<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For
the transition period from _____________ to _____________
COMMISSION FILE NUMBER: 1-12334
FORTUNE PETROLEUM CORPORATION
(Exact name of small business issuer in its charter)
Doing business in Texas and Louisiana as
FORTUNE NATURAL RESOURCES CORPORATION
Delaware 95-4114732
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
One Commerce Green, 515 W. Greens Rd., Suite 720, Houston, Texas 77067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (713) 872-1170
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 Par Value American Stock Exchange
Common Stock Purchase Warrants American Stock Exchange
- ------------------------------ ------------------------------------
Title of each class Name of Exchange on which registered
Securities registered pursuant to section 12(g) of the Act:
- --------------------------------------------------------------------------------
(Title of Class)
10-1/2% Convertible Debentures Due December 31, 1997, $1,000 Face Amount
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year.
$3,193,000
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
The aggregate market value of voting stock held by non-affiliates
at February 29, 1996
$23,311,330
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Shares of common stock outstanding as of February 29, 1996:
11,170,859
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference briefly
describe them and identify the part of Form 10-KSB into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"). The listed documents
should be clearly described for identification purposes (e.g., annual report to
security holders for fiscal year ended December 24, 1990).
None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Fortune Petroleum Corporation ("Fortune" or the "Company"), which does
business in Texas and Louisiana as Fortune Natural Resources Corporation, is an
independent energy company engaged primarily in the acquisition, operation,
production, exploration and development of domestic oil and gas. The Company's
principal properties are located offshore Louisiana, the Texas and Louisiana
Gulf Coast and New Mexico.
During 1995, the Company acquired an interest in 19 exploration
projects (the "Zydeco Projects") which will enable it to participate in
exploration for oil and natural gas in the shallow Gulf Coast waters of
Louisiana in a strategic partnership with Zydeco Exploration, Inc. (the "Zydeco
3D Venture"). On December 11, 1995, the Company also purchased an interest in a
producing oil and gas property located in the Gulf of Mexico offshore Louisiana.
See: "Acquisition Activity -- "Lagniappe Exploration Corporation/Zydeco
Exploration" and "South Timbalier Block 76".
The Zydeco 3D Venture utilizes state-of-the-art three dimensional
("3D") seismic and computer-aided exploration ("CAEX") technology in its
exploration efforts. Zydeco has blended existing 3D seismic and CAEX technology,
production data and characteristics of wells in a particular geographic area and
advanced interpretation techniques (as well as traditional two-dimensional
("2D") seismic data), to identify the 19 Zydeco Projects. The Company believes
that the use of 3D seismic and CAEX technology provides more accurate and
comprehensive geological data for evaluation of drilling prospects than 2D and
traditional evaluation methods. The Company also believes that the techniques
used by Zydeco in combining existing 3D seismic and CAEX technology will provide
the Zydeco 3D Venture and Fortune with a competitive advantage by increasing the
likelihood of finding commercial quantities of oil and gas at lower average
reserve finding costs. The Company is taking steps to utilize the same or
similar techniques in other areas.
On June 30, 1995, the Company closed an underwriting of 4,100,000
shares of Common Stock at a price of $2.00 per share. On July 5, 1995, the
underwriters exercised their overallotment option for an additional 500,000
shares. Total gross proceeds of the offering were $9,200,000 and the Company
netted approximately $8.1 million after deduction of underwriting discounts and
costs of the offering.
On December 15, 1995, the Company closed a private placement of
1,321,117 shares of Common Stock at a price of $3.22 per share. The total gross
proceeds were $4,254,000 and the Company netted approximately $3.3 million after
payment of expenses and costs of the offering. See: "Acquisition Activity --
South Timbalier Block 76".
BUSINESS STRATEGY
The Company has sought to add reserves in the most cost efficient and
effective manner. The Company previously focused its efforts on the acquisition
of producing properties in an effort to take advantage of what it believed to be
competitive prices for proved reserves with development potential in relation to
the cost of reserves discovered through exploration activities. See "Acquisition
Activity." In mid-1994, the Company made a strategic decision to shift its
emphasis away from the acquisition of producing properties to exploration for
oil and natural gas reserves. This decision was prompted by increasing price
competition for attractive producing properties (caused by larger and better
capitalized companies moving into the acquisition market) and a general
tightening in available financing for acquisitions.
The Company's decision to shift its emphasis to exploration was further
influenced by several factors which Fortune believes create new opportunities
for exploration. These factors include increased availability of 3D seismic and
CAEX technology at competitive prices and the reallocation of exploration
budgets by major oil companies from domestic activity to international
exploration. This move by the major oil companies resulted in increased access
to geological and geophysical information relating to potential domestic
prospects, new opportunities to enter into farmout agreements with respect to
prospects held by the major oil companies and less demand and price competition
for domestic acreage. To help facilitate its exploration strategy and focus its
efforts, the Company has recently sold all but one of its California properties
and has entered into a letter of intent to sell the remaining property. See
"Recent Developments -- Divestiture of California Properties". The Company
relocated its headquarters to the greater Houston, Texas area in February 1996.
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The Company expects to continue to review acquisition opportunities
which may be presented to it and to conclude acquisitions which further its
business objectives. Of course, no assurance can be given that any such
opportunities will present themselves or that the Company will be able to
conclude any transactions if they arise.
The Company is involved in a number of exploration projects, including
the Zydeco 3D Venture projects and projects in the San Juan Basin, Rio Arriba
County, New Mexico, the LaRosa Field, Refugio County, Texas, and onshore
Louisiana. Additionally, Zydeco is continuing its work to identify other
potential projects for the Zydeco 3D Venture.
ACQUISITION ACTIVITY
LAGNIAPPE EXPLORATION CORPORATION/ZYDECO EXPLORATION
On May 12, 1995, Fortune acquired Lagniappe Exploration, Inc. ("LEX")
which had previously entered into the exploration agreement with Zydeco. As a
result, Fortune acquired LEX's right to participate in the Zydeco 3D Venture.
Fortune paid the LEX stockholders an aggregate of 1,200,000 shares of Common
Stock and 1,200,000 five year stock purchase warrants exercisable at $4.75 per
share. A portion of such shares and warrants remain in escrow pending the
resolution of a dispute which has arisen among the former LEX stockholders and
others regarding who is entitled to the shares of Common Stock and stock
purchase warrants issued by Fortune at the closing of the LEX acquisition. See
"Legal Proceedings."
The only material asset of LEX was its right to participate in the
Zydeco 3D Venture. Under the exploration agreement with Zydeco, Fortune has
acquired a 50% interest in each of 19 seismically defined oil and gas projects
identified by Zydeco using advanced 3D seismic imaging, visualization and
comprehensive well log analyses in exchange for funding a budget of $4,850,000
for leasehold acquisition and seismic costs. Of these 19 projects, six
constitute "prospects" which are in near-drillable condition, six constitute
"leads" on which additional seismic work or lease acquisition (or both) is
required in order for exploration drilling to commence and seven constitute
"concepts," which means that substantial additional seismic and leasehold
acquisition must be undertaken in order to consider exploration drilling. These
19 projects are primarily located in geological trends in the "Transition Zone"
and the "Timbalier Trench" areas of the Gulf Coast of Louisiana, where there
have been discoveries of crude oil and natural gas reserves and where advanced
3D seismic and CAEX technology is considered by the Company and Zydeco to be
effective in better defining exploration risks. In addition to the 19 projects,
the Company and Zydeco have established areas of mutual interest ("AMIs")
adjoining each prospect and Zydeco has agreed to provide Fortune with a right of
first refusal on any new projects developed along the Gulf Coast of Louisiana
until December 31, 1996. The advantage to Fortune of the establishment of the
AMIs and right of first refusal is that as Zydeco determines new projects within
the AMIs, Fortune will have the right to participate in them, though no
assurance can be given that any new projects will be identified or that Fortune
will have the financial resources to participate in such projects if any are
identified. See: "Development Drilling and Exploration Prospects --
Fortune/Zydeco Joint Venture".
SOUTH TIMBALIER BLOCK 76
On December 11, 1995, the Company acquired a 16-2/3% working interest
(12-1/2% net revenue interest) in a 5,000 acre producing oil and gas property
offshore Louisiana. The property, known as the South Timbalier Block 76 (and
referred to herein as the "Timbalier Block"), includes a producing well,
drilling and production platform and transmission line. The original effective
date of this acquisition was July 1, 1995. A provision in its acquisition
agreement, however, guaranteed certain terms, including an effective date for
oil and gas purposes of June 1, 1995. Fortune is, therefore, entitled to receive
the net cash flow from the well to its interest from that date. The effective
date for financial reporting purposes is November 1, 1995. On March 8, 1996 an
option to acquire a 4.1667% working interest was exercised for $790,000 plus the
retention by Fortune of a $150,000 deposit for a total of $940,000, reducing the
Company's interest in the block to 12-1/2% working interest (9.375% net revenue
interest) effective January 1, 1996. The closing of the transaction took place
on March 11, 1996.
The interest acquired by Fortune was originally owned by PetroFina,
Inc., ("Petrofina") which had agreed to sell the interest to Northport
Production Company ("Northport"). In turn, Northport had agreed to sell the
property to Mr. Donald L. Walker. In order to secure the right to purchase the
interest, Mr. Walker gave PetroFina a non-refundable security deposit of
$150,000. In order to step into Mr. Walker's position, Fortune paid Mr. Walker
$100,000 in cash, agreed to issue stock purchase warrants for 150,000 shares of
Common Stock and granted Mr. Walker the option referred to below. (The warrants
are exercisable for two years at the following prices: 50,000 shares at $4.63
per share and 100,000 shares at $6.00 per share.) In addition, Fortune gave an
additional security deposit to PetroFina of $100,000.
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Fortune paid a total of $2.9 million for its interest in the Timbalier
Block. Of that amount, approximately $560,000 was paid out of the net cash flow
from Fortune's interest in the property between June 1, 1995 and approximately
mid- October 1995. In addition, the $150,000 deposit paid by Mr. Walker and the
$100,000 deposit paid by Fortune were applied to the purchase price. At the
closing of the transaction, the net cash paid by Fortune for its interest in the
Timbalier Block was approximately $2,090,000. Fortune granted Pendragon
Resources, a Texas limited liability company owned by Donald L. Walker, the
right, exercisable until March 11, 1996, to acquire the 4-1/6% working interest
in the Timbalier Block for $790,000 and the retention of a deposit of $150,000.
As noted above, Pendragon Resources exercised this option.
In order to finance the acquisition of the Timbalier Block and also to
provide the Company with additional working capital, Fortune issued 1,321,117
shares of its Common Stock to a group of overseas investors in a transaction
which qualified for an exemption from the registration requirements of the
Securities Act of 1933 under Regulation S. The shares were sold subject to
certain "reset" provisions pursuant to which the purchasers could receive
additional shares if the price of the Common Stock were to drop below the
purchase price during certain calculation periods. As a result of the recent
decline in the price of the Common Stock, the Company may be required to issue a
substantial number of additional shares. However, the Company is currently
investigating certain alleged irregularities in the trading in its Common Stock
and is uncertain whether it will be required to issue additional shares. Were it
required to issue such shares, at the date hereof, the number of additional
shares would be approximately 1,266,000. The shares were originally sold for an
average price of $3.22 per share, approximately 75% of the average closing bid
price of the Common Stock on the two trading days prior to the financing. From
this sale, the Company netted approximately $3.3 million after payment of
expenses of the offering. The balance of approximately $1 million remaining
after payment of the purchase price for the Timbalier Block interest was added
to working capital and will be used for general corporate purpose.
ENRE CORPORATION
On June 24, 1994, Fortune concluded the purchase of a 25% interest in
EnRe-1, LLC, a newly formed Texas Limited Liability Company, of which EnRe
Corporation is the manager. EnRe-1, LLC owns three Jicarilla Apache Minerals
Development Agreements covering 60,000 producing, development and exploratory
acres in Rio Arriba County, New Mexico and associated tangible property. At the
same time, the Company acquired an approximately 22% working interest in certain
mineral, oil and gas leasehold interests in an additional 10,000 exploratory
acres in Rio Arriba County, New Mexico, from EnRe Corporation. (The 25% interest
in EnRe-1, LLC and an approximately 22% working interest in the 10,000
exploratory acres are collectively referred to as the "EnRe Assets.")
The EnRe Assets were acquired in exchange for $1,375,000 in cash. The
effective date under the purchase method of accounting for transferring revenues
and expenses on these properties was determined to be June 1, 1994. See "Legal
Proceedings" for information regarding litigation between the Company and the
operator of the EnRe Assets.
BROOKLYN UNION EXPLORATION COMPANY, INC.
On February 8, 1994, the Company completed an acquisition of a 50%
working interest in a 3,689 acre lease in the La Rosa Natural Gas Field in
Refugio County, Texas from Brooklyn Union Exploration Company, Inc. for
$760,000. The effective date of the transaction using the purchase method of
accounting was February 1, 1994. The acquisition consisted of 12 producing
wells, 4 saltwater producing wells and 35 shut in wells with total new proved
reserves to the Company of 1 BCFE and additional probable reserves behind pipe.
There is also an additional 2,700 undeveloped acres adjacent to production which
was acquired for future exploration. The Company plans to participate in a 3-D
seismic program over the lease in late 1995 to help define exploration prospects
within the undeveloped acreage and the potential for other undiscovered reserves
within the productive field limits.
MICHAEL PETROLEUM, ET AL.
On October 5, 1993 the Company completed the acquisition of certain
mineral, oil and gas leasehold interests and associated tangible property in
exchange for an adjusted price of $6,457,386 in cash and 195,000 private common
stock purchase warrants from Michael Petroleum Corporation, Brazos Resources,
Inc., Pioneer Drilling Company and Endowment Energy Partners. The private common
stock purchase warrants are exercisable at $3.88, expire on June 30, 1996 and
have been transferred to another party. The effective date under the purchase
method of accounting for transferring revenue and expense on these properties
was determined to be July 1, 1993. The mineral, oil and gas leasehold interests
include working interests in producing and non-producing oil and gas properties
located in Webb
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County, Texas. The Lobo sand in this area has very low permeability (under one
millidarce) which has qualified all the acquired production as a "tight" gas
sand. As a tight gas sand, the production, from wells drilled before January 1,
1993, is exempt from Texas State severance tax on the gas production and
qualifies for the Federal Section 29 tax credit worth approximately $.52 per Mcf
produced. For further information about the acquisition, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HINKLE EXPLORATION, LIMITED, SAN FRANCISCO ENERGY CORPORATION
On April 10, 1992, Fortune acquired certain oil and gas producing
properties located in the Sespe Field in Ventura County, California and the
Bracken Lease in the AWP Field, in McMullen County, Texas from Hinkle
Exploration, Limited, San Francisco Energy Corporation and each of its
respective limited partnerships and Klein Bros. Inc. (together referred to as
"Hinkle"). The transaction was accounted for as a purchase as of February 1,
1992 with the acquisition price of $3,741,000 based on the market value of
Fortune's common stock and debt assumed. Included in this acquisition were
leasehold interests located on Union Oil Company of California ("Union") and Los
Angeles Oil Company (L.A.) fee property and Union and L.A. issued a consent to
this assignment. The Company issued 243,153 shares of Fortune Common Stock,
assumed $391,000 of debt incurred against the oil and gas properties by Hinkle
and issued a note for $2,000,000 in exchange for the assets acquired plus
revenues and expenses since August 1, 1991. Additionally, 138,889 and 13,255
purchase warrants for Fortune Common Stock exercisable at $7.20 and $0.04,
respectively, were issued to Hinkle. The 13,255 stock purchase warrants were
registered on December 2, 1992 and exercised on December 11, 1992. The 138,889
stock purchase warrants were adjusted to reflect an exercise price of $3.89 and
their expiration extended to September 28, 1998 in exchange for extending the
final payment of $1,000,000 of the Note to July 1, 1995. On January 26, 1994 the
Company retired the balance still remaining on both the Hinkle Note of
$2,000,000 and the $391,000 of assumed debt using the Bank One, Texas, credit
facility.
RECENT DEVELOPMENTS
SALE OF PARTIAL INTEREST IN SOUTH TIMBALIER BLOCK 76
Fortune granted Pendragon Resources, a Texas limited liability company
owned by Donald L. Walker, the right, exercisable until March 11, 1996, to
acquire a 4-1/6% working interest in the Timbalier Block for $790,000 and the
retention of a deposit of $150,000 (the "Option"). On March 11, 1996 the Option
was exercised for the combined total of $940,000 reducing the Company's interest
in the block to 12.50% working interest (9.375% net revenue interest) effective
January 1, 1996. The closing of the transaction took place on March 11, 1996.
DIVESTITURE OF CALIFORNIA PROPERTIES
On February 23, 1996, Fortune sold its interest in all but one of its
California properties for cash in the amount of $840,000. The properties sold
consisted of the Company's interest in the Hopper Canyon, Holser Canyon, Oxnard
and Sheils Canyon Fields in Ventura County and the Bacon Hills Field in Kern
County. The sale was effective December 31, 1995. In connection with the sale,
Fortune is required to pay commissions and expenses estimated to be $75,000. The
Company's sole remaining California property is the Sespe Field, Ventura County,
California. Fortune has entered into a letter of intent to sell this property to
Seneca Resources for approximately $340,000. The sale is expected to close in
the first quarter of 1996, with an effective date of December 1, 1995. The sale
of the Sespe property is subject to completion of due diligence by the parties,
and no assurance can be given that such sale will occur. The Company took an
impairment of $1.4 million against its 1995 results as a result of these sales.
All of the Company's California properties were pledged to secure the
Company's Credit Facility with Bank One, Texas. Concurrently with the closing of
the sale of the non-Sespe properties, Fortune paid down the Credit Facility by
$1.1 million, representing the entire indebtedness secured by the Company's
California properties.
The closing of the sale of the non-Sespe properties and the anticipated
sale of the Sespe property will complete the Company's strategic move to focus
its efforts on exploration in the Gulf Coast and south Texas area. As previously
announced, in furtherance of the change in focus, the Company has also completed
the relocation of its headquarters to Houston, Texas.
At December 31, 1995, Fortune owned and operated 39 gross and 29.92 net
wells located in California. Production in California during 1995 totaled
approximately 57,160 net barrels of oil and 66,292 net Mcf of gas. This
represented about 62% of the Company's 1995 oil production and about 7% of its
gas production. The remaining property located
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in California, which is operated by the Company, comprised approximately 26% of
Fortune's net proved oil reserves and 1% of Fortune's net proved gas reserves as
of December 31, 1995.
Despite the high percentage of oil production represented by these
properties, the costs of operating the wells in California was, in the view of
management, disproportionately high in relation to the revenues generated. The
high cost of production in California on the Company's properties was a result
of several factors, including the low gravity of the oil, the small production
from each well and environmental and worker's compensation costs. Therefore, the
net income received by the Company on the California properties was small in
relation to the cost of operation.
OIL AND GAS OPERATIONS
OIL AND GAS RESERVES
The Company's oil and gas reserves are located in Texas, offshore
Louisiana, New Mexico and California. Proved reserves represent estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate to be reasonably certain to be recoverable in the future from known
reservoirs under existing economic and operating conditions. Proved developed
oil and gas reserves are proved reserves that can be expected to be recovered
through existing wells using existing equipment and operating methods.
For the years ended December 31, 1994 and 1993, the oil and gas reserve
estimates were reviewed by Huddleston & Co., Inc., ("Huddleston"), independent
petroleum engineers, and Sherwin D. Yoelin, independent petroleum engineer, and
for the year ended December 31, 1995 by Huddleston, in accordance with
guidelines established by the Securities and Exchange Commission.
Such estimates are subject to numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of future
rates of production, prices and the timing of development expenditures. The
accuracy of any reserve estimate is a function of available data and of
engineering and geological interpretation and judgment. The future cash inflow,
as reflected in the "Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves", determined from such reserve data are
estimates only, and the present values thereof should not be construed to be the
current market values of the Company's oil and gas reserves or the costs that
would be incurred to obtain equivalent reserves. While the reserve estimate
presented herein is believed to be reasonable, it should be viewed with the
understanding that subsequent reservoir performance, the timing and success of
future development drilling and changes in pricing structure or market demand
will affect the reserve estimate.
The following sets forth information with respect to estimated proved
oil and gas reserves as determined by Fortune's independent petroleum engineers
attributable to the Company's interests in oil and gas properties as of December
31, 1993, 1994 and 1995.
ESTIMATED NET RESERVE QUANTITIES
<TABLE>
<CAPTION>
December 31,
----------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Total Proved Reserves(1):
Oil (Bbls) 813,000 1,647,000 347,000
Natural Gas (Mcf) 5,562,000 5,911,000 5,938,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) 1,740,000 2,632,000 1,337,000
========= ========= =========
Total Proved Developed Reserves:
Oil (Bbls) 666,000 675,000 324,000
Natural Gas (Mcf) 4,221,000 3,317,000 4,686,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) 1,370,000 1,228,000 1,105,000
========= ========= =========
</TABLE>
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- ------------
(1) Estimates of oil and gas reserves are based in part on the price at
which the product was sold as of the end of each year; and if the cost of
producing the oil and gas exceeds the sales price, the quantity of "recoverable
reserves" is reduced. The increase in reserves from December 31, 1993 to
December 31, 1994 is primarily due to the increase in the average oil price
received by the Company at the end of 1994 ($14.62 per barrel compared to $10.21
per barrel, respectively) and the resulting increase in economically recoverable
quantities. The decrease in reserves from December 31, 1994 to December 31, 1995
is primarily due to the transfer to oil and gas properties held for sale of
reserves attributed to the Company's California properties which were sold in
February 1996, and which represented approximately 1.4 million barrels of oil
and 1.5 BCF of natural gas in the Company's Proved Reserves at December 31,
1994, partially offset by the acquisition of the Timbalier Block 76 which added
proved reserves of 174,000 barrels of oil and 2.9 BCF of natural gas on the
acquisition date.
(2) After conversion (6:1); six units of natural gas to one unit barrel of
crude oil.
DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
The following table represents the estimated future net revenues
(unescalated and discounted at 10% per annum) and the present value of the
future estimated net reserves from the proved developed producing, proved
developed non-producing and the proved undeveloped reserves at December 31,
1993, 1994 and 1995.
DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cumulative Future Net Revenue(1) $ 12,835,000 $ 15,932,000 $ 12,600,000
less adjustment to give effect to a
10% annual discount (4,281,000) (7,784,000) (3,658,000)
------------ ------------ ------------
8,554,000 8,148,000 8,942,000
less discounted present value of
future income taxes -- -- --
------------ ------------ ------------
$ 8,554,000 $ 8,148,000 $ 8,942,000
============ ============ ============
</TABLE>
- ----------------
(1) The decline in the 10% discounted value of future net revenue from
December 31, 1993, to December 31, 1994 is primarily due to the difference in
the average gas price received by the Company at those dates ($2.28 per MMBTU
compared to $1.39 per MMBTU, respectively) and the resulting decline in
quantities offset by increases in reserves from higher oil prices in 1994 as
compared to 1993 year end of $14.62 and $10.21, respectively. The increase in
net revenues from December 31, 1994 to December 31, 1995, is primarily due to
higher production levels of the newly acquired properties as well as higher
average sale prices obtained for that production compared to the prices obtained
for the California production. The increase in 10% discounted value at December
31, 1995 is due to the net effect of acquired reserves offshore Louisiana and
higher natural gas prices of $2.05 per MMBTU at December 31, 1995 as compared to
$1.39 per MMBTU at December 31, 1994 offset by the exclusion of the California
properties sold in February 1996.
PRODUCTION
The approximate net production data related to the Company's properties
for the periods ended December 31, 1993, 1994 and 1995 from the Company's
properties are set forth below (See Item 2 - Description of Property - Texas
Properties, New Mexico Properties and Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operation for further
information):
NET PRODUCTION DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Oil (Bbls) 78,737 87,615 91,981
Gas (Mcf) 723,878 1,016,771 909,000
</TABLE>
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PRICES AND PRODUCTION COSTS
The following table sets forth the approximate average sales prices and
production (lifting) costs per barrel of oil and per Mcf of gas produced and
sold in the United States from the Company's oil and gas leases for the years
ended December 31, 1993, 1994 and 1995:
AVERAGE SALES PRICES AND PRODUCTION COSTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Average Sale Price Received:
Oil (per barrel) $14.33 $14.14 $14.66
Gas (per Mcf) 2.28 2.09 1.77
Average Production Cost
per Equivalent Barrel 4.84 4.24 6.22
</TABLE>
PRODUCING WELLS
The following table lists total gross and net producing oil wells in
which Fortune had an interest at December 31, 1995:
PRODUCING WELLS
<TABLE>
<CAPTION>
Gross Net
----- ---
<S> <C> <C>
Texas 89 17.25
New Mexico 6 1.07
California 6 4.20
Louisiana 1 0.125
--- -----
Total 102 22.65
=== =====
</TABLE>
DEVELOPMENTAL DRILLING AND EXPLORATION PROSPECTS
FORTUNE/ZYDECO JOINT VENTURE
Under the exploration agreement with Zydeco, Fortune has acquired a 50%
interest in each of 19 seismically defined oil and gas projects identified by
Zydeco using advanced 3D seismic imaging, visualization and comprehensive well
log analyses in exchange for funding a budget of $4,850,000 for leasehold
acquisition and seismic costs. Of these 19 projects, six constitute "prospects"
which are in near-drillable condition, six constitute "leads" on which
additional seismic work or lease acquisition (or both) is required in order for
exploration drilling to commence and seven constitute "concepts," which means
that substantial additional seismic and leasehold acquisition must be undertaken
in order to consider exploration drilling. These 19 projects are primarily
located in geological trends in the "Transition Zone" and the "Timbalier Trench"
areas of the Gulf Coast of Louisiana, where there have been discoveries of crude
oil and natural gas reserves and where advanced 3D seismic and CAEX technology
is considered by the Company and Zydeco to be effective in better defining
exploration risks. In addition to the 19 projects, the Company and Zydeco have
established areas of mutual interest ("AMIs") adjoining each prospect and Zydeco
has agreed to provide Fortune with a right of first refusal on any new projects
developed along the Gulf Coast of Louisiana until December 31, 1996. The
advantage to Fortune of the establishment of the AMIs and right of first refusal
is that as Zydeco determines new projects within the AMIs, Fortune will have the
right to participate in them, though no assurance can be given that any new
projects will be identified or that Fortune will have the financial resources to
participate in such projects if any are identified.
The 19 projects are primarily located in the shallow marine waters
(five to 50 feet) within three to five miles of the Louisiana Coastline (the
"Transition Zone") and in the Timbalier Trench, a pre-historic channel of the
Mississippi River which is now offshore and covered in sedimentary deposits. The
Transition Zone and Timbalier Trench have been difficult areas from which to
obtain quality seismic data and to interpret using conventional technology. The
principals of Zydeco have worked in these two areas for the past 18 years.
9
<PAGE> 10
The Company does not currently expect to retain a working interest of
more than 25%, except in certain circumstances, in each well drilled on the
Zydeco Projects and intends to "farmout" its remaining interest to other oil
companies on a "promoted" basis. Fortune may retain larger or smaller working
interests in certain projects depending upon capital availability and other
factors. Under a farmout arrangement, the Company would be relieved of its
obligation to pay, or could recover already paid, acquisition and exploration
costs but would wind up with a smaller interest in any given prospect. For
example, in a typical promoted farmout, the party to which the interest is
farmed out would pay all of Fortune's working interest share of the acquisition
and exploration costs in the project. Fortune would attempt to retain a two to
five percent overriding royalty interest but would not be required to pay any of
the project acquisition and lease operating costs. Under such an arrangement,
Fortune would also normally have a right to convert its overriding royalty
interest into a working interest in the project after the promoted party
recovered all of its costs from revenues derived from the particular well.
