HPCo Letterhead] June 1, 2006
[HPCo
Letterhead]
June
1,
2006
Xxxxx
Xxxxxxxx
Sunrise
Coal, LLC
0000
Xxxxx Xxxx 00
Terre
Haute, Indiana 47802
Re: Sunrise
Coal, LLC
Gentlemen:
This
letter, effective when executed by the parties hereto, will evidence the
current
mutual intent, as set forth in Article 1 below, of Hallador Petroleum
Company, a Colorado corporation (“Hallador”),
on
the one hand, and Sunrise Coal, LLC an Indiana limited liability company
(“Sunrise”),
on
the other hand, for Hallador to purchase preferred and common membership
interests in Sunrise as further described herein, and entering into such
documents, including an amended and restated operating agreement for Sunrise
(the “Amended
Operating Agreement”)
and a
Membership Interest Purchase Agreement, related thereto as the Parties deem
necessary or appropriate (collectively, the “Transaction
Documents”).
Hallador and Sunrise are sometimes referred to individually as “Party”
and
collectively as the “Parties.”
The
proposed investment in Sunrise, the Amended Operating Agreement and the
transactions related thereto, are collectively referred to herein as the
“Transactions.”
This
letter is intended to set forth certain basic terms of the understanding
reached
to date and to serve as a basis for further discussions and negotiations
between
the Parties with respect to the Transactions and the Transaction Documents.
The
matters set forth in Article 1 are not intended to and do not constitute a
binding agreement of the Parties with respect to the Transactions or the
Transaction Documents. Any such binding agreement will arise only upon the
negotiation, execution and delivery of mutually satisfactory definitive
agreements and the satisfaction of the conditions set forth therein, including
obtaining satisfactory financing and the approval of such agreements by the
respective governing authority of each Party.
The
matters set forth in Article 2 of this letter do constitute binding
agreements of the Parties.
In
consideration of the rights and obligations of the Parties hereunder, and
other
good and valuable consideration, the receipt and sufficiency of which are
hereby
acknowledged by the Parties, the Parties hereby agree as follows:
May
25,
2006
Page
2
ARTICLE 1
TRANSACTIONS
| 1.1 |
The
Transactions.
Sunrise shall issue additional membership interests which shall be
purchased by Hallador in exchange for a commitment to make a capital
contribution of up to $20,500,000. Hallador shall become the owner
of 60%
of the Common Units of Sunrise and the existing Sunrise members (the
“Sunrise
Founders”)
shall own 40% of the Common Units of Sunrise, plus each Party shall
own
Preferred Units according to the amounts contributed by each Party.
The
Parties shall agree to additional terms for the capital contribution
commitment and operation of Sunrise according to the Amended Operating
Agreement.
|
| 1.2 |
Transaction
Documents.
The Parties shall negotiate the terms and conditions of the Transaction
Documents in good faith, including an Amended Operating Agreement
in
accordance with the terms set forth on Exhibit A attached
hereto.
|
| 1.3 |
Loan
to Sunrise.
Upon approval and subject to a subordination agreement with Sunrise’s
lenders, Xxxxxxxx will agree to lend up to $5,000,000 (the “Loan”)
to Sunrise prior to the completion of the Transactions and the execution
of the Transaction Documents. Sunrise will execute a promissory note,
in
form and substance satisfactory to Hallador, in the amount of the
Loan.
Any and all amounts outstanding under the Loan at the time of execution
of
the Transaction Documents shall be converted into a capital contribution
and equity in Sunrise.
|
ARTICLE 2
BINDING
AGREEMENTS
| 2.1 |
Exclusivity.
This letter shall remain in force and effect until the earlier of
the date
that the Parties enter into definitive Transaction Documents, or
August 1,
2006 (the “Exclusivity
Period”).
During the Exclusivity Period, none of Sunrise or its members, managers,
officers or directors will, directly or indirectly, discuss, solicit,
pursue, negotiate for or commit to any arrangements relating to the
sale
or transfer of membership interests or other equity ownership interest
in
Sunrise or of any of Sunrise’s assets. If this letter is terminated by
Hallador prior to entering into the Transaction Documents, the Exclusivity
Period shall also terminate.
|
| 2.2 |
Confidentiality.
