EXHIBIT 99.3
[LOGO] VIKING ASSET MANAGEMENT, LLC
CONFIDENTIAL AND PROPRIETARY
July 9, 2007
River Capital Group, Inc.
0 Xxxx Xxxxxx, Xxxxx 000
Xxxxxxxx Xxxxxxx, XX00
Attn: Mr. Xxxxxx Xxxxxx
Chief Executive Officer
Dear Xx. Xxxxxx:
This letter of intent (this "LOI") confirms the understanding between The
Longview Fund, L.P., a California limited partnership ("Longview"), of which
Viking Asset Management, LLC ("Viking") is the investment advisor, and River
Capital Group, Inc., a Delaware corporation (the "Company"), relating to the
proposed exchange (the " Securities Exchange"), as outlined in the Summary of
Terms and Conditions (the "Term Sheet") annexed hereto as Exhibit A, of
securities to be owned by Longview in Sonterra Resources, Inc., a Delaware
company ("Sonterra"), for securities of the Company, and the potential issuance
of additional securities by the Company to Longview, also as set forth in the
Term Sheet. Capitalized terms used in the Term Sheet without definition shall
have the meanings ascribed to them in this LOI.
Sonterra is currently contemplating the acquisition of certain oil and gas
exploration and development properties and related assets from companies
principally engaged in oil and gas exploration and development (including Flash
Gas & Oil Southwest, Inc. and Cinco Resources, Inc.) (collectively, the
"Acquisitions"). Sonterra has been formed for the purpose of effecting the
Acquisitions, and thereafter its business will consist of operating the acquired
assets.
In order to finance and facilitate the Acquisitions, Longview is entering into a
Securities Purchase Agreement, dated of even date herewith (the "Securities
Purchase Agreement") with Sonterra, pursuant to which (and subject to the terms
and conditions thereof) Longview has agreed to purchase (the "Investments")
shares of common stock of Sonterra ("Sonterra Common Stock") for an aggregate
amount of $9,990, certain senior secured notes in the principal amount of
$322,500 (the "Deposit Notes"), certain senior secured notes in the principal
amount of $5,990,010 (of which $322,500 will refinance the Deposit Notes) (the
"Equity Acquisition Notes"), certain additional senior secured notes in the
initial principal amount of up to $2,000,000(the "Non-Equity Notes") and
warrants to purchase 50 shares (subject to adjustment) of Sonterra common stock
(the "Sonterra Warrants"). The Investments are expected to provide substantially
all the funds to enable Sonterra to consummate the Acquisitions and pay the fees
and expenses incurred by Sonterra in connection with the Acquisitions. Upon
consummation of the Acquisitions and Investments, the shares acquired by
Longview will constitute 100% of the issued and outstanding capital stock of
Sonterra, which will own and operate all the assets acquired in the
Acquisitions.
This LOI sets forth the salient points of the Securities Exchange and the
transactions related thereto. Except as expressly set forth herein, this LOI is
non-binding and subject to the completion of legal and business due diligence by
Longview, the fulfillment of certain conditions as set forth herein and the
execution of definitive agreements as mutually acceptable to both parties.
1. Longview and the Company are contemplating the Securities Exchange in which
Longview would exchange all its shares of Sonterra Common Stock and the Equity
Acquisition Notes for shares of common stock of the Company ("RCG Common Stock")
and would exchange the Sonterra Warrants for the warrants of the Company ("RCG
Warrants"). Longview would also exchange all of the Non-Equity Notes for senior
secured notes of the Company in an equal principal amount (the "Initial RCG
Notes"). After giving effect of the Securities Exchange, the Company would own
100% of the issued and outstanding capital stock of Sonterra. The shares of RCG
Common Stock to be acquired in the Securities Exchange would represent 85% of
the outstanding shares of RCG Common Stock as of the consummation of the
Securities Exchange (the "Closing"). The RCG Warrants would have a term of 5
years and be exercisable into a number of shares of RCG Common Stock equal to
the quotient of $1,500,000 divided by the Exercise Price (as defined in the Term
Sheet).