Fortune would exercise this right to convert its overriding royalty into a
working interest if the project proved to be productive and Fortune had the
financial resources at that time to pay its working interest share of the costs
of further development. No assurance can be given that Fortune will be able to
farmout any of the projects on a promoted basis or that, if it is successful in
doing so, that the farmout will be on the exact terms described above. In any
case, it is Fortune's intention to participate in the drilling of Zydeco 3D
Venture projects as they are completed and permitted for drilling.
The Company also has a right under the Zydeco 3D Venture to "farmout" a
portion or all of its interest in each prospect to Zydeco under a put
arrangement in the exploration agreement. Zydeco has an identical right to
farmout to Fortune. In the event of such a farmout of a working interest,
Fortune or Zydeco would retain a negotiated overriding royalty convertible into
a working interest or a default arrangement of a one percent overriding royalty
interest in the project, convertible into a 12-1/2% working interest after
Zydeco or Fortune recouped its drilling costs of the well from production.
Should either Fortune or Zydeco farmout a smaller working interest to one
another, the overriding royalty and after-payout working interests would be
proportionately reduced.
Zydeco and Fortune entered into a farmout of the Polaris Project to
Southern Gas Company of Delaware ("Southern") on May 31, 1995. Under the terms
of the farmout, Southern paid Zydeco and Fortune an aggregate of $100,000 in
exchange for 100% of the working interest in the Project. Zydeco and Fortune
also retained a 6.166% overriding royalty interest of which 4.166% is
convertible to a 12-1/2% working interest after Southern receives payout from a
completed well. Zydeco and Fortune would also receive a payment out of
production of approximately $32,500. Southern is required to commence drilling a
well on the Project on or before March 31, 1996 and will earn an interest in the
Project to a depth of 100 feet below the deepest depth drilled if Southern
completes a commercially productive well. This means that Zydeco and Fortune
will retain the right to explore the Project at deeper depths. No assurance can
be given that Southern will drill the required well or that any drilling
conducted by Southern will be successful.
In 1996, the Company logged a well on the Aurora project. Zydeco did
not participate in the working interest in the well. The well reached total
depth on January 15, 1996. Well logs indicated that the well had penetrated
three hydrocarbon reservoirs. However, given the significant costs of completing
the well and installing a production platform, management elected not to
complete it. The total cost to the Company to acquire, drill, test and plug and
abandon the well was $855,000. Management is evaluating whether to drill another
well on the project in light of the hydrocarbon zones shown on the well logs.
Although not part of the Zydeco 3D Venture AMI, the principals of
Zydeco have offered to Fortune the opportunity to participate in the
recompletion of a well on the DABM prospect and the drilling of a second well
either through the same wellbore (referred to as a "sidetrack" well), or as a
new well. The DABM prospect is owned by Neomar Resources, an entity owned by Sam
Meyers and Steve Knecht, two of the principals of Zydeco. The parties have
reached an agreement in principal under which Fortune would pay 25% of the
recompletion costs (estimated to be $20,000) and of the drilling and completion
costs of the sidetrack well in exchange for an 18.75% working interest in the
prospect. The drilling costs of the sidetrack payable by Fortune are estimated
to be $300,000 and the cost of completion payable by Fortune are estimated to be
an additional $100,000. Recompletion work on the existing well was completed,
and the existing well initially produced at the rate of about 2.2 million Mcf of
gas per day. After a few months, the well became uneconomic and is no longer
producing. The transaction between Fortune and Neomar for the drilling of the
sidetrack well awaits the execution of formal agreements. If Fortune and Neomar
conclude this transaction, it is anticipated that Fortune would pay a $125,000
fee to Neomar for the right to participate in the prospect sometime during 1996.
10
<PAGE> 11
NEW MEXICO PROPERTIES
On June 24, 1994, the Company acquired non-operating working interests,
ranging from 21.5625% to 25% in 70,000 producing, development and exploratory
acres in Rio Arriba County, New Mexico. Of this amount, 60,000 acres are held
under three Mineral Development Agreements ("MDAs"), of 20,000 gross acres each,
from the Jicarilla Apache Indian Tribe (the "Tribe"). Under these MDAs, certain
development activities are required to maintain each of the acreage blocks.
The acreage in the San Juan Basin properties lies immediately north of
the West Puerto Chiquito Field. The Company believes its acreage may be an
extension of that field. Drilling and completion costs per well in the Mancos
Trend Formation usually range from $750,000 to $1,000,000 each.
Since June 1994, Fortune has participated in drilling seven wells and
shooting approximately 70 miles of new seismic data. Fortune's capital
expenditures for the six wells drilled in 1994, the seismic projects, lease
bonuses and other activities, including pipelines and facilities, was
approximately $1.1 million. The costs for drilling and completing one well and
the completion of two additional wells in 1995 was approximately $375,000.
The first well, a 4,500 foot Entrada formation exploratory test, was
drilled in September 1994 on the 10,000 acre Entrada Prospect but was not
completed and was abandoned in December 1994. Two 3,500 foot developmental wells
were drilled and cased on the Leavry Canyon MDA acreage block during November
and December 1994 and are each currently producing approximately 200 Mcf of gas
per day.
One 8,500 foot horizontal well was drilled on the Cedar Canyon MDA
acreage. This well was drilled, then re-drilled and then the operator elected to
attempt further re-drill operations. The Company decided not to participate in
these further re-drill operations.
Two wells were drilled on the Los Indios MDA acreage. These wells were
spudded in late December 1994. Casing was installed on both wells, and both have
been perforated. One well, the Los Indios 15-J was fracture stimulated in the
Mancus "C" zone in late November 1995 and as of March 15, 1996, is awaiting gas
lift installation. The Los Indios 11-J well was perforated in December 1995 and
is awaiting testing. The Company also participated in the drilling of the Cedar
Canyon 22-K well which has been completed, perforated and is currently being
tested.
A meeting of the operating committee for this development area, which
includes representatives of the Company, took place in November 1995 to consider
the development schedule for 1996. The committee decided to defer any additional
drilling activity in 1996 pending the results of completion activities on the
three wells described above. Under the MDAs, one well is required to be drilled
in 1996. The Company estimates that, if such drilling were to occur, its share
of the 1996 capital costs attributable to its interests would be approximately
$193,000. The Company is not obligated to participate in these operations and
would not be obligated to pay these expenses if it elected not to participate.
However, management currently contemplates that the Company would participate
and pay its share of the costs if the operations are undertaken.
Under mutual agreement of the non-operators, EnRe has been asked to
resign as operator of these properties. EnRe has agreed to do so subject to
approval of the Jicarilla Apache tribe. In the interim, for purposes of field
operations, AMPOLEX USA, Inc., the project's largest working interest owner, is
acting as contract operator. It is anticipated that AMPOLEX USA, Inc. will
become the official operator for the project at some point in the near future.
WEBB COUNTY, TEXAS
The Company has a 20% interest in a proved undeveloped infill location
within the Belle Pepper Field in Webb County, South Texas. In June 1994, the
Company participated in the drilling of a 10,000 foot exploratory test well to
the Lobo sand which was determined to be commercially unproductive. Fortune had
a 20% working interest in this well, and its dry hole costs were $115,000 in
1994. Additionally, the Company took a writedown of $200,000 in 1994 for its
acreage cost in this exploration project. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
11
<PAGE> 12
REFUGIO COUNTY, TEXAS
Since acquiring an interest in the LaRosa Field in February 1994, the
Company has participated in over two dozen natural gas and two oil recompletions
in new zones of shut-in wells of which 20 have been successful. The Company
plans to participate in a 3-D seismic program over the 989 productive acres and
the 2,700 undeveloped acres held by production and offsetting the proved
productive acreage. It is hoped that prospects will be defined by the 3-D
seismic program and that development drilling and exploratory drilling on the
undeveloped acreage could commence before the end of 1996.
AWP FIELD, MCMULLEN COUNTY, TEXAS
There are 11 proved developed locations remaining to be drilled in the
AWP field located in McMullen County, in South Texas on either 40 or 80 acre
spacing and the operator is currently in discussion with the landowners to
reduce their royalty from 35% to 25% on several of the remaining locations. The
Company's estimated share of the drilling and completion costs for each of these
wells is $43,000. In late February 1996 developmental drilling was resumed with
the commencement of drilling the Bracken Ranch #47 well location which was
successfully completed as a producer.
Exploration drilling activities may require substantial outlays of
capital and involve a great amount of risk. There can be no assurance at this
time that the Company will be able to raise the capital or find the joint
venture partners required to explore these prospects.
The following table sets forth information regarding development and
exploratory wells drilled by Fortune in the years ended December 31, 1993, 1994
and 1995:
WELL DRILLING ACTIVITY
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Gross Wells
Productive 3.00 5.00 1.00
Dry - 3.00 -
---- ---- --
Total 3.00 8.00 1.00
==== ==== ====
Net Wells
Productive 0.40 1.18 0.20
Dry - 0.47 -
---- ---- --
Total 0.40 1.65 0.20
==== ==== ====
</TABLE>
PRINCIPAL CUSTOMERS
For the year ended December 31, 1993, approximately 68% of the
Company's produced oil and gas was sold to Texaco Trading and Transportation,
Inc. and 14% to Enron. For the year ended December 31, 1994, 48% of the
Company's produced gas was sold to Michael Gas Marketing Co., Inc., 25% to
Tenneco and 15% to Enron. 72% of the Company's produced oil was sold to Texaco
Trading and Transportation and 8% to Enron. During 1995, 56% of the Company's
oil production was sold to Texaco Trading and Transportation and 10% to Laroco,
LLP. For the same period 29% of the Company's gas production was sold to Laroco
LLP, 26% to Michael Gas Marketing and 16% to AWP and 16% to PetroFina.
The Company believes that the loss of any of these customers should not
have any material adverse effect on the Company, since there are a large number
of companies which purchase crude oil and natural gas in the areas in which the
Company operates. The Company does not currently engage in any marketing
activities for its oil and gas, because it believes there is sufficient demand
among purchasers to acquire all of the Company's available production.
12
<PAGE> 13
COMPETITION
Fortune competes with numerous other companies and individuals in the
acquisition of oil and gas properties, the marketing of oil and gas and the
recruitment of experienced personnel. Fortune's competitors include major oil
companies, other small producers, investment groups and individuals, many of
which have financial resources and facilities substantially greater than those
of the Company. However, the major oil companies are selling many of their
smaller or marginal domestic properties. Many operating companies interested in
acquiring properties have greater capital resources than the Company. The
Company's acquisition approach is to concentrate on the properties of smaller
independents and it has had acquisition discussions with several of these
companies involving property acquisition for stock.
EMPLOYEES
At December 31, 1995, Fortune employed a total of nine persons six of
whom were in management and administration and three in its oil and gas
operations. As of March 15, 1996, following the sale of the California
properties, the Company employs six persons, five in management and
administration and one in oil and gas operations. In addition, the Company
utilizes the services of outside consultants in certain technical aspects of the
Company's business. Fortune utilizes these consultants to aid in the evaluation
of Company projects and to evaluate oil and gas assets for potential
acquisitions. On February 5, 1996, the Company relocated its corporate
headquarters to Houston, Texas and has adequate room for expansion at the new
location in the event the Company chooses to hire additional experienced
personnel to support its program of exploration and expansion.
GOVERNMENTAL REGULATION
Environmental laws and regulations are having an increasing impact on
Fortune's operations in nearly all the properties where it has production.
Drilling activities and the production of oil and gas are subject to regulations
under federal and state pollution control and environmental laws and
regulations. It is impossible to predict accurately the effect that additional
environmental requirements may have on future earnings and operations, but it
will continue to be necessary to incur costs in complying with these laws and
regulations. Fortune spent approximately $25,000, $14,000 and $10,000 in
environmental compliance costs in 1995, 1994 and 1993, respectively.
The Company is not currently involved in any judicial or administrative
proceedings which concern any environmental regulation or requirement and
believes that it is in substantial compliance with applicable environmental
regulations. The Company believes that it is reasonably likely that the trend in
environmental legislation and regulations will continue toward stricter
standards. The Company is unaware of future environmental standards that are
reasonably likely to be adopted that will have a material effect on the
Company's financial position or results of operations, but cannot rule out the
possibility.
The Company has never had a material environmental problem, but if a
property in which Fortune has an interest is found to be contaminated, the
Company could be required to participate in a "clean up" program. Such a clean
up, depending on its magnitude and the Company's ownership interest therein,
could require undetermined amounts of capital and exceed the Company's ability
to pay. The Company has obtained primary insurance against oil spills providing
$2,000,000 of coverage per occurrence with a $2,500 deductible and an umbrella
policy for an additional $4,000,000 per occurrence with a $10,000 deductible.
The operations of oil and gas properties covered by leases in which the
Company has or may acquire an interest will require compliance with spacing and
other conservation rules of various state commissions and of the United States
Geological Survey and the Bureau of Land Management with respect to federal oil
and gas acreage. Further, production may be limited under state regulations for
the prevention of waste. At the present time, the Company has no operations
which are adversely affected by well permitting, spacing regulations or
production limitations.
13
<PAGE> 14
ITEM 2. DESCRIPTION OF PROPERTY
LEASEHOLD ACREAGE
Fortune's holdings of developed and undeveloped leasehold acreage as of
December 31, 1995 were approximately as follows:
LEASEHOLD ACREAGE
<TABLE>
<CAPTION>
Developed Undeveloped
--------- -----------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Texas 5,544 1,120 3,960 1,468
New Mexico 1,800 405 68,200 16,106
California(1) 260 260 380 380
Oklahoma 80 5 - -
Louisiana 500 83 25,047 11,023
----- ----- ------ ------
Total 8,184 1,873 97,587 28,977
===== ===== ====== ======
</TABLE>
(1) See: "Recent Developments - Divestiture of California Properties"
TEXAS PROPERTIES
At December 31, 1995, Fortune owned an interest in 108 gross and 24.70
net oil wells located in Texas. During 1995, approximately 18,591 net barrels of
oil and 695,418 net Mcf of gas were produced from the Texas properties as
compared to approximately 19,348 net barrels of oil and 930,448 net mcf of gas
in 1994.
The Texas properties, which are primarily non-operated, comprised
approximately 51% of Fortune's net proven gas reserves and 24% of Fortune's net
proven oil reserves at December 31, 1995.
NEW MEXICO PROPERTIES
At December 31, 1995, Fortune owned an interest in 6 gross and 1.07 net
oil and gas wells located in New Mexico. During the twelve months ended December
31, 1995, approximately 8,377 net Bbls of oil and 34,167 Mcf of gas were
produced from the New Mexico properties compared to 5,246 net Bbls. of oil and
17,697 produced by the New Mexico properties in 1994 for the period following
their acquisition on June 1, 1994 to December 31, 1994. Properties located in
New Mexico, which are all non-operated, represented a negligible portion of
Fortune's net proven gas reserves and comprised 1% net proven oil reserves at
December 31, 1995.
LOUISIANA PROPERTIES
At December 31, 1995, Fortune owned an interest in 1 gross and .125 net
oil wells located in Louisiana. For the two months period ended December 31,
1995, approximately 7,853 net barrels of oil and 121,630 net Mcf of gas were
produced from the Louisiana properties.
The Louisiana properties, which are primarily non-operated, comprised
approximately 47% of Fortune's net proven gas reserves and 48% of Fortune's net
proven oil reserves at December 31, 1995.
CALIFORNIA PROPERTIES
At December 31, 1995, Fortune owned and operated 9 gross and 6.3 net
wells located in California. Production in California during 1995 totaled
approximately 57,160 net barrels of oil and 66,292 net Mcf of gas. Production
from California during 1994 totaled approximately 63,021 net barrels of oil and
68,626 net Mcf of gas. The decrease in California oil production in 1995 is due
primarily to the shut down of the Company's Hopper Canyon facility from February
1995 to late June 1995 due to damage to the access road caused by severe
flooding during heavy storms in January 1995.
14
<PAGE> 15
Properties located in California, which are all operated by the
Company, comprised approximately 26% of Fortune's net proven oil reserves and 1%
of Fortune's net proven gas reserves as of December 31, 1995.
In January 1996 the Company entered into a purchase and sale agreement
to sell its California properties. Effective December 31, 1995, the majority of
the properties, comprising Hopper Canyon, Holser Canyon, Oxnard Field and Shiels
Canyon in Ventura County and the Bacon Hills Lease in Kern County, were sold to
a private oil and gas producer group for a combined price of $840,000. The
Company agreed to sell the remaining California property to Seneca Resources
Corporation ("Seneca"), to be effective December 1, 1995. The Seneca transaction
is expected to close before March 31, 1996.
OKLAHOMA PROPERTIES
At December 31, 1995, Fortune owned non-operated interests in 2 gross
and .11 net wells located on 80 gross (5 net) acres in Oklahoma. These two wells
were shut in during 1994 and 1995. For the year ended December 31, 1993 net
production from Oklahoma properties was 1,087 barrels of oil and 6,660 Mcf of
gas. No oil or gas reserves were attributed to the Company's Oklahoma properties
at December 31, 1995.
TITLE TO PROPERTIES
Detailed title examinations were performed for many of the Company's
properties in December 1993 and January 1994 in conjunction with the Company's
credit facility with Bank One, Texas, and title opinions were issued. In
November 1995, title on the Company's South Timbalier Block 76 offshore
Louisiana acquisition was examined. The Company believes it holds valid title on
all its properties, free and clear of any liens or encumbrances except for
encumbrances described herein. Title opinions are obtained on newly acquired
properties as of the date of the closing. As is customary in the oil and gas
industry, the Company performs only a perfunctory title examination at the time
exploratory oil and gas properties are acquired. Prior to the commencement of
drilling operations, a thorough title examination is conducted and any
significant defects are remedied before proceeding with operations. All of the
Company's leasehold interests, except for Sespe, La Rosa and some of its smaller
properties, have been pledged to secure corporate indebtedness with Bank One,
Texas. Transfers of many of the Company's properties are subject to various
restrictions, including the requirement of obtaining the consent of the
landowner in many instances.
OFFICE FACILITIES
At December 31, 1995, the Company leased office space in Agoura Hills,
California. In February 1996, the Company relocated its headquarters to Houston,
Texas. The lease in Agoura Hills, California currently expires in 1997. On
February 13, 1996, the Company entered into an agreement with Animation Magazine
to sublease the Agoura Hills office space, under terms and conditions identical
to those contained in the Company's lease with its landlord, for the balance of
the term of Fortune's lease. It was also agreed that Fortune would assume the
balance of the 8 months remaining on Animation Magazine's lease on its present
location. This agreement is effective as of March 1, 1996. Rent for the 4,777
square feet which the Company occupied was $53,000 in 1995, $45,000 in 1994,
$43,000 in 1993. At its present location Fortune occupies approximately 5,400
square feet of office space under a lease agreement with a term of 5 years.
The first year's rent is expected to be $49,000 and for 1997 $84,000.
ITEM 3. LEGAL PROCEEDINGS
ENRE LITIGATION
On March 14, 1995, Fortune was served with a lawsuit filed in the
District Court of Bexar County, Texas by EnRe Corporation ("EnRe"), in which
EnRe, as operator of the Company's New Mexico properties, sought recovery of
approximately $438,000 allegedly owed by Fortune for the drilling of certain
wells on such properties. The lawsuit is the result of on-going disputes between
the parties regarding the manner in which EnRe has conducted operations on the
property and the proper interpretation of the operating agreement among the
interest owners on the property. Management of Fortune believes that EnRe has
operated the property in a negligent manner, causing loss to Fortune and the
other interest owners. In addition, management believes that the Company was
permitted under the terms of
15
<PAGE> 16
the operating agreement to elect not to participate in the drilling operations
for which EnRe now seeks payment. On March 24, 1995, Fortune answered EnRe's
lawsuit and filed a counterclaim against EnRe for an undeterminable amount for
damages suffered by Fortune for EnRe's actions. The Company subsequently amended
its counterclaim to allege negligence on the part of EnRe in carrying out
operations on the properties.
On March 30, 1995, a partial settlement was reached as to payment by
Fortune of undisputed well development costs in exchange for EnRe's co-operation
in complying with provisions of the operating agreement to report operating
information to Fortune on a timely basis. As of April 24, 1995, the Company had
paid all well development costs which it believed to be undisputed, totalling
$174,499.
In the opinion of management, Fortune had valid defenses to all claims
in dispute made by EnRe. On March 11, 1996, the Company was advised that its
proposal to EnRe to dismiss its litigation in exchange for the Company's
dismissal of its counterclaim was accepted by EnRe, subject to the filing of the
appropriate dismissals.
LEX LITIGATION
In initially entering into the LEX acquisition, Fortune was advised
that the stockholders of LEX included William D. Forster ("Forster"), BSR
Investments, a British Virgin Islands corporation ("BSR"), and Ensign Financial
Group Limited, a British Virgin Islands corporation ("Ensign"). At the time
Fortune issued its proxy statement for the special meeting of stockholders
called to vote on the LEX acquisition, Fortune was advised that the ownership of
the Fortune Common Stock and warrants to be issued in the acquisition was to be
allocated one-third each to Forster, BSR and Ensign. In preparing for the
closing of the acquisition, however, Fortune was advised that the only
stockholders of LEX were Forster and BSR and that they were the only persons or
entities entitled to vote on the merger of LEX with Fortune's subsidiary.
Fortune obtained a written representation from Forster and BSR to this effect
and received a legal opinion from LEX's counsel confirming these representations
and confirming that all corporate action on the part of LEX necessary to
authorize the merger had occurred.
On May 11, 1995, Baytree Associates, Inc. ("Baytree") and Ensign
commenced litigation in the Supreme Court of New York against Forster, BSR,
Charif Souki (the son of Samyr Souki, president of BSR), LEX and Fortune seeking
to enjoin the closing of the LEX acquisition by Fortune on the grounds that
Ensign was entitled to a one-third interest in the proceeds of the transaction,
namely the Common Stock and warrants to be issued by Fortune. Baytree also
sought $1,000,000 in damages from Fortune for allegedly providing investment
banking services to Fortune in connection with the Regulation S offering made by
the Company in February 1995 and the public offering made in June 1995.
At a hearing on May 12, 1995, the New York court dissolved the
temporary restraining order issued on May 11 which had prohibited the
acquisition and stated affirmatively that Fortune could proceed with the
transaction. Since it was clear from the Ensign lawsuit that Forster and BSR
owned at least two-thirds of the stock of LEX and could bind that corporation to
proceed with the transaction and since most of the Common Stock and warrants
issued by Fortune would remain in escrow following the closing, Fortune
proceeded with the acquisition, which closed on its scheduled closing date of
May 12, 1995. In issuing its Common Stock and warrants to complete the
transaction, Fortune was required to accept the representations made by Forster
and BSR that they were the only stockholders of LEX, but Fortune did not then,
has not since, and will not in the future take any position on who constituted
the stockholders of LEX or who was entitled to the shares and warrants issued by
Fortune in the acquisition. Further, Fortune advised Forster and BSR that the
issues raised by Ensign would need to be resolved by them and obtained from
Forster and BSR an agreement to indemnify Fortune against any claims from any
third party asserting an ownership interest in LEX.
At a subsequent hearing on May 22, 1995, the New York court granted the
Company's motion for summary judgment and dismissed the $1,000,000 claim against
Fortune and dismissed Fortune and LEX from the suit with prejudice based on an
agreement of all parties. Forster, BSR and Souki are now the only remaining
defendants in the action. At the hearing, the parties agreed that the escrow
agent would retain and hold in escrow not less than 400,000 shares and 400,000
warrants, representing one-third of the total shares of Common Stock and
warrants issued in the transaction, pending further order of the court. Fortune
agreed to participate in the discovery process in the action as if it were a
party to the action and, as a matter of convenience to the court, agreed that
the New York court would retain jurisdiction over Fortune and LEX for purposes
of enforcing the provisions of the stipulation.
16
<PAGE> 17
PART II
ITEM 4. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to September 28, 1993, the Company's Common Stock was traded in
the over-the-counter market and quoted on the National Association of Securities
Dealers Automated Quotation System Small Cap Market. On September 28, 1993,
trading in the Common Stock commenced on the American Stock Exchange ("AMEX").
Trading in the Warrants on the AMEX began on April 18, 1994. The following table
sets forth the high and the low quarterly closing prices of the Common Stock and
Warrants on the AMEX for the periods indicated and the high and low bid prices
as quoted on the NASDAQ system (which reflect inter-dealer quotations that do
not necessarily represent actual transactions and are exclusive of retail mark
up, mark down and commissions). (All share amounts and per share prices have
been adjusted to reflect a one-for-four reverse stock split effective June 16,
1993.)
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1996
First Quarter (through
March 15, 1996) $5 $2 $3-3/16 $1-3/8
1995
Fourth Quarter 4-15/16 3-3/8 3-7/16 1-7/8
Third Quarter 3-15/16 2-5/8 2-1/2 1-1/2
Second Quarter 3-5/16 1-5/6 1 1/4
First Quarter 2-1/2 1-3/4 7/8 1/2
1994
Fourth Quarter 3-9/16 1-7/8 1-11/16 7/16
Third Quarter 3-1/4 2 3/4 5/16
Second Quarter 2-3/8 1-3/8 5/8 3/16
First Quarter 2-11/16 2-1/8
1993
Fourth Quarter 3-3/4 2-1/8
Third Quarter (commencing
September 28, 1993) - AMEX 4 3-3/4
Third Quarter (through
September 27, 1993) - NASDAQ 5-7/8 3-3/4
Second Quarter 5-3/4 4
First Quarter 5-1/2 5
</TABLE>
The high and low closing prices of the Common Stock during the fourth
quarter of 1995 were $4.94 and $3.38, respectively. At March 15, 1996, the
closing price of the Common Stock was $2.31. At December 31, 1995, there were
11,139,709 shares of the Company's Common Stock outstanding held of record by
approximately 4,000 stockholders.
17
<PAGE> 18
ITEM 5. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Fortune's primary focus is domestic exploration for, and development
of, oil and natural gas reserves. The Company expects in the future to make use
of advanced 3D and 2D seismic technology, beginning with the Zydeco 3D Venture.
Prior to June 1994, Fortune had been an oil and gas acquisition and development
company seeking to acquire proved reserves and development opportunities on
proven properties. Fortune encountered losses during the past three years, some
of which were generated by conditions such as commodity price induced
impairments and key non-operated wells which had production curtailed to meet
government maximum field allowable levels. The Company initiated the change from
an acquisition based to an advanced technology exploration based plan of
operation to attempt to reduce potential finding costs of oil and gas reserves
to an amount which is less than the cost per BOE to acquire them. There can be
no assurance that such a strategy will be effective.
YEARS ENDED DECEMBER 31, 1994 AND 1995
During the year ended December 31, 1995 Fortune had a net loss of
$6,214,000, compared to a net loss of $2,943,000 for the year ended December 31,
1994. The loss for the period ended December 31, 1995 was primarily due to a
$2,530,000 impairment charge attributable to the Company's early adoption of
Financial Accounting Standards Board Statement 121 (Accounting for the
Impairment of Long-Lived Assets) and $1,472,000 of exploration expenses,
including geological and geophysical, dry hole and abandoned leasehold cost.
In spite of a slight increase in production in 1995, net revenues from
sales of oil and gas decreased $380,000 (11%) in the year ended December 31,
1995, compared to the same 1994 period. The decrease resulted primarily from
lower natural gas prices combined with shutting in the Company's Hopper Canyon
oil field for 5-1/2 months due to a storm damaged access road. Natural gas
prices averaged $1.77 for the year ended December 31, 1995, compared to $2.09
for 1994. Oil prices averaged $14.66 per barrel for the year ended December 31,
1995 as compared to $14.14 per barrel for the year ended December 31, 1994.
Other income consisted primarily of interest income, operator's
overhead fee revenues being charged on joint owned wells and a prospect fee of
$50,000 paid to the Company when if farmed out its 50% interest in its Polaris
Prospect offshore Louisiana.
