0
XXXXXXX 00.0
Xxxxxxx 00, 0000
Xxxxxx Resources Inc.
000 00xx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxx 00000
Attn: Xxxx Xxxxxx
Xxxxx Management
0000 Xxxxxxxxxx, Xxxxx 000
Xxxxxxx, Xxxxx 00000
Attn: Art Pasmas
Re: Flying J Inc./Inland Resources Inc. - Letter-of-Intent
Gentlemen:
In connection with our recent discussions, the purpose of this letter
of intent (the "Letter") is to set forth certain non-binding understandings and
certain binding agreements among Flying J Inc. ("Flying J"), Inland Resources
Inc. ("Inland") and Xxxxx Management LLC ("Xxxxx") with respect to a proposed
acquisition by Inland of certain assets of Flying J and certain wholly owned
affiliates of Flying J (the "Sellers").
A. The following numbered paragraphs in this Section A express our
understanding with respect to the matters described therein, but are expressly
understood not to constitute a complete statement of, or a legally binding
agreement or commitment on the part of any party with respect to, the matters
described therein.
1. The Acquisition. On the terms and subject to the conditions
to be set forth in a definitive, legally binding, written agreement to be
negotiated and executed by Inland, Xxxxx and the Sellers (the "Agreement"), and
subject to the requisite corporate approvals by the various parties, the Sellers
will transfer to Inland or to a subsidiary that Inland will acquire, the
following assets: (i) a 25,000 BBL per day refinery located at 000 Xxxx Xxxxxx
Xxxxxx xx Xxxxx Xxxx Xxxx, Xxxx; (ii) 11 Flying J gasoline stations located in
Smithfield, Utah; Xxxxxxx City (East), Utah; Xxxxxxx (East), Utah; Harrisville,
Utah; Ogden (12th Street), Utah; Layton, Utah; Draper, Utah; Chubbock, Idaho;
Idaho Falls, Idaho; Boise (Overland Road), Idaho; Eureka, California; (iii) all
oil and gas reserves located in the Uintah Basin that are owned by Sellers; and
(iv) Net Working Capital, as hereafter defined, in the amount of $12.3 million
(collectively, the "Subject Assets"), and Inland will purchase and acquire from
Sellers the Subject Assets or all of the outstanding stock of a subsidiary
owning the Subject Assets (the "Acquisition").
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 2
2. Structure of Acquisition. Based on advice of the
professional advisors of Flying J and Inland, a modification of the proposed
structure of the Acquisition may be advisable in order to achieve the desired
tax and accounting objectives of Flying J and Inland. Flying J, Inland and Xxxxx
(the "Parties") will use their reasonable best efforts to cause the Acquisition
to be structured to achieve such objectives.
3. Closing Date. The Parties will use good faith efforts to
negotiate and close the Acquisition on, and to be effective as of, April 1,
1999, or as soon as practical after execution of the Agreement, satisfaction of
all conditions to the Acquisition as set forth in the Agreement, and receipt of
all necessary consents and approvals (the "Closing Date").
4. Consideration. In consideration for the Sellers' sale and
transfer of the Subject Assets to Inland, Inland will pay and deliver to Sellers
or their designees (the "Holders") consideration consisting of the following:
(a) Cash. Inland will pay to Holders the sum of $80
million in cash at the closing of the Acquisition (the "Closing").
(b) Shares/Options. Inland will cause to be issued
and delivered to Holders at the Closing, at the election of Holders, either: (i)
a sufficient number of shares of Inland's Common Stock (the "Shares"), such that
upon consummation of the Acquisition the Shares will represent 60% of the total
issued and outstanding equity of Inland (not counting the Existing Options and
Equalizing Options referenced in paragraph (c) below) and 60% of the voting
power exercisable by all shareholders of Inland; or (ii) Shares representing 49%
of such equity and voting power, and an option or options (the "Options")
exercisable, cumulatively, for the purchase of an additional number of shares of
Inland's Common Stock (the "Option Shares"), such that, after giving effect to
the Acquisition and assuming the exercise in full of the Options (but not the
Existing Options or Equalizing Options), the Holders would own Shares and Option
Shares representing a total of 60% of such equity and voting power. The Options,
if the second option is elected, will be exercisable at a purchase price equal
to the par value per share of the Option Shares, and will be transferable,
subject to compliance with applicable securities laws.
