EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (this "Agreement") is made as of the 3rd day of
June, 2003 by and between U.S. Energy Corp.(the "Company" or "USEG") and
("Holder").
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WHEREAS, pursuant to that certain Subscription Agreement, dated as of the
date hereof, by and between Holder, Rocky Mountain Gas, Inc. ("RMG") and USEG,
Holder agreed to purchase, on the terms and conditions described therein, (i)
44,444 shares of RMG common stock at a price of $2.25 per share (the "RMG
Shares") for an aggregate purchase price of $100,000.00, (ii) warrants to
purchase up to 8,333 shares of RMG common stock (the "RMG Warrant") and (iii)
warrants to purchase up to 6,250 shares of USEG common stock (the "USEG Warrant"
and, together with the RMG Shares and the RMG Warrant, the "Securities"); and
WHEREAS, the parties hereto have agreed that the RMG Shares shall be
exchangeable for shares of USEG common stock ("USEG Common Stock") as provided
for in this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties to this Agreement, intending to be
legally bound, hereby agree as follows:
1. Exchange.
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a. Optional Exchange. Upon the terms and subject to the conditions
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set forth herein, each of the RMG Shares then outstanding may, at the option of
Holder, be exchanged at any time, and from time to time, into fully-paid and
nonassessable shares of USEG Common Stock (each, an "Exchange"); provided,
however, that there shall be no more than three such Exchanges, which may be
twice in amounts of 14,814 Shares and once for 14,815 Shares, or other amounts
at Holder' election, so long as there are no more than three Exchanges. Shares
of RMG common stock issued upon exercise of the RMG Warrant will not be
exchangeable for shares of USEG Common Stock.
b. Expiration of Exchange Rights. If the Market Price (as that term
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is defined herein) exceeds $7.50 per share for twenty (20) consecutive business
days, Holder may, at her option, notify USEG of that fact, whereupon Holder'
right to effectuate an Exchange will expire if not exercised within twenty (20)
business days after Holder provides such notice to USEG.
c. USEG Common Stock Issuable Upon Exchange. The number of shares of
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USEG Common Stock that Holder shall be entitled to receive upon an Exchange
shall be equal to the quotient obtained by dividing (i) the Exchange Value of
the RMG Shares being exchanged (determined as provided in Section 1(d) below) by
(ii) the Exchange Rate then in effect (determined as provided in Section 1(e)
below).
d. Exchange Value. The "Exchange Value" of any RMG Shares that are
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the subject of an Exchange shall be equal to the product of (i) the number of
RMG Shares being exchanged by (ii) the Effective Purchase Price (as that term is
defined in the Exchange Agreement) in effect at the time of such Exchange.
e. Exchange Rate. The "Exchange Rate" with respect to an Exchange
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shall be equal to the product of (i) the Market Price for each of the five (5)
consecutive business days prior to such Exchange multiplied by (ii) 0.85;
provided, however, that if the Exchange Rate with respect to any Exchange
calculated pursuant to this paragraph (d) exceeds $5.00, then the Exchange Rate
with respect to such Exchange shall be deemed to be equal to $5.00.
f. Market Price.
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(1) If shares of USEG Common Stock are listed on a national
securities exchange, are admitted to unlisted trading privileges on such an
exchange, or are listed for trading on a trading system of The Nasdaq Stock
Market, Inc., then the "Market Price" shall be the last reported sale price of
shares of USEG Common Stock during normal business hours on such an exchange or
system; or
(2) If shares of USEG Common Stock are not so listed on such
exchange or system or admitted to unlisted trading privileges, then the "Market
Price" shall be the average of the last reported bid prices during normal
business hours reported by the National Quotation Bureau, Inc.; or
(3) If shares of USEG Common Stock are not so listed or admitted
to unlisted trading privileges and if bid and asked prices are not so reported,
then the "Market Price" shall be an amount, not less than book value, determined
in such reasonable manner as may be mutually agreed upon by the board of
directors of the Company and Holder.