Direct production expenses increased during 1995 by $424,000 (39%)
compared to 1994. The increase is due primarily to the additional operating
expense from the acquired production in Rio Arriba, New Mexico, Refugio County,
Texas and offshore Louisiana; additional wells brought on production in New
Mexico and Refugio County, Texas; and additional expenses incurred in Hopper
Canyon Field, for repairs due to storm damage.
During 1995, Fortune's general and administrative expenses increased by
$192,000 (19%), over 1994. The increase was due primarily to increased insurance
costs, legal fees, public relations expenses, shareholder expense and expense to
relocate the Company's headquarters. Interest expense increased by $410,000
(89%) for the year ended December 31, 1995, due to increased interest bearing
debt from the Refugio County, Texas and Rio Arriba County, New Mexico
acquisitions. The Company's provision for depletion, depreciation and
amortization decreased by $261,000 (13%) in the year ended December 31, 1995,
compared to the same 1994 period due to the effect of the prior year impairment
write-off.
The Company incurred $418,000 in geological and geophysical costs in
1995 vs. none in 1994. Dry hole costs increased $803,000 over 1994 due primarily
to incurring $799,000 in dry hole cost on the Aurora well offshore Louisiana.
The Company follows the intrinsic value method for stock options
granted to employees. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 123, "Accounting for
Stock- Based Compensation." The Company does not intend to adopt the fair value
method for stock-based compensation plans, which is an optional provision of
Accounting Standard 123.
18
<PAGE> 19
YEARS ENDED DECEMBER 31, 1994 AND 1993
During the year ended December 31, 1994 Fortune had a net loss of and
$2,943,000, compared to a net loss of $3,654,000 for the year ended December 31,
1993. The loss for the period ended December 31, 1994 was primarily due to high
depletion expense, lower natural gas prices received by the Company during the
period and higher lease operating costs attributed to the properties acquired
earlier this year. The loss for the year ended December 31, 1994 also includes a
$1,031,000 impairment against oil and gas reserves, a one time charge of
$225,000 for a severance package, to be paid over a two year period, to Daniel
E. Pasquini, the Company's former president who resigned on June 23, 1994, and a
$315,000 charge for the Company's interest in a Webb County, Texas, exploration
project. The $315,000 Webb County loss consisted of $115,000 in dry hole costs
and a $200,000 non-cash impairment which was included in abandoned leasehold
expense.
Net revenues from sales of oil and gas increased $577,000 (21%) in the
year ended December 31, 1994, compared to the same 1993 period. The increase
resulted primarily from production from wells acquired and recompletion
activities at the La Rosa Field. Oil prices the Company received averaged $14.14
per barrel for the year ended December 31, 1994 as compared to $14.33 per barrel
for the year ended December 31, 1993. Gas prices averaged $2.09 per Mcf for the
period ended December 31, 1994 as compared to $2.28 for the year ended December
31, 1993. Also, in the year ended December 31, 1994 other income consisted
primarily of operator overhead fee revenues being charged on joint owned wells.
Direct production expenses increased by $144,000 (15%) in the year
ended December 31, 1994, compared to 1993. The increase was primarily due to the
increase in direct operating expense from the acquired production and additional
wells put on production as a result of recompletions and facility installations
in Refugio County, Texas and Rio Arriba County, New Mexico net of expense
reductions in California operations.
During 1994, Fortune's general and administrative expenses increased by
$229,000 (29%) over 1993 general and administrative expenses. The increase was
due primarily to increased insurance costs, legal fees, public relations
expenses, shareholder expense and expense attributed to a failed merger attempt
during the year. Interest expense increased by $149,000 (48%) for the year ended
December 31, 1994, due to increased interest bearing debt from the Refugio
County, Texas and Rio Arriba County, New Mexico acquisitions. The Company's
provision for depletion, depreciation and amortization increased by $351,000
(20%) in the year ended December 31, 1994, compared to the same 1993 period
because of depletion related to the additional acquired oil and gas properties
and lower gas prices at year end. During 1994, the Company also had impairments
and abandoned leasehold costs totaling $1,280,000 on the Company's oil and gas
properties.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1995, the Company closed an underwriting of 4,100,000
shares of Common Stock at a price of $2.00 per share. On July 5, 1995, the
underwriters exercised their overallotment option for an additional 500,000
shares. The Company netted approximately $8.1 million after deduction of
underwriting discounts and costs of the offering. On December 11, 1995, the
Company closed a private placement of 1,321,117 shares to acquire a producing
property and raise additional capital. From this sale, the Company netted
approximately $3.3 million after payment of expenses of the offering. See
"Description of Business - Acquisition Activity -- South Timbalier Block 76."
Fortune's operating cash flow decreased during 1995 to $(1,112,000) or
(326%) as compared to 1994. This decrease in cash flow was primarily the result
of the effect of lower natural gas prices, the shutting-in of the Company's
Hopper Canyon Field, higher operating costs and the occurrence of geological and
geophysical expenses in 1995.
Fortune's internal liquidity and capital resources in the near term
will consist of working capital derived from its oil and gas operations and the
proceeds from the sale of its California properties. These items comprise all of
Fortune's liquid assets. Fortune's working capital increased during 1995 due to
the cash infusions from the 1995 stock offerings and the anticipated 1996 sales
of the California properties. The proceeds from the sale of the California
properties were used to pay down the Bank One credit facility after year end.
The Company was in breach of its cash flow covenant at December 31, 1995. Bank
One has waived such breach at December 31, 1995, however, the Company has
reclassified the entire Bank One debt to short term for accounting purposes as
it does not believe it will obtain sufficient cash flow, over the next several
months, to avoid a future breach of the covenant.
19
<PAGE> 20
On January 14, 1994, the Company entered into a $10 million secured
master revolving credit facility with Bank One, Texas, N.A. The facility
expires, if not further renewed or extended, on April 1, 1997. The amount the
Company may borrow under the Credit Facility is determined by the borrowing base
as calculated by the Bank semi-annually on the basis of the Company's oil and
gas reserves. The principal balance of the Credit Facility at March 14, 1996 is
$1,900,000. At December 31, 1995, the borrowing base under the Credit Facility
was $3,200,000. The borrowing base continues to decline at the rate of $75,000
per month. Due to the breach in the cash flow covenant, the Company is not able
to fully utilize this borrowing base capacity at this time. The Credit Facility
is secured by a mortgage on substantially all of the Company's existing proved
oil and gas properties with the exception of the newly acquired South Timbalier
Block 76. Under the terms of the facility, the Company is subject to certain
covenants, including restrictions or requirements with respect to working
capital, tangible net worth, net cash flow, additional debt, asset sales and
certain mergers.
On April 24, 1995, in connection with the Bank One agreement to waive
certain covenant breaches, Bank One required the Company to enter into a lockbox
arrangement pursuant to which its revenues are paid to an account with Bank One.
Bank One instituted the lock box arrangement to monitor the Company's revenues
until such time the Company could demonstrate it could consistently meet the
terms of the principal covenants. There is no limitation placed on any funds
subject to the lock box arrangement. In addition, the Company agreed to consider
selling its California properties, although this was not a requirement of the
bank.
Total 1995 capital expenditures, including expenditures for property
acquisition and drilling and completion costs, were $4,415,000 as compared to
$4,065,000 for 1994. Capital expenditures for the year ended December 31, 1994
were $4,065,000, as compared to $6,750,000 for the same 1993 period.
Fortune's capital expenditures for 1996 are currently estimated to be
approximately $2,500,000 for its exploration activities. The Company intends to
provide for these expenditures with its available cash and either the exercise
of outstanding warrants, as described herein, the recovery of prospect costs
advanced by the Company, or a private placement of equity. Should such funds not
be available to the Company as required for timely drilling, the Company can
reduce its working interest participation in the wells, farm-out additional
interest or put its interest back to Zydeco for an overriding royalty and after
payout working interest. Should the Company's working interest in exploration
projects be reduced, then the Company would not derive as great a benefit as it
may have otherwise enjoyed in the event of an exploration success.
At December 31, 1995, the Company was receiving an average of $2.32 per
Mcf for its gas production and $16.10 per Bbl. for its oil production. At
December 31, 1994, the Company was receiving approximately $14.62 per barrel as
an average price for its produced oil and $1.39 per Mcf as an average price for
its produced gas.
In order to provide capital for development activities, in December
1994, the Company borrowed an aggregate of $750,000 from certain principal
stockholders and members of management. For additional information regarding the
terms of these loans, see "Certain Relationships and Related Transactions."
In 1994, cash flows provided by operating activities were $491,000,used
in investing activities were $4,287,000 and provided by financing activities
were $4,085,000. Net cash provided by operating activities decreased by $489,000
from 1993 and reflects the result of higher revenues from oil and gas production
activities, offset by cash used to reduce liabilities from 1993 balances. Net
cash used in investing activities increased by $2,171,000 from 1993 due to
decreased expenditures for property and equipment. Net cash provided by
financing activities decreased by $1,356,000 from 1993 as a net result of the
proceeds provided by the Company's Credit Facility, offset by the retirement of
the Klein and Halliburton notes in comparison to 1993's Common Equity offering
proceeds.
In 1993, cash flows provided by operating activities were $980,000,
used in investing activities were $6,458,000 and provided by financing
activities were $5,441,000. Net cash provided by operating activities increased
by $783,000 from 1992 and reflects significantly higher revenues and year-end
receivables and inventories from oil and gas production activities, offset by
cash used to pay down current portions of long-term debt. Net cash used in
investing activities increased by $6,222,000 from 1992 due to increased
expenditures for property and equipment. Net cash provided by financing
activities increased by $5,413,000 from 1992 as a net result of the proceeds
provided by the Company's public equity offering of Units, offset by the
retirement of the Hinkle and Halliburton Notes, payments on debt incurred in the
Webb County properties' acquisition and the Company's costs of the public equity
offering.
20
<PAGE> 21
Fortune has obtained updated oil and gas reserve reports from
Huddleston & Co. Inc., of Houston, Texas, its independent engineers, dated March
8, 1996. These reports indicated a net present value discounted at ten percent
of the Company's proved reserves equal to $8.9 million at December 31, 1995,
compared to a $8.1 million discounted value at December 31, 1994. Of that total
value, the proved developed producing wells had a discounted value of $6.7
million at December 31, 1995 compared to $5.7 million at December 31, 1994.
Total net proved recoverable reserves at December 31, 1995 decreased to 347,000
barrels of oil and 5.9 billion cubic feet of natural gas from 1,647,000 barrels
of oil and 5.9 billion cubic feet of natural gas at December 31, 1994. The
decrease in proved oil reserves was primarily attributable to reclassifying to
oil and gas properties held for sale, the Company's California properties which
were sold in February 1996.
The Company has filed a registration statement with the Securities and
Exchange Commission in connection with a possible exchange offer to be made to
holders of the Company's outstanding Debentures. The Company does not intend to
proceed with the exchange offer unless the price of the Common Stock on the AMEX
exceeds $4.00 per share. The closing price of the Common Stock on the AMEX on
March 15, 1996, was $2.31 per share. If such exchange offer is made, the Company
anticipates that the minimum exchange ratio would be one share of Common Stock
for each $4.00 principal amount of indebtedness, at least 80% principal amount
of the Debentures would need to be exchanged in order for the exchange offer to
be completed. The purpose of the exchange offer would be to relieve the Company
of approximately $1,700,000 of long term debt and approximately $180,000 of
annual interest expense. No assurance can be given that such exchange offer will
be made by the Company or, if made, that it will result in the exchange of any
of the Debentures into shares of Common Stock.
CAPITAL EXPENDITURES
The total capital expenditures of the Company for the year ended
December 31, 1995, excluding properties purchased, and for the years ended
December 31, 1994, and 1993 were $3,170,000, $1,283,000 and $346,000,
respectively. The increase in capital expenditures for 1995 was principally
attributable to capital expended to acquire, explore and develop the Company's
acquired interests offshore Louisiana, New Mexico and Refugio County, Texas.
ITEM 6. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted beginning at page 26.
ITEM 7. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
21
<PAGE> 22
PART III
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Director and/or
Executive Officer Age Title
----------------- --- -----
<S> <C> <C>
Charles A. Champion(3) 64 Chairman of the Board (until February 8, 1996)
Tyrone J. Fairbanks(1) 39 President, Chief Executive Officer, and
and Director
J. Michael Urban 42 Vice President, Chief Financial Officer
Dean W. Drulias (1)(2) 49 Director and Secretary
Graham S. Folsom (1)(3) 39 Director
William T. Walker, Jr.(1)(2) 64 Director
Barry Feiner(1)(2) 62 Director
Gary Gelman(3) 30 Director
Charif Souki(4) 44 Director
William D. Forster(4) 49 Director
John L. Collins 51 Vice President of Investor Relations
</TABLE>
- ------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Appointed by the Board of Directors on July 27, 1995, to fill newly
created vacancies on the Board of Directors. Messrs Souki and Forster
have announced their intention to resign from the Board of Directors to
pursue other business opportunities. Such resignations are expected to
become effective prior to March 31, 1996. See "Certain Relationships
and Related Transactions."
On February 8, 1996, Mr. Charles A. Champion resigned as Chairman and
Director of Fortune Petroleum citing the relocation of the Company's
headquarters and the recent emphasis on exploration in Texas, Louisiana and the
Gulf of Mexico. While Mr. Champion has over 40 years experience in the oil and
gas industry, his area of expertise is largely California oil and gas
production. Mr. Charles A. Champion joined Fortune's Board of Directors in March
1994 and was elected Chairman in July 1994.
Mr. Tyrone J. Fairbanks has served as a Director of Fortune since
January 1991. Mr. Fairbanks also serves as President, Chief Executive Officer
and Chief Financial Officer of the Company. Prior to joining Fortune, Mr.
Fairbanks served as President, Chief Executive Officer and Director of Fairbanks
& Haas, Inc. from January 1990 to January 1991. Fairbanks and Haas, Inc. was an
oil and gas exploration, production, acquisition and operations company located
in Ventura, California. Mr. Fairbanks co-founded Fairbanks & Haas, Inc. and
served in the capacity of Director and Executive Vice-President from February
1987 to January 1990. See "Business and Properties - Acquisition Activity -
Fairbanks & Haas, Inc." Prior to Fairbanks & Haas, Inc., Mr. Fairbanks served in
positions of increasing responsibility in the area of accounting, finance,
administration and operations within various segments of the oil and gas
industry. Mr. Fairbanks attended California State University at Northridge and
continued his education with courses in finance and accounting at the University
of California at Los Angeles extension and the University of Pennsylvania -
Wharton Business School extension.
Mr. J. Michael Urban was hired effective March 11, 1996, as the
Company's Vice President and Chief Financial Officer. Mr. Urban formerly served
as Vice-President, Finance with Norcen Explorer, Inc., (Norcen) a Texas based
oil and gas company with operations primarily in the offshore Gulf of Mexico.
Norcen is a wholly owned subsidiary of Norcen Energy Resources Limited, a
Canadian public company. Mr. Urban had been with Norcen since March 1986. Prior
to joining Norcen, Mr. Urban was with Arthur Andersen & Co. for six years and a
private Gulf Coast oil and gas company for three years. Mr. Urban received his
BBA in Accounting from the University of Texas in 1976 and has been a Certified
Public Accountant in the State of Texas since 1978.
22
<PAGE> 23
Mr. Dean W. Drulias is a stockholder of and a practicing attorney at
the law firm of Burris, Drulias & Gartenberg, a Professional Corporation, which
has served as counsel to the Company since its incorporation in May 1987. Mr.
Drulias has served as a director since 1991 and as Secretary since July 1994.
During 1993, 1994 and 1995, his firm billed the Company a total of $117,357,
$109,050 and $182,643, respectively, for legal fees and costs. He has practiced
law in the Los Angeles area since 1977 after graduating from Loyola Law School
and specializes in areas of energy, environmental and real property law. Mr.
Drulias is Vice-Chairman of the Company's Executive Committee. Mr. Drulias
received his B.A. degree from the University of California at Berkeley in 1971.
Mr. Graham S. Folsom has served as the Chief Financial Officer of Klein
Ventures, Inc. since April 1987. Klein Ventures, Inc. is a diversified
investment company. Mr. Folsom has been active in the oil investments of such
company and its affiliates since 1987. Mr. Folsom has been licensed as a
Certified Public Accountant in the State of California since 1982 and is
responsible for all of the accounting and financial affairs of Klein Ventures
and its affiliates. Mr. Folsom is chairman of the Company's Audit Committee. Mr.
Folsom is a graduate of University of the Pacific with a B.S. degree in business
administration.
Mr. William T. Walker, Jr. joined Fortune's Board after the successful
completion of Fortune's $7.425 million secondary equity offering in October
1993. Mr. Walker founded Walker Associates, a corporate finance consulting firm
for investment banking, in 1985 and has participated in or been instrumental in
completing over $250,000,000 in public and private offerings since its
inception. Prior to forming Walker Associates, Mr. Walker served as Executive
Vice President, Manager of Investment Banking, Member of the Board and Executive
Committee and Chairman of the Underwriting Committee for Bateman Eichler Hill
Richards, a New York Stock Exchange Member firm from 1969 to 1985 when Bateman
Eichler Hill Richards was purchased by Kemper Group. Prior to joining Bateman
Eichler Hill Richards, Mr. Walker served in various executive capacities and was
a partner with the investment banking firm of Glore Forgan, William R. Staats &
Co. in New York. Mr. Walker attended Stanford University. He also serves on the
boards of directors of Go Video, Inc. (AMEX) and Ameriquest, Inc. (NYSE).
Mr. Charif Souki was appointed to the Board of Directors on July 27,
1995, to fill a vacancy created by the expansion of the board from seven to nine
members. Mr. Souki is the son of Samyr Souki, the President of BSR Investments,
Ltd. which is a substantial owner of the Common Stock. Mr. Souki disclaims
beneficial ownership of the securities held by BSR Investments, Ltd. Mr. Souki
was retired during 1990, 1991 and 1992 and a private investor and restaurant
owner during 1993, 1994 and 1995. On March 15, 1996, Mr. Souki announced his
intention to resign from the Board of Directors in the immediate future. The
Company anticipates that such resignation will become effective prior to March
31, 1996.
Mr. William D. Forster was also appointed to the Board of Directors on
July 27, 1995, to fill a vacancy created by the expansion of the board. Mr.
Forster is the chairman of W. Forster & Co., a New York-based private investment
banking firm. Prior to forming that company, Mr. Forster was a managing director
of Lehman Bros. for approximately 11 years. On March 15, 1996, Mr. Forster
announced his intention to resign from the Board of Directors in the immediate
future. The Company anticipates that such resignation will become effective
prior to March 31, 1996.
Mr. Barry Feiner was elected to the Company's Board of Directors on
January 20, 1995. The Company agreed to elect him pursuant to an arrangement
with Mr. Jack Farber, now deceased, formerly a principal stockholder of the
Company. See "Certain Relationships and Related Transactions" and "Principal
Stockholders." Mr. Feiner graduated from Columbia Law School and is a member of
the Bar of the State of New York. He has practiced law in the State of New York
since 1965. His practice concentrates on the areas of corporate and securities
law. Prior to beginning private practice, Mr. Feiner served on the staff of the
Securities and Exchange Commission. Mr. Feiner holds a B.A. degree from Brandeis
University. Mr. Feiner is Chairman of the Compensation Committee.
Mr. Gary Gelman was elected to the Company's Board of Directors on
January 20, 1995. The Company agreed to elect him pursuant to an arrangement
with Mr. Jack Farber, now deceased, formerly a principal stockholder of the
Company. See "Certain Relationships and Related Transactions" and "Principal
Stockholders." Mr. Gelman graduated from San Diego State University in 1989 and
has served as president of GAR-COR Holding Corporation, a real estate management
and brokerage firm, since that time. Mr. Gelman also serves as a loan consultant
with National Bank of New York City and is a principal partner of Hands-on
Management, a property management and brokerage company managing approximately
400 apartments in 15 buildings. Mr. Gelman is the grandson of Mr. Jack Farber.
23
<PAGE> 24
Mr. John L. Collins was hired by the Company as Vice President of
Investor Relations effective May 30, 1995. Mr. Collins will serve at the
pleasure of the Board of Directors. He formerly served as Vice President of
Investor Relations with Texas Meridian Resources Corporation, a Texas based oil
and gas company, a position he held from January 1991 until his resignation to
join Fortune in May 1995. Mr. Collins became a registered representative with
Merrill Lynch in 1970 and spent 20 years in the securities industry, serving as
Vice President-Investments with A.G. Edwards & Company from 1980 to 1989. During
1990, he held a sales position with Frontier Directory.
DIRECTOR COMPENSATION
As compensation to outside directors, the Company pays directors' fees
equal to $2,500 per quarter, one half in shares of Fortune common stock valued
at $1,250 based on the value of the stock on the last day of each quarter and
$1,250 in cash. Inside directors do not receive any compensation for serving as
directors.
COMMITTEES OF THE BOARD
During the year ended December 31, 1995, the Board of Directors met 19
times. The audit committee met one time and the compensation committee met three
times. Directors Souki, Forster, Walker an Folsom each missed one Board meeting.
Mr. Feiner missed two Board meetings. Mr. Gelman and Mr. Champion missed six
Board meetings. Mr. Fairbanks and Mr. Drulias attended all Board meetings. Each
member of a Board committee attended all committee meetings.
The audit committee consists of three outside directors. Currently,
Graham Folsom is the chairman of the committee. It also meets separately with
representatives of the Company's independent auditors and with representatives
of senior management. The committee reviews the scope of audit coverage, the
fees charged by the independent auditors, matters relating to internal control
systems and the expenses of senior executives.
The compensation committee consists of three outside directors. Barry
Feiner is the chairman of the Committee. The compensation committee met once
during 1994. The committee proposes and administers the Company's stock option
plans, long-term incentive plans and executive incentive plans. In this
capacity, the committee recommends all option grants or awards to Company
officers and executives. The committee also recommends the establishment of
policies dealing with various compensation, pension and profit sharing plans,
although at this time no such plans have been created.
On December 14, 1995, Fortune established an Executive Committee
consisting of five directors to review significant matters affecting the
Company. The Committee has no authority to approve any transaction involving the
expenditure of funds in excess of the spending authority granted to the Chief
Executive Officer. It is anticipated that the Executive Committee will meet at
least monthly but more often as necessary.
DELINQUENT REPORTS UNDER SECTION 16(A)
During 1995, two of the Company's directors, Messrs Souki and Forster,
were delinquent in filing reports under Section 16(a) of the Securities Exchange
Act of 1934, as amended. To the Company's knowledge, no filings were made by
either person from the date of their appointment as directors(July 27, 1995)
through December 31, 1995. Both of these individuals have announced their
intention to resign from the Board of Directors effective March 1996.
ITEM 9. EXECUTIVE COMPENSATION
The following table lists the total compensation paid by the Company to
persons who served in the capacity of chief executive officer during the periods
indicated and to the only other executive officer who received annual
compensation in excess of $100,000:
24
<PAGE> 25
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
NAME AND PRIN- SECURITIES UNDERLYING
CIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS
- -------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Charles A. Champion(1) 1995
Chairman 1994 $ 36,000 - 50,975
Tyrone J. Fairbanks(2) 1995 $125,000 $25,000 105,599
President and CEO 1994 $102,500 $15,000 78,900
</TABLE>
- ---------------
(1) Mr. Champion was elected Chief Executive Officer on June 23, 1994,
concurrently with the resignation of Daniel E. Pasquini as president.
Mr. Champion did not previously serve as an executive officer of
Fortune. On January 5, 1995, Mr. Champion resigned as Chief Executive
Officer and Mr. Fairbanks was elected by the Board to succeed him in
that position. Mr. Champion remained as Chairman of the Board until his
resignation as Chairman and Director on February 8, 1996.
(2) The only years in which Mr. Fairbanks received salary and bonus
exceeding $100,000 was 1995 and 1994. Mr. Fairbanks was elected
President of Fortune on June 23, 1994, and became Chief Executive
Officer on January 5, 1995. Prior to his election as President, he
served as a Vice President and Chief Financial Officer.
On May 30, 1995 the Company hired Mr. John L. Collins as Vice President
of Investor Relations with a salary of $96,000 per year. Fortune issued to Mr.
Collins 25,000 stock purchase warrants exercisable at $3.25 (the market price of
the Common Stock on May 30, 1995, the date of issue) and expiring May 30, 2000.
On March 11, 1996 the Company hired Mr. J. Michael Urban as Vice
President and Chief Financial Officer with a salary of $120,000 a year. Fortune
issued Mr. Urban 35,000 stock purchase warrants exercisable at $2.5625 (the
market price of the Common Stock on March 11, 1996, the date of issue) and
expiring on March 11, 2001.
The following table lists the outstanding options held by the Company's
Chief Executive Officer under Company's Stock Option Plans:
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options in-the-Money Options
at FY-End (1) at FY-End (1)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized ($) Unexercisable Unexercisable
- ---- ----------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Tyrone J. Fairbanks - - 216,999/0 $461,122/$0
</TABLE>
- ---------
(1) Based on the closing price of the Common Stock on December 29, 1995. Based
upon the Company's closing price at March 15, 1996, none of the options are
"In-the-money".
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Tyrone J.
Fairbanks, its President and Chief Executive Officer. The agreement provides
that if employment is terminated for any reason other than for cause, death or
disability within two years following a change in control (which for purposes of
this Agreement means a change in the majority of the Board of Directors
following certain special events) Mr. Fairbanks is entitled to receive a single
payment equal to two year's compensation and all shares of Common Stock subject
to stock options then held by him without payment of the exercise price
therefor. Mr. Fairbanks' agreement also provides for two (2) years of consulting
services upon the completion of the primary term of his contract at forty
percent (40%) of the last compensation thereunder. Mr. Fairbanks' current
employment agreement provides for an annual salary of $150,000. The term of Mr.
Fairbanks' employment contract expires December 31, 1997.
25
<PAGE> 26
STOCK OPTIONS
Fortune has four Stock Option Plans. The plans cover all officers and
employees of the Company. Three of the plans also provide for options for
directors of the Company. Awards are made by the Board of Directors upon
recommendations of its Compensation Committee. There is no performance formula
or measure. Options granted under the 1987 plan must be exercised within ten
years of the date of grant or they are forfeited. Options granted under the 1988
plan, the 1991 plan and a new plan adopted in 1993 must be exercised within five
years of the date of grant or they are forfeited. No future options will be
granted under existing option plans at less than 85% of the fair market value of
the Common Stock. In addition, for a period of one year following the date of
this report, the Company will not grant any options or warrants, other than
options or warrants issued or granted in bona fide financing transactions, which
would result in the aggregate number of options and warrants exceeding 10% of
the then outstanding Common Stock.
All options available under the 1987, 1988 and 1991 plans have been
granted, and no shares remain under any of these plans on which options may be
granted. Options under the 1993 plan available for grant in 1993, 1994 and 1995
have been granted; additional options may be granted under the 1993 plan in 1996
and 1997. Options have been granted as follows: (1) under the 1987 plan, options
for 12,500 shares at a price of $2.60 per share; (2) under the 1988 plan,
options for 27,500 shares at $2.60 per share; under the 1991 plan, options for
32,500 shares at $6.00 per share; and (4) under the 1993 plan, options for
75,000 shares at $5.00 per share granted in 1993, options for 263,000 shares at
$5.48 per share granted in 1994 and options for 264,000 shares at $6.03 per
share granted in 1995. The prices of the options granted in 1991, 1993, 1994 and
1995 were reduced to $2.75 on January 12, 1994.
The following table shows the grants of stock options to each of the
executives named in the Summary Compensation Table during 1995. No options were
exercised by any of these individuals during 1995.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted Fiscal Year Price ($/Sh) Date
---- ------------ ----------- ---------------- ----------
<S> <C> <C> <C> <C>
Charles A. 26,400 10.0% $2.75 05/08/1996
Champion
Tyrone J. 105,999 40.0% $2.75 01/12/2000
Fairbanks
</TABLE>
In the event of a change in control of the Company, the shares of the
Company's common stock subject to options granted to all option holders under
the Company's stock option plans will be issued to them without further action
on their part or the payment of the exercise price for such shares.