(c) Equalizing Options. If, as of the Closing,
Inland has outstanding any options or warrants (the "Existing Options")
exercisable for the issuance of any Inland securities, then at the Closing
Inland will issue to the Holders options and
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 3
warrants (the "Equalizing Options") exercisable at the same prices and on the
same terms as the Existing Options, except that the Equalizing Options shall
have a cashless exercise feature, permitting the Holders, at their election, to
reduce the number of shares to be received on exercise by a number of shares
having a fair market value equal to the exercise price, rather than to pay the
exercise price in cash. The Equalizing Options will be exercisable for the same
types of securities as the Existing Options, and for such number of securities
as will permit the Holders to retain their relative equity interests in Inland
as established pursuant to this Section 4 and Section 5 below. The Equalizing
Options shall become exercisable only as the Existing Options are exercised, on
a pro-rata basis in accordance with the relative number of securities
represented by the Existing Options and the Equalizing Options.
5. Adjustment in Number of Shares or Option Shares. Upon the
Closing Date, and immediately prior to giving effect to the Acquisition, Inland
shall have "Net Working Capital" of at least $6 million and total indebtedness
of no more than $170 million (including the Series C Preferred Stock of Inland).
For purposes of this calculation, the term "Net Working Capital" shall be
defined in accordance with United States generally accepted accounting
principles, except that: (i) the calculation of current assets shall exclude
prepaid items except as otherwise agreed upon by the parties; (ii) current
assets shall include only accounts receivable which the parties determine to be
collectable; (iii) current assets shall not include cash which is restricted or
encumbered; (iv) the calculation of current liabilities shall exclude the
current portion of long term debt; and (v) the Special Expenses as defined in
paragraph B(7) below shall be excluded from the calculation of Net Working
Capital. It is the intention of the Parties that Inland shall maintain, until
the Closing Date, its asset base as presently constituted. If, at the Closing
Date and immediately prior to giving effect to the Closing, Inland has less than
$6 million of Net Working Capital (the "Net Working Capital Test") or more than
$170 million of indebtedness (the "Indebtedness Test" and, together with the Net
Working Capital Test, the "Tests"), then, subject to the last three sentences of
this paragraph A(5), the number of Shares (or, if applicable, the number of
Option Shares) shall be increased from the number determined in accordance with
paragraph A(4)(b) above to that number of shares of Common Stock which would
result in the aggregate equity interest being acquired by the Holders (as
represented by the Shares and, if applicable, the Option Shares) being increased
from 60% to that percentage which is determined by dividing a number derived by
deducting from $66 million the amount by which Inland's Net Working Capital is
less than $6 million and/or the amount by which its total indebtedness exceeds
$170 million by a number derived by subtracting from $165 million the amount by
which Inland's Net Working Capital is less than $6 million and/or the amount by
which Inland's indebtedness exceeds $170 million, and by adding the difference
between the quotient thereof and .40 to
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 4
.60. For example, if immediately prior to the Closing Inland's Net Working
Capital were $5,400,000 and its total indebtedness were $172.3 million, the
Holders' aggregate equity interest in Inland would be increased from 60% to
61.07%, determined in accordance with the following equation: .40 - [(66 - (.6 +
2.3)) + (165 - (.6 + 2.3))] + .60 = 61.07%. No adjustment to the Option Shares
shall be made if, as of the Closing Date, Inland's Net Working Capital exceeds
$6 million and its indebtedness is less than $170 million. Notwithstanding the
foregoing, if Inland satisfies one but not both of the Tests, then the amount by
which the Test which has been satisfied exceeds the minimum requirement shall be
credited to the other Test for purposes of determining whether such other Test
has been satisfied, and the amount of any adjustment. For example, if Inland's
Net Working Capital immediately prior to the Closing were $7.5 million and its
total indebtedness were $172 million, the adjustment would be as follows: .40 -
[(66 - (-1.5 + 2)) * (165 - (-1.5 + 2))] + .60 = 60.18%. Notwithstanding the
above, in no event will the Tests result in a reduction of the Shares and Option
Shares below the numbers determined in accordance with paragraph A(4)(b) above.
6. Registration of Shares and Option Shares. The Shares and
Option Shares shall be subject to registration rights agreements on terms to be
mutually agreed upon by the Parties.
7. Additional Terms and Covenants of Agreement. The Agreement
shall include appropriate shareholder agreements, and such other terms and
conditions as may be mutually agreed upon by the Parties. Subject to receipt of
necessary lender approval, Xxxxx and Inland shall agree that farm-out payments
currently made by Inland to Xxxxx in Inland shares shall, after the Closing
Date, be made in cash only. Provision shall be made to establish appropriate
protections to minority shareholders, including specified super-majority voting
requirements with respect to certain major business transactions.