The contents of this letter and negotiations hereunder are intended
to be
confidential and are not to be discussed with or disclosed to any
third
person, except (i) Hallador may publicly announce it is entering into
negotiations with Sunrise with respect to the Transactions; (ii) with
the express prior written consent of the other Party hereto; (iii) as
may be required or appropriate in response to any summons, subpoena
or
discovery order or to comply with any applicable law, order, regulation,
ruling, stock exchange or national market rule; provided that (a) the
disclosing Party seeks, under applicable law, confidential treatment
for
such information by the governmental or regulatory authority or such
other
recipient, where appropriate, and (b) prior to such disclosure, the
other Party is given prompt written notice of the disclosure requirement
so that it may take whatever action it deems appropriate, including
intervention in any proceeding and the seeking of an injunction to
prohibit such disclosure; or (iv) to financial advisors, legal
counsel and other consultants assisting such Party, or to third parties
in
order to obtain such consents or approvals from such third parties
as may
be necessary or desirable.
|
| 2.3 |
Expenses.
Except as expressly set forth herein, each Party shall bear its own
costs
associated with negotiating and performing its obligations under
this
letter.
|
| 2.4 |
Approval.
No Party shall be bound by any Transaction Document until (i) such
Party’s governing body shall have approved the Transaction Documents,
(ii) such Party shall have executed the Transaction Documents, and
(iii) all conditions precedent to the effectiveness of the
Transaction Documents shall have been satisfied, including the obtaining
of any and all requisite federal and state regulatory orders or approvals
in form and substance satisfactory to the
Parties.
|
| 2.5 |
Entire
Agreement.
This letter constitutes the entire agreement of the Parties relating
to
the subject matter hereof and supersedes all prior discussions, agreements
or understandings, whether oral or written, relating to such subject
matter, including the letter of intent between the Parties executed
on
January 5, 2006. There are no other written or oral agreements or
understandings between the Parties. Any amendment of this letter
must be
written and signed by both Parties.
|
| 2.6 |
Governing
Law.
THIS LETTER SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF
THE STATE OF COLORADO, WITHOUT GIVING EFFECT TO CONFLICT OF LAW
PRINCIPLES.
|
May
25,
2006
Page
4
| 2.7 |
Non-Inclusive;
Non-Binding.
This letter does not contain all matters upon which agreement must
be
reached in order for the Parties to enter into the Transaction Documents
and consummate the Transactions. This letter does not create and
is not
intended to create a binding and enforceable contract between the
Parties
with respect to the provision of Article 1 and the subject matter of
any Transaction Document, and may not be relied upon by a Party as
the
basis for a contract by estoppel or otherwise. A binding commitment
with
respect to the Transactions and the Transaction Documents can only
result
from the execution and delivery of definitive Transaction Documents.
|
| 2.8 |
Relationship
of Parties.
The Parties shall not be deemed in a relationship of partners or
joint
venturers by virtue of this letter, nor shall either Party be an
agent,
representative, trustee or fiduciary of the other. Neither Party
shall
have any authority to bind the other to any
agreement.
|
| 2.9 |
Attorneys’
Fees.
In the event it becomes necessary for either Party to file a suit
to
enforce the binding provisions of this letter, the substantially
prevailing Party shall be entitled to recover, in addition to all
other
remedies or damages, reasonable attorneys’ fees and costs
incurred.
|
[Signature
page follows]
May
25,
2006
Page
4
If
the
provisions of Article 1 correctly set forth our current understanding and
the provisions of Article 2 set forth our binding agreement, please execute
both originals of this letter in the space provided below, retain one
fully-executed original for your file, and return the other original to the
undersigned. This letter may be executed in counterparts and by facsimile
(followed by originals as set forth in the foregoing sentence), and all such
counterparts together shall constitute but one agreement.
Very
truly yours,
By:
/s/
XXXXXX X. XXXXXX
Xxxxxx
X.