LIMITED LIABILITY OF DIRECTORS
In accordance with the Delaware General Corporation Law, the Company
has included a provision in its Certificate of Incorporation to limit the
personal liability of its directors for violations of their fiduciary duties.
The provision eliminates such directors' liability to the Company or its
stockholders for monetary damages, except (i) for any breach of the directors'
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payment of dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which any director derived an
improper personal benefit.
This provision protects the Company's directors against personal
liability for monetary damages arising from breaches of their duty of care.
Directors remain liable for breaches of their duty of loyalty to the Company and
its stockholders and for the specific matters set forth above, as well as for
violations of the federal securities laws. The provision has no effect on the
availability of equitable remedies such as injunction or rescission.
Additionally, these provisions do not protect a director from activities
undertaken in any capacity other than that of director.
26
<PAGE> 27
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's bylaws provide for indemnification of its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law in effect at the time of a claim for indemnification. Such indemnification
applies to any threatened, pending or contemplated suit or proceeding arising by
reason of such person acting as an officer or director of the Company or its
affiliates.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information at February 29, 1996, as to
all persons who, to the knowledge of the Company, were the beneficial owners of
five percent (5%) or more of the outstanding shares of the common stock of the
Company and of all officers and directors.
<TABLE>
<CAPTION>
Amount and Nature Percent
Name Of Beneficial Ownership Of Class(1)
---- ----------------------- -----------
<S> <C> <C>
William D. Forster, (Director)
237 Park Ave, New York (2) 1,030,000 (3) 8.8%
BSR Investments, Inc., Paris, France(2) 1,030,000 (4) 8.8%
Barry Blank, 5353 N. 16th St., Phoenix, AZ 711,313 (6) 6.1%
Klein Ventures, Inc., 640,017 (5) 5.6%
1307 E. Pine St., Lodi, CA
Tyrone J. Fairbanks (Director, President,
and CEO) 515 W. Greens Rd., Houston, TX 238,440 (7) 2.1%
William T. Walker, Jr. (Director)
515 W. Greens Rd., Houston TX 152,992 (7) 1.4%
John L. Collins (Vice President)
515 W. Greens Rd., Houston TX 100,000 (7) *
Graham S. Folsom (Director)
515 W. Greens Rd., Houston, TX 58,384 *
Dean W. Drulias (Director and Secretary)
515 W. Greens Rd., Houston, TX 49,520 *
J. Michael Urban (Vice President and CFO)
515 W. Greens Rd., Houston, TX 35,000 (7) *
Gary Gelman (Director)
515 W. Greens Rd., Houston, TX 19,112 *
Barry Feiner (Director)
515 W. Greens Rd., Houston, TX 13,612 *
--------- ----
All Officers and Directors
as a group of nine (9) persons 1,697,060 (7) 13.9%
</TABLE>
- -----------------
(1) The asterisk (*) indicates less than 1%.
27
<PAGE> 28
(2) Forster and BSR are the record holders of these shares issued in connection
with the LEX acquisition. Ensign Financial Group Limited claims a one-third
interest in such shares and the stock purchase warrants issued in the
acquisition. In light of the dispute which has arisen over the ownership of
these shares and warrants, the Company is unable to state the beneficial
ownership of such shares and warrants. See "Business and Properties - Legal
Proceedings." If Ensign's position is upheld by the New York courts and it is
awarded one-third of the securities issued in the LEX acquisition, to the best
of the Company's knowledge, the ownership, including shares underlying the stock
purchase warrants and other securities noted in footnote (3), would be as
follows:
<TABLE>
<CAPTION>
Amount and Nature of Percent
Beneficial Ownership of Class
-------------------- --------
<S> <C> <C>
Ensign Financial Group Limited, NY, NY 800,000 6.9%
William D. Forster, New York, NY 630,000 5.5%
BSR Investments, Inc., Paris, France 630,000 5.5%
</TABLE>
(3) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000.
(4) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000. Based on information
provided to the Company by BSR, voting and dispositive power is exercised by
Samyr Souki, the president of BSR. Charif Souki, a director of the Company and
son of Samyr Souki, disclaims any ownership interest in or dispositive power
over such shares.
(5) Klein Ventures, Inc. is owned by Mr. Bud Klein. The number of shares shown
includes 138,888 shares underlying stock purchase warrants issued to Klein
Ventures, Inc. in the Hinkle acquisition, 115,000 shares underlying 80,000
public stock purchase warrants acquired in the Company's 1993 public equity
offering exercisable at $3.75 per share and an aggregate of 88,629 shares of
stock owned by Klein Bros. Holdings, Ltd., and 10,000 shares issuable upon
exercise of stock purchase warrants with an exercise price of $2.40 per share
which will be issued to Klein Ventures, Inc. in connection with such note. See
"Certain Relationships and Related Transactions." Each record owner possesses
sole voting and disposition power over such shares, and Klein Ventures, Inc. and
Mr. Bud Klein disclaim beneficial ownership of shares owned by Klein Bros.
Holdings, Ltd. which is owned by Klein Ventures, Inc. and five of Mr. Klein's
children and relatives. However, Klein Ventures, Inc., Klein Bros. Holdings,
Ltd. and Bud Klein may be considered a "group" under regulations of the
Securities and Exchange Commission.
(6) Includes 279,200 shares of Common Stock and an additional 432,113 shares of
which are underlying 300,600 stock purchase warrants held by Mr. Blank and
exercisable at $3.75 per share. Mr. Blank is a Vice President and registered
representative with Coleman and Company Securities, Inc., one of the
Representatives of the Underwriters. See "Underwriting."
(7) Includes 216,999 shares issuable to Mr. Fairbanks upon the exercise of stock
options granted to him under the Company's various stock option plans,
exercisable at $2.75 per share; an aggregate of 139,801 shares issuable upon
exercise of stock options granted to other officers and directors under the
Company's various stock option plans, exercisable at $2.75 per share; 88,289
shares issuable upon exercise of common stock purchase warrants (at $4.41 per
warrant) and 22,264 shares issuable upon exercise of 3,600 warrants (at $11.14
each for 3.3097 shares of Common Stock and two stock purchase warrants
exercisable at $3.75 each for 1.4375 shares) issued in connection with the
Company's 1993 equity offering to William T. Walker, Jr. prior to becoming a
director of the Company; 25,000 shares issuable upon the exercise of common
stock purchase warrants (at $3.25 per share) issued to John L. Collins on May
30, 1995; 35,000 shares issuable upon the exercise of common stock purchase
warrants (at $2.5625 per shares) issued to J. Michael Urban on March 11, 1996.
ITEM 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of the relocation of Fortune Petroleum Corporation's
headquarters to Houston, Texas, the Company provided Tyrone J. Fairbanks, its
President and Chief Executive Officer, with an incentive relocation package to
facilitate his move to Texas. The package consisted of a payment by the Company
of Mr. Fairbanks' moving expenses, a non-recourse, unsecured loan in the amount
of $80,000 bearing interest at the rate of 6% per annum, with $20,000 of such
loan forgiven in each of four consecutive years beginning in 1996 provided Mr.
Fairbanks is still employed by the
28
<PAGE> 29
Company or has been terminated by the Company without cause, and a secured
recourse loan in the amount of $70,000 also bearing interest at the rate of 6%
per annum, payable interest only for two years with a $35,000 principal payment
due on the second and third anniversary of the loan. The Company also extended
the term of Mr. Fairbanks' employment contract through December 31, 1997.
Subsequent to the consummation of the acquisition of LEX, Messrs.
Forster and Souki were elected to the Board of Directors of the Company. Their
election to the Board was not a term or condition of the transaction. For
information regarding the consideration received by Mr. Forster and BSR in the
transaction, see: "Acquisition Activity - - Lagniappe Exploration
Corporation/Zydeco Exploration". BSR is a corporation owned by members of the
family of Mr. Souki. In connection with the acquisition, Mr. Forster and BSR
agreed to indemnify Fortune against costs and expenses in connection with the
Baytree litigation and are currently indebted to the Company in the amount of
approximately $36,000 for expenses incurred by Fortune in the litigation.
On April 24, 1995, the Company obtained a $300,000 "bridge" loan to
enable it to pay certain expenses, including $100,000 on its Credit Facility.
The loan was obtained from LEX, which in turn had borrowed the funds from
several individuals. Upon the consummation of the Company's acquisition of LEX,
it became liable on such loans. The loans were repaid out of the proceeds of the
Company's recently concluded Common Stock offering. Among the individuals who
loaned funds to LEX were Mrs. William H. Forster, mother of William D. Forster,
a principal of LEX and now a director and principal stockholder of Fortune, and
John E. McConnaughy, Jr., formerly a principal stockholder of the Company. See
"Principal Stockholders." Each of Mrs. Forster and Mr. McConnaughy loaned LEX
$100,000 and received from LEX, as an inducement to make the loan, 33,333 shares
of Common Stock and 33,333 stock purchase warrants out of 170,000 shares and
170,000 warrants issued to LEX prior to the closing of the acquisition. W.
Forster & Co., Inc., a corporation wholly owned by William D. Forster, received
a $30,000 placement fee from the Company for assistance in arranging the
$300,000 bridge loan. As a result of its acquisition of LEX, Fortune was
required, at the time the bridge loan was repaid, to accelerate the amortization
of the value of the shares paid by LEX to the lenders in connection with the
bridge loan in the amount of $150,000.
In order to provide additional capital for development activities, on
December 19 and 20, 1994, the Company borrowed an aggregate of $750,000 from
certain principal stockholders and from each of its directors then serving
(Messrs. Champion, Drulias, Fairbanks, Folsom and Walker). The directors loaned
$175,000 to the Company in the aggregate. $375,000 was obtained from Klein
Ventures, Inc., and $200,000 was obtained from Jack Farber. See "Security
Ownership of Certain Beneficial Owners and Management." The notes were
unsecured, bore interest at 11% per annum (1.5% above the Bank One, Texas, prime
rate), payable monthly, and were due six months from their respective dates of
issue. The loans from each of the directors were repaid in full on December 21,
1995. Both the Klein Ventures, Inc. and Farber notes permit the holder to elect
to exchange their notes for shares of Common Stock at the price on the date the
notes were issued ($2.00 and $1.875 per share, respectively), and Fortune
reserved 294,166 shares of common stock for such purpose. Klein Ventures, Inc.
and the Estate of Jack Farber exercised the option contained in their note
agreement to convert the note to Fortune Common Stock. This option was not
available to the directors.
As additional consideration for making the loan, Klein Ventures, Inc.
received 10,000 stock purchase warrants with an exercise price of $2.40 per
share, and Mr. Farber received 35,000 stock purchase warrants with an exercise
price of $1.875 per share. The Company also agreed to name two individuals
nominated by Mr. Farber to fill vacancies on the Board of Directors. Barry
Feiner, Esq., who served as counsel to Mr. Farber prior to the latter's death on
May 5, 1995 and to Barry Blank, another principal stockholder of the Company,
and Mr. Gary Gelman, Mr. Farber's grandson, were elected to the Board of
Directors in January 1995 pursuant to this agreement. Both Mr. Feiner and Mr.
Gelman were re-elected to the board by the stockholders at the 1995 annual
meeting.
See "Management - Directors and Officers" for information regarding
legal services performed by Burris, Drulias & Gartenberg, A Professional
Corporation, for the Company and the Representatives. Dean Drulias, a director
of the Company, is a stockholder of such law firm.
All of the foregoing transactions between the Company and members of
management or principal stockholders were, and any future transactions will be,
on terms no less favorable to the Company than those which could be obtained
from unaffiliated third parties. In addition, no future transaction will be
entered into between the Company and members of management or principal
stockholders unless such transactions are approved by a majority of the
directors who are not members of management or principal stockholders.
29
<PAGE> 30
ITEM 12. EXHIBITS AND REPORTS ON FORM 8-K
(a) Material Contracts:
10.1 Purchase and Sale Agreement between Fortune Petroleum and Arnold
and Joan Travis dated January 31, 1996
10.2 Purchase and Sale Agreement between Fortune Petroleum Corporation
and Seneca Resources Corporation dated March 11, 1996
10.3 Lease Agreement for 515 W. Greens Rd., Houston, Texas 77067
10.4 Sublease agreement with Animation Magazine
10.5 Fairbanks Loan Documents
(b) Consent of Expert:
23.1 Consent from KPMG Peat Marwick LLP dated March 15, 1996
23.2 Consent from Huddleston & Co., Inc. dated March 18, 1996
23.3 Consent from Sherwin D. Yoelin dated March 14, 1996
(c) Reports on Form 8-K
C-1 On December 26, 1995 the Company filed a report on Form 8-K Re:
Acquisition of South Timbalier Block 76 offshore Louisiana
C-2 On January 5, 1996, the Company filed a report on Form 8-K/A
amending Form 8-K listed above and filed on December 26, 1996
C-3 On March 8, 1996, the Company filed a report on Form 8-K
pertaining to the Disposition and Sale of the Majority of its
California properties.
30
<PAGE> 31
INDEX TO FINANCIAL STATEMENTS AND SUPPORTING SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report - KPMG Peat Marwick LLP 32
Balance Sheets - December 31, 1995 and
December 31, 1994 33
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993. 35
Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 36
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993. 37
Notes to Financial Statements 38
</TABLE>
31
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fortune Petroleum Corporation:
We have audited the financial statements of Fortune Petroleum Corporation as
listed in the accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortune Petroleum Corporation
as of December 31, 1995 and 1994 and the results of its operations and its cash
flows for the each of the years in the three year period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," as of December 31, 1995.
/s/ KPMG PEAT MARWICK LLP
March 15, 1996
Houston, Texas
32
<PAGE> 33
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 398,000 $ 1,888,000
Accounts receivable 550,000 1,035,000
Oil and gas properties
held for sale -- 1,180,000
Prepaid expenses and oil inventory 114,000 127,000
------------ ------------
Total Current Assets 1,062,000 4,230,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the successful efforts method 17,912,000 18,960,000
Automotive, office and other 330,000 227,000
------------ ------------
18,242,000 19,187,000
Less--accumulated depletion, depreciation
and amortization (8,253,000) (7,821,000)
------------ ------------
9,989,000 11,366,000
------------ ------------
OTHER ASSETS:
Materials, supplies and other deferred charges 269,000 62,000
Deferred credit facility costs (net of
accumulated amortization of $39,000) 114,000 --
Bond issuance costs (net of
accumulated amortization of $122,000
and $180,000) 167,000 109,000
Restricted cash -- 3,230,000
------------ ------------
550,000 3,401,000
------------ ------------
TOTAL ASSETS $ 11,601,000 $ 18,997,000
============ ============
</TABLE>
See accompanying notes to financial statements.
33
<PAGE> 34
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long term debt $ 4,688,000 $ 3,208,000
Accounts payable 393,000 280,000
Accrued expenses 78,000 96,000
Executive severance payable 96,000 --
Royalties and working interests payable 53,000 94,000
Accrued interest 130,000 119,000
Notes payable to officers, directors
and stockholders 200,000 --
------------ ------------
Total Current Liabilities 5,638,000 3,797,000
------------ ------------
NOTES PAYABLE TO OFFICERS,
DIRECTORS AND STOCKHOLDERS 550,000 --
LONG-TERM DEBT, net of current portion 1,685,000 1,689,000
EXECUTIVE SEVERANCE PAYABLE 63,000 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding-- None -- --
Common stock, $.01 par value Authorized--40,000,000 shares Issued and
outstanding-- 2,644,032 and 11,139,709 shares at December 31,
1994 and 1995, respectively 26,000 111,000
Capital in excess of par value 11,253,000 27,228,000
Accumulated deficit (7,614,000) (13,828,000)
------------ ------------
NET STOCKHOLDERS' EQUITY 3,665,000 13,511,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,601,000 $ 18,997,000
============ ============
</TABLE>
See accompanying notes to financial statements.
34
<PAGE> 35
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Sales of oil and gas, net of
royalties $ 2,762,000 $ 3,339,000 $ 2,959,000
Other income 72,000 58,000 234,000
----------- ----------- -----------
2,834,000 3,397,000 3,193,000
DIRECT PRODUCTION EXPENSES 946,000 1,090,000 1,514,000
----------- ----------- -----------
REVENUES IN EXCESS OF DIRECT
PRODUCTION EXPENSES 1,888,000 2,307,000 1,679,000
----------- ----------- -----------
OPERATING EXPENSES
Provision for depletion, depreciation
and amortization 1,719,000 2,070,000 1,809,000
Geological and geophysical costs -- -- 418,000
General and administrative expenses 791,000 1,020,000 1,212,000
Abandoned leasehold costs 71,000 249,000 56,000
Dry hole costs -- 195,000 998,000
Gain on sale of assets (133,000) -- --
Interest expense 311,000 460,000 870,000
Reserve for doubtful debt 101,000 -- --
Executive severance expense -- 225,000 --
Impairment to oil and gas properties 2,682,000 1,031,000 2,530,000
----------- ----------- -----------
5,542,000 5,250,000 7,893,000
----------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES (3,654,000) (2,943,000) (6,214,000)
PROVISION FOR INCOME TAXES -- -- --
----------- ----------- -----------
NET LOSS (3,654,000) (2,943,000) (6,214,000)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,772,739 2,638,672 6,555,875
=========== =========== ===========
NET LOSS PER COMMON SHARE $ (2.06) $ (1.12) $ (.95)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
35
<PAGE> 36
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in Stock-
Common Stock Excess of Accumulated holders'
Shares Amount Par Value Deficit Equity
---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993 796,460 $ 8,000 $ 5,162,000 $ (1,017,000) $ 4,153,000
========== ======== =========== ============ ===========
Common stock returned to
treasury (269) -- (2,000) -- (2,000)
Common stock issued for public
offering 1,800,000 18,000 5,416,000 -- 5,434,000
Warrants issued for public
offering -- -- 444,000 -- 444,000
Warrants issued for payment of services -- -- 111,000 -- 111,000
Common stock issued for
exercise of stock options 9,376 -- 25,000 -- 25,000
Common stock issued for
payment of interest 22,365 -- 86,000 -- 86,000
Common stock issued for
directors' fees 5,539 -- 16,000 -- 16,000
Net loss -- -- -- (3,654,000) (3,654,000)
---------- -------- ----------- ------------ -----------
BALANCE, December 31, 1993 2,633,471 $ 26,000 $11,258,000 $ (4,671,000) $ 6,613,000
========== ======== =========== ============ ===========
Common stock returned
to treasury (80) -- (2,000) -- (2,000)
Adjustment to proceeds
for 1993 public offering -- -- (29,000) -- (29,000)
Common stock issued for
exercise of stock options 4,688 -- 12,000 -- 12,000
Common stock issued for
directors' fees 5,953 -- 14,000 -- 14,000
Net loss -- -- -- (2,943,000) (2,943,000)
---------- -------- ----------- ------------ -----------
BALANCE, December 31, 1994 2,644,032 $ 26,000 $11,253,000 $ (7,614,000) $ 3,665,000
========== ======== =========== ============ ===========
Common stock returned
to treasury (12) -- -- -- --
Common stock issued for
exercise of stock options 202,481 2,000 500,000 -- 502,000
Common stock issued for
directors fees 14,445 -- 39,000 -- 39,000
Common stock issued for
stock offerings 6,569,117 65,000 11,729,000 -- 11,794,000
Common stock issued for
merger 1,200,000 12,000 2,480,000 -- 2,492,000
Common stock and warrants issued
for payment of investment
banking services 100,000 2,000 263,000 -- 265,000
Common stock issued for
warrant conversion 115,479 1,000 392,000 -- 393,000
Common stock issued for
note conversion 294,167 3,000 572,000 -- 575,000
Net loss -- -- -- (6,214,000) (6,214,000)
---------- -------- ----------- ------------ -----------
BALANCE, December 31, 1995 11,139,709 $111,000 $27,228,000 $(13,828,000) $13,511,000
========== ======== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
36
<PAGE> 37
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,654,000) $(2,943,000) $(6,214,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Common stock issued for interest expense 86,000 -- --
Common stock issued for directors' fees,
compensation and consulting fees 16,000 14,000 39,000
Depletion, depreciation and amortization 1,719,000 2,070,000 1,809,000
Abandoned leasehold and dry hole costs -- 444,000 1,054,000
Gain on disposition of assets (62,000) -- --
Amortization of deferred financing cost -- -- 172,000
Impairment of oil and gas assets 2,682,000 1,031,000 2,530,000
Reserve for doubtful debt 101,000 -- --
Provision for executive severance -- 225,000 (17,000)
Changes in assets and liabilities:
Accounts receivable (263,000) 24,000 (485,000)
Prepaids and oil inventory 46,000 (45,000) (13,000)
Accounts payable and accrued expenses 375,000 (202,000) (95,000)
Payment of executive severance -- (66,000) (111,000)
Royalties and working interest payable (28,000) (13,000) 41,000
Accrued interest 43,000 31,000 (11,000)
Materials, supplies and other (81,000) (79,000) 189,000
----------- ----------- -----------
Net cash provided by (used in) operating activities 980,000 491,000 (1,112,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties (6,746,000) (4,035,000) (4,431,000)
Expenditures to abandon properties and dry hole costs -- (230,000) (855,000)
Restricted cash invested -- -- (3,230,000)
Proceeds from sale of properties and equipment 292,000 8,000 --
Expenditures for other property and equipment (4,000) (30,000) 16,000
----------- ----------- -----------
Net cash used in investing activities (6,458,000) (4,287,000) (8,500,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 4,680,000 --
Proceeds from notes to stockholders -- 750,000 --
Repayment of long term debt (571,000) (1,326,000) (1,651,000)
Proceeds from issuance of common stock 6,336,000 12,000 15,220,000
Expenditures for offering costs (322,000) (29,000) (2,467,000)
Common stock repurchase (2,000) (2,000) --
----------- ----------- -----------
Net cash provided by financing activities 5,441,000 4,085,000 11,102,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (37,000) 289,000 1,490,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 146,000 109,000 398,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 109,000 $ 398,000 $ 1,888,000
=========== =========== ===========
Supplemental information:
Interest paid in cash $ 225,000 $ 400,000 $ 692,000
Common Stock issued or issuable as directors' fees 16,000 14,000 39,000
Common Stock issued or issuable for interest paid 86,000 -- --
Warrants issued for public offering 444,000 -- --
Warrants issued for public offering expenses 111,000 -- --
Common stock issued for payment of executive severance -- -- 43,000
Common stock issued to acquire LEX -- -- 2,492,000
Common stock and warrants issued for payment of investment banking fees -- -- 265,000
Common stock issued for conversion of debt -- -- 575,000
Value of California assets transferred to oil and gas assets held for sale -- -- 1,180,000
</TABLE>
See accompanying notes to financial statements.
37
<PAGE> 38
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fortune Petroleum Corporation (Fortune or the Company), which does
business in Texas and Louisiana as Fortune Natural Resources Corporation, is an
independent energy company engaged in the acquisition, production and
exploration of oil and gas, primarily offshore Louisiana, the Texas and
Louisiana Gulf Coast and New Mexico.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
OIL INVENTORY
Oil inventory is stated at approximate fair market value. Market value is
determined based on current well head price of oil less selling and delivery
costs.
PROPERTY AND EQUIPMENT
Oil and gas properties are accounted for using the successful efforts
method. Costs of acquiring non-producing acreage, drilling development wells and
successful exploration wells are capitalized. All other exploratory expenses are
charged to operations as incurred. The carrying value of oil and gas properties
is evaluated in relation to the estimated future net revenues based on reserve
report estimates (See: "Reserve Impairment" below). Depletion, depreciation and
amortization are calculated using the unit-of-production method. Oil and gas
reserve quantities are based on a reserve report by an independent petroleum
engineer.
Automotive, office and other property and equipment are stated at cost.
Depreciation is provided using the straight-line method over an estimated future
service life of five years.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of identified actual cost
or replacement cost.
INCOME TAXES
The Company utilizes the asset and liability method for recognition of
deferred tax assets and liabilities. Deferred taxes are recognized for future
tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. The effect on deferred
taxes of a change in tax rates is recognized in income in the period the change
occurs.
BOND ISSUANCE COSTS
Bond issuance costs are being amortized using the straight line method
over the 5 year life of the related debt.
RESERVE IMPAIRMENT
In December 1995, $1.2 million of the Company's oil and gas assets were
reclassified as oil and gas property held for sale as of December 31, 1995,
since such assets are being sold during 1996. During 1993, 1994 and 1995 these
properties did not have a significant impact on net income. These assets were
recorded at their estimated realizable value at December 31, 1995 in accordance
with Statement 121 as is discussed below.
38
<PAGE> 39
Prior to December 31, 1995, the Company evaluated the carrying cost of
its oil and gas properties for impairment by performing a ceiling test based on
the aggregate present value of future net revenues, discounted at ten percent.
Based upon such evaluation, the Company recorded impairments of $1,031,000 and
$2,682,000 in 1994 and 1993, respectively. In March 1995, the Financial
Accounting Standards Board (FASB) issued Statement 121, "Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("Statement 121"). This statement requires that an impairment loss be recognized
when the carrying amount of an asset exceeds the sum of the estimated future
cash flow (undiscounted) of the assets. Under Statement 121, the Company
reviewed the impairment of proved oil and gas properties on a depletable unit
basis. For each depletable unit determined to be impaired, an impairment loss
equal to the difference between the carrying value and the fair value of the
depletable unit was recognized. Fair value, on a depletable unit basis, was
estimated to be the present value of expected future cash flows computed by
applying estimated future oil and gas prices, as determined by management, to
estimated future production of oil and gas reserves over the economic lives of
the reserves. As a result of the Company's election to adopt Statement 121 on
December 31, 1995, a provision of $2,530,000 was charged against operations
during 1995.
The Company makes periodic assessments of existing unproved properties to
determine whether they have been impaired. Such assessment is made on a
property-by-property basis. If the results of the assessment indicate
impairment, the Company recognizes the impairment at the time the assessment is
made. Based on the most recent assessment, the Company believes that no
impairment to unproved properties exists at December 31, 1995.
RECLASSIFICATION
Certain reclassifications have been made to the 1994 and 1993 amounts to
conform with the current year presentation.
(2) RESTRICTED CASH
Under the terms of the Company's exploration agreement with Zydeco
Exploration, Inc., (See Note 3) Fortune had contributed $4,850,000 in cash as of
December 31, 1995 for its share of a predetermined lease acquisition, seismic
acquisition and seismic processing cost budget. At December 31, 1995,
approximately $1,620,000 of that budget had been expended leaving $3,230,000 of
restricted cash available for future budgeted expenditures. The Company has
signature authority (jointly with Zydeco) on the bank account containing these
funds, is the recipient of interest from the bank account and must jointly
approve expenditures from the account.
(3) ACQUISITIONS AND DISPOSITION OF ASSETS
SOUTH TIMBALIER BLOCK 76
On December 11, 1995, Fortune acquired for $2.2 million a 16-2/3% working
interest (12-1/2% net revenue interest) in a 5,000 acre producing oil and gas
property offshore Louisiana from PetroFina, Inc. The property, known as the
South Timbalier Block 76 (and referred to herein as the "Timbalier Block"),
includes a producing well, drilling and production platform and transmission
line. The acquisition has an effective date for oil and gas purposes of June 1,
1995, with Fortune being entitled to receive the net cash flow from the well to
its interest from that date; the effective date for financial reporting purposes
is November 1, 1995. During March 1996, the Company's interest has been
subsequently reduced to a 12-1/2% working interest (9-3/8% revenue interest) as
the result of the exercise by Pendragon Resources, LLC of an option to acquire
the balance of the Company's interest. (See Note 13.)
