities.
(iii) The Company has experienced net losses in each fiscal
quarter since its inception and expects to continue to incur significant net
losses for the foreseeable future. While the Company is unable to predict
accurately its future operating expenses, it currently expects these expenses to
increase substantially as it implements its business plan.
6
(iv) In order to fund its future operations, attract and
retain employees, consultants and other service providers, and satisfy other
obligations, the Company may be required to issue additional shares of Common
Stock, securities exercisable or convertible into shares of Common Stock, or
debt. Such securities may be issued for a purchase price consisting of cash,
services or other consideration that may be materially different than the
purchase price of the Units. The issuance of any such securities may result in
substantial dilution to the relative ownership interests of the Company's
existing shareholders and substantial reduction in net book value per share.
Additional equity securities may have rights, preferences and privileges senior
to those of the holders of Common Stock, and any debt financing may involve
restrictive covenants that may limit the Company's operating flexibility.
(v) The Company has provided herein that it intends to use
most of the net proceeds from the Offering for general working capital purposes
and other general corporate purposes. Thus, Purchaser is making its investment
in the Securities based in part upon very limited information regarding the
specific uses to which the net proceeds will be applied.
(vi) An investment in the Securities may involve certain
material legal, accounting and federal and state tax consequences. Purchaser
should consult with its legal counsel, accountant and/or business adviser as to
the legal, accounting, tax and related matters accompanying such an investment.
(n) Legends. The certificates and agreements evidencing the
Securities shall have endorsed thereon the following legend (and appropriate
notations thereof will be made in the Company's stock transfer books), and stop
transfer instructions reflecting these restrictions on transfer will be placed
with the transfer agent of the Securities:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE.
THE SECURITIES REPRESENTED HEREBY HAVE BEEN TAKEN BY THE REGISTERED OWNER
FOR INVESTMENT, AND WITHOUT A VIEW TO RESALE OR DISTRIBUTION THEREOF, AND
MAY NOT BE SOLD, TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER THAT SUCH TRANSFER OR DISPOSITION DOES NOT
VIOLATE THE SECURITIES ACT OF 1933, AS AMENDED, THE RULES AND REGULATIONS
THEREUNDER OR OTHER APPLICABLE SECURITIES LAWS.
4. Representations and Warranties of the Company. The Company represents
and warrants to Purchaser as follows:
(a) Organization and Qualification. The Company is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, with the corporate power and authority to own and operate its
business as presently conducted, except where the failure to be or have any of
the foregoing would not have a material adverse effect on the Company. The
Company is duly qualified as a foreign corporation or other entity to do
business and is in good standing in each jurisdiction where the character of its
properties owned or held under lease or the nature of their activities makes
such qualification necessary, except for such failures to be so qualified or in
good standing as would not have a material adverse effect on the Company.
7
(b) Authority; Validity and Effect of Agreement.
(i) The Company has the requisite corporate power and
authority to execute and deliver this Agreement, perform its obligations under
this Agreement, and conduct the Offering. The execution and delivery of this
Agreement by the Company, the performance by the Company of its obligations
hereunder, the Offering and all other necessary corporate action on the part of
the Company have been duly authorized by its board of directors, and no other
corporate proceedings on the part of the Company are necessary to authorize this
Agreement or the Offering. This Agreement has been duly and validly executed and
delivered by the Company and, assuming that it has been duly authorized,
executed and delivered by Purchaser, constitutes a legal, valid and binding
obligation of the Company, in accordance with its terms, subject to the effects
of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
(ii) The Shares have been duly authorized and, when issued and
paid for in accordance with this Agreement, will be validly issued, fully paid
and non-assessable shares of Common Stock with no personal liability resulting
solely from the ownership of such shares and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company. The shares of Common Stock issuable upon exercise of the Warrants when
issued and paid for in accordance with the Warrants, will be duly authorized,
validly issued, fully paid and non-assessable shares of Common Stock with no
personal liability resulting solely from the ownership of such shares and will
be free and clear of all liens, charges, restrictions, claims and in
encumbrances imposed by or through the Company.
(c) No Conflict; Required Filings and Consents. Neither the
execution and delivery of this Agreement by the Company nor the performance by
the Company of its obligations hereunder will: (i) conflict with the Company's
certificate of incorporation or bylaws; (ii) violate any statute, law,
ordinance, rule or regulation, applicable to the Company or any of the
properties or assets of the Company; or (iii) violate, breach, be in conflict
with or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or permit the termination of any
provision of, or result in the termination of, the acceleration of the maturity
of, or the acceleration of the performance of any obligation of the Company, or
result in the creation or imposition of any lien upon any properties, assets or
business of the Company under, any material contract or any order, judgment or
decree to which the Company is a party or by which it or any of its assets or
properties is bound or encumbered except, in the case of clauses (ii) and (iii),
for such violations, breaches, conflicts, defaults or other occurrences which,
individually or in the aggregate, would not have a material adverse effect on
its obligation to perform its covenants under this Agreement.
8
(d) SEC Reports and Financial Statements. The Company has filed with
the SEC, and has heretofore made available to Purchaser, true and complete
copies of all forms, reports, schedules, statements and other documents required
to be filed by it under the Exchange Act or the Securities Act. In addition, the
Company has incorporated by reference into this Agreement, its Quarterly Report
on Form 10-QSB for the fiscal quarter ended September 30, 2005, its Current
Reports on Form 8-K dated August 11, 2005 and July 21, 2005, and its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2004 (as such
documents have been amended since the date of their filing, collectively, the
"Company SEC Documents"). As of their respective dates or, if amended, as of the
date of the last such amendment, the Company SEC Documents, including any
financial statements or schedules included therein: (i) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading; and (ii)
complied in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, as the case may be, and the applicable
rules and regulations of the SEC thereunder. Each of the financial statements
included in the Company SEC Documents have been prepared from, and are in
accordance with, the books and records of the Company, comply in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present the financial position and the results of operations
and cash flows of the Company as of the dates thereof or for the periods
presented therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments not material in amount).
(e) Placement and Finder's Fees. Except as provided in Section 1(c),
neither the Company nor any of its respective officers, directors, employees or
managers, has employed any broker, dealer, finder, advisor or consultant, or
incurred any liability for any investment banking fees, brokerage fees,
commissions or finders' fees, advisory fees or consulting fees in connection
with the Offering for which the Company has or could have any liability.
5. Indemnification. Purchaser agrees to indemnify, defend and hold
harmless the Company and its respective affiliates and agents from and against
any and all demands, claims, actions or causes of action, judgments,
assessments, losses, liabilities, damages or penalties and reasonable attorneys'
fees and related disbursements incurred by the Company that arise out of or
result from a breach of any representations or warranties made by Purchaser
herein, and Purchaser agrees that in the event of any breach of any
representations or warranties made by Purchaser herein, the Company may, at its
option, forthwith rescind the sale of the Units to Purchaser.
6. Registration Rights. The Company covenants and agrees as follows:
6.1 For the purpose of this Section 6, the following definitions
shall apply:
(a) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations of the SEC thereunder, all as
the same shall be in effect at the time.
9
(b) "Person" shall mean an individual, partnership (general or
limited), corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
(c) "Register," "registered," and "registration" shall refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or order of
effectiveness of such registration statement or document by the SEC.
(d) "Registration Statement" shall mean any registration
statement of the Company filed with the SEC pursuant to the provisions of
Section 6.2 of this Agreement, which covers the resale of the Restricted Stock
on an appropriate form then permitted by the SEC to be used for such
registration and the sales contemplated to be made thereby under the Securities
Act, or any similar rule that may be adopted by the SEC, and all amendments and
supplements to such registration statement, including any pre- and post-
effective amendments thereto, in each case including the prospectus contained
therein, all exhibits thereto and all materials incorporated by reference
therein.