2. In order to enable and facilitate the Securities Exchange, the Company shall
authorize and effect, as soon as practicable, a reverse stock split at a ratio
acceptable to Longview, and prepare, file with the Securities and Exchange
Commission (the "SEC") and distribute an information statement to the
stockholders of the Company with respect thereto (and, to the extent required by
the rules and regulations of the SEC, with respect to the Securities Exchange
and the Acquisitions), to reduce the issued and outstanding number of its shares
and therefore cause the Company to have available a sufficient number of
authorized but unissued shares for issuance to Longview in the Securities
Exchange. Consummation of the Securities Exchange will be conditioned on the
implementation of the reverse stock split.
3. In addition to the reverse stock split described in Section 2, consummation
of the Securities Exchange would be subject to a number of conditions,
including, without limitation, the following: (i) satisfactory completion of a
due diligence by Longview and Longview being satisfied in all respects with the
due diligence review in its sole discretion; (ii) negotiation and execution of
mutually acceptable definitive agreements and indemnities as more specifically
described below; (iii) approval of the reverse stock split by Longview as holder
of a majority of the Company's issued and outstanding common stock; (iv)
approval of the Securities Exchange, the transactions related thereto and the
related definitive agreements by the Company's Board of Directors; (v) receipt
of all necessary consents and approvals of all third parties, including, without
limitation, all applicable governmental entities; and (vi) any other customary
conditions that may be reasonably requested by the parties hereto.
4. From and after the date hereof until the termination of this LOI in
accordance with the terms hereof, the Company shall afford Longview's officers,
partners, independent certified public accountants, legal counsel and other
representatives reasonable access to the Company's properties, books, records
and, upon notice and prior consent, personnel, in order that Longview may have
full opportunity to make such investigation as it reasonably desires to make in
connection with the Securities Exchange.
5. From and after the date hereof until 60 calendar days thereafter, each of
Longview and the Company will not, and will cause its attorneys, agents and
representatives not to, directly or indirectly, conduct any action to initiate,
assist, solicit, receive, negotiate, encourage or accept any offer or inquiry
from any person (i) to engage in any Business Combination (as defined below),
(ii) to reach any agreement or understanding (whether or not such agreement or
understanding is absolute, revocable, contingent or conditional) for, or
otherwise attempt to consummate, any Business Combination or (iii) to furnish or
cause to be furnished any information with respect to it or any of its
subsidiaries or affiliates to any person (other than as contemplated by this
LOI) who it or any such subsidiary, affiliate or representative knows or has
reason to believe is in the process of considering any Business Combination. If
either Longview or the Company or any of its attorneys, agents and
representatives receives from any person any oral or written offer, inquiry or
informational request of the type referred to above, such party will promptly
advise the other party in writing of such offer, inquiry or request and deliver
a copy of any such written offer to the other party. As used herein, "Business
Combination" shall mean any merger, consolidation or combination to which the
Company or Sonterra is a party, any sale, dividend or other disposition of
capital stock or other equity interest or exchange of capital stock or other
securities of the Company or Sonterra or any sale, dividend or other disposition
of all or substantially all of the assets and properties of the Company or
Sonterra, except as contemplated hereby.