The following pro forma unaudited results reflect the years ended
December 31, 1994 and 1995 as if the Timbalier Block 76 acquisition had
occurred, and the option had been exercised, and the common stock issued in the
acquisition of LEX was issued (See below and note 9), as of January 1, 1994:
<TABLE>
<CAPTION>
Pro Forma Information
For the Years Ended December 31,
1994 1995
---- ----
<S> <C> <C>
Revenues $ 4,596,000 $ 4,451,000
=========== ===========
Net Loss $(2,554,000) $(5,654,000)
=========== ===========
Net Loss Per Common Share $ (.49) $ (.63)
=========== ===========
</TABLE>
39
<PAGE> 40
LAGNIAPPE EXPLORATION CORPORATION/ZYDECO EXPLORATION
On May 12, 1995, Fortune acquired Lagniappe Exploration, Inc. ("LEX") which
had previously entered into the exploration agreement with Zydeco. The Company
acquired all of the issued and outstanding equity securities of LEX in exchange
for 1.2 million shares of Fortune Petroleum Common Stock and 1.2 million
warrants. The acquisition has been recorded using the purchase method of
accounting effective May 12, 1995. Upon acquisition, LEX became a wholly- owner
subsidiary of the Company. The market value of the shares, when issued, was
$2,572,000. Prior to the Company's acquisition, LEX did not have day-to-day
operations, the only material asset was its right to participate in the Zydeco
3D Venture. Under the exploration agreement with Zydeco, Fortune has acquired a
50% interest in each of 19 seismically defined oil and gas projects identified
by Zydeco using advanced 3D seismic imaging, visualization and comprehensive
well log analyses in exchange for funding a budget of $4,850,000 for leasehold
acquisition and seismic costs. These 19 Zydeco Projects are primarily located in
geological trends in the "Transition Zone" and the "Timbalier Trench" areas of
the Gulf Coast of Louisiana, where there have been discoveries of crude oil and
natural gas reserves.
The Company does not currently expect to retain a working interest of more
than 25%, except in certain circumstances, in each well drilled on the Zydeco
Projects and intends to "farmout" its remaining interest to other oil companies
on a "promoted" basis. Fortune may retain larger or smaller working interests in
certain projects depending upon capital availability and other factors. Under a
farmout arrangement, the Company would be relieved of its obligation to pay, or
could recover already paid, acquisition and exploration costs but would wind up
with a smaller interest in any given prospect. The Company also has a right
under the Zydeco 3D Venture to "farmout" a portion or all of its interest in
each prospect to Zydeco under a put arrangement in the exploration agreement.
Zydeco has an identical right to farmout to Fortune.
Zydeco and Fortune entered into a farmout of the Polaris Project to
Southern Gas Company of Delaware ("Southern") on May 31, 1995. Under the terms
of the farmout, Southern paid Zydeco and Fortune an aggregate of $100,000 in
exchange for 100% of the working interest in the Project. Zydeco and Fortune
also retained a 6.166% overriding royalty interest of which 4.166% is
convertible to a 12-1/2% working interest after Southern receives payout from a
completed well. Zydeco and Fortune would also receive a payment out of
production of approximately $32,500. Southern is required to commence drilling a
well on the Project on or before March 31, 1996 and will earn an interest in the
Project to a depth of 100 feet below the deepest depth drilled if Southern
completes a commercially productive well. This means that Zydeco and Fortune
will retain the right to explore the Project at deeper depths. No assurance can
be given that Southern will drill the required well or that any drilling
conducted by Southern will be successful.
ENRE CORPORATION
On June 24, 1994, the Company acquired a 25% interest in EnRe-l LLC, a
company formed to develop and explore for oil and gas lands held under certain
Jicarilla Apache mineral development agreements in Rio Arriba County, New
Mexico. The net acquisition price was $1,674,000, and the effective date of the
transaction using the purchase method of accounting was June 1, 1994. As a
result of the acquisition, the Company has effective non-operating working
interests ranging from 21.5625% to 25% in 70,000 producing, development and
exploratory acres.
LAROCO, LLP
On February 8, 1994, the Company completed an acquisition of a 50% working
interest in a 3,689 acre lease in the La Rosa Natural Gas Field in Refugio
County, Texas from Brooklyn Union Exploration Company, Inc. for $760,000. The
effective date of the transaction using the purchase method of accounting was
February 1, 1994.
MICHAEL PETROLEUM, ET AL.
On October 5, 1993, the Company concluded the acquisition from Michael
Petroleum Corporation, Brazos Resources, Inc., Pioneer Drilling Company and
Endowment Energy Partners of certain interests in two producing natural gas
fields in Webb County, Texas. The funding was provided by substantially all of
the net proceeds from the public offering which closed on the same date (See
Note 7). The transaction was accounted for as a purchase as of July 1, 1993 with
a net acquisition price of $6,457,000 and 195,000 common stock purchase warrants
exercisable at $3.88, to expire on June 30, 1996 and which have been transferred
to another party.
40
<PAGE> 41
(4) OIL AND GAS PROPERTIES AND OPERATIONS - UNAUDITED
Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization at December 31, 1993, 1994
and 1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Capitalized costs of oil
and gas properties $14,302,000 $17,912,000 $18,960,000
Less accumulated depletion,
depreciation and amortization (5,282,000) (7,193,000) (7,629,000)
----------- ----------- -----------
$ 9,020,000 $10,719,000 $11,331,000
=========== =========== ===========
</TABLE>
Of the above capitalized costs, the amount representing unproved properties was
$5,939,000, $1,036,000 and $440,000 in 1995, 1994 and 1993, respectively.
Costs incurred in oil and gas producing activities were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Property acquisition $ 57,000 $ 511,000 $6,788,000
Exploration -- 231,000 576,000
Development 289,000 541,000 498,000
-------- ---------- ----------
$346,000 $1,283,000 $7,862,000
======== ========== ==========
</TABLE>
The results of operations from oil and gas producing activities for the
years ended December 31, 1993, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues from oil and gas producing activities:
Sales to unaffiliated parties $ 2,762 $ 3,339 $ 2,959
------- ------- -------
Production (lifting) costs:
Operating costs and
production and other taxes 946 1,090 1,514
Depreciation, depletion and amorti-
zation 1,645 1,904 1,774
Exploration expenses 71 444 1,472
Impairment to oil and gas reserves 2,682 1,031 2,530
Other 11 -- --
------- ------- -------
Total expenses 5,355 4,469 7,290
------- ------- -------
Pretax loss from producing activities (2,593) (1,130) (4,331)
Income tax (expense) benefit -- -- --
------- ------- -------
Results of oil and gas producing activities
(excluding corporate overhead and interest costs) $(2,593) $(1,130) $(4,331)
======= ======= =======
</TABLE>
41
<PAGE> 42
(5) LONG TERM DEBT
<TABLE>
<CAPTION>
A summary of long-term debt follows: December 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Convertible Subordinated Debentures of $1,725,000 (net of discount of $103,000
and $88,000) due December 31, 1997, including interest of 10-1/2%
per annum paid semi-annually $1,653,000 $1,668,000
Bank One credit facility due April 1, 1997 including
interest at 1-1/2% over Bank One, Texas, NA's
prime rate payable monthly 4,680,000 3,200,000
Other debt with interest ranging from 0%
to 9-1/4% per annum due through 1998 40,000 29,000
---------- ----------
Total long-term debt 6,373,000 4,897,000
Less current installments 4,688,000 3,208,000
---------- ----------
Long-term debt, excluding current installments $1,685,000 $1,689,000
========== ==========
</TABLE>
The 10-1/2% Convertible Subordinated Debentures due December 31, 1997 bear
an effective interest rate of 12.13% and were convertible into shares of the
Company's common stock, after April 1, 1994, at a conversion price of $6.32 per
share or 158 shares per Debenture. Therefore, if all $1,725,000 were converted
the number of the Company's common shares then outstanding would increase by
272,981 shares.
The Company has a $10,000,000 credit facility with Bank One under which it
has the ability to borrow amounts up to an available borrowing base as defined
in the credit agreement. This borrowing base was $3,200,000 at December 31,
1995. The credit facility contains various financial covenants, is secured by
all of the Company's oil and gas properties and currently requires monthly
principal reduction payments of $75,000.
At December 31, 1995, the Company was not in compliance with its cash flow
coverage ratio covenant. Under the terms of credit facility agreement the bank
has the right to demand repayment of the entire loan balance in the event of
covenant defaults. The Company is currently in discussions with Bank One
regarding breach of this covenant, however, it has obtained a waiver of this
covenant from the bank as of December 31, 1995. As of February 29, 1996, the
Company has repaid Bank One $1,100,000 with funds primarily from the proceeds of
the sale of its California properties. The outstanding balance remaining against
the Bank One credit facility is $1,925,000 after the February 29, 1996 payment.
The Company's maturities of long-term debt over the next three years are as
follows:
<TABLE>
<CAPTION>
Year Long-term debt maturity
---- -----------------------
<S> <C>
1996 $3,208,000
1997 1,673,000
1998 16,000
----------
$4,897,000
==========
</TABLE>
(6) INCOME TAXES
No provision for income taxes was required for the years ended
December 31, 1993, 1994 and 1995.
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
Deferred tax assets: 1994 1995
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $1,762,000 $2,936,000
Oil and Gas Properties difference
in accumulated depletion 1,634,000 1,688,000
---------- ----------
3,396,000 4,624,000
Less valuation allowance (100%) 3,396,000 4,624,000
---------- ----------
Net deferred taxes $ 0 $ 0
========== ==========
</TABLE>
42
<PAGE> 43
At December 31, 1995, the Company estimates it had cumulative net
operating loss carryforwards for Federal income tax purposes of $8,634,000 which
is significantly restricted under I.R.C. 382 and which is available to offset
future Federal taxable income, if any, with various expirations through 2008.
The Company is uncertain as to the recoverability of the above deferred tax
assets and has therefore applied a 100% valuation allowance.
The Company has available IRC Section 29 Tax Credits that may be used
to reduce or eliminate any corporate through the year 2001. It is uncertain at
this time to what extent the Company will be able to utilize these federal tax
credits, as their utilization is dependent upon the amount, if any, of future
federal income tax incurred, after application of the Company's net operating
loss carryforwards.
(7) STOCK OFFERINGS
On June 27, 1995, the Company entered into an Underwriting Agreement
to sell 4.1 million shares of the Company's common stock at $2.00 per share. On
July 3, 1995, the underwriters advised the Company they were exercising their
right to purchase an additional 500,000 shares of common stock of the Company at
$2.00 per share under the overallotment terms of the Underwriting Agreement.
Proceeds of approximately $8.1 million, net of offering fees and expenses were
received from the sale of the shares.
On December 15, 1995, the Company closed a private placement of
1,321,117 shares of Common Stock at a price of $3.22 per share. Net proceeds of
approximately $3.3 million were received for the sale of these shares. The
shares were sold subject to certain "reset" provisions pursuant to which the
purchasers could receive additional shares if the price of the Common Stock were
to drop below the purchase price during certain calculation periods. As a result
of the recent decline in the price of the Common Stock, the Company may be
required to issue a substantial number of additional shares. However, the
Company is currently investigating certain alleged irregularities in the trading
in its Common Stock and is uncertain whether it will be required to issue
additional shares. Were it required to issue such shares as of the date hereof
the number of additional shares would be approximately 1,266,000. In February
1995, the Company closed a previous private placement of 648,000 shares of
Common Stock. The proceeds were used to fund the initial contribution to the
Zydeco venture.
(8) COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with its president and chief
executive officer that provides for an annual salary of $150,000 through
December 31, 1997, and is subject to renewal upon expiration. Upon termination
of the employment agreement, the president and chief executive officer has a
two-year consulting agreement at 40% of his annual salary.
The Company leases certain office space under a non-cancelable
operating lease. Rental Expense under the office lease for the years ended
December 31, 1995, 1994 and 1993 was $53,000, $45,000 and $43,000, respectively.
Minimum future lease payments under the non-cancelable lease are as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1996 $ 49,000
1997 $ 84,000
1998 $ 84,000
1999 $ 84,000
2000 $ 84,000
Thereafter $ 35,000
--------
$420,000
========
</TABLE>
43
<PAGE> 44
On March 14, 1995, Fortune was served with a lawsuit filed in the District
Court of Bexar County, Texas by EnRe Corporation, in which EnRe , as operator of
the Company's New Mexico properties, seeks recovery of approximately $438,000
allegedly owed by Fortune for the drilling of certain wells on such properties.
The lawsuit is the result of disputes between the parties regarding the manner
in which EnRe has conducted operations on the property and the proper
interpretation of the operating agreement among the interest owners on the
property. Fortune management believes that EnRe has operated the property in a
negligent manner, causing loss to Fortune and the other interest owners. In
addition, management believes that the Company was permitted under the terms of
the operating agreement to elect not to participate in the drilling operations
for which EnRe sought payment. On March 24, 1995, Fortune answered EnRe's
lawsuit and filed a counterclaim against EnRe for an undeterminable amount for
damages suffered by Fortune for EnRe's actions.
On March 30, 1995, a partial settlement was reached as to payment by
Fortune of undisputed well development costs in exchange for EnRe's co-operation
in complying with provisions of the operating agreement to report operating
information to Fortune on a timely basis. As of April 24, 1995, the Company had
paid all well development costs which it believed to be undisputed, totalling
$174,499.
In the opinion of management, Fortune has valid defenses to all claims
still in dispute made by EnRe. On March 11, 1996 the Company was advised that
its proposal to EnRe to dismiss its litigation in exchange for the Company's
dismissal of its counterclaim was accepted by EnRe pending the completion of the
appropriate settlement documents.
(9) RELATED PARTY TRANSACTIONS
As part of the relocation of Fortune Petroleum Corporation's headquarters
to Houston, Texas, the Company provided Tyrone J. Fairbanks, its President and
Chief Executive Officer, with an incentive relocation package to facilitate his
move to Texas. The package consisted of a payment by the Company of Mr.
Fairbanks' moving expenses, a non-recourse, unsecured loan in the amount of
$80,000 bearing interest at the rate of 6% per annum, with $20,000 of such loan
forgiven in each of four consecutive years beginning in 1996, provided Mr.
Fairbanks is still employed by the Company or has been terminated by the Company
without cause, and a secured recourse loan in the amount of $70,000 also bearing
interest at the rate of 6% per annum, payable interest only for two years with a
$35,000 principal payment due on the second anniversary of the loan and all
remaining principal and interest due on the third anniversary of the loan. The
Company also extended the term of Mr. Fairbanks' employment contract through
December 31, 1997.
In connection with the acquisition of LEX, Fortune paid Messrs. William D.
Forster and BSR Investments, the LEX stockholders, an aggregate of 1,200,000
shares of Common Stock and 1,200,000 five year stock purchase warrants
exercisable at $4.75 per share. A portion of such shares and warrants remain in
escrow pending the resolution of a dispute which has arisen among the former LEX
stockholders and others regarding who is entitled to the shares of Common Stock
and stock purchase warrants issued by Fortune at the closing of the LEX
acquisition.
In initially entering into the LEX acquisition, Fortune was advised that
the stockholders of LEX included William D. Forster, BSR Investments, ("BSR"), a
corporation owned by members of the family of Mr. Charif Souki (Souki) and
Ensign Financial Group Limited, a British Virgin Islands corporation ("Ensign").
In preparing for the closing of the acquisition, however, Fortune was advised
that the only stockholders of LEX were Forster and BSR and that they were the
only persons or entities entitled to vote on the merger of LEX with Fortune's
subsidiary. Fortune obtained a written representation from Forster and BSR to
this effect and received a legal opinion from LEX's counsel confirming these
representations and confirming that all corporate action on the part of LEX
necessary to authorize the merger had occurred.
On May 11, 1995, Baytree Associates, Inc. ("Baytree") and Ensign commenced
litigation in the Supreme Court of New York against Forster, BSR, Souki (the son
of Samyr Souki, president of BSR), LEX and Fortune seeking to enjoin the closing
of the LEX acquisition by Fortune on the grounds that Ensign was entitled to a
one-third interest in the proceeds of the transaction, namely the Common Stock
and warrants to be issued by Fortune. Baytree also sought $1,000,000 in damages
from Fortune for allegedly providing investment banking services to Fortune in
connection with the Regulation S offering made by the Company in February 1995
and the public offering made in June 1995.
44
<PAGE> 45
At a hearing on May 22, 1995, the New York court granted the Company's
motion for summary judgment and dismissed the $1,000,000 claim against Fortune
and dismissed Fortune and LEX from the suit with prejudice based on an agreement
of all parties. Forster, BSR and Souki are now the only remaining defendants in
the action. At the hearing, the parties agreed that the escrow agent would
retain and hold in escrow not less than 400,000 shares and 400,000 warrants,
representing one-third of the total shares of Common Stock and warrants issued
in the transaction, pending further order of the court. Fortune agreed to
participate in the discovery process in the action as if it were a party to the
action and, as a matter of convenience to the court, agreed that the New York
court would retain jurisdiction over Fortune and LEX for purposes of enforcing
the provisions of the stipulation.
Subsequent to the consummation of the acquisition of LEX, Messrs. Forster
and Souki were elected to the Board of Directors of the Company. Their election
to the Board was not a term or condition of the transaction. In connection with
the acquisition, Mr. Forster and BSR agreed to indemnify Fortune against costs
and expenses in connection with the Baytree litigation and are currently
indebted to the Company in the amount of approximately $30,000 for expenses
incurred by Fortune in the litigation.
On April 24, 1995, the Company obtained a $300,000 "bridge" loan to enable
it to pay certain expenses, including $100,000 on its Credit Facility. The loan
was obtained from LEX, which in turn had borrowed the funds from several
individuals. Upon the consummation of the Company's acquisition of LEX, it
became liable on such loans. The loans were repaid out of the proceeds of the
Company's recently concluded Common Stock offering. Among the individuals who
loaned funds to LEX were Mrs. William H. Forster, mother of William D. Forster,
a principal of LEX and now a director and principal stockholder of Fortune, and
John E. McConnaughy, Jr., formerly a principal stockholder of the Company. Each
of Mrs. Forster and Mr. McConnaughy loaned LEX $100,000 and received from LEX,
as an inducement to make the loan, 33,333 shares of Common Stock and 33,333
stock purchase warrants out of 1,200,000 shares and 1,200,000 warrants issued to
LEX in conjunction with the acquisition. W. Forster & Co., Inc., a corporation
wholly owned by William D. Forster, received a $30,000 placement fee from the
Company for assistance in arranging the $300,000 bridge loan.
In order to provide additional capital for development activities, on
December 19 and 20, 1994, the Company borrowed an aggregate of $750,000 from
certain principal stockholders and from each of its directors then serving
(Messrs. Champion, Drulias, Fairbanks, Folsom and Walker). The directors loaned
$175,000 to the Company in the aggregate; $375,000 was obtained from Klein
Ventures, Inc.; and $200,000 was obtained from Jack Farber. The notes were
unsecured, bearing interest at 11% per annum (1.5% above the Bank One, Texas,
prime rate), payable monthly, and the notes were due six months from their
respective dates of issue.
Both the Klein Ventures, Inc. and Farber notes permit the holder to elect
to exchange their notes for shares of Common Stock at the price on the date the
notes were issued ($2.00 and $1.875 per share, respectively), and Fortune
reserved 294,166 shares of common stock for such purpose. On or about June 30,
1995, the estate of Mr. Farber converted its note into 106,667 shares of Common
Stock. As additional consideration for making the loan, Klein Ventures, Inc.
received 10,000 stock purchase warrants with an exercise price of $2.40 per
share, and Mr. Farber received 35,000 stock purchase warrants with an exercise
price of $1.875 per share. The Company also agreed to name two individuals
nominated by Mr. Farber to fill vacancies on the Board of Directors. Barry
Feiner, Esq., who served as counsel to Mr. Farber prior to the latter's death on
May 5, 1995 and to Barry Blank, another principal stockholder of the Company,
and Mr. Gary Gelman, Mr. Farber's grandson, were elected to the Board of
Directors in January 1995 pursuant to this agreement. Both Mr. Feiner and Mr.
Gelman were re-elected to the board by the stockholders at the 1995 annual
meeting.
At maturity, on December 21, 1995, Klein Ventures, Inc. opted for
conversion of its notes to Fortune common stock. The balance of the notes to the
directors were repaid in full.
No future transaction will be entered into between the Company and members
of management or principal stockholders unless such transactions are approved by
a majority of the directors who are not members of management or principal
stockholders.
On January 1995, Daniel E. Pasquini, the former president of the Company,
agreed to a modification of a previous severance package. He accepted $85,000 in
cash, the exercise price of 45,000 stock options held by him was reduced to
$.575 per share and the Company issued him warrants to purchase 45,000 shares of
common stock at $2.75 per share.
45
<PAGE> 46
Mr. Dean W. Drulias is a stockholder of and a practicing attorney at the
law firm of Burris, Drulias & Gartenberg, a Professional Corporation, which has
served as counsel to the Company since its incorporation in May 1987. Mr.
Drulias has served as a director since 1991 and as Secretary since July 1994.
During 1994 and 1995, his firm billed the Company a total of $109,950, and
$182,643, respectively, for legal fees and costs.
As compensation to outside directors, the Company pays directors' fees
equal to $2,500 per quarter, one half in shares of Fortune common stock valued
at $1,250 based on the value of the stock on the last day of each quarter and
$1,250 in cash. Inside directors do not receive such compensation
(10) STOCKHOLDERS' EQUITY
On January 20, 1995, the Company amended its Certificate of Incorporation
to increase the number of authorized shares of Common Stock from 10,000,000
shares to 40,000,000 and the number of authorized preferred shares from 100,000
to 2,000,000.
The Company follows the intrinsic value method for stock options granted to
employees. In October 1995, the FASB issued Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation." The Company does
not intend to adopt the fair value method for stock-based compensation plans
which is an optional provision of Accounting Standard 123.
Fortune has four non-compensatory Stock Option Plans. The plans cover all
officers and employees of the Company. Three plans also provide for options for
directors of the Company. Awards are made by the Board of Directors upon
recommendations of its Compensation Committee. There is no performance formula
or measure. Options granted under the 1987 plan must be exercised within ten
years of the date of grant or are forfeited. Options granted under the 1988,
1991 and 1993 plans must be exercised within five years of the date of grant or
they are forfeited.
All options available under the 1987, 1988, 1991 and 1993 plans (including
the 1994 and 1995 grants under this plan) have been granted, and no shares
remain under any of these plans on which options may be granted. Options have
been granted as follows: options under the 1987 plan have been granted to
acquire 12,500 shares of Fortune Common Stock, at a price of $2.60 per share;
options of 27,500 at $2.60 per share under the 1988 plan; 32,500 at $6.00 per
share under the 1991 plan have been granted by the Board of Directors; and
75,000 options at $5.00 per share (the 1993 portion) and 263,000 options at
$5.48 per share (the 1994 portion) and 264,000 options at $6.03 per shares (the
1995 portion) have been granted under the five year plan adopted in 1993. The
prices of the options granted in 1991, 1993, 1994 and 1995 were reduced for all
optionholders who remained employees of the Company to $2.75 per share on
January 12, 1995.
In January 1995 a past director of the Company exercised 6,250 options at
$.58 under the 1987 stock option plan and 6,250 options under the 1988 plan,
10,000 options at $.58 under the 1991 plan and 22,500 options awarded in 1993
under the 1993 multi-year stock option plan at $.58. In December 1995 the same
past director exercised the balance of his available options, or 78,900 at $2.75
awarded in 1994 under the 1993 multi-year plan.
In July 1995 a director exercised 3,750 options at $2.75, awarded him in
1993 under the same plan.
In September 1995 an employee of the Company exercised 14,383 options at
$2.75 under the 1993 multi-year stock option plan, covering the 1993 and 1994
awards and a portion of the 1995 award.
In November 1995 an employee exercised 500 options at $2.60 under the 1987
plan, 1,250 options at $2.60 under the 1988 plan and 15,200 options at $2.75,
awarded in 1994 under the 1993 multi-year stock option plan.
In December 1995 an employee exercised 875 options at $2.60 under the 1987
plan, 2,964 options at $2.75 under the 1991 plan, 3,383 options at $2.75 awarded
in 1993 under the 1993 multi-year stock option plan, 11,100 options at $2.75,
awarded in 1994 under the same plan and 7,543 options at $2.75, the 1995 award
under the plan.
Also in December 1995 another employee exercised 3,383 options at $2.75
awarded him in 1993 under the 1993 multi-year stock option plan, and 6,617
options representing a portion of the 1994 award under the same plan.
46
<PAGE> 47
In July 1994, a director, exercised 4,688 options at an exercise price of
$2.60 per share from his option under the 1988 stock option plan.
In March 1993, two past directors of the Company exercised 4,688 options
each at an exercise price of $2.60 per share from their options under the 1988
Stock Option Plan.
At December 31, 1995 the Company's outstanding warrants to purchase common
stock consisted of:
<TABLE>
<CAPTION>
Number of Warrants Exercise Price Range Expiration Date
------------------ -------------------- ---------------
<S> <C> <C>
187,500 $ 3.88 06/30/96
10,000 $ 2.40 12/19/96
35,000 $ 1.88 12/20/96
100,000 $ 6.00 12/11/97
50,000 $ 4.63 12/11/97
2,133,903 $3.75-$4.41 09/28/98
57,375 $11.14 10/05/98 *
45,000 $ 2.75 01/06/00
25,000 $ 3.25 05/30/00
1,200,000 $ 4.75 05/12/00
100,000 $ 4.75 08/01/00
60,000 $ 3.63 09/06/00
---------
4,003,778
=========
</TABLE>
- ----------
* Each warrant permits the holder to purchase 3.3 shares of common stock plus
two stock purchase warrants, expiring September 28, 1998, which permit the
holder to purchase one additional share of common stock at an exercise price of
$3.75.
(11) MAJOR CUSTOMER
The Company sold oil representing 56% of its oil production under contracts
to one customer for the year ended December 31, 1995. 71% of the Company's gas
production was sold under contracts to three customers (29%, 26% and 16%,
respectively) for the year ended December 31, 1995.
The Company sold oil representing 72% of its oil production under contracts
to one customer for the year ended December 31, 1994. 88% of the Company's gas
production was sold to three customers (48%, 25% and 15%, respectively) for the
year ended December 31, 1994.
The Company sold oil representing 82% of its oil production under contracts
to two customers (68% and 14%, respectively) for the year ended December 31,
1993. 90% of the Company's gas production was sold to two customers (64% and
26%, respectively) for the year ended December 31, 1993.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, debt and other financial assets and liabilities approximate
their fair value.
(13) SUBSEQUENT EVENTS
On March 8, 1996 the option to acquire a 4.1667% working interest in the
South Timbalier Block 76 was exercised for $790,000 plus the retention by
Fortune of a $150,000 deposit for a total of $940,000 reducing the Company's
interest in the block to 12-1/2% working interest (9.375% net revenue interest)
effective January 1, 1996. The closing of the transaction took place on March
11, 1996.
47
<PAGE> 48
The interest acquired by Fortune was originally owned by PetroFina, Inc.,
which had agreed to sell the interest to Northport Production Company. In turn,
Northport had agreed to sell the property to Mr. Donald L. Walker. In order to
secure the right to purchase the interest, Mr. Walker gave PetroFina a
non-refundable security deposit of $150,000. In order to step into Mr. Walker's
position, Fortune paid Mr. Walker $100,000 in cash, agreed to issue stock
purchase warrants for 150,000 shares of Common Stock and granted Mr. Walker the
option referred to below. (The warrants are exercisable for two years at the
following prices: 50,000 shares at $4.63 per share and 100,000 shares at $6.00
per share.) In addition, Fortune gave an additional security deposit to
PetroFina of $100,000.
Fortune paid a total of $2.9 million for its interest in the Timbalier
Block. Of that amount, approximately $560,000 was paid out of the net cash flow
from Fortune's interest in the property between June 1, 1995 and approximately
mid- October 1995. In addition, the $150,000 deposit paid by Mr. Walker and the
$100,000 deposit paid by Fortune were applied to the purchase price. At the
closing of the transaction, the net cash paid by Fortune for its interest in the
Timbalier Block was approximately $2,090,000. Fortune granted Pendragon
Resources, a Texas limited liability company owned by Donald L. Walker, the
right, exercisable until March 11, 1996, to acquire the 4-1/6% working interest
in the Timbalier Block for $790,000 and the retention of a deposit of $150,000.