(e) "Restricted Stock" shall mean (i) the Shares; (ii) the
shares of Common Stock issuable upon exercise of the Warrants; and (iii) any
additional shares of Common Stock of the Company issued or issuable after the
date hereof in respect of any of the foregoing securities, by way of a stock
dividend or stock split; provided that as to any particular shares of Restricted
Stock, such securities shall cease to constitute Restricted Stock when (x) a
Registration Statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of thereunder, (y) such securities are permitted to be transferred
pursuant to Rule 144(k) (or any successor provision to such rule) under the
Securities Act or (z) such securities are otherwise freely transferable to the
public without further registration under the Securities Act.
(f) "Selling Stockholders" shall mean Purchaser and any other
purchaser of Units in the Offering, and their respective successors and assigns.
6.2. Registration of the Shares.
The Company shall use its reasonable best efforts to prepare
and file with the SEC, within 60 days of the date the Offering is completed, a
Registration Statement under the Act to permit the public sale of the Restricted
Stock, and to cause such Registration Statement to be declared effective within
150 days of the date the Offering is completed. The Selling Stockholders shall
furnish such information as may be reasonably requested by the Company in order
to include such Restricted Stock in such Registration Statement. If any Selling
Stockholder decides not to include all of its Restricted Stock in any
registration statement thereafter filed by the Company, such Selling Stockholder
shall nevertheless continue to have the right to include any Restricted Stock in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein. In the event that any registration pursuant to
this Section 6.2 is terminated or withdrawn, the Company shall use its
reasonable best efforts to prepare and file with the SEC, as soon thereafter as
practicable, a Registration Statement under the Securities Act to permit the
public sale of the Restricted Stock purchased hereby.
10
6.3. Registration Procedures. Whenever it is obligated to register
any Restricted Stock pursuant to this Agreement, the Company shall:
(a) prepare and file with the SEC a Registration Statement
with respect to the Restricted Stock in the manner set forth in Section 6.2
hereof and use its reasonable best efforts to cause such Registration Statement
to become effective as promptly as possible and to remain effective until the
earlier of: (i) the sale of all shares of Restricted Stock covered thereby, (ii)
the availability under Rule 144(k) for the Selling Stockholder to immediately,
freely resell without restriction all Restricted Stock covered thereby, or (iii)
two (2) years from the date of this Agreement;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to such Registration Statement and
the prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective for the period specified in Section 6.3(a)
above and to comply with the provisions of the Act with respect to the
disposition of all Restricted Stock covered by such Registration Statement in
accordance with the intended method of disposition set forth in such
Registration Statement for such period;
(c) furnish to the Selling Stockholders such number of copies
of the Registration Statement and the prospectus included therein (including
each preliminary prospectus) as such person may reasonably request in order to
facilitate the public sale or other disposition of the Restricted Stock covered
by such Registration Statement;
(d) use its reasonable best efforts to register or qualify the
Restricted Stock covered by such Registration Statement under the state
securities laws of such jurisdictions as any Selling Stockholder shall
reasonably request; provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) in the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each
Purchaser participating in such underwriting shall also enter into and perform
its obligations under such an agreement, as described in Section 6.2(b);
(f) immediately notify each Selling Stockholder at any time
when a prospectus relating thereto is required to be delivered under the Act, of
the happening of any event as a result of which the prospectus contained in such
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required or necessary to be
stated therein in order to make the statements contained therein not misleading
in light of the circumstances under which they were made. The Company will use
reasonable efforts to amend or supplement such prospectus in order to cause such
prospectus not to include 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 not misleading in the light of the circumstances under which
they were made;
11
(g) prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
with such Registration Statements as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement;
(h) use its reasonable best efforts to list the Restricted
Stock covered by such Registration Statement on each exchange or automated
quotation system on which similar securities issued by the Company are then
listed (with the listing application being made at the time of the filing of
such Registration Statement or as soon thereafter as is reasonably practicable);
(i) notify each Selling Stockholder of any threat by the SEC
or state securities commission to undertake a stop order with respect to sales
under the Registration Statement; and
(j) cooperate in the timely removal of any restrictive legends
from the shares of Restricted Stock in connection with the resale of such shares
covered by an effective Registration Statement.
6.4. Delay of Registration.
(a) The Company and the Selling Stockholders agree that the
Selling Stockholders may suffer damages if the Registration Statement is not
filed on or prior to the date that is 60 days after the date the Offering is
completed (the "Target Filing Date") and maintained in the manner contemplated
herein. The Company and the Selling Stockholders further agree that it would not
be feasible to ascertain the extent of such damages with precision. Accordingly,
if the Registration Statement is not filed on or prior to the Target Filing
Date, the Company shall pay in cash or in shares of Common Stock (at the
Company's option) as liquidated damages for such failure and not as a penalty to
the Selling Stockholders, an amount equal to two percent (2%) of the Purchase
Price and an additional amount equal to one percent (1%) of the Purchase Price
at the end of each subsequent 30-day period during which the Registration
Statement is not filed (the "Late Filing Damages"). Any payments to be made to
the Selling Stockholders pursuant to this Section 6.4(a) shall be due and
payable within three (3) business days of any demand therefor by the Selling
Stockholders. The parties agree that the Late Filing Damages represent the sole
and exclusive remedy, whether at law or in equity, available to the Selling
Stockholders if the Registration Statement is not filed on or prior to the
Target Filing Date. If the Company elects to pay the Late Filing Damages in
shares of Common Stock, such shares of Common Stock shall be valued at the
average closing price of a share of Common Stock on the applicable trading
market for the Common Stock for the 5-trading-day period immediately preceding
the date of demand of such Late Filing Damages.
12
(b) The Company and the Selling Stockholders agree that the
Selling Stockholders may suffer damages if the Registration Statement is not
declared effective by the SEC on or prior to the date that is 150 days after the
date the Offering is completed (the "Effectiveness Deadline"). The Company and
the Selling Stockholders further agree that it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, if the
Registration Statement is not declared effective by the SEC prior to the
Effectiveness Deadline, the Company shall pay in cash or in shares of Common
Stock (at the Company's option) as liquidated damages for such failure and not
as a penalty to the Selling Stockholders, an amount equal to two percent (2%) of
the Purchase Price and an additional amount equal to one percent (1%) of the
Purchase Price at the end of each subsequent 30-day period during which the
Registration Statement is not declared effective (the "Non-Effectiveness
Damages"). Payments to be made to the Selling Stockholders pursuant to this
Section 6.4(b) shall be due and payable within three (3) business days of any
demand therefor by the Selling Stockholders. The parties agree that the
Non-Effectiveness Damages represent the sole and exclusive remedy, whether at
law or in equity, available to the Selling Stockholders if the Registration
Statement is not declared effective on or prior to the date that is 150 days
after the Target Filing Date. If the Company elects to pay the Non-Effectiveness
Damages in shares of Common Stock, such shares of Common Stock shall be valued
at the average closing price of a share of Common Stock on the applicable
trading market for the Common Stock for the 5-trading-day period immediately
preceding the date of demand of such Non-Effectiveness Damages.
(c) No Selling Stockholder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 6.
6.5 Expenses.
(a) For the purposes of this Section 6.5, the term
"Registration Expenses" shall mean: all expenses incurred by the Company in
complying with Section 6.2 of this Agreement, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for the Company, fees under state
securities laws, fees of the National Association of Securities Dealers, Inc.
("NASD"), fees and expenses of listing shares of Restricted Stock on any
securities exchange or automated quotation system on which the Company's shares
are listed and fees of transfer agents and registrars. The term "Selling
Expenses" shall mean: all underwriting discounts and selling commissions
applicable to the sale of Restricted Stock and all accountable or
non-accountable expenses paid to any underwriter in respect of such sale.