8. Representations and Warranties. The Agreement will contain
usual and customary representations, warranties, covenants and other agreements
on behalf of the Parties with respect to, by way of example but not limitation,
the following matters:
(a) Authority to enter into and perform their
obligations under the Agreement;
(b) Ownership and status of the Subject Assets and
the Inland Assets (as defined in paragraph B(2) below);
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 5
(c) The Sellers' right to transfer the Subject
Assets;
(d) The status of Inland's business and the
businesses conducted with the Subject Assets;
(e) Inland's compliance with applicable securities
laws and applicable disclosure and reporting requirements, and the status of the
Shares and Option Shares; and
(f) Such other matters as are customary for
commercial transactions of a similar nature.
9. Conditions to Closing. The Closing of the Acquisition will
be subject to usual and customary conditions, including but not limited to:
(a) Completion of each Party's due diligence
investigation of the other Parties' business operations, assets, financial
records, legal records (including suits, claims, investigations, contingent
claims, threatened claims and potential claims), information systems, company
policies and procedures, payroll, benefits and personnel records and procedures,
insurance statutes and policies, material agreements, environmental conditions
and compliance with applicable laws, rules and regulations, including SEC
regulations;
(b) The filing of required Xxxx Xxxxx Xxxxxx
Premerger Notifications with the Federal Trade Commission and the United Stated
Department of Justice and obtaining a successful termination thereof;
(c) Flying J's written approval of Inland's capital
and debt structure after giving effect to the Acquisition;
(d) Delivery of customary opinions, closing
certificates and other closing documentation; and
(e) Such other conditions as are customary for
commercial acquisition transactions of a similar nature.
10. Conduct of Business. From and after the date of this
Letter and until the Closing, Flying J and Inland shall conduct the businesses
and operations involving the
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 6
Subject Assets and the Inland Assets consistent with their past practices and
normal operations and in accordance with such covenants as may be set forth in
the Agreement, and will use reasonable efforts to preserve the such assets and
the goodwill and value of such businesses and operations, and to maintain the
relationships of suppliers, customers and others having business relationships
relating thereto.
B. Upon execution of counterparts of this Letter by Inland and Xxxxx,
the following numbered paragraphs under this Section B will constitute the
legally binding and enforceable agreements of the Parties, in recognition of the
costs to be borne by the Parties in pursuing the Acquisition, and further in
consideration of their mutual undertakings as to the matters described herein.
1. Standstill Agreement. Except as otherwise agreed in writing
between Inland and Flying J, from the date hereof until the earlier of (i) the
date that the Parties execute the definitive Agreement relating to the
Acquisition, (ii) the date that Inland and Flying J mutually agree in writing to
abandon the Acquisition, (iii) the date that either Inland or Flying J
determines in good faith and notifies the other in writing that facts discovered
during the course of the notifying party's due diligence investigations in
connection with the Acquisition are such that the notifying party is unwilling
to proceed with the transaction, or (iv) March 1, 0000 (xxx "Xxxxxxxxxx
Xxxxxx"), xxxx of the Parties will engage in discussions with any third parties
regarding any transactions which would prevent the consummation Acquisition, or
enter into any agreement with any third party regarding (1) the sale or purchase
of any of the Subject Assets or Inland Assets, (2) the purchase or sale of any
shares of Inland or of Big West Oil Company, now known as BWOC Inc., Big West
Oil, LLC, or Flying J Oil & Gas Inc. (collectively the "Flying J Affiliates"),
or (3) a merger, partnership or other joint venture involving the Subject Assets
or Inland Assets, or operations of Inland, Flying J or any of the Flying J
Affiliates. The parties contemplate that the Agreement will include provision
for continuation of the Standstill Period from the date of execution thereof,
through the Closing Date.
2. Restrictions on Dispositions of Assets. During the
Standstill Period, and except as otherwise agreed in writing by Inland and
Flying J, Flying J shall not, and shall not allow the other Sellers to, without
the consent of Inland, sell, encumber, assign or otherwise transfer any of the
Subject Assets other than to an affiliated entity able to participate in the
Acquisition as a Seller, and Inland will not, without the consent of Flying J,
sell, encumber, assign or otherwise transfer to any third party any interest in
any of its assets (other than working capital utilized in the ordinary course of
business) that has a book value greater than one dollar ($1.00) (the "Inland
Assets"). Flying J has consented to Inland's disposition of either or both of
the refineries located in Roosevelt, Utah and Tacoma, Washington.