6. Longview understands and acknowledges that the Company is a public company,
and that until the proposed Securities Exchange is made public, Longview and
those whom Longview advise of the proposed Securities Exchange (which shall only
be on a "need to know basis") may be privy to material inside information
regarding the Company. Accordingly, Longview understands, and has apprised those
of its officers and agents who know of the potential Securities Exchange and
others to whom disclosure has been made by Longview, of the need for
confidentiality. Longview is also aware, and confirms that its officers and
agents to whom disclosure have been made by Longview are aware, that the
securities laws of the United States prohibit any person who has material,
non-public information concerning another party from purchasing or selling
securities in reliance upon such information or from communicating such
information to any other person or entity under circumstances in which it is
reasonably foreseeable that such person or entity is likely to purchase or sell
such securities in reliance upon such information. Nothing in this LOI shall
constitute admission by either party that any information in fact contains
material, non-public information. Neither party shall make any disclosure
concerning these negotiations between the parties, this LOI, the Term Sheet or
the Securities Exchange, without the prior mutual consent of the Company and
Longview, except as may be required by law, regulation or subpoena (including,
without limitation, Section 13(d) of the Securities Exchange Act of 1933, as
amended, and the rules and regulations promulgated thereunder, as applicable to
Longview and certain affiliates thereof). The parties agree that, to the extent
reasonably feasible, they will advise and confer with each other prior to the
issuance of any reports, statements or releases pertaining to this LOI or the
proposed Securities Exchange. In addition, Longview agrees that except for the
Securities Exchange, it will not, prior to the expiration or termination hereof,
purchase or sell any securities of the Company.
7. This LOI will terminate 60 days after the date hereof, or earlier upon the
mutual agreement of the Company and Longview.
8. It is understood that no party has any binding agreement with respect to the
proposed Securities Exchange, other than those in Sections 4 through 9 of this
LOI, unless and until definitive agreements containing the terms and conditions
thereof have been signed and delivered by the parties, and that no party has any
duty, expressed or implied, to execute and deliver any such agreement. Longview
represents that its investment advisor, Viking, is authorized to execute and
deliver the LOI on behalf of Longview and to bind Longview to the terms hereof,
to the extent such terms are binding as set forth in paragraph 8. This LOI may
be amended only in writing executed by the parties hereto. This LOI may be
executed in counterparts each of which shall be deemed an original and all of
which together shall constitute one agreement. Facsimile and other electrically
transmitted signatures shall be acceptable in lieu of originals.
9. This LOI shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to the conflict of laws rules
thereof that would result in the application of the substantive laws of another
jurisdiction.
Please have a duly authorized and directed representative of the Company execute
this LOI confirm all of the foregoing and the Company's agreement in principle
to the proposed terms of the Securities Exchange and the other transactions set
forth in the attached Term Sheet.
[the remainder of this page is left blank and signatures appear on the following
page]
We look forward to working with you.
Sincerely,
THE LONGVIEW FUND, L.P.
By: VIKING ASSET MANAGEMENT LLC
Its: Investment Advisor
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By: Xxxxxx X. Xxxxxxxx
Its: Managing Director
Xxxxxx and accepted as of the day of
July, 2007 by:
RIVER CAPITAL GROUP, INC.
--------------------------------
By: Xxxxxx Xxxxxx
Its: Chairman, President and Chief Executive Officer
As of the day of July, 2007, each of Sonterra Resources, Inc. and Xxxxxxx X.
Xxxxxxx, Xxxxx X. Xxxxxxx and Xxxxxx X. Xxxxxxxx (who were the initial
stockholders, and are and will remain officers, of Sonterra and are to become
employees of the Company upon consummation of the Securities Exchange) hereby
acknowledges the understanding of The Longview Fund, L.P. and River Capital
Group, Inc. set forth in this LOI and the attached Term Sheet and agrees to
cooperate with such parties in connection with the Securities Exchange and the
other transactions contemplated hereby and thereby and the negotiation,
execution and delivery of documents and instruments relating thereto.
SONTERRA RESOURCES, INC.