(b) Except as otherwise provided herein, the Company will pay
all Registration Expenses in connection with the Registration Statements filed
pursuant to Section 6.2 of this Agreement. All Selling Expenses in connection
with any Registration Statements filed pursuant to Section 6.2 of this Agreement
shall be borne by the Selling Stockholders pro rata on the basis of the number
of shares registered by each Selling Stockholder whose shares of Restricted
Stock are covered by such Registration Statement, or by such persons other than
the Company (except to the extent the Company may be a seller) as they may
agree.
6.6. Obligations of the Selling Stockholders.
13
(a) In connection with each registration hereunder, each
Selling Stockholder will furnish to the Company in writing such information with
respect to it and the securities held by it and the proposed distribution by it,
as shall be reasonably requested by the Company in order to assure compliance
with applicable federal and state securities laws as a condition precedent to
including the Selling Stockholder's Restricted Stock in the Registration
Statement. Each Selling Stockholder shall also promptly notify the Company of
any changes in such information included in the Registration Statement or
prospectus as a result of which there is an untrue statement of material fact or
an omission to state any material fact required or necessary to be stated
therein in order to make the statements contained therein not misleading in
light of the circumstances under which they were made.
(b) In connection with the filing of the Registration
Statement, each Selling Stockholder shall furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with such Registration Statement or prospectus.
(c) In connection with each registration pursuant to this
Agreement, each Selling Stockholder agrees that it will not effect sales of any
Restricted Stock until notified by the Company of the effectiveness of the
Registration Statement, and thereafter will suspend such sales after receipt of
telegraphic or written notice from the Company to suspend sales to permit the
Company to correct or update a Registration Statement or prospectus. At the end
of any period during which the Company is obligated to keep a Registration
Statement current, each Selling Stockholder shall discontinue sales of
Restricted Stock pursuant to such Registration Statement upon receipt of notice
from the Company of its intention to remove from registration the Restricted
Stock covered by such Registration Statement that remains unsold, and each
Selling Stockholder shall notify the Company of the number of shares registered
which remain unsold immediately upon receipt of such notice from the Company.
6.7. Information Blackout and Holdbacks.
(a) At any time when a Registration Statement effected
pursuant to Section 6.2 is effective, upon written notice from the Company to
Purchaser that the Company has determined in good faith that the sale of
Restricted Stock pursuant to the Registration Statement would require disclosure
of non-public material information, Purchaser shall suspend sales of Restricted
Stock pursuant to such Registration Statement until such time as the Company
notifies Purchaser that such material information has been disclosed to the
public or has ceased to be material, or that sales pursuant to such Registration
Statement may otherwise be resumed.
(b) Notwithstanding any other provision of this Agreement,
Purchaser shall not effect any public sale or distribution (including sales
pursuant to Rule 144 under the Securities Act), if and when available, of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the thirty (30) days prior to the
commencement of any primary offering to be undertaken by the Company of shares
of its unissued Common Stock ("Primary Offering"), which may also include other
securities, and ending one hundred twenty (120) days after completion of any
such Primary Offering, unless the Company, in the case of a non-underwritten
Primary Offering, or the managing underwriter, in the case of an underwritten
Primary Offering, otherwise agree.
14
6.8. Indemnification.
(a) The Company agrees to indemnify, to the extent permitted
by law, each Selling Stockholder, such Selling Stockholder's respective
partners, officers, directors, underwriters and each Person who controls any
Selling Stockholder (within the meaning of the Securities Act) against all
losses, claims, damages, liabilities and expenses caused by (i) any untrue
statement of or alleged untrue statement of material fact contained in the
Registration Statement, prospectus or preliminary prospectus or any amendment or
supplement thereto, (ii) any omission of or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law in connection with the offering covered by such Registration
Statement ("Violations"); provided, however, that the indemnity agreement
contained in this Section 6.8(a) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Company, which consent shall not be
unreasonably withheld, nor shall the Company be liable in for any loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation which occurs in reliance upon and in conformity with information
furnished to the Company by such Selling Stockholder, partner, officer,
director, underwriter or controlling person of such Selling Stockholder.
(b) To the extent permitted by law, each Selling Stockholder
shall indemnify and hold harmless the Company, each of its directors, its
officers and each person, if any, who controls the Company within the meaning of
the Securities Act, any underwriter and any other Selling Stockholder selling
securities under such registration statement or any of such other Selling
Stockholder's partners, directors or officers or any person who controls such
Selling Stockholder, against any losses, claims, damages or liabilities (joint
or several) to which the Company or any such director, officer, controlling
person, underwriter or other such Selling Stockholder, or partner, director,
officer or controlling person of such other Selling Stockholder, may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs (i) in reliance
upon and in conformity with information furnished by such Selling Stockholder to
the Company, (ii) as a result of any failure to deliver a copy of the prospectus
relating to such Registration Statement, or (iii) as a result of any disposition
of the Restricted Stock in a manner that fails to comply with the permitted
methods of distribution identified within the Registration Statement.
(c) Any Person entitled to indemnification hereunder shall (i)
give prompt written notice to the indemnifying party of any claim with respect
to which it seeks indemnification (provided that the failure to give prompt
notice shall not impair any Person's right to indemnification hereunder to the
extent such failure has not prejudiced the indemnifying party), and (ii) unless
in such indemnified party's reasonable judgment a conflict of interest between
such indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
15
(d) If the indemnification provided for in this Section 6.8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the violation(s) described in Section
6.8(a) that resulted in such loss, claim, damage or liability, as well as any
other relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission; provided, that in no event
shall any contribution by a Selling Stockholder hereunder exceed the net
proceeds from the offering received by such Selling Stockholder.
(e) The indemnification provided for under this Agreement
shall remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director or controlling
Person of such indemnified party and shall survive the transfer of securities.
The Company also agrees to make such provisions as are reasonably requested by
any indemnified party for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
7. Confidentiality. Purchaser acknowledges and agrees that:
(a) All of the information contained herein and in the other
Offering Documents is of a confidential nature and may be regarded as material
non-public information under Regulation FD of the Securities Act.
(b) This Agreement and the other Offering Documents have been
furnished to Purchaser by the Company for the sole purpose of enabling Purchaser
to consider and evaluate an investment in the Company, and will be kept
confidential by Purchaser and not used for any other purpose.
(c) The existence of this Agreement and the information contained
herein shall not, without the prior written consent of the Company, be disclosed
by Purchaser to any person or entity, other than Purchaser's personal financial
and legal advisors for the sole purpose of evaluating an investment in the
Company, and Purchaser will not, directly or indirectly, disclose or permit
Purchaser's personal financial and legal advisors to disclose, any of such
information without the prior written consent of the Company.
16
(d) Purchaser shall make its representatives aware of the terms of
this section and to be responsible for any breach of this Agreement by such
representatives.
(e) Purchaser shall not, without the prior written consent of the
Company, directly or indirectly, make any statements, public announcements or
release to trade publications or the press with respect to the subject matter of
this Agreement and the other Offering Documents.
(f) If Purchaser decides to not pursue further investigation of the
Company or to not participate in the Offering, Purchaser will promptly return
this Agreement, the other Offering Documents and any accompanying documentation
to the Company.
8. Non-Public Information. Purchaser acknowledges that information
concerning the matters that are the subject matter of this Agreement may
constitute material non-public information under United States federal
securities laws, and that United States federal securities laws prohibit any
person who has received material non-public information relating to the Company
from purchasing or selling securities of the Company, or from communicating such
information to any person under circumstances in which it is reasonably
foreseeable that such person is likely to purchase or sell securities of the
Company. Accordingly, until such time as any such non-public information has
been adequately disseminated to the public, Purchaser shall not purchase or sell
any securities of the Company, or communicate such information to any other
person.
9. Entire Agreement. This Agreement contains the entire agreement between
the parties and supercedes all prior agreements and understandings, both written
and oral, between the parties with respect to the subject matter hereto, and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, guarantees or covenants except as specifically set
forth in this Agreement. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
10. Amendment and Modification. This Agreement may not be amended,
modified or supplemented except by an instrument or instruments in writing
signed by the party against whom enforcement of any such amendment, modification
or supplement is sought.
