Exhibit 99.1
TEXOIL, INC.
1600 Smith, Suite 4000
Houston, Texas 77002
Tel. (713) 652-5741
(800) 742-1665
Fax (713) 652-9601
November 14, 1997
Cliffwood Oil & Gas Corp.
110 Cypress Station Drive
Suite 215
Houston, TX 77090
Attention: Mr. Frank Lodzinski
Re: Proposal to Combine the Business Activities of Texoil, Inc., and
Cliffwood Oil & Gas Corp.
Gentlemen:
This letter is intended to summarize the principal terms of a proposed business
combination being mutually considered by Texoil, Inc.("Texoil") and Cliffwood
Oil & Gas Corp. ("Cliffwood"). Texoil and Cliffwood are called the "Parties,"
and individually a "Party". The proposed business combination is sometimes
referred to herein as the "Possible Merger."
PART ONE
The Parties wish to commence negotiating a definitive written agreement and plan
of merger ("Agreement") providing for the Possible Merger. The execution of any
such Agreement would be subject to, among other things, the satisfactory
completion by each of the Parties' ongoing investigation of the other Party's
business, and would also be subject to approval by the Parties' respective board
of directors.
Based on information currently known to the Parties, it is proposed that the
Agreement include the following terms:
1.BASIC TRANSACTION
A newly formed wholly owned subsidiary of Texoil would merge with and into
Cliffwood, the shareholders of Cliffwood would receive common stock of Texoil in
exchange for their shares of Cliffwood, and the option and warrant holders of
Cliffwood would receive options to purchase common stock of Texoil in exchange
for their options to purchase shares of Cliffwood. Each share of Cliffwood
common stock will be exchanged in the Possible Merger for shares of common stock
in Texoil at an exchange ratio set forth below (the "Exchange Ratio"). The
Parties mutually contemplate that the transaction would, if possible, be treated
for financial accounting purposes as a pooling of interests, as opposed to a
purchase. The closing of this transaction (the "Closing") is intended to occur
as soon as possible after all conditions to closing have been satisfied,
including the termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, the "HSR Act" and the
requisite approval of the shareholders of Texoil and Cliffwood, as applicable.
2.EXCHANGE RATIO
The Exchange Ratio is based upon agreed values of the Parties, and results
in 6.74 shares of Texoil for each share of Cliffwood Class A and Class B stock.
The Exchange Ratio is intended to result in a 70%-30% ownership ratio in favor
of Cliffwood shareholders AFTER the conversion of the following debt and
preferred stock securities ("Securities") to Texoil common shares, at the
conversion prices specified as part of the terms of such Securities:
(a) $2,300,000 Series A preferred stock, plus accrued dividends.
(b) $4,500,000 convertible notes payable to Resource Investors
Management Company Limited Partnership or its affiliates
(collectively "RIMCO").
(c) All other notes payable, except for $1,050,000 which will be repaid
to current holders.
This Exchange Ratio assumes that, at closing, Texoil will have 10,979,590
shares outstanding and will issue 25,619,043 Texoil shares to Cliffwood
shareholders. Cliffwood will have a total of 3,800,991 Class A and Class B
shares outstanding, but in any event shall reflect the 70%-30% ratio specified
above. Texoil will assume all warrants and options of Cliffwood adjusted to
affect the same Exchange Ratio basis.
3.DISSENTING SHAREHOLDERS
Texoil's obligation to close the Possible Merger shall be conditioned on
there being no more than 10% of the shareholders of Cliffwood exercising
dissenters' rights.
4.EMPLOYMENT AND NON-COMPETITION AGREEMENTS
At the closing, Frank A. Lodzinski ("Lodzinski") would enter into a three
(3) year employment agreement under which Lodzinski would agree to serve as
Chairman of the Board and Chief Executive Officer and would be contractually
entitled to receive a salary of not less than $90,000 per year (on an annualized
basis) plus such additional salary, bonuses and benefits as may from time to
time be determined and approved by Texoil's Board of Directors. In addition,
Lodzinski's employment agreement will provide that in exchange for services
rendered under such agreement, he will receive a minimum annual grant of options
to purchase at least 33,334 shares of Texoil's common stock at the prevailing
market price on the date of each grant, such options to have vesting periods and
other terms as provided under Texoil's employee stock option plan. The Lodzinski
employment agreement will also provide that he will be nominated by Texoil for
election to its Board of Directors to serve, in consecutive terms, for at least
three years from the closing of the Possible Merger.
