EXHIBIT 2.1
April 17, 1996
Mr. Walter Williams
Mr. T.W. Hoehn, III
Texoil, Inc.
1600 Smith Street, Suite 4000
Houston, Texas 77002
Gentlemen:
This letter of intent shall set forth the current understandings and
initial agreements which have been reached between Fortune Petroleum Corporation
("Fortune") and Texoil, Inc. ("Texoil") pursuant to which Texoil and Fortune
contemplate entering into a transaction, more fully discussed below, in which
Texoil will be acquired through merger by Fortune in a tax-free transaction.
Through our mutual discussions, we have agreed that, in consideration for
the acquisition of Texoil, Fortune will, at the closing of the transaction
contemplated herein, issue to the shareholders of record of common stock of
Texoil one (1) share of the $.01 par value common stock of Fortune (the "Fortune
Stock") in exchange for each three and two-tenths (3.2) shares of the common
stock of Texoil, not to exceed 1,845,000 shares of Fortune common stock. Subject
to the additional contingencies discussed below, such merger shall be subject to
approval by the boards of directors of both Fortune and Texoil, the receipt by
Texoil, prior to the signing of a definitive merger agreement, of a "fairness
opinion" concerning the terms of the transaction from an investment banking firm
or other person acceptable to the parties, the filing by Fortune and
effectiveness of a Registration Statement under the Securities Act of 1933, and
approval of this transaction by the shareholders of Texoil and Fortune.
Prior to the record date of the transaction described above, all owners of
Texoil's preferred stock shall exchange such shares and any accrued dividends
into common stock of Texoil at the market price of such stock on the effective
date of the exchange, in a total aggregate amount of not more that 1,700,000
shares of Texoil common stock.
On the closing of the transaction contemplated hereby, the outstanding
principal on all loans from Texoil shareholders to Texoil shall be converted to
Fortune common stock at the average of the closing market price of such stock on
the ten (10) business days immediately prior to the closing of the transaction
contemplated hereby (such shares are referred to herein as the "Liquidation
Shares"). Thereafter, Fortune shall provide assistance in the liquidation of the
Liquidation Shares by ensuring that such shareholders (who Fortune understands
consist of T.W. Hoehn, Jr. and the Walter Williams family) receive the entire
amount of their previously-existing loan amounts within fifteen (15) months of
the closing of the transaction contemplated hereby; provided, however, that
Fortune shall guarantee the receipt by T.W. Hoehn, Jr. ("Hoehn") of the first
$200,000 of such proceeds during the two-week period following the closing and
the balance of such proceeds within one year following the closing. Fortune and
Hoehn shall reconcile the accounting of such liquidation so as to provide for
the proportionate return to Fortune of any amounts received by Hoehn insofar as
Fortune was required to advance funds on its guarantee.
Prior to the closing of the transaction contemplated hereby, each of the
current officers, directors, and principal shareholders of Texoil shall enter
into "lock-up" agreements, whereby their ability to trade the Fortune Stock
(exclusive of the Fortune common stock to be issued in conversion of outstanding
loans) to be issued to each, shall be restricted for a period of not less than
six (6) months nor more than the period required to consummate the sale of the
Liquidation Shares and upon other mutually-acceptable terms. All such stock
shall bear appropriate legend regarding the terms of the lock-up agreement. At
the conclusion of the lock-up period, Fortune shall register under Form S-3
those shares previously subject to the agreement.
In the definitive merger agreement to be entered into by the parties, the
terms and conditions for the assumption and adjustment of the terms of
outstanding warrants and stock options of Texoil shall be addressed. It is
currently contemplated, subject to further review, that the outstanding options
and warrants will be assumed by Fortune in accordance with their terms.
The parties hereto contemplate that, following their mutual approval of
this letter, they will, in good faith, enter into a period of completing due
diligence reviews and will commence the drafting and preparation of the
documents, agreements, applications, proxies, and registration statements
necessary for carrying out their mutual intent hereunder. The parties
contemplate that this transaction will require the approval of the shareholders
of Texoil and Fortune pursuant to proxy statements calling special meetings of
shareholders. Such proxy statements will be included in the registration
statement to be filed with the Securities and Exchange Commission ("SEC")
covering all of the shares of Fortune common stock which are contemplated to be
issued in this transaction. Each party will bear and pay its own costs and
expenses which may be incurred in connection with this transaction and the
preparation of the documents and agreements associated with it.