g. Mechanics of Exchange. The rights of Exchange set forth Section
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1(a) shall be exercised by Holder giving written notice (the "Exchange Notice")
to USEG that Holder elects to effectuate an Exchange. Upon Holder' giving of an
Exchange Notice, Holder will surrender to USEG the certificate or certificates
(the "Exchange Certificates") representing the RMG Shares being exchanged, duly
endorsed in blank or accompanied by an effective stock power; provided, however,
that the failure of the holder to surrender the required Exchange Certificates
shall not render ineffective any such Exchange and, in such event, the RMG
Shares that are the subject of such Exchange shall thereafter be deemed no
longer to be outstanding and to represent only the right to receive a
certificate or certificates for shares of USEG Common Stock upon surrender of
the Exchange Certificates as provided in Section 1(g)(2).
(1) Each Exchange Notice shall include a statement of the name or
names (with address), subject to compliance with applicable laws to the extent
such designation shall involve a transfer, in which the certificate or
certificates for shares of USEG Common Stock shall be issued, and shall be given
to the Company at its principal office at any time during its usual business
hours on the date set forth in such notice.
(2) Within three (3) business days after the receipt by the
Company of an Exchange Notice pursuant to an Optional Exchange and surrender of
the Exchange Certificates, the Company shall cause to be issued and delivered to
Holder or her designee a certificate or certificates for the number of whole
shares of USEG Common Stock issuable upon such Exchange. The certificates for
such USEG Common Stock shall be registered in such name or names as Holder may
direct, subject to compliance with applicable laws to the extent such
designation shall involve a transfer.
(3) To the extent permitted by law, each Exchange shall be deemed
to have been effected, and the Exchange Rate shall be determined, as of the
close of business on the date on which an Exchange Notice is sent by Holder.
h. Fractional Shares. If any Exchange would result in the issuance
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of any fractional shares of USEG Common Stock, the Company shall, in lieu of
issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the Market Price on the date of exchange.
i. Balance Certificates. In the event some but not all of the RMG
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Shares are not exchanged pursuant to an Exchange, USEG shall cause RMG to
execute and deliver to or on the order of Holder, at the expense of RMG, a new
certificate representing the number of RMG Shares which were not exchanged.
j. Lost Certificates. Upon receipt by the Company of evidence
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satisfactory to it of the loss, theft, destruction or mutilation of any
certificates for RMG Shares, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
any certificates for RMG Shares, if mutilated, the Company will execute and
deliver one or more new certificates of like tenor and date.
2. Registration Covenant.
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a. Holder enters into this Agreement in reliance upon the Company's
assurance of providing to Holder the benefits of a registration statement and
the prospectus to be contained therein, to permit Holder to sell all shares of
USEG Common Stock issuable upon an exchange or an exercise of the Securities
under circumstances involving a public offering, as soon as reasonably
practicable after such exchange or exercise. To that end, the Company covenants
and agrees with Holder that the Company shall, on behalf of Holder, (1) under
Section 6 of the Securities Act of 1933, as amended (the "Act"), file, within
thirty (30) days of the date hereof, a registration statement on Form S-3 (a
"Registration Statement") with (and use its best efforts to cause such
registration statement to be declared effective as promptly as practicable by)
the United States Securities and Exchange Commission (the "SEC"), to permit
offers and sales involving a public offering (as such term is interpreted by the
SEC) under Section 5 of the Act by Holder of the Registrable Shares (as that
term is defined herein) in accordance with this Agreement; provided, however,
that if Form S-3 is not available at that time, then the Company shall file a
registration statement on such form then available to effect a registration of
the Registrable Shares, subject to the consent of Holder, which consent will not
be unreasonably withheld; and (2) qualify such offers and sales of the
Registrable Shares under the securities laws of the state of residence of
Holder. The Registration Statement under clause (1) above may be only for
Holder' Registrable Shares, or may be for Holder' Registrable Shares and also
for shares registered for resale by other persons.