5.OTHER TERMS
Each Party would make such representations, warranties and covenants for the
benefit of the other Party as would be customary for transactions of the type
and size of the Possible Merger, material compliance with which shall be
conditions to the obligation of the other Party to close the Possible Merger.
Such representations, warranties and covenants would expire upon closing of the
Possible Merger, except for those specific covenants the Parties mutually agree
may extend beyond closing of the Possible Merger. The consummation of the
contemplated transaction by the Parties would be subject to the satisfaction of
various conditions including without limitation the following:
(a) Texoil shall have received a favorable fairness opinion from
Rauscher Pierce Refsnes, Inc. or another mutually agreed upon
investment banking firm.
(b) If necessary, Texoil shall have filed a proxy statement and
registration statement on Form S-4 which shall have been declared
effective by the Securities and Exchange Commission. Alternatively,
counsel for each Party shall have concluded that the Possible Merger
and related transactions may be lawfully concluded in reliance upon
available exemptions from the securities registration provisions of
federal and applicable state securities laws.
(c) If necessary, a majority of the shareholders of each of the Parties
shall have approved the transaction.
(d) No litigation shall have been filed preventing the transaction from
being consummated or seeking damages with respect to the Possible
Merger.
(e) The combined entity shall have elected to its Board of Directors a
slate of members, with two (2) being nominated by Texoil, one (1)
being nominated by mutual agreement of
the Parties and at least four (4) being nominated by Cliffwood, each
of whom shall be specified in the definitive Agreement.
(f) At the closing of the Possible Merger, Cliffwood shall have
unrestricted cash and current borrowing capacity under its line of
credit with Comerica Bank - Texas and/or other credit facilities
totaling at least $3.0 million.
(g) Each Party shall have obtained such consents and waivers from
governmental authorities and private parties as may be necessary or
appropriate to conclude the Possible Merger.
(h) All indebtedness of Texoil to RIMCO shall have been converted or
exchanged by RIMCO into Texoil Common Stock in accordance with the
terms of such indebtedness.
(i) All Texoil preferred stock held by its directors and/or affiliates
plus accrued and unpaid dividends shall have been converted into
Texoil Common Stock in accordance with the terms of such securities.
(j) All indebtedness of Texoil to T.W. Hoehn Jr., T.W. Hoehn, III, Opal
Air, Inc., W.F. Seagle and/or other directors and affiliates over
and above a total of $1,050,000 shall be converted to common shares
of Texoil in accordance with the terms of such indebtedness.
(k) RIMCO shall make up to $10.0 million of new funds available to
Texoil, pending consummation of the Possible Merger, at closing of
the Possible Merger in the form of Convertible Subordinated Notes,
under terms mutually agreeable to Texoil, Cliffwood and RIMCO.
PART TWO
The following paragraphs of this letter (the "Binding Provisions") are the
legally binding and enforceable agreements of the Parties. Except for the
Binding Provisions, this letter shall be non-binding.
1.ACCESS
During the period from the date this letter is signed by the Parties (the
"Signing Date") until the date on which either Party provides the other Party
with written notice that negotiations toward an Agreement are terminated (the
"Termination Date"), each Party will afford the other Party full and free
access, without limitation, to each others personnel, properties, seismic data,
contracts, corporate books and records, and all other documents and data.