11. Extensions and Waivers. At any time prior to the Closing, the parties
hereto entitled to the benefits of a term or provision may (a) extend the time
for the performance of any of the obligations or other acts of the parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document, certificate or writing delivered pursuant
hereto, or (c) waive compliance with any obligation, covenant, agreement or
condition contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument or
instruments in writing signed by the party against whom enforcement of any such
extension or waiver is sought. No failure or delay on the part of any party
hereto in the exercise of any right hereunder shall impair such right or be
construed to be a waiver of, or acquiescence in, any breach of any
representation, warranty, covenant or agreement.
17
12. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, provided, however, that no party hereto may assign its rights or
delegate its obligations under this Agreement without the express prior written
consent of the other party hereto. Except as provided in Sections 5 and 6,
nothing in this Agreement is intended to confer upon any person not a party
hereto (and their successors and assigns) any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
13. Survival of Representations, Warranties and Covenants. The
representations and warranties contained herein shall survive the Closing and
shall thereupon terminate 18 months from the Closing, except that the
representations contained in Sections 3(a), 3(b), 4(a), and 4(b) shall survive
indefinitely. All covenants and agreements contained herein which by their terms
contemplate actions following the Closing shall survive the Closing and remain
in full force and effect in accordance with their terms. All other covenants and
agreements contained herein shall not survive the Closing and shall thereupon
terminate.
14. Headings; Definitions. The Section headings contained in this
Agreement are inserted for convenience of reference only and will not affect the
meaning or interpretation of this Agreement. All references to Sections
contained herein mean Sections of this Agreement unless otherwise stated. All
capitalized terms defined herein are equally applicable to both the singular and
plural forms of such terms
15. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance is held to be invalid or unenforceable to
any extent, the remainder of this Agreement shall remain in full force and
effect and shall be reformed to render the Agreement valid and enforceable while
reflecting to the greatest extent permissible the intent of the parties.
16. Notices. All notices hereunder shall be sufficiently given for all
purposes hereunder if in writing and delivered personally, sent by documented
overnight delivery service or, to the extent receipt is confirmed, telecopy,
telefax or other electronic transmission service to the appropriate address or
number as set forth below:
If to the Company:
Touchstone Resources USA, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: Chief Executive Officer
with a copy to:
Fox Rothschild LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esquire
18
If to Purchaser:
To that address indicated on the signature page hereof.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof, except to the extent that the General Corporation Law of the State
of Delaware shall apply to the internal corporate governance of the Company.
18. Arbitration. If a dispute arises as to the interpretation of this
Agreement, it shall be decided in an arbitration proceeding conforming to the
Rules of the American Arbitration Association applicable to commercial
arbitration then in effect at the time of the dispute. The arbitration shall
take place in Philadelphia, Pennsylvania. The decision of the arbitrators shall
be conclusively binding upon the parties and final, and such decision shall be
enforceable as a judgment in any court of competent jurisdiction. The parties
shall share equally the costs of the arbitration.
19. Counterparts. This Agreement may be executed and delivered by
facsimile in two or more counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same agreement.
19
IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have
caused this Agreement to be executed as of the date set forth below.
PURCHASER
Date: ____________________ __________________________________
By:
--------------
Name: ________________________
Title: _______________________
Address: _____________________
______________________________
______________________________
Social Security
or Tax ID No.: _______________
Number of Units Purchased:________
Purchase Price
@ $1.80 per Unit: $_______________
TOUCHSTONE RESOURCES USA, INC.
Date:____________________
By:
--------------
▇▇▇▇▇ ▇▇▇▇
Chief Executive Officer
20
EXHIBIT A
SUMMARY INVESTMENT MEMORANDUM
CAPITALIZATION
The following table sets forth the number of shares of common stock and
the number of shares of common stock issuable upon exercise or conversion, as
applicable, of outstanding warrants, options, convertible notes and convertible
preferred stock as of November 22, 2005:
Common Stock, $0.001 par value ........................ 68,639,758
Series A Convertible Preferred Stock, $0.001 par
value .............................................. 7,100,630
Warrants .............................................. 15,159,893
Options ............................................... 5,217,540
Convertible Notes...................................... 3,277,778
----------
Total (fully diluted) ................................. 99,395,599
==========
RISK FACTORS
An investment in the Units is highly speculative and involves a high
degree of risk. You should carefully consider the following risk factors in
addition to other information in our filings with the SEC before purchasing the
Units. If any of these or other risks actually occurs, our business may be
adversely affected, the trading price of our Common Stock may decline, and you
may lose all or part of your investment.
Risks Associated With Our Business
We have had operating losses and limited revenues to date, need additional
capital to execute our business plan and do not expect to be profitable in the
foreseeable future.
We have experienced net losses in each fiscal quarter since our inception,
and we expect to continue to incur substantial losses for the foreseeable
future. Net loss applicable to common stockholders for our fiscal year ended
December 31, 2004 and for the nine-month period ended September 30, 2005 was
$15,595,304 and $11,820,551, respectively. As of December 31, 2004 and September
30, 2005, we had an accumulated deficit of $15,680,932 and $27,501,481,
respectively. In addition, we have generated limited revenues to date and our
current liabilities exceed our current assets. We may not be able to generate
significant revenues in the future and expect our operating expenses to increase
substantially over the next 12 months as we continue to pursue our gas and oil
exploration activities. As a result, we expect to continue to experience
negative cash flow for the foreseeable future and cannot predict when, if ever,
we might become profitable. We will need to raise additional funds, and such
funds may not be available on commercially acceptable terms, if at all. If we
cannot raise funds on acceptable terms, we may not be able to execute our
business plan, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements. This may seriously harm our business,
financial condition and results of operations. As a result of these factors, our
independent auditors have included an explanatory paragraph in their opinion for
the year ended December 31, 2004 as to the substantial doubt about our ability
to continue as a going concern.
1
We are a development stage company with a limited operating history.
We are a development stage company with only a limited operating history
upon which to base an evaluation of our current business and future prospects.
We have only been engaged in the oil and gas exploration and development
business since March 2004 and do not have an established history of locating and
developing properties that have oil and gas reserves. As a result, the revenue
and income potential of our business is unproven. In addition, because of our
limited operating history, we have limited insight into trends that may emerge
and affect our business. We may make errors in predicting and reacting to
relevant business trends and will be subject to the risks, uncertainties and
difficulties frequently encountered by early-stage companies in evolving markets
such as ours. We may not be able to successfully address any or all of these
risks and uncertainties. Failure to adequately do so could cause our business,
results of operations and financial condition to suffer.
Our operations will require significant capital expenditures for which we may
not have sufficient funding.
We intend to make capital expenditures far in excess of our existing
capital resources to exploit our existing reserves and to discover new oil and
gas reserves. Specifically, we expect to incur capital calls and production
costs of approximately $19 million over the next 12 months. We intend to rely on
external sources of financing to meet our capital requirements to continue
acquiring, exploring and developing oil and gas properties and to otherwise
implement our corporate development and investment strategies. We plan to obtain
such funding through the debt and equity markets, but we cannot assure you that
we will be able to obtain additional funding when it is required or that it will
be available to us on commercially acceptable terms, if at all. We also intend
to make offers to acquire oil and gas properties in the ordinary course of our
business. If these offers are accepted, our capital needs may increase
substantially. If we fail to obtain the funding that we need when it is
required, we may have to forego or delay potentially valuable opportunities to
acquire new oil and gas properties or default on existing funding commitments to
third parties and forfeit or dilute our rights in existing oil and gas
properties.
If we are unable to satisfy our debt obligations to third parties, our business
may be adversely affected.