The parties contemplate that each will move forward in good faith toward
finalizing their respective due diligence, preparing the definitive merger
agreement and other necessary closing documents, and obtaining the approval of
their respective boards of directors and shareholders. Upon approval of the
transaction contemplated hereby by each board of directors, the parties will,
not later than April 26, 1996, enter into a definitive merger agreement and, as
quickly thereafter as possible, file the proposed Registration Statement with
the SEC. The Registration Statement shall include the recommendation of the
board of directors of each of the parties to their respective shareholders for
approval of the transaction contemplated hereby. It is anticipated that the
shareholders of each party will be asked to approve this transaction not later
than August 15, 1996.
Upon closing of the transaction contemplated herein, Fortune will appoint
Walter Williams to its board of directors and T.W. Hoehn, III to its executive
committee. It is contemplated that Mr. Williams will be elected chairman of the
board of Fortune. Further, Fortune believes that a continuity of Texoil's
professional staff is a desirable component of the transaction contemplated
hereby. Accordingly, Fortune intends to devote further review to the feasibility
of extending offers of employment to such staff.
The definitive merger agreement covering the transaction contemplated
hereby will include standard forms of representations and warranties,
substantially alike for Fortune and Texoil in those instances where necessary or
required, appropriate for transactions of a similar nature, including, but not
limited to, disclosure of all material liabilities, principal shareholder
lock-ups, and good title to the assets of Texoil and Fortune. Texoil recognizes,
however, that the nature of the transaction contemplated hereby necessitates
that all provisions contained in a definitive merger agreement may not be
reciprocal.
During the interim period between the signing of the definitive merger
agreement and closing or earlier termination of the merger (the "Due Diligence
Period"), Fortune will provide the capital required (the "Prospect Costs") to
fund Texoil's working interest shares of the costs of its Raceland, Greens Lake
and Laurel Grove prospects (the "Prospects"). In addition, Fortune will
contribute amounts, up to $150,000, to Texoil to assist Texoil in paying other
reasonable and necessary, determined solely at Fortune's discretion, expenses of
conducting its business during the Due Diligence Period (the "Other Funded
Costs"). Texoil will endeavor to minimize the Other Funded Costs during the Due
Diligence Period by reducing its overhead. Texoil will endeavor to obtain
agreements, subject to Fortune's review, from attorneys, accountants, and other
consultants to perform their work on the merger on a turnkey basis. Any amounts
contributed by Fortune to Texoil or paid by Fortune on behalf of Texoil for
Other Funded Costs shall reduce the purchase price to the extent that such Other
Funded Costs along with any other increase in the total of the net working
capital deficit and other liabilities exceed the total of the net working
capital deficit and other liabilities, as of March 31, 1996, by more than
$150,000. Fortune shall not be required to pay any Other Funded Costs or
Prospect Costs (hereinafter collectively referred to as "Reimbursable Costs")
until the parties have executed a definitive merger agreement. In exchange for
Fortune advancing funds for Reimbursable Costs, at the time of the first such
advance, Texoil shall execute and deliver to Fortune a security interest,
sufficient to fully collateralize all Reimbursable Costs, in all of Texoil's
interest in the Prospects, including, but not limited to, all seismic data,
seismic options, and leasehold interests.
In the event that Texoil, either voluntarily or involuntarily, is acquired
by a third party which thereafter repudiates the transaction contemplated
hereby, or in the event that Texoil, due to acquisition or merger discussions
with a third party, repudiates or materially impairs the ability of either party
to proceed with the transaction contemplated hereby, Fortune shall be entitled
to (i) the repayment, within two (2) business days, of the Reimbursable Costs
together with interest thereon at the lesser of 18% per annum or the maximum
allowable by law and (ii) an assignment of the greater of 10% of 8/8 in each of
the Prospects on the same basis as Texoil holds its interests or 50% of Texoil's
interest in each of the Prospects, proportionately adjusted as provided below.
In the event that Fortune, either voluntarily or involuntarily, is acquired by a
third party which thereafter repudiates the transaction contemplated hereby, or
in the event that Fortune, due to acquisition or merger discussions with a third
party, repudiates or materially impairs the ability of either party to proceed
with the transaction contemplated hereby, Fortune shall only be entitled to the
return, within one year, of the Reimbursable Costs. If the consummation of the
merger is enjoined by a court of competent jurisdiction, the obligations of the
parties hereunder shall be terminated and Fortune shall receive, within ninety
(90) days from the date such injunction becomes final, the return of the
Reimbursable Costs plus interest thereon at the lesser of 18% per annum or the
maximum allowable by law and an assignment from Texoil of an interest equal to
five percent (5%) of 8/8 in each of the Prospects, proportionately adjusted as
provided below.