2.EXCLUSIVE DEALING
Until the later of (i) 90 days after the Signing Date or (ii) the
Termination Date:
(a) Each Party will not, directly or indirectly, through any
representative or otherwise, solicit or entertain offers from,
negotiate with or in any manner encourage, discuss, accept, or
consider any proposal of any other person relating to the
acquisition of the shares or substantially all the assets of such
Party, their assets or business, in whole or in part, whether
directly or indirectly, through purchase, merger, consolidation, or
otherwise (other than sales and/or divestitures in the ordinary
course of business); and
(b) Each Party will, subject to the fiduciary duties of their Board of
Directors, immediately notify the other Party regarding any contact
between they or their respective representatives and any other
person regarding any such offer or proposal or any related inquiry.
Each Party may, however, furnish information and may engage in discussions
or negotiations with any person if, following the receipt of an unsolicited bona
fide inquiry from any such person (i) counsel to any Party advises such Party's
Board of Directors that failure to furnish such information or engage in such
discussions or negotiations is likely to involve the Party's Board of Directors
in a breach of their fiduciary duties and (ii) the Party's Board of Directors
believe, in good faith, that such person may make a bona fide proposal for a
transaction more favorable to the Company's shareholders than the transaction
contemplated by the Possible Merger; PROVIDED that nothing shall prohibit a
Party or its Board of Directors from making such disclosure to such Party's
shareholders which, in the judgment of the Board of Directors with the advice of
counsel, may be required under the applicable law.
3.BREAK-UP FEE
If (a) either Party breaches Paragraph 2 of this Part Two or provides to the
other Party written notice that negotiations toward an Agreement are terminated
(such Party being referred herein as the "Terminating Party"), and (b) within 90
days after the date of such breach or the Termination Date, as the case may be,
either Party signs a letter of intent or other agreement relating to a business
combination, merger, divestiture of all or a majority of the Terminating Party's
assets, acquisition of assets or a business for a majority of the Terminating
Party's outstanding shares, or an exchange or sale of a majority of the
Terminating Party's shares, whether directly or indirectly, through purchase,
merger, consolidation, or otherwise (other than sales or divestitures of the
Terminating Party's assets in the ordinary course of business) then the
Terminating Party, or its successors and assigns, shall pay to the other Party
the sum of $400,000.
The break-up fee shall not be payable in the event that Texoil does not
receive a fairness opinion, in the event of litigation being filed seeking an
injunction against, or damages for, the Possible Merger, RIMCO does not commit
to and fund at least $6.0 million pursuant to Part One, Paragraph 5(k) above or
some other material adverse event affecting either party.
4.CONDUCT OF BUSINESS
During the period from the Signing Date until the Termination Date, each
party will operate their business in the ordinary course and will refrain from
any extraordinary transactions unless mutually agreed upon in writing by both
Parties. The Parties acknowledge that each Party may pursue or has pending
certain transactions and as such the following transactions are specifically
excluded from the provisions of this paragraph:
(a) Texoil may offer for sale up to a 12.5% working interest in its
Raceland project under terms mutually agreeable to the Parties.
(b) Cliffwood may close a sale of certain producing assets in the Rocky
Mountain states for gross sales proceeds of $1,325,000 to Prima
Energy.
5.CONFIDENTIALITY
Except as and to the extent required by law, each Party will not disclose or
use, and will direct its representatives not to disclose or use to the detriment
of the other Party, any Confidential Information (as defined below) with respect
to the information furnished, or to be furnished, by either Party to the other,
or their respective representatives at any time or in any manner other than in
connection with its evaluation of the transaction proposed in this letter. For
purposes of this Paragraph, "Confidential Information" means any information
about a Party unless (a) such information is already known to the other Party or
its representatives or to others not bound by a duty of confidentiality or such
information becomes publicly available through no fault of such Party or its
representatives, (b) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the Possible Merger, or (c) the furnishing or use of such
information is required by or necessary or appropriate in connection with legal
proceedings. Cliffwood acknowledges and agrees that all material information
provided by Texoil to Cliffwood and its advisors is Confidential Information
unless such information has been disclosed in reports filed by Texoil with the
Securities and Exchange Commission. Upon the written request of either Party,
the other Party will promptly return or destroy any Confidential Information in
its possession and certify in writing to the other Party that it has done so.