As of November 14, 2005, we had outstanding term indebtedness to third
parties in the aggregate amount of approximately $3.05 million, all of which is
due during the next 12 months. Of this amount, $2.05 million is secured by
substantially all of our assets. We do not currently have the funds available to
repay this existing indebtedness. If we are unable to repay this indebtedness as
it becomes due, the lenders will have the right to declare the indebtedness in
default and seek all available remedies against us, including executing upon all
of our assets. In addition, the presence of this indebtedness may have a
negative effect on our ability to obtain additional financing. There can be no
assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements.
2
The successful implementation of our business plan is subject to risks inherent
in the oil and gas business.
Our oil and gas operations are subject to the economic risks typically
associated with exploration, development and production activities, including
the necessity of making significant expenditures to locate and acquire
properties and to drill exploratory ▇▇▇▇▇. In addition, the cost and timing of
drilling, completing and operating ▇▇▇▇▇ is often uncertain. In conducting
exploration and development activities, the presence of unanticipated pressure
or irregularities in formations, miscalculations or accidents may cause our
exploration, development and production activities to be unsuccessful. This
could result in a total loss of our investment in a particular property. If
exploration efforts are unsuccessful in establishing proved reserves and
exploration activities cease, the amounts accumulated as unproved costs will be
charged against earnings as impairments.
In addition, market conditions or the unavailability of satisfactory oil
and gas transportation arrangements may hinder our access to oil and gas markets
or delay our production. The availability of a ready market for our oil and gas
production depends on a number of factors, including the demand for and supply
of oil and gas and the proximity of reserves to pipelines and terminal
facilities. Our ability to market our production depends in substantial part on
the availability and capacity of gathering systems, pipelines and processing
facilities, in some cases owned and operated by third parties. Our failure to
obtain such services on acceptable terms could materially harm our business. We
may be required to shut in ▇▇▇▇▇ for lack of a market or because of inadequacy
or unavailability of pipelines or gathering system capacity. If that occurs, we
would be unable to realize revenue from those ▇▇▇▇▇ until arrangements are made
to deliver our production to market.
Our future performance is dependent upon our ability to identify, acquire and
develop oil and gas properties.
Our future performance depends upon our ability to identify, acquire and
develop oil and gas reserves that are economically recoverable. Our success will
depend upon our ability to acquire working and revenue interests in properties
upon which oil and gas reserves are ultimately discovered in commercial
quantities, and our ability to develop prospects that contain proven oil and gas
reserves to the point of production. Without successful acquisition and
exploration activities, we will not be able to develop oil and gas reserves or
generate revenues. We cannot provide you with any assurance that we will be able
to identify and acquire oil and gas reserves on acceptable terms, or that oil
and gas deposits will be discovered in sufficient quantities to enable us to
recover our exploration and development costs or sustain our business.
The successful acquisition and development of oil and gas properties
requires an assessment of recoverable reserves, future oil and gas prices and
operating costs, potential environmental and other liabilities, and other
factors. Such assessments are necessarily inexact and their accuracy inherently
uncertain. In addition, no assurance can be given that our exploitation and
development activities will result in the discovery of any reserves. Our
operations may be curtailed, delayed or canceled as a result of lack of adequate
capital and other factors, such as title problems, weather, compliance with
governmental regulations or price controls, mechanical difficulties, or unusual
or unexpected formations, pressures or and work interruptions. In addition, the
costs of exploitation and development may materially exceed our initial
estimates.
3
We rely heavily upon reserve estimates when determining whether or not to
acquire or invest in a particular oil or gas property.
The oil and gas reserve information that we present in our filings with
the Securities and Exchange Commission ("SEC") and use in evaluating oil and gas
prospects is based on reserve estimates involving a great deal of subjectivity.
Different reserve engineers may make different estimates of reserves and cash
flows based on the same available data. Reserve estimates depend in large part
upon the reliability of available geologic and engineering data which is
inherently imprecise. Geologic and engineering data are used to determine the
probability that a reservoir of oil and natural gas exists at a particular
location, and whether oil and natural gas are recoverable from a reservoir.
Recoverability is ultimately subject to the accuracy of data including, but not
limited to the following:
o geological characteristics of the reservoir structure;
o reservoir fluid properties;
o the size and boundaries of the drainage area;
o reservoir pressure; and
o the anticipated rate of pressure depletion.
The evaluation of these and other factors is based upon available seismic
data, computer modeling, well tests and information obtained from production of
oil and natural gas from adjacent or similar properties, but the probability of
the existence and recoverability of reserves is less than 100% and actual
recoveries of proved reserves usually differ from estimates.
Reserve estimates also require numerous assumptions relating to operating
conditions and economic factors, including:
o the price at which recovered oil and natural gas can be sold;
o the costs of recovery;
o assumptions concerning future operating costs, severance and excise
taxes, development costs and workover and remedial costs;
o prevailing environmental conditions associated with drilling and
production sites;
o availability of enhanced recovery techniques, ability to transport
oil and natural gas to markets and governmental regulation; and
4
o other regulatory factors, such as taxes and environmental laws.
A negative change in any one or more of these factors could result in
quantities of oil and natural gas previously estimated as proved reserves
becoming uneconomic to produce. For example, a decline in the market price of
oil or natural gas to an amount that is less than the cost of recovery of such
oil and natural gas in a particular location could make production commercially
impracticable. The risk that a decline in price could have that effect is
magnified in the case of reserves requiring sophisticated or expensive
production enhancement technology and equipment, such as some types of heavy
oil. Each of these factors, by having an impact on the cost of recovery and the
rate of production, will also affect the present value of future net cash flows
from estimated reserves. In addition, the 10% discount factor, which is required
by the SEC to be used to calculate discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with us
or the oil and gas industry in general.
We have a very small management team and the loss of any member of this team may
prevent us from implementing our business plan in a timely manner.
We have two executive officers and a limited number of additional
employees and consultants. Our success depends largely upon the continued
services of these individuals, particularly our executive officers. Although we
have an employment agreement with our chief executive officer, we do not
maintain key person life insurance policies on any of our officers. The loss of
one or more of these individuals could seriously harm our business, financial
condition and results of operations. In such an event, we may not be able to
recruit personnel to replace these individuals in a timely manner, or at all, on
acceptable terms.
Our continued growth could strain our personnel and infrastructure resources,
and if we are unable to implement appropriate controls and procedures to manage
our growth, we may not be able to successfully implement our business plan.
We continue to experience rapid growth in our operations, which has
placed, and will continue to place, a significant strain on our management,
administrative, operational and financial infrastructure. Our future success
will depend in part upon the ability of our executive officers to manage growth
effectively. This may require us to hire and train additional personnel to
manage our expanding operations. In addition, we must continue to improve our
operational, financial and management controls and our reporting systems and
procedures. If we fail to successfully manage our growth, we may be unable to
execute upon our business plan.
The geographic concentration of substantially all of our properties in Texas,
Louisiana and Mississippi subjects us to an increased risk of loss of revenue or
curtailment of production from factors affecting that region.
The geographic concentration of substantially all of our projects in the
states of Texas, Louisiana and Mississippi means that some or all of our
properties could be affected by the same event should the region experience:
5
o severe weather;
o delays or decreases in production, the availability of equipment,
facilities or services;
o delays or decreases in the availability of capacity to transport,
gather or process production; or
o changes in the regulatory environment.
Because substantially all of our properties could experience the same condition
at the same time, these conditions could have a relatively greater impact on our
results of operations than they might have had our properties been dispersed
over a greater geographic area.
In addition, our ability to add reserves through drilling is dependent
upon our ability to timely obtain drilling permits and regulatory approvals. The
permitting and approval process has been more difficult in recent years due to
increased activism from environmental and other groups and has extended the time
it takes to receive permits. Because of our relatively small size and
concentrated property base, we can be disproportionately disadvantaged by delays
in obtaining or failing to obtain drilling approvals compared to companies with
larger or more dispersed property bases. For example, we are less able to shift
drilling activities to areas where permitting may be easier, and we have fewer
properties over which to spread the costs of complying with these regulations
and the cost of foregone opportunities resulting from delays.