--------------------------------
By:
Its:
--------------------------------
By: Xxxxxxx X. Xxxxxxx
--------------------------------
By: Xxxxx X. Xxxxxxx
--------------------------------
By: Xxxxxx X. Xxxxxxxx
[Signature page to the Letter of Intent]
Summary of Terms and Conditions
Securities Exchange
Parties: River Capital Group, Inc. (the "Company") and The
Longview Fund, L.P. ("Longview")
Securities Exchange and o Longview would exchange all its shares of
Additional Note Issuance: Sonterra Common Stock and the Equity
Acquisition Notes for shares of RCG Common
Stock.
o Longview would exchange the Sonterra
Warrants for the RCG Warrants. The RCG
Warrants would have a term of 5 years, be
exercisable, at a price per share equal to
the Exercise Price (as defined below), into
an amount of the RCG Common Stock equal to
the quotient of $1,500,000, divided by the
Exercise Price (as defined below). The
"Exercise Price" shall be equal to 110% of
the quotient of $6,000,000 divided by the
number of shares of RCG Common Stock issued
to Longview in the Securities Exchange. The
RCG Warrants will otherwise have
substantially the same terms and conditions
as the Sonterra Warrants (appropriately
revised to reflect the Company's status as a
public company).
o After giving effect of the Securities
Exchange, the Company would own 100% of the
issued and outstanding capital stock of
Sonterra.
o The shares of RCG Common Stock to be
acquired in the Securities Exchange would
represent 85% of the outstanding shares of
RCG Common Stock immediately following the
Closing.
o The Company would issue new senior secured
notes ("Initial RCG Notes") of the Company
to Longview in exchange for the Non-Equity
Notes issued by Sonterra to Longview, in the
same aggregate principal amount of the
Non-Equity Notes and on substantially the
same terms and conditions as the Non-Equity
Notes (appropriately revised to reflect the
Company's status as a public company).
o The Company would assume or guarantee the
obligations of Sonterra under the Securities
Purchase Agreement.
o The Company would also have the rights in
its discretion on a quarterly basis to
require Longview to purchase up to an
additional $2.0 million principal amount of
notes (the "Additional RCG Notes"), which,
when added to the principal amount of the
Initial RCG Notes, would represent up to an
aggregate of $10.0 million in principal
amount of senior secured notes. The
Additional RCG Notes and the Initial RCG
Notes are referred collectively as the RCG
Notes.
Security: The RCG Notes shall be secured by a first
perfected security interest on all tangible and
intangible assets acquired by the Company and its
subsidiaries, other than the assets of River
Capital Holdings Ltd. and River Reinsurance Ltd.
and any other subsidiaries engaged in or holding a
license or other governmental authorization
permitting it to engage in the insurance or
reinsurance business (the "Insurance
Subsidiaries"), and a first perfected security
interest on all other tangible and intangible
assets now owned, and/or hereafter created or
acquired by the Company or any of its
subsidiaries, other than the Insurance
Subsidiaries, including but not limited to all
accounts (excluding any funds held in escrow on
behalf of third party joint interest owners),
notes, securities of other entities, contracts
receivable, inventory, machinery and equipment,
land and buildings and general intangibles.
Longview would also receive a first perfected
pledge of and security interest in 100% of the
stock of, and a full and unconditional guaranty
by, all subsidiaries (existing & future, direct
and indirect) and affiliates, other than the
Insurance Subsidiaries.
Company Early Redemption: The Company, at any time after the Closing may
repay any or all outstanding RCG Notes in cash, at
a price equal to 103% of par plus accrued Interest
reducing by 1% annually until Maturity.
Reverse Stock Split: The consummation of the Securities Exchange is
contingent on the successful implementation of the
reverse stock split. The Company shall file, as
soon as practicable, the Information Statement
described in the LOI to which this Term Sheet is
annexed.
Participation Rights: During the period beginning at the Closing and
ending on the later of the 2nd anniversary of the
Closing and sixty days after no RCG Notes remain
outstanding, Longview will have the right to
purchase up to 50% of all debt and/or
equity/equity- linked financings offered by the
Company (the "Participation Rights"). The
Participation Rights would be subject to certain
standard exceptions to be discussed.