As noted above, Pendragon Resources exercised this option on March 8, 1996.
During 1995 the Company had entered into a purchase and sale agreement to
sell the majority of its California properties comprising of Hopper Canyon,
Holser Canyon, Oxnard Field and Shiels Canyon in Ventura County and Bacon Hills
Lease in Kern County. The properties were divested on February 23, 1996, to a
private oil and gas producer group for a combined price of $840,000 with an
effective date of December 31, 1995. The Company has signed a letter of intent
to sell its remaining California property to Seneca Resources Corporation, to be
effective December 1, 1995. The transaction is expected to close on March 31,
1996. At December 31, 1995, the Company has classified as oil and gas properties
held for sale the net proceeds estimated to be received from both of these
transactions and recorded an impairment reserve of $1.4 million.
(14) UNAUDITED PRO-FORMA OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST
INFORMATION
All of the Company's reserves are located within the United States. Proved
reserves represent estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate to be reasonably certain to be
recoverable in the future from known reservoirs under existing economic and
operating conditions Proved developed oil and gas reserves are reserves that can
be expected to be recovered through existing wells using existing equipment and
operating methods.
For the years ended December 31, 1994 and 1993, the oil and gas reserve
estimates were reviewed by Huddleston & Co., Inc., ("Huddleston") Houston, Texas
independent petroleum engineers and Sherwin D. Yoelin, independent petroleum
engineer, and for the year ended December 31, 1995, by Huddleston, in accordance
with guidelines established by the Securities and Exchange Commission. Such
estimates are subject to numerous uncertainties inherent in the estimation of
quantities of proved reserves and in the projection of future rates of
production, prices and the timing of development expenditures. The future cash
inflow, as reflected in the "Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Reserves", determined from such reserve
data are estimates only, and the present values thereof should not be construed
to be the current market values of the Company's oil and gas reserves or the
costs that would be incurred to obtain equivalent reserves.
48
<PAGE> 49
CHANGES IN ESTIMATED RESERVE QUANTITIES
The Company's net interests in estimated quantities of proved developed and
undeveloped reserves of crude oil and natural gas at December 31, 1993, 1994,
and 1995, and changes in such quantities during the years, 1993, 1994 and 1995,
were as follows:
<TABLE>
<CAPTION>
CRUDE OIL (Barrels)
---------------------------------
Year Year Year
1993 1994 1995
------ ------ ------
(in thousands)
<S> <C> <C> <C>
BEGINNING OF PERIOD 2,066 813 1,647
Revisions of previous estimates (1,195) 866 (160)
Production (79) (88) (92)
Purchase of minerals in place 77 56 174
Sales of minerals in place* (56) -- (1,222)
------ ------ ------
END OF PERIOD 813 1,647 347
====== ====== ======
Proved developed reserves
Beginning of period 983 666 675
====== ====== ======
End of period 666 675 324
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
NATURAL GAS (Mcf)
---------------------------------
Year Year Year
1993 1994 1995
------ ------ ------
(in thousands)
<S> <C> <C> <C>
BEGINNING OF PERIOD 4,795 5,562 5,911
Revisions of previous estimates (1,183) 533 (388)
Production (724) (1,017) (909)
Purchase of minerals in place 3,010 833 2,934
Sales of minerals in place* (336) -- (1,610)
------ ------ ------
END OF PERIOD 5,562 5,911 5,938
====== ====== ======
Proved developed reserves
Beginning of period 2,582 4,221 3,317
====== ====== ======
End of period 4,221 3,317 4,686
====== ====== ======
</TABLE>
* During 1995, the Company's interests in its California properties, which were
sold in February 1996, were transferred to oil and gas properties held for sale.
49
<PAGE> 50
NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
This statement attempts to present future net cash flows related to proved
oil and gas reserves without the subjectivity inherent in either direct
estimation of market value or entity specific discounted net cash flow. This
measure is not a measure of fair market value nor a measure of the present value
of future cash flows, but rather a rough estimation of such.
This measure should be responsive to some of the key variables that affect
fair market value, such as changes in reserve quantities, selling prices,
production costs and tax rates.
The future net cash inflows are developed as follows:
(1) Estimates are made of quantities of proved reserves and the future
periods during which they are expected to be produced based on period-end
economic conditions.
(2) The estimated future production of proved reserves is priced on the basis
of period-end prices except for fixed and determinable escalation provisions in
existing contracts.
(3) The resulting future gross revenue streams are reduced by estimated
future costs to develop and to produce the proved reserves, based on period-end
cost estimates.
(4) The resulting future net revenue streams are reduced to present value
amounts by applying a 10 percent discount factor.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
Disclosure of the principal component of the standardized measure of
discounted future net cash flows provides information concerning the factors
involved in making the calculation. In addition, the disclosure of both
undiscounted and discounted net flows provides a measure of comparing proved oil
and gas reserves both with and without an estimate of production timing. The
standardized measure of discounted future net cash flows relating to proved
reserves reflects income taxes.
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Future cash inflows $ 22,153 $ 32,898 $ 19,531
Future costs:
Production (7,950) (11,283) (6,050)
Development (1,368) (5,683) (881)
-------- -------- --------
Future net inflows before income taxes 12,835 15,932 12,600
Future income taxes -- -- --
-------- -------- --------
Future net cash flows 12,835 15,932 $ 12,600
10% discount factor (4,281) (7,784) (3,658)
-------- -------- --------
Standardized measure of
discounted net cash flows $ 8,554 $ 8,148 $ 8,942
======== ======== ========
</TABLE>
50
<PAGE> 51
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVEN
RESERVE QUANTITIES
This statement discloses the sources of changes in the standardized measure
from period to period. The amount reported as "Net change in sales and transfer
prices" represents the approximate effect of increasing the evaluation of
reserves proved in prior periods to reflect higher prices in effect in the
following years. The "Accretion of discount" was computed by applying the 10
percent discount factor to be valuation of the proved reserves as of the
beginning of the period before income tax effects. "Changes in estimated future
development costs" arise from several sources: (1) revisions of previous
estimates for both development costs actually incurred in the current period and
for development costs estimated to be incurred in succeeding periods, (2) new
discoveries from which future development must be performed and (3)
current-period expenditures which reduced the future expenditures estimated in
prior periods (the amounts at the beginning of the period). The "Sales and
transfers, net of production costs" are expressed in actual dollar amounts.
"Revisions of quantity estimates" are expressed at period-end prices. The "Net
change in income taxes" is computed as the change in present value of future
income taxes. The "Changes in production rates (timing) and other" reflects all
other changes, such as changes in timing, and includes the residual from
estimation errors in computing other elements of change.
<TABLE>
<CAPTION>
Year Year Year
1993 1994 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Standardized Measure:
Beginning of period $ 5,646 $ 8,554 $ 8,148
Increases (decreases):
Sales and transfers, net of
production costs (1,816) (2,249) (1,445)
Net change in sales and transfer
prices net of production costs (2,087) (1,635) 460
Changes in estimated future
development costs 4,197 (4,315) 500
Revisions of quantity estimates (10,999) 6,385 (871)
Accretion of discount 565 855 814
Net change in income taxes 5,905 -- --
Purchases of reserves in place 7,231 1,464 5,329
Sales of reserves in place* (291) -- (3,024)
Changes in production rates
(timing) and other 203 (911) (969)
-------- -------- --------
Standardized Measure:
End of period $ 8,554 $ 8,148 $ 8,942
======== ======== ========
</TABLE>
* During 1995, the Company's interests in its California properties,which were
sold in February 1996, were transferred to oil and gas properties held for sale.
51
<PAGE> 52
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on March 22, 1996.
FORTUNE PETROLEUM CORPORATION
By: /s/ J. MICHAEL URBAN
-------------------------------------------------
J. Michael Urban, Vice President, Chief Financial
Officer and Chief Accounting Officer
By: /s/ TYRONE J. FAIRBANKS
-------------------------------------------------
Tyrone J. Fairbanks, President, Chief Executive
Officer and Director
In accordance with the Exchange Act this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ TYRONE J. FAIRBANKS President, Chief Executive Officer, March 22, 1996
- ----------------------------------- and Director
Tyrone J. Fairbanks
/s/ DEAN W. DRULIAS Secretary and Director March 22, 1996
- -----------------------------------
Dean W. Drulias
/s/ GRAHAM S. FOLSOM Director March 22, 1996
- -----------------------------------
Graham S. Folsom
/s/ WILLIAM T. WALKER, JR. Director March 22, 1996
- -----------------------------------
William T. Walker, Jr.
/s/ BARRY FEINER Director March 22, 1996
- -----------------------------------
Barry Feiner
/s/ GARY GELMAN Director March 22, 1996
- -----------------------------------
Gary Gelman
</TABLE>
52
<PAGE> 1
EXHIBIT 10.1
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (this "Agreement") is made and
entered into this __ day of January, 1996, but is effective for all purposes as
of December 31, 1995, by and between ARNOLD and JOAN TRAVIS and THE WOOD FAMILY
TRUST ("Purchasers") and FORTUNE PETROLEUM CORPORATION, a Delaware corporation
("Seller").
W I T N E S E T H:
WHEREAS, Seller is the owner of the oil and gas leaseholds and related
equipment defined below as the Assets; and
WHEREAS, Seller desires to sell to Purchasers, and Purchasers desire
to purchase from Seller, the Assets upon the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing, and the mutual and
dependent promises contained herein, and other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Parties agree as
follows:
ARTICLE I
PURCHASE AND SALE
1.1 AGREEMENT TO SELL AND PURCHASE. Subject to the terms and
conditions of this Agreement, Purchasers agree to purchase, and Seller agrees
to sell, transfer, and convey all its right, title, and interest in the Assets,
as of the Effective Time.
1.2 ASSETS. The term "Assets" shall mean all Seller's right,
title and interest in:
A. The oil, gas and mineral leasehold interests more
particularly described in the attached Exhibit "A", which is incorporated
herein by reference (hereafter referred to as the "Properties"), subject to all
existing agreements including, but not limited to, operating agreements,
unitization agreements, pooling agreements, declarations of pooling or
unitization, farmout agreements, assignments, oil or gas sale contracts, gas
processing contracts, and any and all other instruments and agreements
pertaining thereto (the "Existing Contracts") which Existing Contracts are
identified on Exhibit "B" hereof.
B. All (i) wells, tanks, pipelines, steam generators,
fixtures, equipment, improvements, and other property and (ii) easements,
rights-of-way, permits, licenses, servitudes, environmental permits, orders,
rights, authorizations, and appurtenances, used or held for use or related to
the Properties or the development or operation of the Properties or the
production, treatment, storage, compression, processing or transportation of
hydrocarbons
<PAGE> 2
from or on the Properties (collectively, the "Incidental Property"). Without
limiting the foregoing, an inventory of certain Incidental Property is set
forth in Exhibit "C" hereto.
C. All rights and obligations arising from the Existing
Contracts applicable to the Properties.
D. All of the applicable files, records, and data relating to
the items described in subsections A, B, and C, above, (but excluding Seller's
internal financial and accounting records) (the "Records") including, without
limitation, title records (including abstracts of title and title curative
documents), contracts, geological and geophysical records, data and
information, production records, electric logs, core data, pressure data,
decline curves, and graphical production curves, and all related matters in the
possession of Seller.
E. Subject to section 1.5 below, all oil, gas, or other
minerals or other substances produced from or attributable to the Properties
from and after the Effective Time, together with all proceeds from or
attributable thereto.
1.3 ASSETS EXCLUDED. The Assets at the Effective Time do not
include Seller's accounts receivable associated with the Assets, cash on hand,
cash equivalents, indemnity bonds, or certificates of deposit.
1.4 EFFECTIVE TIME. Ownership of the Assets shall be transferred
from Seller to Purchasers at the closing of the transaction contemplated herein
as provided in Article X (the "Closing"), but shall be effective as of 7:00
a.m. on December 31, 1995 (the "Effective Time"). Seller shall be entitled to
any amount realized from and accruing to the Assets prior to the Effective
Time, and shall be liable for the payment of all expenses (including, but not
limited to, capital expenditures) attributable to the Assets and arising prior
to the Effective Time. Purchasers shall be entitled to any amount realized
from and accruing to the Assets and arising subsequent to the Effective Time,
and shall be liable for the payment of all expenses (including, but not limited
to, capital expenses) attributable to the Assets subsequent to the Effective
Time.
1.5 MEASUREMENT OF PRODUCTION. Seller shall cause the oil storage
facilities on, or utilized in connection with, the Assets to be gauged as of
the Effective Time and cause the gas production meter charts and the sales
meter charts on the pipelines transporting gas production from the Assets to be
read (or changed) as of the Effective Time. Purchasers shall have the right to
witness all such gauging and chart reading. The production in such
2
<PAGE> 3
storage facilities, or downstream of such meters on the gas pipelines, prior to
and as of the Effective Time shall belong to Seller, and production placed in
such storage facilities thereafter and production upstream of the meters on the
pipelines shall belong to Purchasers and shall become a part of the Assets.
Prior to Closing, Purchasers, upon request, shall be provided with access to
the records of the gauging and chart reading for the purpose of verifying such
records.
1.6 RECORDS. Seller shall have the right to make copies of the
Records as it may desire prior to the delivery of the Records to Purchasers.
Purchasers shall maintain the records for a period of five (5) years after the
Closing and shall further grant to Seller or its designee access to the
Records, upon written request of Seller during normal business hours and Seller
shall have the right to copy such copies of Records at its sole cost and
expense.
ARTICLE II
PURCHASE PRICE
The purchase price for the Assets (the "Purchase Price") shall be
determined as follows:
A. Eight Hundred Forty Thousand Dollars ($840,000.00);
B. Plus the value of all oil produced or gas in storage or
upstream of the pipeline connection constituting the point of sale at the
Effective Time that is credited to the Properties (value to be the contract
price in effect as of the Effective Time or, if no contract price, the market
price at the wellhead less any taxes deducted by the purchaser of such oil or
gas if any);
C. Plus the amount of all expenses and deposits (including,
but not limited to, capital expenditures) paid by Seller and relating to any of
the Assets for any period of time after the Effective Time;
D. Plus the value of any Property Taxes, as defined in
Section 13.1, paid by Seller and relating to any of the Assets for any period
of time after the Effective Time;
E. Less all monies, proceeds, receipts and income received by
Seller, net of royalties, and attributable to the Assets for all periods of
time subsequent to the Effective Time, including an amount equal to the value
of oil, gas or other minerals or substances produced and sold by Seller after
the Effective Time;
3
<PAGE> 4
F. Less the amount of all advances and deposits received by
Seller and relating to the Assets after the Effective Time; and
G. Less the amount of Seller's prorated share of any accrued
but unpaid Property Taxes relating to any of the Assets for the period prior to
the Effective Time.
ARTICLE III
REVIEW OF ASSETS
3.1 ACCESS TO RECORDS AND PROPERTIES. Prior to the execution of
this Agreement, Seller has granted Purchasers access to the Properties and
certain of the files and records relating to the Assets. Until the Closing,
Seller will give Purchasers access to the Records in Seller's possession
relating to the Assets and will use its best efforts to furnish to Purchasers
all other information (including accounting and financial information) with
respect to the Assets as Purchasers may from time to time reasonably request,
except to the extent that Seller is prohibited from disclosing such information
by law or agreement with a third party and, with respect to such restricted
information, Seller shall use its best efforts to cause such information to be
disclosed to Purchasers. Such access by Purchasers shall be limited to
Seller's normal business hours, by appointment only, and shall be without
disruption of Seller's normal and usual operations. Seller hereby grants to
Purchasers a license to enter upon any of the Properties prior to the Closing,
subject only to reasonable notice to Seller, in order to conduct inspections,
tests, surveys, appraisals, and studies which Purchasers may desire at their
sole cost, risk and expense to determine the condition of the Assets,
including, without limitation, whether hazardous substances are present in or
under the Assets.
3.2 ENVIRONMENTAL REVIEW. Purchasers shall have until January 31,
1996 to, at their sole cost and expense, conduct environmental assessments of
the Properties. Seller shall grant Purchasers and their representatives, at
Purchasers' sole risk, full and free rights of ingress and egress to the
Properties for such purposes. Purchasers may take cores and samples of soil,
water, or air and may test these samples either on or off the Properties to
determine whether the Properties contain or have been affected by, or have ever
contained or been affected by, any Hazardous Material. If Purchasers determine
that any such substance is present on the Properties in an uncontained
condition or under other circumstances constituting a violation of any
Environmental Law, Purchasers shall promptly notify Seller and shall provide
Seller all information in Purchasers' possession concerning the presence of
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such substance, including any facts, tests and calculations on which Purchasers
base their position. If Seller has not satisfied Purchasers, in Purchasers'
sole discretion, that the presence of Hazardous Materials has been removed and
any reasonable possibility of the recurring release of such substance precluded
or that any failure to comply with an Environmental Law has been remedied prior
to February 9, 1996, Purchasers may consider such circumstance a Defect and
shall thereafter proceed under section 3.6, below. "Hazardous Material" shall
include, without limitation, polychlorinated byphenyls, chlorinated
hydrocarbons, hazardous wastes, toxic substances or any similar such pollutants
or contaminants, and shall include substances defined as "hazardous
substances," "hazardous materials," "toxic substance," "hazardous wastes," or
"extremely hazardous wastes," in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601,
et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901,
et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C. Sections 2610,
et seq.; and Sections 25115, 25117, and 25316 of the California Health and
Safety Code; and any law, ordinance, and regulation promulgated pursuant to the
foregoing. The term "Environmental Law" shall mean any federal, state or local
environmental, health or safety statute, ordinance or regulation applicable to
the Assets.
3.3 SELLER'S TITLE. The documents to be executed and delivered by
Seller to Purchasers at the Closing transferring title to the Properties shall
be in a recordable form, shall grant to Purchasers full rights (to the extent
so transferable) to enforce the covenants and warranties (including
title-related warranties) to which Seller is entitled, and shall be in
substantially the form set forth in the attached Exhibit "D" hereof. As
reasonably requested by Purchasers, Seller also agrees to execute and deliver
at and after the Closing such other assignments, bills of sale, certificates of
title and other matters which are appropriate to transfer the Assets to
Purchasers.
3.4 MARKETABLE TITLE. Seller represents and warrants unto
Purchasers that it shall convey to Purchasers at the Closing Marketable Title
to all its working interest and net revenue interest in the Properties. The
term "Marketable Title" shall mean such title that is deducible of record, from
the records of the county in which the Assets are located, free from reasonable
doubt to the end that a prudent person engaged in the business of the
ownership, development and operation of producing oil and gas properties with
knowledge of
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all of the facts and their legal bearing would be willing to accept the same,
and, except for Permitted Encumbrances, Seller's working interest and net
revenue interest in each Property are free of any material liens and
encumbrances, caused or arising by, through or under Seller, but not otherwise.
3.5 PERMITTED ENCUMBRANCES. The term "Permitted Encumbrances"
shall mean, in addition to those specifically identified on Exhibit "E" hereof.
A. Royalties, overriding royalties, reversionary interests
and similar burdens if the working or net cumulative effect of such burdens
does not reduce the net revenue interests of Seller below the interest shown on
Exhibit "A" hereto.
B. Division orders and sales contracts terminable without
penalty upon no more than ninety (90) days' notice to the purchaser of
production.
C. Preferential rights to purchase and required third-party
consents to assignments and similar agreements with respect to which waivers or
consents are obtained from the appropriate parties or the appropriate time
period for asserting the rights has expired without an exercise of the rights.
D. Liens for taxes or assessments not yet delinquent or, if
delinquent, that are being contested in good faith in the normal course of
business.
E. Materialman's, mechanic's, repairman's, employee's,
contractor's, operator's, and other similar liens or charges arising in the
ordinary course of business (a) if they have not been filed pursuant to law,
(b) if filed, they have not yet become due and payable or payment is being
withheld as provided by law, or (c) if their validity is being contested in
good faith by appropriate action.
F. All rights to consent by, required notices to, filing
with, or other actions by governmental entities in connection with the sale or
conveyance of oil and gas leases or interests if they are customarily obtained
subsequent to the sale or conveyance.
G. Conventional rights of reassignment requiring notice to
the holders of the rights.
H. Easements, rights-of-way, servitudes, permits, surface
leases and other rights relating to surface operations which do not have a
material adverse effect on the operation of the Properties.
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I. All other liens, charges, encumbrances, contacts,
agreements, instruments, obligations, defects, irregularities affecting the
Properties which individually or in the aggregate are not such as to interfere
materially with the operation, value or use of any of the Properties, do not
prevent Purchasers from receiving the proceeds of production from any Property,
do not materially reduce the interest of Seller with respect to all oil and gas
produced from any Property (or a well located thereon) below the net revenue
interest, and do not increase the costs and expenses that Seller is obligated
to pay above the working interest, both as set forth in Exhibit "A" hereto.
J. All rights reserved to or vested in any governmental,
statutory or public authority to control or regulate any of the Properties in
any manner, and all applicable laws, rules and orders of governmental
authority.
K. Any Title Defects that Purchasers may have expressly
waived in writing.
L. The terms and conditions of the Existing Contracts, and
any contracts for the sale, purchase, exchange, or refining of hydrocarbons and
other agreements which are customary in the oil and gas development and
extraction business.
3.6 NOTICE OF DEFECTS. Purchasers shall notify Seller, in
writing, on or before February 12, 1996, of (a) any matter that would cause
title to any Property or portion thereof not to be Marketable Title ("Title
Defect") or (b) any condition, adverse commitment, liability, or contingency,
including, without limitation, environmental conditions, liabilities, or
contingencies, but excluding Casualty Defects ("Other Defect"), which, in
Purchasers' reasonable opinion, would materially impair the value of the
Assets, together with the amount by which Purchasers believe the value of the
Properties has been reduced by each such defect. Any conditions or
circumstances that would otherwise constitute defects which are not raised by
Purchasers to Seller, in writing, by February 12, 1996 shall be deemed to be
waived.
3.7 REMEDIES FOR DEFECTS. For any Defect timely disclosed to
Seller as provided in section 3.6, above, and provided Purchasers elect not to
waive such Defect, Seller shall have the right, but not the obligation, to
attempt to cure any such Defect for ten (10) days following such notice. With
respect to any such Defect that Seller elects not to cure or fail to cure
within such ten-day period, Seller shall give notice to Purchasers, within five
(5) days thereafter, that it desires to reach an agreement as to a reduction of
the Purchase Price
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caused by the Defect, in which case the Purchase Price shall be reduced by such
value, and the Property subject to the Defect shall be sold pursuant to this
Agreement. If the Parties fail to reach agreement as to the reduction of the
Purchase Price within five days after delivery of such notice by Seller, a
determination of such reduction shall be made by a mutually acceptable
consultant, who shall take into account all factors necessary for a proper
evaluation. The consultant's determination shall be conclusive, binding on the
Parties, and enforceable in any court of competent jurisdiction. All costs and
expenses associated with such a third-party determination shall be borne
equally by the Parties. Notwithstanding the foregoing, no remedy shall be made
for any Defect pursuant to this section 3.7 if the aggregate amount
attributable to all such Defects is less than $50,000.
3.8 CASUALTY LOSS. If any of the Properties are substantially
damaged or destroyed by fire or other casualty ("Casualty Defect") prior to the
Effective Time, Seller shall notify Purchasers promptly after Seller learns of
such event. Seller shall have the right, but not the obligation, to cure any
personal property or fixtures, replacing the damaged Properties with equivalent
items, no later than the Closing. In the event Seller elects not to cure or
replace the damaged Properties, Purchasers shall proceed to purchase the
damaged Properties; however, Purchasers may reduce the Purchase Price by the
value of damage to the Properties. In that event, insurance proceeds and all
rights and claims against other parties relating to the Casualty Defect, if
any, shall belong to Seller. In the event the parties cannot agree within
thirty (30) days of Seller's notice upon the value of damage to the Properties
for the purpose of reducing the Purchase Price in accordance with this Section
3.8, such determination shall be made by a mutually acceptable consultant. All
costs and expenses associated with such a determination shall be borne equally
by the Parties. If any Casualty Defects occur subsequent to the Effective Time
but prior to the Closing, Purchasers shall proceed to purchase the damaged
Properties at the price shown in Section 2.lA hereof, excluding any reduction
in the purchase price for Casualty Defects, and shall be entitled to retain all
insurance proceeds and claims against other parties relating to any such
Casualty Defect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents the following:
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4.1 DISCLAIMERS. Except as specifically set forth in Article III
and this Article IV, Seller makes no warranties or representations, express or
implied, in connection with the Assets, and expressly disclaim any such
representations or warranties, except as set forth herein, with regard to any
information or data disclosed or provided by it or its officers, directors,
agents, representatives, employees, or advisors to Purchasers or Purchasers'
agents, representatives, employees, or advisors. Subject to this Section 4.1
and to the schedule of exceptions attached hereto as Exhibit "F" hereof (the
"Schedule of Exceptions"), Seller makes the representations and warranties set
forth in Sections 4.2 through 4.11. SELLER EXPRESSLY DISCLAIMS ANY WARRANTY AS
TO THE CONDITION OF ANY REAL OR PERSONAL PROPERTY, FIXTURES AND ITEMS OF
MOVABLE PROPERTY COMPRISING ANY PART OF THE ASSETS INCLUDING (a) ANY IMPLIED OR
EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE, (c) ANY IMPLIED OR EXPRESS WARRANTY OF
CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (d) ANY RIGHTS OF PURCHASERS
UNDER APPLICABLE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION; AND (e) ANY
CLAIM BY PURCHASERS FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN,
IT BEING EXPRESSLY UNDERSTOOD BY PURCHASERS THAT THE PERSONAL PROPERTY,
FIXTURES AND ITEMS ARE BEING CONVEYED TO PURCHASERS AS IS, WHERE IS, WITH ALL
FAULTS, AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR AND THAT PURCHASERS
HAVE MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS PURCHASERS DEEM APPROPRIATE.
4.2 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Seller is a
corporation duly organized, validly existing and in good standing under the
laws of Delaware, has all necessary power to own the Properties and to carry on
its business as now owned and operated by it, and is duly qualified to do
business and is in good standing in all jurisdictions in which the nature of
its business or of its Properties makes such qualifications necessary.
4.3 POWER. Except as identified on the Schedule of Exceptions,
Seller has the
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power to enter into and perform this Agreement and the transactions
contemplated by this Agreement. Subject to any preferential purchase rights,
and restrictions on assignment of the type generally found in the oil and gas
industry, and rights to consent by, required notice to, and filings with or
other actions by governmental entities where the same are customarily obtained
subsequent to the assignment of oil and gas interests, the execution, delivery
and performance of this Agreement by Seller, and the transactions contemplated
by this Agreement, will not violate (a) any material agreement or instrument to
which Seller is a party or by which Seller or any of the Assets are bound, (b)
any judgment, order, ruling, or decree applicable to Seller, as a party in
interest, or (c) any law, rule or regulation applicable to Seller relating to
the Assets other than a violation which would not have a material adverse
effect on Seller or the Assets.
4.4 AUTHORIZATION. The execution, delivery and performance of
this Agreement and the transactions contemplated by this Agreement have been
duly and validly authorized by all requisite action on the part of Seller.
This Agreement has been duly executed and delivered on behalf of Seller and, at
the Closing, all documents and instruments required to be executed and
delivered by Seller shall have been duly executed and delivered. This
Agreement constitutes a legal, valid and binding obligation of Seller
enforceable in accordance with its terms, subject, however, to bankruptcy,
insolvency, reorganization, fraudulent conveyance and similar laws from time to
time in effect relating to the rights and remedies of creditors, as well as to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.5 BROKERS. Seller has incurred no obligation or liability,
contingent or otherwise, for brokers' or finders' fees relating to the matters
provided for in this Agreement which will be the responsibility of Purchasers,
and any such obligation or liability that might exist shall be the sole
obligation of Seller.