We may be unable to identify liabilities associated with the properties we
acquire or obtain protection from sellers against such liabilities.
The properties we acquire may be subject to liabilities that we are unable
to identify or from which we are unable to obtain protection from the seller.
Our reviews of acquired properties are inherently incomplete because it is not
generally feasible to review in depth every individual property involved in each
acquisition. Our assessment may not reveal all existing or potential problems,
nor will it permit us to become familiar enough with the properties to assess
fully their capabilities and deficiencies. Inspections may not reveal structural
or environmental problems, such as pipeline corrosion or groundwater
contamination, when they are made. Even a detailed review of records and
properties may not necessarily reveal existing or potential problems, nor will
it permit us to become sufficiently familiar with the properties to assess fully
their deficiencies and potential.
In addition, we may not be able to obtain contractual indemnities from the
seller for liabilities that it created. We often assume certain environmental
and other risks and liabilities in connection with the acquired properties. We
may also be required to assume the risk of the physical condition of the
properties in addition to the risk that they may not perform in accordance with
our expectations.
6
The oil and gas exploration and production industry historically is a cyclical
industry and market fluctuations in the prices of oil and gas could adversely
affect our business.
Prices for oil and gas tend to fluctuate significantly in response to
factors beyond our control. These factors include, but are not limited to:
o weather conditions in the United States and elsewhere;
o economic conditions in the United States and elsewhere;
o actions by OPEC, the Organization of Petroleum Exporting Countries;
o political instability in the Middle East and other major oil and gas
producing regions;
o governmental regulations, both domestic and foreign;
o domestic and foreign tax policy;
o the pace adopted by foreign governments for the exploration,
development, and production of their national reserves;
o the price of foreign imports of oil and gas;
o the cost of exploring for, producing and delivering oil and gas;
o the discovery rate of new oil and gas reserves;
o the rate of decline of existing and new oil and gas reserves;
o available pipeline and other oil and gas transportation capacity;
o the ability of oil and gas companies to raise capital;
o the overall supply and demand for oil and gas; and
o the availability of alternate fuel sources.
Changes in commodity prices may significantly affect our capital
resources, liquidity and expected operating results. Price changes directly
affect revenues and can indirectly impact expected production by changing the
amount of funds available to reinvest in exploration and development activities.
Reductions in oil and gas prices not only reduce revenues and profits, but could
also reduce the quantities of reserves that are commercially recoverable.
Significant declines in prices could result in non-cash charges to earnings due
to impairment. We do not currently engage in any hedging program to mitigate our
exposure to fluctuations in oil and gas prices.
Changes in commodity prices may also significantly affect our ability to
estimate the value of producing properties for acquisition and divestiture and
often cause disruption in the market for oil and gas producing properties, as
buyers and sellers have difficulty agreeing on the value of the properties.
Price volatility also makes it difficult to budget for and project the return on
acquisitions and the development and exploitation of projects. We expect that
commodity prices will continue to fluctuate significantly in the future.
7
Our ability to produce sufficient quantities of oil and gas from our properties
may be adversely affected by a number of factors outside of our control.
The business of exploring for and producing oil and gas involves a
substantial risk of investment loss. Drilling oil and gas ▇▇▇▇▇ involves the
risk that the ▇▇▇▇▇ may be unproductive or that, although productive, the ▇▇▇▇▇
may not produce oil and/or gas in economic quantities. Other hazards, such as
unusual or unexpected geological formations, pressures, fires, blowouts, loss of
circulation of drilling fluids or other conditions may substantially delay or
prevent completion of any well. Adverse weather conditions can also hinder
drilling operations. A productive well may become uneconomic if water or other
deleterious substances are encountered that impair or prevent the production of
oil and/or gas from the well. In addition, production from any well may be
unmarketable if it is impregnated with water or other deleterious substances.
There can be no assurance that oil and gas will be produced from the properties
in which we have interests. In addition, the marketability of oil and gas that
may be acquired or discovered may be influenced by numerous factors beyond our
control. These factors include the proximity and capacity of oil and gas
pipelines and processing equipment, market fluctuations in oil and gas prices,
taxes, royalties, land tenure, allowable production and environmental
protection. We cannot predict how these factors may affect our business.
We are dependent upon the efforts of various third parties that we do not
control and, as a result, we may not be able to control the timing of
development efforts, the associated costs, or the rate of production of
reserves.
The success of our business is dependent upon the efforts of various third
parties that we do not control. We serve as the operator for the Vicksburg
Project, ▇▇▇▇▇▇▇ Project, Maverick Basin Project, ▇▇▇▇▇▇▇▇ Ranch Project and
▇▇▇▇▇▇ Ranch Project. We do not serve as the operator for the remaining
projects. As a result, we may have limited ability to exercise influence over
the operations of some non-operated properties or their associated costs. Our
dependence on the operator and other working interest owners for these projects
and our limited ability to influence operations and associated costs could
prevent the realization of our targeted returns on capital in drilling or
acquisition activities. The success and timing of development and exploitation
activities on properties operated by others depend upon a number of factors that
will be largely outside of our control, including:
o the timing and amount of capital expenditures;
o the operator's expertise and financial resources;
o approval of other participants in drilling ▇▇▇▇▇;
o selection of technology;
o the rate of production of the reserves; and
o the availability of suitable offshore drilling rigs, drilling
equipment, production and transportation infrastructure, and
qualified operating personnel.
We rely upon various companies to assist us in identifying desirable oil
and gas prospects to acquire and to provide us with technical assistance and
services. We also rely upon the services of geologists, geophysicists, chemists,
engineers and other scientists to explore and analyze oil and gas prospects to
determine a method in which the oil and gas prospects may be developed in a
cost-effective manner. Although we have developed relationships with a number of
third-party service providers, we cannot assure you that we will be able to
continue to rely on such persons. If any of these relationships with third-party
service providers are terminated or are unavailable on commercially acceptable
terms, we may not be able to execute our business plan.
8
The unavailability or high cost of drilling rigs, equipment, supplies, personnel
and oil field services could adversely affect our ability to execute our
exploration and development plans on a timely basis and within our budget.
Shortages or the high cost of drilling rigs, equipment, supplies or
personnel could delay or adversely affect our exploitation and exploration
operations, which could have a material adverse effect on our business,
financial condition and results of operations. Since our operations and
properties are concentrated in Texas, Louisiana and Mississippi, we could be
materially and adversely affected if the unavailability or high cost of rigs,
equipment supplies or personnel is particularly severe in this region. We must
currently schedule rigs several months in advance to ensure availability for a
particular project.
We may be required to write-down the carrying values and/or estimates of total
reserves of our oil and gas properties.
Accounting rules applicable to us require that we review periodically the
carrying value of our oil and gas properties for possible impairment. Based on
specific market factors and circumstances at the time of prospective impairment
reviews and the continuing evaluation of development plans, production data,
economics and other factors, we may be required to write down the carrying value
of our oil and gas properties.
For our fiscal year ended December 31, 2004, we recorded impairment
charges of $315,322 related primarily to an impairment of the carrying value of
unproved properties acquisition and drilling costs incurred in PHT West Pleito,
LLC and the carrying value of our equity investment in the Stent Project. During
the nine-month period ended September 30, 2005, we recorded impairment charges
of $1,185,684. A write-down constitutes a noncash charge to earnings. See "Item
6. Management's Discussion and Analysis - Critical Accounting Policies -
Impairment of Properties" of our Annual Report on Form 10-KSB for a discussion
of when and how impairment of properties charges are determined. We may incur
noncash charges for impairment of our properties in the future, which could have
a material adverse effect on our results of operations in the period taken. We
may also reduce our estimates of the reserves that may be economically
recovered, which could have the effect of reducing the total value of our
reserves.
We may be unable to retain our leases and working interests in leases.