Registration Rights: The Company and Longview will enter into a
registration rights agreement which will require
the Company to file within 30 days from the
Closing a registration statement to register the
shares of RCG Common Stock underlying the RCG
Warrants. The registration statement shall become
effective within 120 days from the Closing.
Longview will also have piggyback and demand
registration rights with respect to the shares of
RCG Common Stock acquired in the Securities
Exchange, as well as the shares underlying the RCG
Warrants. The filing of a registration statement
for registration of the maximum number of shares
permitted by the rules and policies of the SEC
shall constitute compliance with the filing
obligations.
Representations and Customary for transactions of this nature with
Warranties: respect to the Company and all of its subsidiaries
existing and future, including but not limited to:
1. Corporate existence and good standing.
2. Corporate and governmental authorization; no
contravention.
3. Enforceability and validity of all
agreements. Validity, enforceability,
perfection and priority of all security
interests and liens granted to Longview.
4. Capital structure and outstanding
indebtedness.
5. Title to property; no encumbrances except
permitted leases.
6. Accuracy of information.
7. Compliance with laws and regulations.
8. No material litigation.
9. Existence, incorporation, etc. of
subsidiaries.
10. Payment of taxes.
11. Adequacy of insurance.
12. Full disclosure.
Covenants: Customary covenant in transactions of this nature
(which shall be substantially similar to those
contained in the Securities Purchase Agreement but
will be appropriately modified to reflect the
Company's status as a public company), including
but not limited to:
Affirmative Covenants:
1. Maintain existence; conduct of business;
public company status.
2. Operation and maintenance of properties.
3. Insurance.
4. Compliance with laws, including public
company filing obligations.
5. Listing of Common Stock.
6. Additional collateral; title information;
additional guarantors.
Negative Covenants:
1. Indebtedness and liens, other than permitted
subordinated debt and permitted liens.
2. Dividend, distributions and redemptions;
repayment of subordinated debt.
3. Investments, loans and advances.
4. Sale of properties; sale or discount of
receivables.
5. Merger or consolidations subject to standard
exceptions.
6. Sale of assets.
The covenants limiting the Company's ability to
sell its properties, engage in merger or
consolidations and sell assets shall contain
exceptions expressly permitting the Company's sale
of the Insurance Subsidiaries, a sale of such
Insurance Subsidiaries' assets, or merger or
consolidations of such Insurance Subsidiaries, in
each case pursuant to a transaction in which the
Company disposes its entire interest in the
Insurance Subsidiaries.
Financial Covenants: 1. Quarterly Revenue - From September 30, 2007
to June 30, 2008, the Company's trailing 3
month quarterly revenue from all sales and
services must be at least $300,000, and then
at least $500,000 at all times thereafter
until Maturity.
If the Company falls out of compliance with this
covenant, the Company would be required to repay
that amount of principal equivalent to the
percentage of noncompliance. For instance, if on
September 30, 2007 the Company's Quarterly Revenue
is only 95% of "X" (to be determined) the Company
would be 5% noncompliant, and required to repay 5%
of the outstanding Notes.
2. BCFE - From the oil and gas properties that
are subject to the first priority secured
lien, the Company must maintain Total Proven
Reserves (which includes PDP, PDNP and PUD
reserves only) at each period set forth
below at or above the number set forth
opposite such period. Provided, however that
the calculation may not include more than
40% of PUDs.
Period Ending BCFE
------------- ----
Date of first funding 2.0
Sept 30, 2007 2.0
Dec 31, 2007 4.0
March 31, 2008 5.0
June 30, 2008 to Maturity 7.0
This covenant is measured quarterly, and in the
event of noncompliance with any of the required
BCFE amounts as of the applicable measurement
date, the Company would be required to repay that
amount of principal equivalent to the percentage
of noncompliance. For instance, if on September
30, 2007 the Company's BCFE is equal to 1.90
instead of the required 2.0 BCFE, this would
amount to 95% of the required reserve amount, in
which case the Company would be 5% noncompliant,
and required to repay 5% of the outstanding Notes.