4.6 DEFAULT OF AGREEMENT. Seller is not in default under the
terms of any contracts, leases, or agreements respecting the Properties which
might result in a material impairment or loss of title to any material part of
the Properties or the value thereof or which might materially hinder or impede
the operations of the Properties.
4.7 VIOLATION OF LAW. Seller is not in violation of any
applicable laws, rules,
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regulations or orders of any governmental agency having jurisdiction over the
Properties or operations thereon which would result in a material impairment of
the Properties or the value thereof or which would materially hinder or impede
the operation of the Properties.
4.8 CLAIMS AND LITIGATION. There are no legal or administrative
proceedings, material claims or investigations now pending or, to the best of
Seller's knowledge, threatened before any court or administrative body against
Seller, which, upon determination would adversely effect the value of the
Assets or which has or will materially affect Seller's ability to consummate
the transactions contemplated by this Agreement.
4.9 TAXES AND ASSESSMENTS. To the best of Seller's knowledge,
all material ad valorem, production, severance, excise, and similar taxes and
assessments based upon or measured by the value of or the ownership of the
production of hydrocarbons from the Properties which have become due and payable
have been properly paid or are being challenged in good faith, all applicable
tax returns have been filed, and Seller knows of no claim by any applicable
taxing authority in connection with the payment of these taxes.
4.10 PAYMENT OF RENTS AND ROYALTIES. Seller has either paid or
caused to be paid in a timely and proper manner all rents, royalties, and other
applicable lease maintenance payments which have come due and payable, and all
oil and gas leases described in Exhibit "A" hereof are valid and in full force
and effect as of the Closing.
4.11 EXHIBITS. To the best of Seller's knowledge, all information
contained in the Exhibits attached to this Agreement is free from any
intentional misrepresentation or omission of material facts or disclosures.
ARTICLE V
REPRESENTATIONS OF PURCHASERS
Purchasers hereby represent and warrant to Seller the following:
5.1 STATUS. Purchasers are individuals experienced in the
acquisition and operation of oil and gas properties and consider themselves
qualified to carry on the business of producing and marketing hydrocarbons, to
be conducted by them following the consummation of the transaction contemplated
hereby.
5.2 BROKERS. Purchasers have incurred no obligation or liability,
contingent or otherwise, for brokers' or finders' fees relating to the matters
provided for in this Agreement which will be the responsibility of Seller. Any
such obligation or liability that might exist
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shall be the sole obligation of Purchasers.
5.3 CLAIMS AND LITIGATION. There is no suit, action, claim,
investigation or inquiry by any person or entity or any administrative agency
or governmental body and no legal, administrative or arbitration proceeding
pending or, to Purchasers' best knowledge, threatened against Purchasers which
has or will materially affect Purchasers' ability to consummate the
transactions contemplated by this Agreement.
5.4 MATERIAL MISSTATEMENTS OR OMISSIONS. No representations or
warranties by Purchasers in this Agreement contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary to make the statements or facts contained herein not misleading.
ARTICLE VI
PRE-CLOSING OBLIGATIONS OF SELLER
6.1 OPERATIONS. From the date of this Agreement until the Closing
(the "Interim Period"), except as otherwise approved by Purchasers, Seller
shall (a) permit Purchasers to have access to the Properties, (b) consult with
Purchasers with respect to all material decisions to be made with respect to
the Properties, (c) operate the Properties as a reasonably prudent operator,
(d) act, with respect to the Assets, in good faith and in accordance with its
best business judgment as if the Assets were not being sold to Purchasers, (e)
exercise reasonable diligence in safeguarding and maintaining secure and
confidential all geological and geophysical maps, confidential reports and data
in its possession relating to the Assets, and (f) not transfer, sell,
hypothecate, encumber, abandon or otherwise dispose of any material portion of
the Properties (other than as required in connection with the exercise by third
parties of preferential rights to purchase any of the Properties) without the
prior written consent of Purchasers.
6.2 PERMISSIONS. During the Interim Period, Seller shall use
reasonable efforts to obtain all permissions, approvals, and consents by
federal, state and local governmental authorities and others as may be required
to consummate the transaction contemplated by this Agreement (excluding
governmental permissions, approvals and consents which are customarily obtained
after the assignment of an oil and gas interest, which shall be the
responsibility of Purchasers to obtain).
6.3 DEFAULTS. Seller shall give prompt written notice to
Purchasers of any notice
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of default (or written threat of default, whether disputed or denied by Seller)
received or given by Seller subsequent to the Effective Time under any
instrument or agreement affecting the Properties to which Seller is a party or
by which it or any of the Properties is bound.
6.4 CONDUCT OF BUSINESS IN NORMAL COURSE. Seller will carry on
its business and activities on the Properties diligently and in substantially
the same manner as they previously have been carried out, and shall not make or
institute any unusual or novel methods of purchase, sale, lease, management,
accounting, or operation that will vary materially from those methods used as
of the Effective Date without the prior written consent of Purchasers.
6.5 PRESERVATION OF BUSINESS AND RELATIONSHIPS. Seller will use
its reasonable best efforts, without making any commitments on behalf of
Purchasers, to preserve its business organizations intact and to preserve its
present relationships with suppliers, customers, and others having business
relationships with Seller.
6.6 MAINTENANCE AND INSURANCE. Seller will continue to carry its
existing insurance, subject to variations in amount required by the ordinary
operations of its business. At the request of Purchasers and at Purchasers'
sole expense, the amount of insurance against fire and other casualties which,
at the date of this Agreement, is carried on any of the Properties or in
respect of any operations shall be increased by such amount or amounts as
Purchasers shall specify.
ARTICLE VII
PRE-CLOSING OBLIGATIONS OF PURCHASERS
7.1 CONFIDENTIALITY. Purchasers shall cause the information and
data furnished or made available by Seller to Purchasers and their employees
and representatives in connection with this Agreement or Purchasers'
investigation of the Assets, to be maintained in confidence and not to be used
for any purpose other than in connection with this Agreement or Purchasers'
investigation of the Assets; provided, however, that the foregoing obligation
shall terminate on the earlier to occur of (a) the Closing or (b) such time as
the information or data in question becomes generally available to the oil and
gas industry other than through the breach of the foregoing obligation. The
obligations of Purchasers under this section 7.1 shall be in addition to, and
not in lieu of, Purchasers' obligation under any confidentiality agreements
relating to the Assets previously executed by Purchasers.
7.2 RETURN OF DATA. Purchasers agree that if this Agreement is
terminated for any
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reason whatsoever, Purchasers shall, at Seller's request, promptly return to
Seller all information and data furnished to Purchasers or their employees and
representatives in connection with this Agreement or Purchasers' investigation
of the Assets, and Purchasers agree not to retain any copies of any such
information or data.
7.3 COOPERATION. Purchasers will cooperate with Seller to assist
it in carrying out the agreements as set forth in Article VI above.
ARTICLE VIII
CONDITIONS OF SELLER TO CLOSING
The obligation of Seller to consummate the transaction contemplated by
this Agreement is subject, at the option of Seller, to the fulfillment on or
prior to the Closing of each of the following conditions:
8.1 REPRESENTATIONS. The representations and warranties of
Purchasers contained in this Agreement shall be true and correct in all
material respects on the Closing as though made on and as of such date.
8.2 PERFORMANCE. Purchasers shall have performed all obligations,
covenants and agreements hereunder and shall have complied with all covenants
and conditions contained in this Agreement to be performed or complied with by
them at or prior to the Closing.
8.3 PENDING MATTERS. No suit, action or other proceeding, public
or private, shall be pending, which (a) seeks to restrain, enjoin or otherwise
prohibit the consummation of the transactions contemplated by this Agreement,
(b) challenges the transactions contemplated by this Agreement under the United
States antitrust laws, or (c) seeks either monetary or injunctive relief from
the transactions contemplated hereunder.
8.4 MATERIAL CHANGE. There shall not have been material change in
the financial condition of Purchasers from the date hereof. Purchasers shall
not after the date hereof, have transferred, sold, hypothecated, encumbered,
abandoned, or otherwise disposed of any material portion of the assets or
properties owned by it.
ARTICLE IX
CONDITIONS OF PURCHASERS TO CLOSING
The obligation of Purchasers to consummate the transaction provided
for in this Agreement is subject, at the option of Purchasers, to the
fulfillment on or prior to Closing of each of the following conditions:
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9.1 REPRESENTATIONS. The representations and warranties of Seller
contained in this Agreement shall be true and correct in all material respects
on the Closing as though made on and as of such date.
9.2 PERFORMANCE. Seller shall have performed all obligations,
covenants and agreements hereunder and shall have complied with all covenants
and conditions contained in this Agreement to be performed or complied with by
them at or prior to the Closing.
9.3 PENDING MATTERS. No suit, action or other proceeding, public
or private, shall be pending, which (a) seeks to restrain, enjoin or otherwise
prohibit, the consummation of the transactions contemplated by this Agreement,
(b) challenges the transactions contemplated by this Agreement under the United
States antitrust laws, or (c) seeks either monetary or injunctive relief from
the transactions contemplated hereunder.
ARTICLE X
CLOSING
10.1 TIME AND PLACE OF CLOSING. If the conditions to Closing have
been satisfied or waived, the consummation of the transactions contemplated by
this Agreement shall be held on February 20, 1996 and shall be held at the
offices of Burris, Drulias & Gartenberg, 11755 Wilshire Boulevard, Suite 1230,
Los Angeles, California.
10.2 CHANGE OF CLOSING DATE. The Closing may be changed to such
earlier or later date as may be fixed by mutual agreement of the Parties.
10.3 CLOSING OBLIGATIONS. At the Closing:
A. Seller shall execute, acknowledge and deliver the deeds,
assignments, bills of sale, or other transfer documents provided for in this
Agreement, deliver possession of the Assets to Purchasers, and shall execute
and deliver to Purchasers such other instruments and take such other action
as may be necessary to carry out their obligations under this Agreement;
B. Seller shall deliver to Purchasers the Records pertaining
to the Assets;
C. Seller and Purchasers shall execute, acknowledge, and
deliver transfer orders or letters in lieu thereof directing all purchasers of
production to make payment to Purchasers of proceeds attributable to production
from the Properties to Purchasers;
D. Purchasers shall execute such other instruments and take
such other action
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as may be necessary to carry out its obligations under this Agreement;
E. Purchasers shall take possession of the Assets, and take
over custody and control of the Assets, all accounting, lease maintenance and
other related functions and, where possible, all operations on the Properties;
and
ARTICLE XI
POST-CLOSING OBLIGATIONS
11.1 CALCULATION OF ADJUSTED PURCHASE PRICE. Not later than
forty-five (45) days after the Closing, Seller shall prepare, in accordance
with this Agreement, and deliver to Purchasers a final statement setting forth
post-closing adjustments to the Purchase Price and showing the calculation of
such adjustments (the "Closing Adjustment Statement"). The Closing Adjustment
Statement will include any adjustments pursuant to Article II and, if the
Closing Adjustment Statement reflects a balance owing to Purchasers, such
payment shall be delivered with the Closing Adjustment Statement. Within
thirty (30) days after receipt of the Closing Adjustment Statement, Purchasers
shall deliver to Seller any objections that Purchasers have such statement. If
Purchasers have no objections to the Closing Adjustment Statement and it
reflects a balance owing to Seller, Purchasers shall pay such balance within
such thirty (30) day period. The Parties shall undertake to agree on the
adjustments no later than ninety (90) days after the Closing. Final
adjustments shall be made in cash and shall be conclusively deemed to be final
unless challenged by Purchasers within thirty (30) days of receipt of the
Closing Adjustment Statement. If the Parties cannot reach agreement as to all
or any portion of the final adjustments, such disputed portion shall be
resolved by submitting the issue to arbitration pursuant to the Commercial
Arbitration Rules of the American Arbitration Association then currently in
effect, which Arbitration shall be held in Los Angeles County, California.
The costs of any such arbitration shall be shared equally by the Parties.
11.2 RECEIPTS AND CREDITS. Following final adjustments, all
monies, proceeds, receipts, credits and income attributable to the Assets for
all periods of time subsequent to the Effective Time shall be the sole property
and entitlement of Purchasers, and, to the extent received by Seller, it shall
fully disclose, account for and transmit the same promptly to Purchasers.
Following final adjustments, all monies, proceeds, receipts and income
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attributable to the Assets, for all periods of time prior to the Effective
Time, shall be the sole property and entitlement of Seller and, to the extent
received by Purchasers, they shall fully disclose, account for and transmit the
same promptly to Seller. All costs, expenses, disbursements, obligations and
liabilities attributable to the Assets for period of time prior to the
Effective Time, regardless of when due or payable shall be the sole obligation
of Seller and Seller shall promptly pay, or if paid by Purchasers, promptly
reimburse Purchasers for and hold Purchasers harmless from and against same.
All costs, expenses, disbursements, obligations, and liabilities attributable
to the Assets for periods of time subsequent to the Effective Time, regardless
of when due or payable, shall be the sole obligation of the Purchasers and
Purchasers shall promptly pay, or if paid by Seller, promptly reimburse Seller
for and hold Seller harmless from and against same. Seller shall be entitled
to a credit for and reimbursement in an amount equal to any amount received by
Purchasers after the Closing for any delivery or performance by Seller prior to
the Effective Time.
11.3 ASSUMPTION OF OBLIGATIONS AND INDEMNIFICATION. At Closing (a)
Purchasers shall and do hereby assume all expenses and obligations attributable
to the Assets on or after the Effective Time including, but not limited to, any
obligation to properly plug and abandon all wells now or hereafter located on
the Properties (regardless of whether any such obligation to plug and abandon
or restoration of the surface is attributable to periods of time prior to or
after the Effective Time) and restore the surface of the Properties in
accordance with applicable lease or other agreements and governmental
(including environmental) laws, orders and regulations, and, upon request of
Seller, Purchasers agree to execute and deliver specific assumption agreements
with respect to any such obligations, (b) Purchasers agree to indemnify, defend,
and hold harmless Seller, its shareholders, officers, directors, employees,
agents, and representatives, from and against any and all claims, liabilities,
losses, costs and expenses (including, without limitation, court costs and
reasonable attorneys' fees) that are attributable to or arise out of the use or
operation of the Assets on or after the Effective Time (including, without
limitation, with respect to the obligation to properly plug and abandon all
wells now or hereafter located on the Properties including restoration of
the surface) and, with respect to damage to property, or injury to or death of
persons, occurring after the Effective Time but attributable in
17
<PAGE> 18
whole or in part to conditions that existed before the Effective Time, except
to the extent Seller or its shareholders, officers, directors, employees,
agents, and representatives were grossly negligent or acted with willful
misconduct; and (c) Seller agrees to indemnify, defend and hold harmless
Purchasers from and against (i) any and all claims, liabilities, losses, costs
and expenses (including, without limitation, court costs and reasonable
attorneys' fees) that are attributable to or arise out of the use or operation
of the Assets before the Effective Time (other than relating to the obligation
to properly plug and abandon all wells and restore the surface of the property)
or (ii) to property damage or injury to or death of persons occurring from and
after the Effective Time and prior to the Closing, to the extent such property
damage or injury or death is the result of Seller's gross negligence or willful
misconduct.
11.4 RECORDING. As soon as practicable after the Closing,
Purchasers shall record all deeds, conveyances and assignments of the
Properties in the appropriate counties and provide Seller with all recording
data.
11.5 FURTHER ASSURANCES. After the Closing, the Parties agree to
take such further action and to execute, acknowledge and deliver all such
further documents that are necessary or useful in carrying out the purposes of
this Agreement or of any document delivered pursuant to this Agreement. In
addition, upon request, Seller shall provide Purchasers with reasonable access
to Seller's accounting and financial information regarding the Assets to
enable Purchasers to prepare pro forma financial statements in order to comply
with rules or requirements of any governmental agency having jurisdiction.
ARTICLE XII
TERMINATION
12.1 RIGHT OF TERMINATION. This Agreement may be terminated at any
time at or prior to the Closing:
A. By mutual consent of the Parties; or
B. At the option of the non-breaching Party if the other
Party is in material default of its obligations under this Agreement, ten (10)
days after delivery of notice of such
18
<PAGE> 19
default to the breaching party if a cure of the default is not effected.
12.2 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to section 12.1, this Agreement shall become void and of no further
force or effect, except for the provisions of Sections 7.1 and 7.2 hereof,
which shall remain in force. In the event this Agreement is terminated
pursuant to section 12.1B, each Party shall retain all rights which it may have
against the other in law and at equity.
ARTICLE XIII
TAXES
13.1 APPORTIONMENT OF AD VALOREM AND PROPERTY TAX. All ad valorem
taxes, real property taxes, personal property taxes, and similar obligations
relating to the Assets ("Property Taxes") shall be prorated between Seller and
Purchasers as of the Effective Time and the Purchase Price shall be adjusted
accordingly. The proration shall be based on the actual assessment of the
taxing period in which the Effective Time occurs. Seller agrees to (a)
immediately forward to Purchasers any Property Tax reports and returns received
by Seller after the Closing and (b) provide Purchasers with appropriate
information which is necessary for Purchasers to file any required Property Tax
reports and returns.
13.2 SALES TAXES. Purchasers shall be liable for any sales tax or
other transfer tax, as well as any applicable conveyance, transfer and
recording fees, and real estate transfer stamps or taxes imposed on the
transfer of the Assets pursuant to this Agreement and any interest or penalties
assessed thereon.
13.3 OTHER TAXES. All production, severance, excise, windfall
profit and other taxes (other than income taxes) relating to production of oil,
gas and condensate attributable to the Assets prior to the Effective Time shall
be paid by Seller, and all such taxes relating to such production on or after
the Effective Time shall be paid by Purchasers.
13.4 COOPERATION. Each Party shall provide the other with
reasonable information which may be required by the other for the purpose of
preparing tax returns and responding to any audit by any taxing jurisdiction.
Each shall cooperate with all reasonable requests of the other made in
connection with contesting the imposition of taxes. Notwithstanding anything
to the contrary in this Agreement, neither shall be required at any time to
disclose to the other any tax returns or other confidential tax information.
ARTICLE XIV
19
<PAGE> 20
MISCELLANEOUS
14.1 ENTIRE AGREEMENT. This Agreement, the documents to be
executed pursuant to this Agreement, and the attached Exhibits constitute the
entire agreement between the Parties pertaining to the subject matter of this
Agreement and supersede all prior agreements, understandings, negotiations and
discussions of the Parties, whether oral or written. There are no warranties,
representations, or other agreements between the Parties in connection with the
subject matter of this Agreement except as specifically set forth herein or in
documents delivered pursuant hereto. No supplement, amendment, alteration,
modification, or waiver of this Agreement shall be binding unless executed in
writing by the Parties.
14.2 WAIVER. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions of this
Agreement (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
14.3 HEADINGS. The headings of articles and sections used in this
Agreement are for convenience only and shall not be considered a part of or
affect the construction or interpretation of any provision of this Agreement.
14.4 ASSIGNMENT. No Party shall assign all or any part of this
Agreement, nor shall any Party assign or delegate any of its rights or duties
hereunder, without the prior written consent of the other Party and any
assignment made without such consent shall be void. Except as otherwise
provided in this Section 14.4, this Agreement shall be binding upon and inure
to the benefit of the Parties and their respective permitted successors,
assigns and legal representatives.
14.5 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall
entitle any party other than Purchasers and Seller to any claim, cause of
action, remedy or right of any kind.
14.6 GOVERNING LAW. This Agreement, other documents delivered
pursuant hereto, and the legal relations between the Parties shall be governed
and construed in accordance with the laws of the State of California, excluding
the body of law relating to conflicts of law. The validity of the various
assignments or conveyances affecting the title to the Properties shall be
governed by and construed in accordance with the laws of the jurisdiction
20
<PAGE> 21
in which the Properties are located. The warranties contained in such
assignments or conveyances and the remedies arising from such warranties shall
be governed by and construed in accordance with the laws of the State of
California, excluding the body of law relating to conflicts of law.
14.7 ARBITRATION. Any claim or controversy arising out of the
provisions of this Agreement shall be resolved by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association.
All hearings in any such arbitration shall be held in Los Angeles County,
California. Any judgment upon the award rendered by the arbitrator in such
arbitration may be entered in any court having jurisdiction thereover.
14.8 ATTORNEY'S FEES. In the event legal action is instituted in
order to enforce or interpret the provisions of this Agreement, the prevailing
party in such action shall be entitled to recover, as an item of its costs, the
reasonable value of its attorney's fees incurred in such action.
14.9 NOTICES. Any notice, communication, request, instruction, or
other document required or permitted by this Agreement shall be given in
writing by certified mail, return receipt requested, postage prepaid, or by
prepaid air express, telegram, or delivered, as follows:
If to Seller:
Fortune Petroleum Corporation
30101 Agoura Court, Suite 110
Agoura Hills, California 91301
Attention: Mr. Tyrone J. Fairbanks
If to Purchaser:
Arnold and Joan Travis
727 Holmby Avenue
Los Angles, California 90024
14.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in
any number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute for
all purposes one agreement.
14.11 EXPENSES. Except as otherwise provided in this Agreement,
each Party shall
21
<PAGE> 22
be solely responsible for all expenses incurred by it in connection with this
transaction (including, without limitation, fees and expenses of its own
counsel, accountants, and consultants) and shall not be entitled to
reimbursement therefor from the other.
14.12 EXHIBITS. All references in this Agreement to Exhibits shall
be deemed to be references to such Exhibits as the same may be amended and
supplemented by mutual agreement of the Parties through and as of the Closing.
14.13 PUBLICITY. The Parties agree that, prior to making any public
announcement or statement with respect to the transactions contemplated by this
Agreement, the Party desiring to make such public announcement or statement
shall consult with the other parties hereto and exercise its best efforts to
(a) agree upon the text of a joint public announcement or statement to be made
by both of such parties or (b) obtain approval of the other party hereto to the
text of a public announcement or statement to be made solely by one Party.
Nothing contained herein shall be construed to require any Party to obtain
approval of the others to disclose information with respect to the transactions
contemplated by this Agreement to any state or federal governmental authority
or agency to the extent required by applicable law or by any applicable rules,
regulations or orders of any governmental authority or agency having
jurisdiction or necessary to comply with disclosure requirements of any stock
exchange and applicable securities laws.
14.14 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal, or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect.
14.15 SURVIVAL. The representations and warranties of the Parties
and any obligation of the Parties set forth in this Agreement, shall not
survive the Closing except as specifically set forth in sections 11.1, 11.2,
11.3, 14.8, and 14.11 of this Agreement.
22
<PAGE> 23
IN WITNESS WHEREOF, the Parties hereto have executed and delivered
this Agreement as of the day and year first above written.
SELLER: PURCHASERS:
FORTUNE PETROLEUM CORPORATION
-----------------------------------
ARNOLD TRAVIS
By:
---------------------------------- -----------------------------------
DEAN W. DRULIAS JOAN TRAVIS
-----------------------------------
JACK WOODS
23
<PAGE> 1
EXHIBIT 10.2
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT, dated March 4, 1996, is made and entered into by and
between Fortune Petroleum Corporation ("Seller") and Seneca Resources
Corporation ("Buyer").
1. Seller is the owner of certain interests in (a) the oil, gas
and mineral leases (the "Leases") (b) all wells, surface equipment, subsurface
equipment, pipelines and all other real, personal and mixed property located on
the lands covered by the Leases and used in the operation thereof, and (c) all
permits, licenses, easements, product sales contracts and similar rights
associated with operation of the Leases described in Exhibit "A" attached
hereto and in the lands covered thereby, as shown on the plat attached hereto
as Exhibit "A-1". Those interests are referred to herein as the "Properties".
Seller desires to sell the Properties to Buyer and Buyer desires to purchase
the Properties from Seller, all in accordance with and for the consideration
recited in the provisions hereof.
2. Seller shall sell, transfer and assign, to Buyer all of
Seller's rights, title and interest in and to the Properties. The Properties
do not include (a) any accounts receivable relating to operation of the Leases
prior to the Effective Date, or (b) liquid hydrocarbons in storage on the
Leases at the Effective Date. The transfer of the Properties from Seller to
Buyer shall be on the form of Assignment, Conveyance and Bill of Sale attached
hereto as Exhibit "B".
3. As consideration for the sale of the Properties, Buyer shall
pay Seller at Closing the sum of Three Hundred Forty Thousand Fifty-eight and
No/100 United States Dollars ($340,058.00).
4. The Effective Date of the transfer of the Properties shall be
December 1, 1995, at 7:00 a.m., PST.
5. Seller agrees to make available to Buyer its records relating
to the title of said properties, including, but not limited to abstracts, title
reports, title opinions, leases, lease purchase reports, operating agreements,
letter agreements, contracts, gas purchase contracts and any other informative
material relating to said Properties in its possession in order for Buyer to
make a determination of the correctness of Seller's interest in said
Properties. Buyer will pay for its own legal representation and title work
necessary. Seller agrees to pay for its own legal representation and any
curative title work requested by Buyer. Should Seller fail to cure title,
Buyer shall have the right but not the obligation to accept the title as is or
do its own curative work.
6. Seller shall also represent and warrant that at the time of
the transfer of its interest in the Properties there will be no liens,
encumbrances, reversions or reassignment obligations adverse to the interest to
be assigned hereunder, judgments, suits, actions or other proceedings existing
or threatened against its interest in the Properties.
7. The Emission Bank, if any, as referenced in Rule 26.4 of the
Rules and Regulations of the Ventura County Air Pollution Control District, and
elsewhere, on said Properties, if any, shall be included in the sale to Buyer.
8. Promptly, after execution of this Agreement by both parties,
Buyer shall have the right, but not the obligation, until March 25, 1996, at
its own risk and expense to conduct or have conducted an Environmental
Assessment of the Properties. The sale herein contemplated shall be contingent
upon a finding satisfactory to Buyer of no significant environmental liability.
Seller shall provide Buyer with reasonable access to the Property to conduct
the
<PAGE> 2
environmental assessment. Buyer shall provide Seller copies of all reports,
results and data, but not analysis, received by Buyer in connection with the
environment assessment. Buyer shall release, indemnify, defend and hold Seller
harmless from any liability, loss or damage to persons or property incurred
while, conducting the environmental assessment.
9. Contingent upon closing hereunder, Buyer shall defend,
indemnify and hold Seller harmless from any and all claims in favor of any
person for personal injury, death, or damage to property or to the environment,
or for any other claim or relief, arising directly or indirectly from, or
incident to, the use, occupation, operation, maintenance or abandonment of any
of the Properties, or condition of the property or premises, whether latent or
patent, and which are attributable to operations and activities conducted
subsequent to the Effective Date.
10. Seller shall defend, indemnify and hold Buyer harmless from
any and all claims in favor of any person for personal injury, death or damage
to property or to the environment, or for any other claim or relief, arising
directly or indirectly from, or incident to, (i) Seller's use, occupation,
operation, maintenance, or abandonment of any of the Properties attributable to
times prior to the Effective Date or (ii) any latent condition of the
Properties attributable to operations and activities conducted during which the
Properties were owned by or under the control of Seller.
11. Buyer agrees to accept full responsibility for and all costs
associated with plugging and abandoning all existing wells listed on Exhibit
"A" and subsequently drilled wells. Buyer is also responsible for abandoning
all production facilities on the Properties and restoring the surface. Buyer
shall complete the plugging and abandonment of wells and surface restoration in
compliance with the rules and regulations of any governmental agency having
jurisdiction over the properties and with applicable provisions of the Leases.
12. The Closing of the transaction contemplated in this Agreement
and the transfer of the Properties shall occur on or before April 1, 1996, at
the offices of Albrecht & Associates, Inc., 1111 Fannin, Suite 1470, Houston,
Texas 77002 or such other date, time and place upon which Seller and Buyer may
agree in writing.