Some of our properties are held under leases and working interests in
leases. If we or the holder of the lease fail to meet the specific requirements
of each lease, such lease may terminate or expire. We cannot assure you that any
of the obligations required to maintain each lease will be met. The termination
or expiration of our leases or our working interest relating to a lease may harm
our business. Some of our property interests will terminate unless we fulfill
certain obligations under the terms of our agreements related to such
properties. If we are unable to satisfy these conditions on a timely basis, we
may lose our rights in these properties. The termination of our interests in
these properties may harm our business.
9
In addition, we will need significant funds to meet capital calls,
drilling and production costs on our various interests in oil and gas prospects
to explore, produce, develop, and eventually sell the underlying natural gas and
oil products. Specifically, we expect to incur capital calls and production
costs of approximately $19 million with respect to our various limited
partnership and limited liability company interests during the next 12 months.
If any of the other owners of the leasehold interests in any of the projects in
which we participate, or any of the limited partners or membership interest
holders in the limited partnerships or limited liability companies,
respectively, in which we own an interest fails to pay its equitable portion of
development costs or capital calls, we may need to pay additional funds to
protect our ownership interests.
Title deficiencies could render our leases worthless.
The existence of a material title deficiency can render a lease worthless
and can result in a large expense to our business. It is our practice in
acquiring oil and gas leases or undivided interests in oil and gas leases to
forgo the expense of retaining lawyers to examine the title to the oil or gas
interest to be placed under lease or already placed under lease. Instead, we
rely upon the judgment of oil and gas lease brokers or landmen who perform the
field work in examining records in the appropriate governmental office before
attempting to place under lease a specific oil or gas interest. This is
customary practice in the oil and gas industry. However, we do not anticipate
that we, or the person or company acting as operator of the ▇▇▇▇▇ located on the
properties that we intend to lease, will obtain counsel to examine title to the
lease until the well is about to be drilled. As a result, we may be unaware of
deficiencies in the marketability of the title to the lease. Such deficiencies
may render the lease worthless.
If we or our operators fail to maintain adequate insurance, our business could
be materially and adversely affected.
Our operations are subject to risks inherent in the oil and gas industry,
such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or
well fluids, fires, pollution, earthquakes and other environmental risks. These
risks could result in substantial losses due to injury and loss of life, severe
damage to and destruction of property and equipment, pollution and other
environmental damage, and suspension of operations. Any offshore operations that
we engage in will be subject to a variety of operating risks peculiar to the
marine environment, such as hurricanes or other adverse weather conditions, to
more extensive governmental regulation, including regulations that may, in
certain circumstances, impose strict liability for personal injuries, property
damage, oil spills, discharge of hazardous materials, remediation and clean-up
costs, and other environmental damages. We could be liable for environmental
damages caused by previous property owners. As a result, substantial liabilities
to third parties or governmental entities may be incurred, the payment of which
could have a material adverse effect on our financial condition and results of
operations.
10
For the projects for which we act as the operator, we maintain insurance
coverage for our operations with policy limits and retention liability customary
in the industry, including limited coverage for sudden environmental damages and
for existing contamination. We do not believe that insurance coverage for
environmental damages that occur over time or insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. As a result, we may be subject to liability or
may lose substantial portions of our properties in the event of certain
environmental damages.
In the projects in which we own an equity interest in a limited
partnership that owns a non-operating interest, the operator for the prospect
maintains insurance of various types to cover our operations with policy limits
and retention liability customary in the industry. We believe the coverage and
types of insurance maintained by the operators of such prospects are adequate
and, therefore, have not acquired our own insurance coverage for such prospects.
The occurrence of a significant adverse event on such prospects that is not
fully covered by insurance could result in the loss of all or part of our
investment in a particular prospect which could have a material adverse effect
on our financial condition and results of operations.
Complying with environmental and other government regulations could be costly
and could negatively impact our production.
Our business is governed by numerous laws and regulations at various
levels of government in the countries in which we operate. These laws and
regulations govern the operation and maintenance of our facilities, the
discharge of materials into the environment and other environmental protection
issues. Such laws and regulations may, among other potential consequences,
require that we acquire permits before commencing drilling, restrict the
substances that can be released into the environment with drilling and
production activities, limit or prohibit drilling activities on protected areas
such as wetlands or wilderness areas, require that reclamation measures be taken
to prevent pollution from former operations, require remedial measures to
mitigate pollution from former operations, such as plugging abandoned ▇▇▇▇▇ and
remediating contaminated soil and groundwater, and require remedial measures to
be taken with respect to property designated as a contaminated site.
Under these laws and regulations, we could be liable for personal injury,
clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. We maintain limited insurance
coverage for sudden and accidental environmental damages as well as
environmental damage that occurs over time. However, we do not believe that
insurance coverage for the full potential liability of environmental damages is
available at a reasonable cost. Accordingly, we could be liable, or could be
required to cease production on properties, if environmental damage occurs.
The costs of complying with environmental laws and regulations in the
future may harm our business. Furthermore, future changes in environmental laws
and regulations could occur that result in stricter standards and enforcement,
larger fines and liability, and increased capital expenditures and operating
costs, any of which could have a material adverse effect on our financial
condition or results of operations.
11
The oil and gas industry is highly competitive.
The oil and gas industry is highly competitive. We compete with oil and
natural gas companies and other individual producers and operators, many of
which have longer operating histories and substantially greater financial and
other resources than we do, as well as companies in other industries supplying
energy, fuel and other needs to consumers. Many of these companies not only
explore for and produce crude oil and natural gas, but also carry on refining
operations and market petroleum and other products on a worldwide basis. Our
larger competitors, by reason of their size and relative financial strength, can
more easily access capital markets than we can and may enjoy a competitive
advantage in the recruitment of qualified personnel. They may be able to absorb
the burden of any changes in laws and regulation in the jurisdictions in which
we do business and handle longer periods of reduced prices for oil and gas more
easily than we can. Our competitors may be able to pay more for productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can. Further,
these companies may enjoy technological advantages and may be able to implement
new technologies more rapidly than we can. Our ability to acquire additional
properties in the future will depend upon our ability to conduct efficient
operations, evaluate and select suitable properties, implement advanced
technologies and consummate transactions in a highly competitive environment.
Our international investments in oil and gas interests may be subject to risks
associated with the legal, tax, economic and political environment of the
country in which the interest is located.
Our foreign investments may be subject to certain risks, including
uncertain political, economic, legal and tax environments and expropriation and
nationalization of assets. We attempt to conduct our business and financial
affairs so as to protect against political and economic risks applicable to
operations in the various countries where we operate, but there can be no
assurance that we will be successful in protecting against such risks.
Our international assets and operations are subject to various political,
economic and other uncertainties, including, among other things, the risks of
war, expropriation, nationalization, renegotiation or nullification of existing
contracts, taxation policies, foreign exchange restrictions, changing political
conditions, international monetary fluctuations, currency controls and foreign
regulations that favor or require the awarding of drilling contracts to local
contractors or require foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction. In addition, if a dispute arises with
foreign operations, we may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons, especially
foreign oil ministries and national oil companies, to the jurisdiction of the
United States.
Our private ownership of oil and gas reserves under oil and gas leases in
the United States differs distinctly from our ownership of oil and gas
properties in foreign countries. In the foreign countries in which we may
operate, the state generally retains ownership of the reserves and consequently
retains control of, and in many cases participates in, the exploration and
production of hydrocarbon reserves. Accordingly, operations outside the United
States and estimates of reserves attributable to properties located outside the
United States may be materially affected by host governments through royalty
payments, export taxes and regulations, surcharges, value-added taxes,
production bonuses and other charges.
12
Risks Related to the Offering and Our Stock
There is no minimum offering amount and even if all Units included in this
Offering, we will not have sufficient funds to satisfy our expected expenditures
related to our current projects or repay our outstanding indebtedness.