Cliffwood hereby agrees that it will refrain from, and will cause each of
its officers, directors, employees, consultants, and any other of its affiliates
to refrain from purchasing or selling Texoil's common stock or warrants to
purchase common stock from the Signing Date until the later of (i) the first
anniversary of the Signing Date or (ii) so long as any such persons are in
possession of material, non-public information regarding Texoil.
6.DISCLOSURE
Except as and to the extent required by law, without the prior written
consent of the other Party, neither Party will, and each will direct its
representatives not to make, directly or indirectly, any
public comment, statement, or communication with respect to, or otherwise to
disclose or to permit the disclosure of the existence of discussion regarding a
possible transaction between the Parties or any of the terms, conditions, or
other aspects of the transaction proposed in this letter. If a Party is required
by law to make any such disclosure, it must first provide to the other Party the
content of the proposed disclosure, the reasons that such disclosure is required
by law, and the time and place that the disclosure will be made.
7.COSTS
Each Party will be responsible for and bear all of its own costs and
expenses (including any broker's or finder's fees and the expenses of its
representatives) incurred at any time in connection with pursuing or
consummating the Possible Merger. The reasonable costs of accounting services
related to pooling of interest or purchase accounting to be used in the Possible
Merger and the recapitalization or reorganization of Texoil shall be shared
equally by the Parties.
8.CONSENTS
During the period from the Signing Date until the Termination Date, the
Parties will cooperate with each other and proceed, as promptly as is reasonably
practical, to prepare and to file any notification required by the HSR Act.
9.ENTIRE AGREEMENT
The Binding Provisions constitute the entire agreement between the Parties,
and supersede all prior oral or written agreements, understandings,
representatives and warranties, and courses of conduct and dealing between the
Parties on the subject matter hereof. Except as otherwise provided herein, the
Binding Provisions may be amended or modified only by a writing executed by all
of the Parties.
10. GOVERNING LAW
The Binding Provisions will be governed by and construed under the laws of
the State of Texas without regard to conflicts of laws and principles.
11. JURISDICTION: SERVICE OR PROCESS
Any action or proceeding seeking to enforce any provision of, or based on
any right arising out of this Letter may be brought against any of the Parties
in the courts of the State of Texas, County of Harris, or, if it has or can
acquire jurisdiction, in the United States District Court for the Southern
District of Texas, and each of the Parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any action or proceeding
referred to in the proceeding sentence may be served on any party anywhere in
the world.
12. TERMINATION
The Binding Provisions will automatically terminate on December 31, 1997,
unless extended in writing by the Parties and may be terminated earlier upon
written notice by either party to the other party unilaterally, for any reason
or no reason, with or without cause, at any time; provided, however, that the
termination of the Binding Provisions will not affect the liability of a party
for breach of any of the Binding Provisions prior to the termination. Upon
termination of the Binding Provisions, the Parties will have no further
obligations hereunder, except as stated in Paragraphs 2,3,5,7,9,10,11,12,13 and
14 of this Part Two, which will survive any such termination.
13. COUNTERPARTS
This Letter may be executed in one or more counterparts, each of which will
be deemed to be an original copy of this Letter and all of which, when taken
together, will be deemed to constitute one and the same agreement.
14. NO LIABILITY
The paragraphs and provisions of Part One of this letter do not constitute
and will not give rise to any legally binding obligation on the part of any of
the Parties. Moreover, except as expressly provided In the Binding Provisions
(or as expressly provided in any binding written agreement that the Parties may
enter into in the future), no past or future action, course of conduct, or
failure to act relating to the Possible Merger, or relating to the negotiation
of the terms of the Possible Merger or any Definitive Agreement, will give rise
to or serve as a basis for any obligation or other liability on the part of the
Parties.
If you are in agreement with the foregoing, please sign and return one copy
of this letter agreement, which thereupon will constitute our agreement with
respect to its subject matter.
Very truly yours,
TEXOIL, INC.
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By: Ruben Medrano
President
Duly executed and agreed as to the Binding Provisions on ___________, 1997
CLIFFWOOD OIL & GAS CORP.
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By: Frank A. Lodzinski
Chief Executive Officer