b. For purposes of this Agreement, "Registrable Shares" means any and
all shares of USEG Common Stock that are issued or are issuable pursuant to the
Subscription Agreement, the Warrants or this Agreement. The number of
Registrable Shares shall initially be set at 100,000, based upon an assumed
Exchange Rate of approximately $1.00. In the event that, from time to time, the
number of shares USEG Common Stock issued or issuable upon Exchange of Shares
pursuant to Section 1 hereof and upon exercise of the USEG Warrant exceeds the
number of Registrable Shares previously registered under this Section 2, the
Company shall file with the SEC, as soon as practicable, one or more additional
registration statements contemplated by paragraph (a) above (each, in addition
to the Registration Statement referred to in paragraph (a) above, a
"Registration Statement") to increase the number of Registrable Shares such that
a sufficient number of shares are registered to cover all shares of USEG Common
Stock issued or issuable upon such Exchange or exercise. In the event that the
number of shares of USEG Common Stock issued upon the completed Exchange of all
of the Shares is less than the number of shares of USEG Common Stock previously
registered under Section 6 of the Act, the number of shares of USEG Common Stock
representing such difference may, at the option of the Company, be deregistered
by filing an amendment to the Registration Statement with the SEC.
c. If after the date hereof the Company issues additional shares of
USEG Common Stock to which Holder is entitled as a result of a stock split,
stock dividend, recapitalization, combination or similar event, the Company's
registration covenant contained in this Section 2 shall extend to and cover such
additional shares of USEG Common Stock received by Holder.
d. In furtherance of implementing such covenant, the Company and
Holder agree that:
(1) The Company shall pay all expenses of registration, including
filing fees, printing fees, fees and costs of counsel, fees and costs of the
Company's audit firm incurred in review of and providing consent to filing of
the Registration Statement, and qualification fees (and associated costs of
counsel) of the sale of the Registrable Shares under the laws of the state where
Holder resides. The Company shall not pay commissions owed on sale of the
Registrable Shares.
(2) Holder shall provide the Company with all information
reasonably required by the Company to comply with the rules and regulations of
the SEC in respect of information about Holder to be included in the initial
filing of the Registration Statement on Form S-3, and thereafter for so long as
the Registration Statement is effective under paragraph (4) below.
(3) The Company shall prepare and file the Registration Statement
with the SEC within thirty (30) days of the date hereof. The Company shall
provide to counsel for Holder pre-filing drafts of the initial Registration
Statement, all comments received from the staff of the SEC concerning such
filing and drafts of any subsequent amendments or supplements to the
Registration Statements on a pre-filing basis. The Company shall use its best
efforts to respond to any comments from the staff as soon as practicable, by
filing amendments to the Registration Statement or otherwise, with the objective
of having the Registration Statement declared effective as soon as practicable
after initial filing. The Company shall inform Holder in writing, through
counsel, of the Registration Statement's effective date when granted, and of the
effective date of qualification for offer and sale of the Registrable Shares by
the securities law administrator of the state wherein Holder resides. The
Company also shall register and qualify the Registrable Shares under applicable
state securities laws and list such Registrable Shares on The Nasdaq Stock
Market National Market if shares of the Company's common stock are so listed at
the time the Registration Statement becomes effective, and take such other
actions as are reasonable or necessary to comply with the requirements of the
Act and the regulations thereunder, or the reasonable request of Holder, with
respect to the registration and distribution of the Registrable Shares.
(4) The Company shall maintain the effectiveness of the
Registration Statement and the current and complete status of the related
prospectus, at its sole expense, until the earlier of the sale of all
Registrable Shares by Holder or other persons pursuant to paragraph (5) below,
subject to the provisions of paragraph (a) above.
(5) The registration covenant is only for the benefit of Holder,
and such other persons who may come to own the Registrable Shares prior to the
effective date of the Registration Statement, provided subsequent owners have
become such in compliance with the Act to be established to the reasonable
satisfaction of the Company.