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 7
3. Restrictions on Speculative Transactions. Except as
otherwise agreed in writing between Inland and Flying J, during the Standstill
Period no Party shall engage in, and each Party shall restrict its officers,
directors, shareholders, affiliates and employees who are involved in or aware
of this Letter and/or the proposed Acquisition from engaging in, any trade,
speculation or other dealing in any of the shares of another Party's stock on
the public market.
4. Employment Issues. During the Standstill Period and except
with respect to the Flying J North Salt Lake refinery union contract, no Party
shall, without the written consent of Inland and Flying J, enter into any
written, oral or implied contract with any person which would entitle such
person to become or continue as an employee of Inland after the Closing Date for
any specific term or to receive any compensation or benefit upon the termination
of such employee's employment relationship with Inland, other than accrued wages
and standard benefits.
5. Xxxxx Voting Agreement. Simultaneously with the execution
of the Agreement, Xxxxx shall enter into a voting agreement with Flying J and
Inland, whereby Xxxxx shall agree to cause all shares of Inland Capital Stock
beneficially held by Xxxxx to be voted in favor of the Acquisition.
6. Confidentiality; Non-Disclosure. The confidentiality
agreement in place between Inland and Flying J and dated November 30, 1998 shall
continue in full force and effect as to the parties thereto. To the extent not
covered by such agreement, the Parties hereto agree that each of them shall at
all times take all reasonably necessary steps to safeguard the confidentiality
of proprietary information of the other Parties disclosed by or on behalf of any
of such other Parties in connection with this Letter, the Agreement or the
Acquisition, that such information will be used solely for the purpose of
evaluating the Acquisition, and that such information will not be disclosed to
any third party without the prior written consent of the disclosing Party. Each
Party hereto shall cause its employees and agents who are involved with the
Acquisition and who receive access to any confidential information of another
Party to execute confidentiality agreements wherein the employee or agent shall
agree to not disclose to any third party the fact that the parties are
contemplating a transaction, the nature of the contemplated transaction or the
essence of any confidential information of another Party hereto that comes into
the possession of such employee or agent. Each Party will consult the other
Parties prior to making a public disclosure of this
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 8
Letter or the proposed Acquisition prior to execution of the Agreement, and will
do so only if advised by counsel that such disclosure is required to satisfy
applicable legal requirements.
7. Expenses. Each Party shall be solely responsible for and
bear all of its own respective costs and expenses incurred at any time in
connection with pursuing or consummating the Agreement and the Acquisition,
including but not limited to, fees and expenses of business brokers, legal
counsel, accountants and other facilitators and advisors. Subject to the closing
of the Acquisition as contemplated by the Agreement, payments made to satisfy
those obligations set forth in Exhibit A attached hereto (collectively the
"Special Expenses") shall be borne by Inland or the entity surviving the
Acquisition, if Inland is not the surviving entity.
8. Access. Subject to the applicable obligations of
confidentiality as referenced herein, each of Inland and Flying J agree to
afford the other's accountants, legal counsel and other designated
representatives with reasonable access to its properties, records and personnel
to the extent relevant to the Acquisition, so that such persons may inspect,
investigate and audit the relevant operations and businesses before the Closing.
Each of Flying J and Inland agrees to conduct any such inspection, investigation
and audit in a reasonable manner, during regular business hours, so as not to
disrupt the normal functioning of the other's business.
Please sign the enclosed copy of this Letter to confirm our mutual
understandings and agreements as set forth herein, and return the signed copy to
the undersigned.
Very truly yours,
Flying J Inc.
By: /s/ J. Xxxxxxx Xxxxx
------------------------------
Title: President
---------------------------
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Letter-of-Intent - Flying J Inc./Inland
January 18, 1999
Page 9
Acknowledged and agreed to, effective as of the date first
above written.
Inland Resources Inc.
By: /s/ Xxxxxx X. Xxxxxx
------------------------------
Title: Co-Chairman of the Board
----------------------------
Xxxxx Management LLC
By: /s/ Xxxxx X. Xxxxxxx
------------------------------
Title: Senior Vice President
----------------------------
10
EXHIBIT A
SPECIAL EXPENSES
Inland Resources Inc.:
----------------------
Investment banking fees and expenses(1) $2,150,000
Legal costs associated with recapitalization 300,000
Employment agreements (2) 550,000
Employee retainage and closing expenses (3) 152,376
Flying J:
---------
Investment banking fees and expenses To be determined
Costs and expenses associated with new catalytic cracker
$500,000
Footnotes:
(1) Includes $100,000 for fairness opinion, if required.