If the merger is not consummated due to the failure of any of the
representations or warranties made by Texoil, or the breach by Texoil of any of
the terms or provisions of the agreement between the parties, or for any other
reason attributable to Texoil's failure or inability to proceed (except as
provided above), Fortune shall have the right to receive, at its election,
either (i) the return, within thirty (30) days after termination of the merger
negotiations, of all the Reimbursable Costs plus interest thereon at the lesser
of 18% per annum or the maximum allowable by law or (ii) an amount of working
interest equal to an unpromoted 50% of Texoil's total interest in the Prospects,
under the same terms and conditions that Texoil owns its interests,
proportionately adjusted as provided below (the "Default Interest"). If the
merger is not consummated due to the failure of any of the representations or
warranties made by Fortune, or the breach by Fortune of any of the terms or
provisions of the agreement between the parties, or for any other reason
attributable to Fortune's failure or inability to proceed (except as provided
above), Fortune shall have the right to receive, at Texoil's election, either
(i) the return, within ninety (90) days after termination of the merger
negotiations, of all of the Reimbursable Costs plus interest thereon at the
lesser of 18% per annum or the maximum allowable by law or (ii) the Default
Interest. The proportionate adjustment referred to above shall be a fraction,
the numerator of which shall be the total of Reimbursable Costs, and the
denominator of which shall be 1,208,000, subject to a possible revision in the
denominator based upon the final terms of a pending transaction concerning
Texoil's interest in the Laurel Grove Prospect. The fraction may be greater than
one.
Each party agrees that it remains bound by the terms of the
confidentiality agreements previously entered into by the parties. Each party
will issue a press release in form and substance acceptable to the other upon
the execution of this letter of intent. Such press releases shall be issued no
later than the opening of trading on April 18, 1996. Further, each party shall
file with the SEC a Form 8-K disclosing the material terms of this transaction.
The parties will each continue to operate their businesses and operations
from the date hereof through the closing of the transaction contemplated hereby
in a reasonable and prudent manner so as to not cause or allow a material loss
or decline in the value, use, or contemplated benefit of their respective assets
or any portion thereof. Further, neither party shall take any action to enter
into any agreement prior to the closing of the transaction contemplated hereby
for the issuance of significant additional shares of stock or securities
convertible into stock or otherwise take steps to alter their capital structure
without the prior written consent of the other. Texoil shall not sell or
encumber, or enter into any agreement to sell or encumber, any of its
properties, leases, prospects, or other assets without the prior written
approval of Fortune. Fortune shall, prior to the sale, acquisition, or
encumbrance of any assets, advise Texoil of its intention and shall provide it
with the details of the transaction.
The parties understand that the merger agreement to be prepared will be
the definitive agreement and hereby stipulate that this letter is not intended
to be and shall not be construed as a binding agreement between the parties.
Notwithstanding the foregoing, the parties acknowledge that each, by entering
into this letter of intent, will begin to expend considerable sums in commencing
due diligence, preparing and negotiating the definitive merger agreement, and
preparing and filing appropriate documents with the SEC. The parties are
undertaking such expenditures pursuant to an explicit representation and
warranty that a majority of Texoil directors, a majority of Fortune directors,
and shareholders representing a majority of all outstanding Texoil shares have
each been notified of and approved the transaction in substantially the form set
forth in this letter of intent. In the event that the board of directors of
either party fails to approve a definitive merger agreement in substantially the
form set forth herein, the parties agree that the resulting damages would be
impracticable or extremely difficult to ascertain. Because of these
difficulties, the parties agree that, in the event of such a breach, the party
which fails to approve the definitive merger agreement shall pay the sum of
$50,000 to the other as liquidated damages. Except for the representation and
warranty concerning director and shareholder approval and the provisions
concerning confidentiality, set forth above, the terms of this letter of intent
shall not survive the execution of the definitive merger agreement. Except for
such specific provisions, neither party hereto shall be bound to any of the
terms or provisions herein set forth until the formal agreement reflecting this
transaction are prepared and are duly approved by each party's respective board
of directors and shareholders, as necessary.
If this letter correctly sets forth our discussions to date, please date,
sign, and return one copy of it to the undersigned immediately.
Very truly yours,
/s/ TYRONE J. FAIRBANKS
TYRONE J. FAIRBANKS
ACCEPTED AND AGREED TO
THIS 17th DAY OF APRIL, 1996
TEXOIL, INC.
BY: /s/ WALTER WILLIAMS
WALTER WILLIAMS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BY: /s/ T.W. HOEHN, III
T.W. HOEHN, III
CHAIRMAN, SPECIAL COMMITTEE OF DIRECTORS