We currently do not have the funds available to meet existing and expected
expenditures related to our existing projects or to repay outstanding
indebtedness over the next 12 months. Funds received in payment for the Units
will be released to us upon execution of the Securities Purchase Agreement to
which this Memorandum is attached. We are not required to raise any minimum
amount of proceeds prior to obtaining such funds. Because there is no minimum
amount of Units we must sell before accepting funds in the Offering, investors
participating in the Offering will not be assured that we will have sufficient
funds to execute our business plan, satisfy expected capital expenditures, repay
indebtedness as it becomes due, and support operations over the next 12 months
and will bear the risk that we will be unable to secure the funds necessary to
meet our current and anticipated capital obligations. Even if we sell all of the
Units included in this Offering, we will need to raise additional financing
within the next 12 months. We can give no assurances that we will be able to do
so on terms acceptable to us, if at all. If we are unable to do so, we could
lose some or all of our entire ownership interest in certain of our projects and
be liable for damages.
The offering price of the Units has been arbitrarily determined.
The offering price of the Units has been arbitrarily determined by us and
bears no relationship to our assets, net worth, book value, potential business
operations or other recognized criteria of value. The offering price should,
therefore, not be taken to be an indication of the actual value of the Company
or the Units offered hereby.
Investors in this Offering will suffer immediate and substantial dilution in net
tangible book value per share.
Investors in this Offering will suffer an immediate and substantial
dilution in the net tangible book value per share of the shares of our common
stock contained in the Units. Net tangible book value per share of common stock
is determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) on a particular date, by the number of
shares of common stock outstanding on such date. Dilution is the difference
between the offering price of a security and the net tangible book value of that
security immediately after the offering, giving effect to the receipt of net
proceeds in the offering. The net tangible book value of our common stock is
substantially less than the offering price of the Units. Investors in this
Offering may also suffer further dilution if we sell additional equity or
convertible securities following completion of this Offering.
13
Investors in this Offering may experience dilution of their ownership interests
due to the issuance of additional shares of our Common Stock.
We may in the future issue our previously authorized and unissued
securities which will result in the dilution of the ownership interests of our
present stockholders. We are currently authorized to issue 150,000,000 shares of
common stock and 5,000,000 shares of preferred stock with such designations,
preferences and rights as determined by our board of directors. As of November
14, 2005 we have issued 68,639,758 shares of common stock, options to purchase
an additional 5,217,540 shares of common stock, warrants to purchase an
additional 15,159,893 shares of common stock, notes convertible into an
additional 3,277,778 shares of common stock, and preferred stock convertible
into an additional 7,100,630 shares of our common stock. Assuming the exercise
or conversion, as applicable, of the all of the forgoing securities, we would
have 99,395,599 outstanding shares of common stock. If all of the Units are sold
in the Offering, we would be issuing an additional 21,677,778 shares of common
stock and may be required to issue up to 10,838,889 additional shares of common
stock upon exercise of warrants included in the Units. Issuance of these shares
will substantially dilute the ownership interests of our existing stockholders.
The potential issuance of such additional shares of common stock may also create
downward pressure on the trading price of our common stock. We may also issue
additional shares of our stock in connection with the hiring of personnel,
future acquisitions, future private placements of our securities, for capital
raising purposes, or for other business purposes. This may further dilute the
interests of our existing holders.
Purchasers of Units may have to bear the risk of such investment for an
indefinite period of time as federal and applicable state securities laws impose
substantial restrictions on the resale of the common stock.
The Units offered hereby have not been registered under the Securities Act
or any state securities or blue-sky law and constitute "restricted securities"
under applicable federal securities laws. As a result, subscribers for the Units
may not sell or otherwise transfer such securities except pursuant to
registration under the Securities Act and any applicable state securities laws
or an exemption therefrom. Because of such restrictions, a subscriber for the
Units must bear the economic risks of such investment for an indefinite period
of time. Although we have agreed to register the public resale of the shares of
common stock and shares issuable upon exercise of the warrants included in the
Units, there can be no assurance as to when such a registration statement will
become effective or whether there will be a public trading market for our common
stock at such time. The influx into the market of such a significant number of
shares could have an adverse effect on the market prior to the Company
registering the public resale of such shares.
No legal or tax advice.
An investment in the Units may involve certain material federal and state
tax consequences. Prospective investors should not rely on this Memorandum or
the Securities Purchase Agreement for legal, tax or business advice. Prospective
investors in the Offering should consult with their respective legal counsel,
accountant or business adviser as to legal, tax and related matters concerning
investment in the Units offered hereby.
14
There is no significant market for our common stock.
There is no active trading market for our common stock. Our common stock
is not eligible for trading on any national or regional securities exchange or
the Nasdaq Stock Market. Our common stock is eligible for trading on the OTC
Bulletin Board. This market tends to be substantially less liquid than national
and regional securities exchanges or the Nasdaq Stock Market. We cannot provide
you with any assurance that an active trading market for our common stock will
develop, or if such a market develops, that it will be sustained.
Applicable SEC Rules governing the trading of "▇▇▇▇▇ stocks" limits the trading
and liquidity of our common stock which may affect the trading price of our
common stock.
Our common stock currently trades on the OTC Bulletin Board. Since our
common stock continues to trade below $5.00 per share, our common stock is
considered a "▇▇▇▇▇ stock" and is subject to SEC rules and regulations that
impose limitations upon the manner in which our shares can be publicly traded.
These regulations require the delivery, prior to any transaction involving a
▇▇▇▇▇ stock, of a disclosure document explaining the ▇▇▇▇▇ stock market and the
associated risks. Under these regulations, brokers who recommend ▇▇▇▇▇ stocks to
persons other than established customers or certain accredited investors must
make a special written suitability determination for the purchaser and receive
the purchaser's written agreement to a transaction prior to sale. These
regulations may have the effect of restricting the ability of brokers to sell
our shares of common stock which will have the effect of limiting the trading
activity of our common stock and reducing the liquidity of an investment in our
common stock.
We intend to raise additional capital in the future, and such additional capital
may be dilutive to stockholders or impose operational restrictions.
We intend to raise additional capital in the future to help fund our
operations through sales of shares of our common stock or securities convertible
into shares of our common stock, as well as issuances of debt. Additional equity
financing may be dilutive to our stockholders and debt financing, if available,
may involve restrictive covenants that may limit our operating flexibility. If
additional capital is raised through the issuance of shares of our common stock
or securities convertible into shares of our common stock, the percentage
ownership of our stockholders will be reduced. These stockholders may experience
additional dilution in net book value per share and any additional equity
securities may have rights, preferences and privileges senior to those of the
holders of our common stock.
The trading price of our common stock is likely to be highly volatile.
The trading price of our shares has from time to time fluctuated widely
and in the future may be subject to similar fluctuations. The trading price may
be affected by a number of factors including events described in the risk
factors set forth in this report as well as our operating results, financial
condition, announcements regarding our oil and gas activities, general
conditions in the oil and gas exploration and development industry, and other
events or factors. In addition, the stock market has experienced significant
price and volume fluctuations that have particularly affected the price of many
small capitalization companies and that often have been unrelated or
disproportionate to the operating performance of these companies. Market
fluctuations such as these may seriously harm the market price of our common
stock. Further, securities class action suits have been filed against companies
following periods of market volatility in the price of their securities. If such
an action is instituted against us, we may incur substantial costs and a
diversion of management attention and resources, which would seriously harm our
business, financial condition and results of operations.
15
We do not intend to pay dividends in the foreseeable future.
We have never declared or paid a dividend on our common stock. We intend
to retain earnings, if any, for use in the operation and expansion of our
business and, therefore, do not anticipate paying any dividends in the
foreseeable future. In addition, the terms of our Series A Convertible Preferred
Stock prevent us from declaring or paying any dividends on our common stock
unless and until all accrued or declared and unpaid dividends on such shares
have been paid in full. As a result, in the event we have retained earnings
available for distribution as dividends, we must first pay any accrued or
declared and unpaid dividends on any outstanding shares of Series A Convertible
Preferred Stock before we pay any dividends on shares of our common stock.
16