3. Indemnification.
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a. By Holder. Holder agrees to indemnify and hold harmless USEG,
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and each other person who controls USEG within the meaning of Section 15 of the
Act, against any and all loss, liability, claim, damage and expense whatsoever
(including, but not limited to, any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any litigation
commenced or threatened or any claim whatsoever) arising out of or based upon
any materially false or misleading representation or information made by Holder
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to the Company in connection with information or representations furnished by
Holder expressly for use in connection with the Registration Statement.
b. By USEG. USEG agrees to indemnify and hold harmless Holder, and
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each other person who controls Holder within the meaning of Section 15 of the
Act, against any and all loss, liability, claim, damage and expense whatsoever
(including, but not limited to, any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any litigation which
is commenced or threatened or any claim whatsoever) arising out of or based upon
any materially false or misleading statement or any misrepresentation or untrue
statement made by the Company in the Registration Statement. However, this
indemnification shall not extend to and shall not cover any loss, liability,
claim, damage or expense in connection with any materially false or misleading
statement, misrepresentation or untrue statement made in reliance upon and in
conformity with written information furnished to USEG by Holder which is
specifically intended by Holder for use in the preparation of the Registration
Statement or the preliminary prospectus or prospectus to be contained therein.
c. Procedures. Promptly after receipt by an indemnified party under
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this Section 3 of notice of the commencement of any action, suit, proceeding,
investigation or threat thereof made in writing for which such indemnified party
may make a claim under this Section 3, such indemnified party shall deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party; provided, however, that an indemnified
party shall have the right to retain its own counsel at its own expense (except
as specifically provided below). The failure to deliver written notice to the
indemnifying party within a reasonable time following the commencement of any
such action shall not relieve such indemnifying party of any liability to the
indemnified party under this Section 3 unless and to the extent that the
indemnifying party is actually prejudiced thereby, but in no event shall it
relieve the indemnifying party of any liability that it may have to any
indemnified party otherwise than pursuant to this Section 3. Any fees and
expenses incurred by the indemnified party (including any fees and expenses
incurred in connection with investigating or preparing to defend such action or
proceeding) shall be paid to the indemnified party, as incurred, within sixty
(60) days of written notice thereof to the indemnifying party (regardless of
whether it is ultimately determined that an indemnified party is not entitled to
indemnification hereunder, but in such event such amounts shall be immediately
refunded). Any such indemnified party shall have the right to employ separate
counsel in any such action, claim or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be the expenses
of such indemnified party unless (i) the indemnifying party has agreed to pay
such fees and expenses or (ii) the indemnifying party shall have failed to
promptly assume the defense of such action, claim or proceeding or (iii) the
named parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or in addition
to those available to the indemnifying party and that the assertion of such
defenses would create a conflict of interest such that counsel employed by the
indemnifying party could not faithfully represent the indemnified party, it
being understood, however, that the indemnifying party shall not, in connection
with any one such action, claim or proceeding or separate but substantially
similar or related actions, claims or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for all such indemnified
parties. No indemnifying party shall be liable to an indemnified party for any
settlement of any action, proceeding or claim without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld.
d. Contribution. If the indemnification required by this Section 3
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from the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to in
this Section 3, (i) the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (x) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party on the one hand and the indemnified
party or parties on the other or (y) if the allocation provided by clause (x) is
not permitted by applicable law, in such proportion as to reflect not only the
relative benefits received by the indemnifying party on the one hand and the
indemnified party or parties on the other, but also the relative fault of the
indemnifying party and indemnified parties in connection with the actions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any has been committed by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such materially false or misleading representation, warranty or other
information; and (ii) USEG and Holder agree that it would not be just and
equitable if contribution pursuant to this Section 3(d) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in Section 3(d)(i) hereof. No
person guilty of fraudulent misrepresentation within the meaning of Section
11(f) of the Act shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. The obligations of the Company and
the Subscriber under this Section 3 shall survive the completion of any offering
of securities pursuant to the Registration Statement.
