West Hawk Development Corp.
TSX VENTURE : WHD

West Hawk Development Corp.

July 10, 2009 19:57 ET

West Hawk Provides Disclosure Update for Application to Reinstate Trading

DENVER, COLORADO--(Marketwire - July 10, 2009) - West Hawk Development Corp. (TSX VENTURE:WHD) (the "Company") is pleased to provide to its shareholders and other stakeholders, this comprehensive update regarding the Company's business and operations made in connection with its reinstatement of the trading of its shares on the TSX Venture Exchange (the "Exchange").

Reinstatement Application

The Company submitted its application for reinstatement of trading to the Exchange on June 30, 2009 following a lengthy and comprehensive compliance review during which the Company's shares have been suspended from trading. Trading is expected to recommence on July 15, 2009.

In the course of its review, the Exchange has identified deficiencies in the Company's disclosure record and other occasions on which the Company was not in compliance with Exchange policies. As a result, the Company has been put on notice by the Exchange to comply with Exchange policies in the future.

Chapter 11 Proceedings

The Company filed for protection under Chapter 11 of the Bankruptcy Code on behalf of West Hawk Energy (USA) LLC ("WHE"), an indirect partially owned subsidiary, on December 18, 2008. The Company holds a 75% interest in WHE through its wholly-owned subsidiary, West Hawk Holdings (USA) LLC ("WHE Holdings"). The remaining 25% of WHE is owned by Shanxi Lu'An Mining Industry (Group) Company of China.

WHE has engaged Chiron Financial Advisors, LLC ("Chiron") as its financial advisors and they have been working together to find the best financing solution for the Company. Over the previous six months they have held several management meetings and discussions, have met with debtor's counsel and have completed several field visits to the Figure Four project. On January 27, 2009 WHE met with creditors representatives and the US Trustee, at which meeting the Trustee gave creditors the opportunity to organize a creditors' committee. However, no creditors elected to participate in a creditors committee and to date, no creditor proposals have been advanced.

WHE had until June 18, 2009 to implement the restructuring of WHE's indebtedness and improve its capital structure, but WHE has applied for and obtained from the United States Bankruptcy Court for the District of Colorado (the "Bankruptcy Court") an extension to the exclusivity period under the Chapter 11 protection for six months to November 18, 2009. The Company continues to work with its legal and financial advisors to develop the most appropriate reorganization plan for WHE, which includes negotiating amendments to WHE's Drilling and Development Agreement with EnCana Oil and Gas (USA) Inc., assessing how much funding WHE will require to implement the plan of reorganization and negotiating debtor-in-possession financing with Chiron. The plan submission deadline is November 15, 2009. The Company will provide further updates on the Chapter 11 proceedings as they occur.

WHE is indebted in the amount of approximately $10.3 million. See "Fuselier Holdings LLC" below.

On April 7, 2009, the Company filed for protection under Chapter 11 of the Bankruptcy Code on behalf of WHE Holdings in respect of approximately $1,000,000 in intercompany debt. That same day, WHE Holdings and WHE filed a joint motion in the Bankruptcy Court to consolidate the companies' bankruptcy estates. If the motion is approved, all assets and liabilities of each company would be consolidated and deemed assets and liabilities of both companies, any claim or obligation against one company would be deemed a claim or obligation against both companies, and any plan of reorganization would be a single plan for both companies as a consolidated entity. The motion is before the Bankruptcy Court, which has not yet scheduled a hearing date. It is not known when the hearing will be held. In the event that the motion to consolidate is denied, WHE and WHE Holdings will each pursue its plan of reorganization independently, in which case WHE Holdings will have until November 15, 2009 to submit its plan of reorganization and is currently working with Chiron to this end.

Fuselier Holdings LLC

The Company announced on January 2, 2009 that Fuselier Holdings LLC ("Fuselier") had terminated the agreement (the "Agreement") pursuant to which WHE had assigned and transferred to Fuselier approximately US$10.6 million in outstanding trade debt (the "Debt"). The termination of the Agreement caused approximately US$9.3 million in Debt remaining unpaid at the time of termination to revert back to WHE.

WHE is currently indebted to its creditors in the amount of approximately US$10.3 million, which includes the US$9.3 million that reverted back to WHE on termination of the Agreement and approximately US$1 million in additional WHE trade debt that was never assigned to Fuselier. At the time of execution of the Agreement, US$10.6 million represented the Company's best estimate of the aggregate WHE creditor claims then outstanding. While negotiating settlements with creditors, Fuselier estimated that the actual amount owed to the creditors was US$1.4 million greater. The Company, however, believes that the additional debt is closer to US$1 million, as noted above. The Agreement contemplated that in such circumstances the parties would amend the Agreement to assign the additional debt, but no such amendment was made prior to the termination.