Xxxxxx
President
and Chief Executive Officer
Acknowledged,
Agreed to and Accepted:
SUNRISE
COAL, LLC
By:/S/
XXXXX X. XXXXXXXX
Xxxxx
X.
Xxxxxxxx
Managing
Member and
Attorney-in-Fact
May
25,
2006
Page
5
EXHIBIT
A
Terms
of
Amended Operating Agreement
|
Issuer:
|
Sunrise
Coal, LLC, an Indiana limited liability company (“Sunrise”), located at
0000 Xxxxx Xxxx 00, Xxxxx Xxxxx, Xxxxxxx.
|
|
Capital
Structure:
|
The
current capital structure of Sunrise will be recapitalized such
that all
equity ownership in Sunrise will be represented by and divided
into two
classes of LLC Units on a going forward basis: Preferred Units
and Common
Units (the “Recapitalization”),
such Units carrying the relative rights and obligations set forth
below.
As part of the Recapitalization, the Sunrise Founders will surrender
all
their existing membership interests in Sunrise in exchange for
Preferred
Units and Common Units.
|
|
Initial
Hallador Capital Commitment / Initial Capital Contribution
|
$20,500,000,
consisting of $20,000,000 cash and $500,000 of legal, accounting
and other
expenses incurred by Hallador.
|
|
Initial
Sunrise Founder Capital Contribution
|
$2,800,000,
including conversion of the principal amount of existing loans
made by
certain of the Sunrise Founders to Sunrise, plus an additional
amount
representing interest accrued on such loans to the date of
conversion.
|
|
Additional
Capital Commitments
|
Capital
Calls for additional Capital Contributions shall be made as needed
by
Sunrise but only upon the approval of a Supermajority of the Board.
All
such Capital Calls shall be made on the basis of Participation
Percentages
of the Common Members. In the event any Common Member defaults
on a
Capital Commitment, the other Members shall be offered the right
to fund
such defaulted Capital Commitment. Any Member making such an additional
Capital Contribution shall be issued an additional number of Common
Units
that result in an increase in such Member’s Participation Percentage to
that percentage that equals the aggregate Capital Contributions
by such
Member divided by the aggregate Capital Contributions (including
any
additional Capital Contributions) made by all Members.
|
|
Common
Unit Issuances
|
Subject
to adjustment for future Capital Contributions made under “Additional
Capital Commitments” above, initially Sunrise will be issued 40 Common
Units and Hallador will be issued 60 Common Units. Accordingly
the initial
Participation Percentages of the Members will be as follows:
Sunrise40.00%
Hallador60.00%
Total100.00%
|
1-LA/886174.3
May
25,
2006
Page
6
|
Preferred
Unit Issuances
|
Preferred
Units will be issued to Hallador and the Sunrise Founders (as a
group) and
adjusted from time to time based upon the aggregate Capital Contributions
made by each of Hallador and the Sunrise Founders (as a group)
divided by
the aggregate Capital Contribution made by Hallador and the Sunrise
Founders.
|
|
Tax
Distributions:
|
For
any fiscal year of Sunrise, Available Cash Flow will be distributed
to the
Members in amounts deemed sufficient for each member to pay its
federal,
state, and local income tax liability attributable to its allocable
share
of the taxable income of the Sunrise (a “Tax
Distribution”)
for the prior fiscal year. For such purpose, the Parties will agree
upon
the effective income tax rate of each Member. Tax Distributions
will be
made within the first ninety (90) day period after such prior fiscal
year
but only to the extent necessary and available for distribution
(taking
into account all distributions made to the Members in the fiscal
year to
which a Tax Distribution applies).