4. Rule 144; Exchange Act Filings. The Company covenants and agrees
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that it will file as and when applicable, on a timely basis, all reports
required to be filed by it under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). If, for any reason the Company is not required to
file reports pursuant to the Exchange Act, the Company shall at the request of
Holder make publicly available the information specified in subparagraph (c)(2)
of Rule 144 of the Act, and take such further action as may be reasonably
required from time to time and as may be within the reasonable control of the
Company, to enable Holder to transfer the Securities to a transferee without
registration under the Act within the limitation of the exemptions provided by
Rule 144 under the Securities Act or any similar rule or regulation hereafter
adopted by the Commission. The Company further covenants and agrees that it will
furnish to Holder so long as Holder owns the Securities, promptly upon request,
(i) a written statement by the Company as to the status of its compliance with
the reporting requirements of Rule 144, the Act and the Exchange Act, (ii) a
copy of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested to permit Holder to sell such Securities pursuant
to Rule 144 without registration.
5. Modification. Neither this Agreement nor any provisions hereof
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shall be modified, discharged or terminated except by an instrument in writing
signed by the party against whom enforcement of any modification, discharge or
termination is sought.
6. Legend. Each certificate representing the shares of USEG Common
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Stock issuable upon exchange of the Shares or exercise of the USEG Warrant, as
the case may be, will be imprinted with a legend in substantially the following
form:
"THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED OR OFFERED FOR
SALE OR TRANSFER UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND OTHER APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH SECURITIES IS
THEN IN EFFECT, OR IN AN OPINION OF COUNSEL OF THE REGISTERED OWNER AND
ADDRESSED TO THE ISSUER AND IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER, SUCH REGISTRATION UNDER THE SECURITIES ACT AND OTHER APPLICABLE
SECURITIES LAWS IS NOT REQUIRED."
7. Notices. All notices required to be given to any of the parties
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hereunder shall be in writing and shall be deemed to have been sufficiently
given for all purposes when presented personally to such party or sent by
certified or registered mail, return receipt requested, to such party at its
address set forth below:
If to the Company: U.S. Energy Corp.
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000 Xxxxx 0xx Xxxx
Xxxxxxxx, Xxxxxxx 00000
Attn: Xxxxx Xxxxxx
Fax: 000-000-0000
With a copy to: The Law Offices of Xxxxxxx X. Xxxxxx
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0000 Xxxx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxx 00000
Attn: Xxxxxxx X. Xxxxxx, Esq.
Fax: 000-000-0000
If to the Holder: Holder
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Such notice shall be deemed to be given when received if delivered
personally or two (2) business days after the date sent by FedEx or other
delivery service, with delivery specified to be not later than 'second business
day.' Any notice of any change in such address shall also be given in the
manner set forth above. Whenever the giving of notice is required, the giving
of such notice may be waived in writing by the party entitled to receive such
notice.
8. Counterparts. This Agreement may be executed through the use of
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separate signature pages, which taken together shall constitute one binding
agreement.
9. Section and Other Headings. The section and other headings
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contained herein are for reference purposes only and shall not affect the
meaning or interpretation of the Agreement.
10. Survival. All representations, warranties and covenants contained
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in the Agreement shall survive all changes in the transactions, documents and
instruments described herein that are not material or which are to the benefit
of Holder.
11. Notification of Changes. Holder hereby covenants and agrees to
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notify the Company upon the occurrence of any event prior to the Company's
execution and acceptance of this Agreement that would cause any representation,
warranty, or covenant of Holder contained in the Agreement to be false or
incorrect.
12. Binding Effect. This Agreement shall be binding upon and inure to
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the benefit of and be enforceable by each of the parties and their respective
successors and assigns.
13. Entire Agreement. This instrument contains the entire agreement of
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the parties with respect to the subject matter of this Agreement.
14. Assignability. This Agreement may not be assigned by either
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party without the prior written consent of the other party.
15. Applicable Law. This Agreement shall be governed by and construed
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in accordance with the laws of the State of Wyoming as applied to residents of
that state entering into contracts wholly to be performed in that state,
notwithstanding the jurisdiction wherein it is signed by Holder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
this date above first written.
U.S. ENERGY CORP.
By:
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Name:
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Title:
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Holder