On termination of the Agreement and reversion of the Debt to WHE, Fuselier has no further liability in respect of the Debt and neither WHE nor the Company has any further rights of indemnification against Fuselier in respect of the Debt.

The Company originally announced the Agreement on April 10, 2008. The transaction allowed the Company to consolidate WHE's debts, free up cash flow and ultimately remove liens that had been filed by the trade creditors against the Company's Figure Four project. The Company unsuccessfully pursued alternate financing on more favorable terms for several months before it signed the Agreement with Fuselier.

In consideration for assuming the US$10.6 million in Debt, the Company agreed to pay Fuselier US$11.9 million through the transfer of 4,000,000 previously issued common shares of the Company (having an aggregate value of US$800,000) and the issue of two promissory notes (the "Notes") totaling US$11.1 million. Of this amount, US$1.3 million represented Fuselier's transaction fees, including the interest costs and penalties that Fuselier assumed on the transferred Debt and management, legal and administrative fees. The Notes and accrued interest were payable by the Company through the issuance of common shares at a minimum price per share of not less than $0.19, which was the then market price of the Company's stock. It was intended that Fuselier would sell the Company's shares into the market in order to raise the funds necessary to pay down the assigned Debt. The transaction was subject to Exchange approval, which the Company received on April 30, 2008.

In early November 2008, Fuselier defaulted in its payments to the creditors. Following this default, the Company advanced a total of US$125,000 to Fuselier throughout November and December 2008 so that Fuselier could meet its payment obligations to WHE's creditors (and thereby avoid a default by WHE under the DDA). The loan was never repaid and the Company therefore applied the US$125,000 loan amount as an additional payment against the outstanding principal balance of the Notes.

On December 18, 2008, Fuselier advised the Company that it was terminating the Agreement because the Company's shares were suspended from trading on the Exchange and because the Company's share price fell below $0.19. Under the terms of the Agreement, Fuselier was permitted to terminate the Agreement only for cause, which included, among other matters, the Company or any material subsidiary of the Company liquidating, seeking bankruptcy protection or ceasing to operate, or any of the Company's representations and warranties under the Agreement being or becoming false. The Agreement provides that if Fuselier terminates the Agreement for cause, the Company is not entitled to any repayment of the shares issued under the Notes. The Company is consulting legal counsel to determine whether Fuselier had sufficient cause under the Agreement to terminate; however, there is no assurance that the Company will have adequate grounds to seek any remedy against Fuselier or whether, if a remedy is sought, the Company would be successful in recovering any of the shares issued to Fuselier or the value of such shares.

At the date of termination of the Agreement, Fuselier had made payments against the Debt to WHE creditors totalling US$1,247,434 and the Company had transferred or issued an aggregate of 21,757,391 common shares to Fuselier (or 14.5% of the Company's current outstanding share capital) over a period of 9 months in satisfaction of US$4,675,070 in outstanding principal and interest under the Notes. A portion of these shares were sold by Fuselier to pay WHE's creditors and reduce the Debt. Fuselier is not a registered shareholder of the Company and accordingly, the exact number of shares currently held by Fuselier is not known to the Company. However, Fuselier was limited under the terms of the Agreement to holding not more than 9.9% of the Company's shares at any time. To the Company's knowledge, Fuselier does not currently hold more than 9.9% of its shares.

The Notes were deemed cancelled on termination of the Agreement and accordingly, WHE and the Company are no longer obligated to pay the balance of the Notes or issue any further shares to Fuselier under the Notes.

In a separate but related transaction, Fuselier has defaulted on its repayment to the Company of the US$1.3 million bridge loan announced May 30, 2008. Fuselier used the funds to settle certain debt obligations WHE owed to Laurus Master Fund, Ltd. The Company had extended the maturity date of the loan on several occasions, most recently to December 31, 2008, but after Fuselier again failed to meet the December 31st repayment deadline, the loan agreement terminated. The related US$1.684 million promissory note issued to Fuselier similarly terminated and neither party has any further liabilities or obligations to the other under the two notes or the related agreements. As at the date of termination, the Company had made no payments to Fuselier under the US$1.684 million note.

Fuselier and Jean R. Fuselier, the Chief Executive Officer and principal shareholder of Fuselier, are no longer involved with the Company in any manner other than as a shareholder.