Any
Tax Distribution will be deemed to be an advance distribution of
amounts
otherwise distributable to the Members under “Distributions” set forth
below and will be reallocated among the Members in the amounts
that would
subsequently otherwise be distributable to the Members under such
paragraph in the order they would otherwise have been
distributable.
|
|
Distributions:
|
Each
fiscal quarter of Sunrise (and after the payment of all Tax
Distributions), Sunrise shall make distributions to the Members
to the
extent there is Available Cash Flow (i.e.,
cash flow received by Sunrise from its operations, reduced by payments
to
satisfy Sunrise’s expenses, liabilities (including the Credit Agreement)
and reserve withholding needs) as follows:
First,
to the holders of Preferred Units (in such capacity, “Preferred
Members”),
a ten percent (10%) per annum rate of return on their respective
average
daily Unreturned Capital Balances (as defined below) for the fiscal
quarter of the distribution (the “Preferred
Returns”
of such Members). Distributions of Preferred Returns shall be made
to the
Preferred Members in proportion to their respective accrued and
unpaid
Preferred Returns. Preferred Returns shall accrue and compound
annually
until paid in full.
Second,
to Preferred Members, in an amount equal to their respective Unreturned
Capital Balances. As used in this Term Sheet, the term “Unreturned
Capital Balance”
of a Preferred Member will be the aggregate amount of Capital
Contributions made by the Member with respect to the Preferred
Units of
the Member, reduced by all prior distributions made with respect
to such
Unreturned Capital Balance. Unreturned Capital Balance distributions
shall
be made to the Preferred Members in proportion to their respective
Unreturned Capital Balances.
Thereafter,
to
the holders of Common Units (in such capacity, “Common
Members”)
in proportion to their respective Participation Percentages. As
used in
this Term Sheet, the term “Participation
Percentage”
of a Common Member shall be a fraction (expressed as a percentage),
the
numerator of which is the number of Common Units of which the Member
is
the record owner and the denominator of which is the aggregate
number of
issued and outstanding Common Units.
|
|
Allocations:
|
Allocations
of the Sunrise income and loss for “book for tax” or “capital accounting”
purposes shall be made to the members each fiscal year in a manner
sufficient for the “capital account” of each member to equal the amount of
a distribution each member would receive if the Sunrise liquidated
all its
assets for their “book for tax” value, satisfied all its liabilities, and
distributed the constructive proceeds under the order and priority
outlined above under the heading “Distributions.” Allocations of the
Sunrise taxable income and taxable loss shall be made in a manner
consistent with their corresponding allocations of book income
and loss,
except to the extent a different allocation is required by the
tax laws.
Hallador and the Sunrise Founders shall negotiate reasonably and
in good
faith as to the values to be assigned to the specific asset classes
of
Sunrise for book for tax purposes and the specific application
of Section
704(c) to any book tax disparity created by such valuations.
|
|
Voting
Rights:
|
All
voting rights and management will be vested exclusively in the
Board,
except where otherwise required by law. Only the Common Members
will be
entitled to vote on all matters presented to the Members for vote.
Accordingly, voting of the Members will be made on the basis of
Participating Percentages.
|
|
Management:
|
Except
as described below, management of Sunrise shall be pursuant to
the
majority vote of a board of managers (the “Board”). The number of managers
appointed to the Board shall be 5, with 3 managers to be appointed
by
Xxxxxxxx and 2 managers to be appointed by the Sunrise Founders.
The
affirmative vote of at least 4 managers (the “Supermajority”) shall be
required to approve the following actions by Sunrise: issuances
of
additional equity, additional capital contributions, a merger of
Sunrise
or a sale of all or substantially all of the assets of
Sunrise.
|
|
Transfers:
|
Transfers
to an affiliate of a member, a family member of a member or to
a trust
controlled by a member shall be permitted transfers. All other
transfers
shall be subject to a right of first refusal by Sunrise and the
other
Sunrise members. The Sunrise Founders shall have the right to tag
along
with any sale of Hallador’s membership interest in Sunrise equal to 50% or
more of the outstanding membership interests in
Sunrise.
|
|
Non-compete:
|
Each
Sunrise member will agree not to compete against Sunrise’s business while
an employee of Sunrise and will agree not to engage in any new
coal mining
ventures within an area of five miles around each Sunrise project
if a
member terminates his or her employment with Sunrise.
|
|
Audits
and Financial Information:
|
Sunrise
will provide year-end audits and quarterly audit reviews conducted
by an
accounting firm of Hallador’s choice.
|