3. PRV Ratio -From the oil and gas properties
that are subject to the first priority
secured lien, the Company must maintain a
Proven Reserve Value Ratio ("PRV Ratio")
during any period set forth below at or
above the number set forth opposite such
period. (The PRV Ratio would be calculated
as follows: (actual PDP and PDNP mcfe x
relevant hub spot price x 40%) + (actual PUD
mcfe x relevant hub spot price x 15%) +
(appraised value of pipeline systems and
separation/tank farm facilities x 40% in
year one and 20% in year two) + cash and
cash equivalents + hydrocarbon receivables +
market value of xxxxxx less hedge margin
collateral - hydrocarbon payables - accrued
cash expenses - debt due within 1 year
(excluding the RCG Notes) all divided by the
outstanding RCG Notes.)
Period Ending Ratio
------------- -----
Date of Closing 1.0
Sept 30, 2007 1.0
Dec 31, 2007 1.25
March 31, 2008 1.5
June 30, 2008 to Maturity 1.75
This covenant is measured quarterly, and the
Company would be required on a quarterly basis to
repay that amount of principle necessary to remain
in compliance with the above ratio.
These covenants will be substantially identical to
those contained in the Non-Equity Notes to be
issued by Sonterra, provided that for any 3 month
measurement period encompassing both the period
prior to the Closing and the period after the
Closing, the Company's achievement of the
quarterly revenue covenant shall be determined by
reference to the sum of the Company's actual
revenue for the portion of the measurement period
occurring after the Closing plus the pro forma
combined revenue of the Company and Sonterra for
the portion of such measurement period occurring
prior to the Closing.
Post-closing Covenant: o The Company shall divest the Insurance
Subsidiaries as soon as reasonably
practicable after the Closing in
consideration of the purchaser of such
subsidiary assuming all of the liabilities
of such subsidiaries.
o The Company shall file a Form 8-K (including
all required financial and other
information, as such required financial
information may be subject to modifications
pursuant to the policies of the SEC staff)
with the SEC within the prescribed time
period after the Closing.
Officer Option Pool: At the Closing, a management incentive option pool
shall be established covering a number of options
equal to 20% of the number of shares of Common
Stock outstanding immediately following the
Closing (the "Options"). The Options will be
issued in three tranches and the Options in each
tranche will vest 1/3 on each of the first three
anniversaries following the Closing. One tranche
of Options will have an exercise price equal to
the "fair value" of the RCG Common Stock as of the
Closing, as determined by Longview (the "Initial
Option Exercise Price"), the second tranche will
have an exercise price equal to 130% of the
Initial Option Exercise Price and the third
tranche will have an exercise price equal to 150%
of the Initial Option Exercise Price. The Options
will be allocated among management as set forth on
Schedule I hereto. The other terms of the Options
and the option plan under which the Options are
issued shall be acceptable to Longview.
Employment Agreements: At Closing, the Company will enter into employment
agreements with each of Xxxxxxx X. Xxxxxxx, Xxxxx
X. Xxxxxxx and Xxxxxx X. Xxxxxxxx (the
"Principals"), which employment agreement shall be
in a form acceptable to Longview and the
Principals and which shall include customary terms
and provisions, including customary non-compete
and non-solicitation provisions.
Term Sheet: This Term Sheet sets forth the contemplated terms
for the transaction described herein, This Term
Sheet does not create any legally binding
obligation of the Investors (or any of their
affiliates) or a commitment to provide the
financing described in this Term Sheet. Any such
transaction shall be subject to satisfactory
completion of due diligence as determined by the
Investors, the satisfaction of all closing
conditions, the execution and delivery of the
definitive agreements and there being no material
adverse change in the business, assets, results of
operations condition (financial or otherwise),
credit worthiness or prospects of the Company or
the financial markets.