EnCana Arbitration and Litigation

As disclosed in the Company's press release dated March 23, 2009, WHE has filed a Demand for Arbitration and commenced a lawsuit against EnCana Oil and Gas (USA) Inc. raising claims under the parties' Drilling and Development Agreement dated May 1, 2006. The arbitration is pending and a hearing is scheduled regarding the litigation for December 7, 2009 in the State District Court.

Operations

To continue exploration and assessment work on the Company's Groundhog coal property, located in British Columbia, Canada, the Company anticipates that it will need to raise approximately $1.5 million, which includes payment of approximately $530,000 in outstanding accounts payable and $1 million to complete its analysis of coal samples obtained during the Company's October 2008 drill program and thereafter commission a current technical report. The Company's current focus for its Groundhog property is to test the core samples obtained and, if warranted based on the results of the core samples, commission a current technical report, build a geological model, determine the right business structure to develop the Groundhog property, and prepare a business plan. The Company has made the required property payments and the property remains in good standing.

Drilling and gas production at the Company's Figure Four project has also been suspended. A top priority of the Company's reorganization plan for WHE is to secure production from the eight existing wells in the future. The Company has previously announced its engagement of Chiron Financial Advisors LLC to assist in raising the funds necessary to complete the reorganization and resolve WHE's outstanding Chapter 11 bankruptcy.

Management Team

The Company's board of directors and executive management have undergone changes since the November 5, 2008 suspension. On December 4, 2008, Mr. Roger Baer resigned as Managing Director, Canadian Operations and Mr. Fabio Capponi resigned from the Board of Directors. On January 6, 2009, Mr. Gonzalo Torres Macchiavello replaced Dr. Wm. Mark Hart as President and Chief Executive Officer. Also in January 2009 the Company, as part of its cost reduction plan, laid off Dr. Andrew Schissler, Executive Vice President of Engineering and Ms Kongrui Wang, Controller. On March 1, 2009, Dr. Jinsheng Chen resigned as a director and as President and Chief Executive Officer of Asian Operations. On March 24, 2009, Mr. John Owen was appointed Chief Financial Officer, but resigned shortly thereafter also on March 24, 2009 after Mr. Owen and the Company failed to agree on the terms of Mr. Owen's compensation package. Mr. Lonny Haugen was appointed Chief Financial Officer on April 20, 2009. On July 7, 2009, Dr. Hart resigned from his position as Chairman of the Company but continues to serve on the Board of Directors.

Mr. Haugen continues to serve the Company as Chief Financial Officer and Mr. Macchiavello continues to serve as President and Chief Executive Officer. Mr. Baer continues to act in a consulting capacity in regards to matters related to his past positions in the Company on an as needed basis. The Board of Directors is now comprised of Dr. Hart, Mr. Macchiavello, Mr. Richard Braun, Mr. David Francisco and Mr. Dongfei Wong.

This experienced team of individuals, led by Mr. Macchiavello, is committed to creating a sustainable business model and maximizing value for the Company's shareholders. The team is also committed to maintaining a standard of timely, consistent and accurate communication with its stakeholders, including its shareholders, regulators and the public. The team's immediate priorities are to complete a plan of reorganization of WHE assets and resolve the outstanding Chapter 11 bankruptcy proceedings of WHE and WHE Holdings, find a permanent and sustainable solution for the Company's Figure Four natural gas project, secure financing for its operations, including in particular the continued exploration of its Groundhog coal property, and significantly reduce its debt.

On behalf of the Board of Directors,

Gonzalo Torres Macchiavello

About the Company: West Hawk Development Corp. is focused on providing valuable, high-demand energy products from a variety of sources. Assets include the Figure Four natural gas property located in the Piceance Basin, Colorado, being developed under a drilling and development agreement and the Groundhog coal property located in northwestern British Columbia.

Cautionary Note: This news release contains forward-looking information, including in particular, statements regarding the anticipated reinstatement of the trading of the Company's shares on the Exchange, anticipated completion of a satisfactory restructuring of assets and debt of WHE and WHE Holdings, anticipated capital raising, capital expenditures and investment plans. By its nature, forward-looking information involves risks and uncertainties because such information relates to events and depends on factors that will or may occur in the future. Actual results may vary depending upon a number of factors, including without limitation, the discretion of the Exchange to reinstate trading of the Company's shares, the ability of the Company to raise sufficient capital and/or find funding partners to complete a restructuring of WHE and WHE Holdings and recommence operations at the Company's properties, results of exploration, industry production, commodity demand and pricing, currency exchange rates and general economic factors.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

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