13. The purchase price shall be adjusted based on actual final
determined working interest and net revenue interest if they should vary from
the interest described in Exhibit "A", and expenditures incurred and revenues
received after the effective date referred to herein and prior to the date of
actual closing of the transaction. Seller shall be responsible for all
obligations incurred and be entitled to all revenues accrued prior to the
Effective Date herein, with respect to the interests conveyed pursuant hereto,
and Buyer shall be so responsible and entitled, respectively, for such
obligations incurred and revenues accrued thereafter. However, notwithstanding
the foregoing, it is recognized that Seller will continue to operate the
properties until the date of closing, and will be and remain responsible for
any and all costs, expenses, losses, liabilities and damages, other than
routine operating costs and expenses, attributable to the interests subject
hereto, such as, but not limited to, costs, expenses, damages, losses and
liabilities associated with blowouts, fires, or other unanticipated occurrences
of a non-routine nature.
14. For a period of three years after closing, Seller agrees not
to lease or cause to be leased any mineral property lying within one (1) mile
of the Properties.
15. The Assignment to be made in accordance with this Agreement
shall be made with warranty of title by, through and under Seller, but not
otherwise.
16. BUYER UNDERSTANDS AND AGREES THAT THE PROPERTIES ARE SOLD "AS
IS" AND "WHERE IS", WITH ALL FAULTS AND DEFECTS, WITHOUT RECOURSE BY BUYER, ITS
SUCCESSORS AND/OR ASSIGNS, AGAINST SELLER AND WITHOUT COVENANT, REPRESENTATION
OR WARRANTY, EXPRESS, IMPLIED OR STATUTORY; AND WITHOUT LIMITATION OF THE
GENERALITY OF THE IMMEDIATELY PRECEDING CLAUSE, SELLER EXPRESSLY DISCLAIMS AND
NEGATES (a) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE
AND (b) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY.
<PAGE> 3
17. THE PARTIES AGREE TO EXECUTE AND DELIVER, AFTER THE CLOSING,
ANY AND ALL OTHER INSTRUMENTS AND AGREEMENTS TO ACCOMPLISH THE TRANSACTION
CONTEMPLATED HEREBY AND, WITHIN SIXTY (60) DAYS AFTER CLOSING, SHALL MAKE ALL
ADJUSTMENTS CONTEMPLATED IN PARAGRAPH 13 ABOVE FOR WHICH THE NECESSARY
INFORMATION WAS NOT AVAILABLE AT CLOSING. SELLER SHALL DELIVER TO BUYER ALL OF
ITS FILES RELATING TO THE PROPERTIES
18. SUBJECT TO TIME CONSTRAINT PROVISION OF PARAGRAPH 8. BUYER
SHALL NOT BE OBLIGATED TO CONSUMMATE THE PURCHASE DESCRIBED IN THIS AGREEMENT
UNTIL BUYER, AT ITS SOLE OPTION AND EXPENSE HAS COMPLETED A PHASE I
ENVIRONMENTAL STUDY AND THE RESULTS THEREOF, IN BUYER'S OPINION, BEING
SUFFICIENT TO PROCEED WITH THE CLOSING.
19. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA, EXCLUDING, HOWEVER, ANY PROVISION OF
CALIFORNIA LAW THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF A DIFFERENT
JURISDICTION.
20. The exhibits to this Agreement are incorporated herein by
reference.
21. The terms, covenants and conditions hereof bind and inure to
the benefit of Buyer and Seller and their successors and assigns and are
covenants running with the lands, Leases, equipment and facilities and with
each transfer or assignment of all or any part thereof.
22. Except for the obligations created pursuant to the provisions
of paragraphs 9., 10., 14. and 17. above, the warranties, covenants,
obligations, and indemnities contained herein shall not survive the Closing.
EXECUTED on the date first written above, to be effective on the
Effective Date.
SELLER
FORTUNE PETROLEUM CORPORATION
By: Tyrone J. Fairbanks
--------------------------------
Tyrone J. Fairbanks
President
BUYER
SENECA RESOURCES CORPORATION
By: James A. Beck
--------------------------------
James A. Beck
Executive Vice President
<PAGE> 4
EXHIBIT "A"
Leases:
1. That certain Oil and Gas Lease dated July 1, 1963, executed by Union
Oil Company of California, as Lessor in favor of Wainscoat & Whitely,
Inc., as Lessee, recorded July 31, 1963 in Book 2366, Page 39,
Official Records, Ventura County, California, INSOFAR AND ONLY INSOFAR
as such lease covers the following described lands:
Lot Nos. 43 and 44, Survey No. 3151 known as the Twilight Consolidated
Placer Mining Claim, consisting of the Ireland and Twilight Placer
Claims and embracing a portion of Township 5 North, Range 19 West,
S.B.B. & M., SAVE AND EXCEPT:
Parcel 1: Portions of Lots 43 and 44, all depths
NW/4, W/2 NE/4, W/2 SW/4 of Lot 43;
N/2, SW/4 of Lot 44.
Parcel 2: Portions of Lots 43 and 44 lying below a depth of
eight hundred and fifty feet (850') into the Sespe
Formation or below a depth of eight hundred thirteen
feet (813') above sea level, whichever is deeper.
SE/4 of Lot 44.
Parcel 3: Portion of Lot 43 lying below the base of the Sespe
Formation as encountered at 4,700' in the Hinkle
Exploration "Higgins" #129-21 Well located in the
Northwest Quarter (NW/4) of Section 28, Township 5
North, Range 19 West, S.B.B. & M.
E/2 NE/4; E/2 SW/4 and SE/4 of Lot 43.
2. That certain Oil and Gas Lease dated June 29, 1962 executed by The Los
Angeles Oil Company, as Lessor, in favor of Union Oil Company of
California, as Lessee, recorded December 29, 1965 in Book 2919, Page
446, Official Records, Ventura County, California, INSOFAR AND ONLY
INSOFAR as such lease covers the following described lands:
Parcel 1: That certain parcel of land known as Lot 40, Township
5 North, Range 19 West, S.B.B. & M., known as and
called Higgins Oil Mine, as designated and delineated
on the official plat of the survey of said land
returned to the General Land Office by the Surveyor
General, as set forth in that certain assignment of
Oil and Gas Lease, recorded August 29, 1966 in Book
3085, Page 585, Official Records, excepting therefrom
that portion lying within Parcel 2 below and the
following described lands:
A. Portions of Lot No. 40, Township 5 North, Range 19
West, S.B.B. & M., known as and called Higgins Oil
Mine, as designated and delineated on the official
plat of the survey of said land referred to the
General Land Office by the Surveyor General, more
particularly described as follows:
Parcel A-1, all depths:
Beginning at the corner common to Sections 20, 21, 28
and 29, Township 5 North, Range 19 West, S.B.B. & M.;
thence, North 0 degrees 30' 38" East 791.71 feet to a
point; thence, South 89 degrees 32' 54" East 553.61
feet to a point; thence, South 0 degrees 22' 53"
East 154.03 feet to the true point of beginning;
thence:
<PAGE> 5
1st: South 88 degrees 54'20" East 1,280.23 feet,
to a point; thence,
2nd: North 0 degrees 39'29" East 1,358.25 feet, to
a point; thence,
3rd: North 88 degrees 54'20" West 1,283.02 feet,
to a point; thence,
4th: South 0 degrees 39'29" West 1,204.27 feet, to
a point; thence,
5th: South 0 degrees 33'53" East 154.03 feet, more
or less, to the true point of beginning,
EXCEPTING therefrom the West 20 acres.
containing 20 acres, more or less.
Parcel A-2, all depths:
The East 750' of the North 2100' of Lot 40,
containing 36.00 acres, more or less.
Parcel 2: A portion of Lot 40, Township 5 North, Range 190
West, S.B.B.& M., known as and called Higgins Oil
Mine, as designated and delineated on the official
plat of the survey of said land returned to the
General Land Office by the Surveyor General, from a
depth of one thousand one hundred fifteen (1,115')
feet below the surface thereof down to the base of
the Lower Sespe Formation as defined by four thousand
three hundred sixty seven (4,367') feet measured
depth in the initial test well, as set forth in that
certain document recorded October 26, 1992 as
Instrument No. 92-189156, described as follows:
Parcel A:
Beginning at the corner common to Sections 20, 21, 28
and 29, Township 5 North, Range 19 West, S.B.B. & M.,
thence North 0 degrees 30'38" East 791.71 feet to a
point; thence South 89 degrees 32'54" East 553.61
feet to a point; thence South 0 degrees 22'53" East
1,528.88 feet to the true point of beginning; thence
1st: South 88 degrees 54'20" East 1,255.29 feet to
a point; thence
2nd: North 0 degrees 39'29" East 1,374.43 feet to
a point; thence
3rd: North 88 degrees 54'20" West 1,280.23 feet,
more or less, to a point, thence
4th: South 0 degrees 22'53" East 1,374.85 feet,
more or less, to the true point of beginning.
Parcel B:
Beginning at the corner common to Sections 20, 21, 28
and 29, Township 5 North, Range 19 West, S.B.B. & M.,
thence North 0 degrees 30'38" East 791.71 feet to a
point; thence South 89 degrees 32'54" East 553.61
feet to a point; thence South 0 degrees 22'53" East
154.03 feet to the true point of beginning; thence
1st: South 88 degrees 54'20" East 1,280.23 feet to
a point; thence
2nd: North 0 degrees 39'29" East 1,358.25 feet to
a point; thence
3rd: North 88 degrees 54'20" West 1,283.02 feet to
a point; thence
4th: South 0 degrees 39'29" West 1,204.27 feet to
a point; thence
5th: South 0 degrees 22'53" East 154.03 feet, more
or less, to the true point of beginning,
EXCEPTING THEREFROM the East 20 acres, and
containing 20 acres more or less.
<PAGE> 6
<TABLE>
<CAPTION>
Well Name Working Interest Net Revenue Interest
(No Less Than)
<S> <C> <C> <C>
(1) Higgins 2 100% 70.0%
(5) Higgins 11X-28 100% 70.0%
(5) Higgins 12-28 100% 70.0%
(2)(5) Higgins U76-28 100% 70.0%
(5) Higgins 129-21 100% 70.0%
(5) Ireland 186-20 100% 70.0%
(5) Ireland 197-20 100% 70.0%
(3) Twilight 2 100% --
(4) Twilight 3 100% 70.0%
(1) Shut-in in Vaqueros formation (Possible backup water disposal well)
(2) Horizontal Completion
(3) Active waste water disposal well
(4) Shut-in in Vaqueros formation
(5) Active producing well in Basal Sespe formation
</TABLE>
<PAGE> 7
[MAP]
Assessor's Map Bk.16-Pg.
County of Ventura, Calif.
Exhibit "A-l"
Outline of a portion of Lots No. 40, 43 & 44, Township 5
North, Range 19 West, S.B.B. & M., known as and called
Higgins Oil Mine, Ireland Placer Claim and Twilight Placer
Claim, more particularly described in Exhibit "A" hereto.
<PAGE> 8
Recording Requested By and Return To:
Seneca Resources Corporation
1201 Louisiana, Suite 400
Houston, TX 77002
EXHIBIT "B"
ASSIGNMENT, CONVEYANCE AND BILL OF SALE
STATE OF CALIFORNIA )
) KNOW ALL MEN BY THESE PRESENTS
COUNTY OF VENTURE )
THIS ASSIGNMENT, CONVEYANCE AND BILL OF SALE entered into this 1st day
of April, 1996, by and between FORTUNE PETROLEUM CORPORATION, 30101 Agoura
Court, Suite 110, Agoura Hills, California 91301 ("ASSIGNOR") and SENECA
RESOURCES CORPORATION, a Pennsylvania corporation, whose address is 1201
Louisiana, Suite 400, Houston, Texas 77002, ("ASSIGNEE");
WITNESSETH:
THAT ASSIGNOR for and in consideration of the sum of Ten Dollars
($10.00), and other good and valuable consideration, in hand paid, the receipt
and sufficiency of which is hereby acknowledged, does hereby effective as of
7:00 a.m., Pacific Standard Time, December 1, 1995 ("Effective Date"), grant,
bargain, sell, assign, transfer, set over, and convey unto ASSIGNEE, it
successors and assigns:
1. All of ASSIGNOR's undivided interest in and to the oil and gas leases
described in Exhibit "A" attached hereto (the "Leases), insofar as the
Leases cover and relate to the land described in Exhibit "A" (the
"Lands"), together with all of ASSIGNOR's interests in and to all the
property and rights incident thereto, including all rights of ASSIGNOR
in, to and under all operating agreements, exploration agreements,
pooling or unitization agreements, farmout agreements, product
purchase and sale contracts, leases, permits, right-of-ways,
easements, licenses, options, orders, contracts and instruments in any
way relating to the Leases and the Lands.
2. All of ASSIGNOR's undivided interest in and to all of the wells
situated on the Lands or on land spaced, pooled or unitized therewith
together with the personal property, fixtures and improvements on,
appurtenant to, or used or obtained by ASSIGNOR in connection with the
Lands or wells or with the production, treatment, sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto,
including without limitation well equipment, casing, tubing, tanks,
crude oil, condensate and products placed into storage or into
pipelines after December 1, 1995, at 7:00 a.m., Pacific Standard Time,
boilers, buildings, pumps, motors, machinery, pipelines, gathering
systems, power lines, roads, and field processing plants, and all
other appurtenances thereunto belonging.
3. At ASSIGNEE's sole cost, risk and expense ASSIGNOR also hereby grants
and transfers to ASSIGNEE, its successors and assigns, to the extent
so transferable, the benefit of and the right to enforce the covenants
and warranties, if any, which ASSIGNOR is entitled to enforce with
respect to the Leases, Lands, and wells against ASSIGNOR's
predecessors in title to same.
4. All other leasehold interest, overriding royalty interests, mineral
and royalty interest and other interests, if any, owned by ASSIGNOR,
in and to the Land and the Leases and in or attributable to production
therefrom.
<PAGE> 9
THERE IS SAVED AND EXCEPTED FROM THIS ASSIGNMENT, CONVEYANCE AND BILL
OF SALE, THE FOLLOWING:
A. A reservation by ASSIGNOR of any accounts receivable relating
to operations on the Leases prior to the Effective Date.
B. A reservation by ASSIGNOR of all liquid hydrocarbons in
storage on the Leases on the Effective Date.
TO HAVE AND TO HOLD UNTO ASSIGNEE, its successors and assigns, forever
subject to the following:
A. The provisions of paragraphs 9., 10., 14., and 17. of the
Purchase and Sale Agreement between the parties hereto dated
March 4, 1996. The terms of those paragraphs shall prevail in
the event of a conflict between their provisions and the terms
of this Assignment.
B. A post closing adjustment within sixty (60) days of closing to
account for all costs, expenses and income attributable to the
Properties after the Effective Date and borne or enjoyed by
ASSIGNOR and for all costs, expenses and income attributable
to the properties, before the Effective Date and borne or
enjoyed by ASSIGNEE and not included on the Closing Statement
executed at Closing by ASSIGNOR and ASSIGNEE.
C. ASSIGNEE shall accept full responsibility for any and all
costs associated with plugging and abandoning of all existing
wells listed on Exhibit "A" and subsequently drilled wells.
Buyer is also responsible for abandoning all production
facilities on the Properties and the restoration of the
surface in compliance with the provisions of the Leases and
all rules and regulations of the governmental agency having
jurisdiction over the Properties.
D. This instrument is made upon the understanding and agreement
that, all personal property and equipment conveyed hereby is
sold, assigned and accepted by ASSIGNEE in its "where is, as
is" condition without any warranties whatsoever, express or
implied or statutory, of marketability, quality condition,
merchantability and/or fitness for a particular purpose or
use, all of which is expressly disclaimed.
IN WITNESS WHEREOF, this instrument is executed as of the day and year
first written above.
ASSIGNOR
FORTUNE PETROLEUM CORPORATION
By:
--------------------------------
Tyrone J. Fairbanks
President
ASSIGNEE
SENECA RESOURCES CORPORATION
By:
--------------------------------
James A. Beck
Executive Vice President
<PAGE> 10
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT, dated March 4, 1996, is made and entered into by and
between Fortune Petroleum Corporation ("Seller") and Seneca Resources
Corporation ("Buyer").
1. Seller is the owner of certain interests in (a) the oil, gas
and mineral leases (the "Leases") (b) all wells, surface equipment, subsurface
equipment, pipelines and all other real, personal and mixed property located on
the lands covered by the Leases and used in the operation thereof, and (c) all
permits, licenses, easements, product sales contracts and similar rights
associated with operation of the Leases described in Exhibit "A" attached
hereto and in the lands covered thereby, as shown on the plat attached hereto
as Exhibit "A-1". Those interests are referred to herein as the "Properties".
Seller desires to sell the Properties to Buyer and Buyer desires to purchase
the Properties from Seller, all in accordance with and for the consideration
recited in the provisions hereof.
2. Seller shall sell, transfer and assign, to Buyer all of
Seller's rights, title and interest in and to the Properties. The Properties do
not include (a) any accounts receivable relating to operation of the Leases
prior to the Effective Date, or (b) liquid hydrocarbons in storage on the
Leases at the Effective Date. The transfer of the Properties from Seller to
Buyer shall be on the form of Assignment, Conveyance and Bill of Sale attached
hereto as Exhibit "B".
3. As consideration for the sale of the Properties, Buyer shall
pay Seller at Closing the sum of Three Hundred Forty Thousand Fifty-eight and
No/100 United States Dollars ($340,058.00).
4. The Effective Date of the transfer of the Properties shall be
December 1, 1995, at 7:00 a.m., PST.
5. Seller agrees to make available to Buyer its records relating
to the title of said properties, including, but not limited to abstracts, title
reports, title opinions, leases, lease purchase reports, operating agreements,
letter agreements, contracts, gas purchase contracts and any other informative
material relating to said Properties in its possession in order for Buyer to
make a determination of the correctness of Seller's interest in said
Properties. Buyer will pay for its own legal representation and title work,
necessary. Seller agrees to pay for its own legal representation and any
curative title work requested by Buyer. Should Seller fall to cure title,
Buyer shall have the right but not the obligation to accept the title as is or
do its own curative work.
6. Seller shall also represent and warrant that at the time of
the transfer of its interest in the Properties there will be no liens,
encumbrances, reversions or reassignment obligations adverse to the interest to
be assigned hereunder, judgments, suits, actions or other proceedings existing
or threatened against its interest in the Properties.
7. The Emission Bank, if any, as referenced in Rule 26.4 of the
Rules and Regulations of the Ventura County Air Pollution Control District, and
elsewhere, on said Properties, if any, shall be included in the sale to Buyer.
8. Promptly, after execution of this Agreement by both parties,
Buyer shall have the right, but not the obligation, until March 25, 1996, at
its own risk and expense to conduct or have conducted an Environmental
Assessment of the Properties. The sale herein contemplated shall be contingent
upon a finding satisfactory to Buyer of no significant environmental liability.
Seller shall provide Buyer with reasonable access to the Property to conduct
the
<PAGE> 11
environmental assessment. Buyer shall provide Seller copies of all reports,
results and data, but not analysis, received by Buyer in connection with the
environment assessment. Buyer shall release, indemnify, defend and hold Seller
harmless from any liability, loss or damage to persons or property incurred
while, conducting the environmental assessment.
9. Contingent upon closing hereunder, Buyer shall defend,
indemnify and hold Seller harmless from any and all claims in favor of any
person for personal injury, death, or damage to property or to the environment,
or for any other claim or relief, arising directly or indirectly from, or
incident to, the use, occupation, operation, maintenance or abandonment of any
of the Properties, or condition of the property or promises, whether latent or
patent, and which are attributable to operations and activities conducted
subsequent to the Effective Date.
10. Seller shall defend, indemnify and hold Buyer harmless from
any and all claims in favor of any person for personal injury, death or damage
to property or to the environment, or for any other claim or relief, arising
directly or indirectly from, or incident to, (i) Seller's use, occupation,
operation, maintenance, or abandonment of any of the Properties attributable to
times prior to the Effective Date or (ii) any latent condition of the
Properties attributable to operations and activities conducted during which the
Properties were owned by or under the control of Seller.
11. Buyer agrees to accept full responsibility for and all costs
associated with plugging and abandoning all existing wells listed on Exhibit
"A" and subsequently drilled wells. Buyer is also responsible for abandoning
all production facilities on the Properties and restoring the surface. Buyer
shall complete the plugging and abandonment of wells and surface restoration in
compliance with the rules and regulations of any governmental agency having
jurisdiction over the properties and with applicable provisions of the Leases.
12. The Closing of the transaction contemplated in this Agreement
and the transfer of the Properties shall occur on or before April 1, 1996, at
the office's of Albrecht & Associates, Inc., 1111 Fannin, Suite 1470, Houston,
Texas 77002 or such other date, time and place upon which Seller and Buyer may
agree in writing.
13. The purchase price shall be adjusted based on actual final
determined working interest and net revenue interest if they should vary from
the interest described in Exhibit "A", and expenditures incurred and revenues
received after the effective date referred to herein and prior to the date of
actual closing of the transaction. Seller shall be responsible for all
obligations incurred and be entitled to all revenues accrued prior to the
Effective Date herein, with respect to the interests conveyed pursuant hereto,
and Buyer shall be so responsible and entitled, respectively, for such
obligations incurred and revenues accrued thereafter. However, notwithstanding
the foregoing, it is recognized that Seller will continue to operate the
properties until the date of closing, and will be and remain responsible for
any and all costs, expenses, losses, liabilities and damages, other than
routine operating costs and expenses, attributable to the interests subject
hereto, such as, but not limited to, costs, expenses, damages, losses and
liabilities associated with blowouts, fires, or other unanticipated occurrences
of a non-routine nature.
14. For a period of three years after closing, Seller agrees not
to lease or cause to be leased any mineral property lying within one (1) mile
of the Properties
15. The Assignment to be made in accordance with this Agreement
shall be made with warranty of title by, through and under Seller, but not
otherwise.
16. BUYER UNDERSTANDS AND AGREES THAT THE PROPERTIES ARE SOLD "AS
IS" AND "WHERE IS", WITH ALL FAULTS AND DEFECTS, WITHOUT RECOURSE BY BUYER, ITS
SUCCESSORS AND/OR ASSIGNS, AGAINST SELLER AND WITHOUT COVENANT, REPRESENTATION
OR WARRANTY, EXPRESS, IMPLIED OR STATUTORY; AND WITHOUT LIMITATION OF THE
GENERALITY OF THE IMMEDIATELY PRECEDING CLAUSE, SELLER EXPRESSLY DISCLAIMS AND
NEGATES (a) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE
AND (b) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY.
<PAGE> 12
17. THE PARTIES AGREE TO EXECUTE AND DELIVER, AFTER THE CLOSING,
ANY AND ALL OTHER INSTRUMENTS AND AGREEMENTS TO ACCOMPLISH THE TRANSACTION
CONTEMPLATED HEREBY AND, WITHIN SIXTY (60) DAYS AFTER CLOSING, SHALL MAKE ALL
ADJUSTMENTS CONTEMPLATED IN PARAGRAPH 13 ABOVE FOR WHICH THE NECESSARY
INFORMATION WAS NOT AVAILABLE AT CLOSING. SELLER SHALL DELIVER TO BUYER ALL OF
ITS FILES RELATING TO THE PROPERTIES
18. SUBJECT TO TIME CONSTRAINT PROVISION OF PARAGRAPH 8, BUYER
SHALL NOT BE OBLIGATED TO CONSUMMATE THE PURCHASE DESCRIBED IN THIS AGREEMENT
UNTIL BUYER, AT ITS SOLE OPTION AND EXPENSE HAS COMPLETED A PHASE I
ENVIRONMENTAL STUDY AND THE RESULTS THEREOF, IN BUYER'S OPINION, BEING
SUFFICIENT TO PROCEED WITH THE CLOSING.
19. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA, EXCLUDING, HOWEVER, ANY PROVISION OF
CALIFORNIA LAW THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF A DIFFERENT
JURISDICTION.
20. The exhibits to this Agreement are incorporated herein by
reference.
21. The terms, covenants and conditions hereof bind and inure to
the benefit of Buyer and Seller and their successors and assigns and are
covenants running with the lands, Leases, equipment and facilities and with
each transfer or assignment of all or any part thereof.
22. Except for the obligations created pursuant to the provisions
of paragraphs 9., 10., 14. and 17. above, the warranties, covenants,
obligations, and indemnities contained herein shall not survive the Closing.
EXECUTED on the date first written above, to be effective on the
Effective Date.
SELLER
FORTUNE PETROLEUM CORPORATION
By: Tyrone J. Fairbanks
--------------------------------
Tyrone J. Fairbanks
President
BUYER
SENECA RESOURCES CORPORATION
By: James A. Beck
--------------------------------
James A. Beck
Executive Vice President
<PAGE> 13
EXHIBIT "A"
Leases:
1. That certain Oil and Gas Lease dated July 1, 1963, executed by Union
Oil Company of California, as Lessor in favor of Wainscoat & Whitely,
Inc., as Lessee, recorded July 31, 1963 in Book 2366, Page 39,
Official Records, Venture County, California, INSOFAR AND ONLY INSOFAR
as such lease covers the following described lands:
Lot Nos. 43 and 44, Survey No. 3151 known as the Twilight Consolidated
Placer Mining Claim, consisting of the Ireland and Twilight Placer
Claims and embracing a portion of Township 5 North, Range 19 West,
S.B.B. & M., SAVE AND EXCEPT:
Parcel 1: Portions of Lots 43 and 44, all depths
NW/4, W/2 NE/4, W/2 SW/4 of Lot 43;
N/2, SW/4 of Lot 44.
Parcel 2: Portions of Lots 43 and 44 lying below a depth of
eight hundred and fifty feet (850') into the Sespe
Formation or below a depth of eight hundred thirteen
feet (813') above sea level, whichever is deeper.
SE/4 of Lot 44
Parcel 3: Portion of Lot 43 lying below the base of the Sespe
Formation as encountered at 4,700' in the Hinkle
Exploration "Higgins" #129-21 Well located in the
Northwest Quarter (NW/4) of Section 28, Township 5
North, Range 19 West, S.B.B. & M.
E/2 NE/4; E/2 SW/4 and SE/4 of Lot 43.
2. That certain Oil and Gas Lease dated June 29, 1962 executed by The Los
Angeles Oil Company, as Lessor, in favor of Union Oil Company of
California, as Lessee, recorded December 29, 1965 in Book 2919, Page
446, Official Records, Ventura County. California. INSOFAR AND ONLY
INSOFAR as such lease covers the following described lands:
Parcel 1: That certain parcel of land known as Lot 40, Township
5 North, Range 19 West, S.B.B. & M., known as and
called Higgins Oil Mine, as designated and delineated
on the official plat of the survey of said land
returned to the General Land Office by the Surveyor
General, as set forth in that certain assignment of
Oil and Gas Lease, recorded August 29, 1966 in Book
3085, Page 585, Official Records, excepting therefrom
that portion lying within Parcel 2 below and the
following described lands:
A. Portions of Lot No. 40, Township 5 North, Range 19
West, S.B.B. & M., known as and called Higgins Oil
Mine, as designated and delineated on the official
plat of the survey of said land referred to the
General Land Office by the Surveyor General, more
particularly described as follows:
Parcel A-1, all depths:
Beginning at the corner common to Sections 20, 21, 28
and 29, Township 5 North, Range 19 West, S.B.B. & M.;
thence, North 0 degrees 30' 38" East 791.71 feet to a
point; thence, South 89 degrees 32' 54" East 553.61
feet to a point; thence, South 0 degrees 22' 53"
East 154.03 feet to the true point of beginning;
thence:
<PAGE> 14
1st: South 88 degrees 54'20" East 1,280.23 feet,
to a point; thence.
2nd: North 0 degrees 39'29" East 1,358.25 feet, to
a point; thence,
3rd: North 88 degrees 54'20" West 1,283.02 feet,
to a point; thence,
4th: South 0 degrees 39'29" West 1,204.27 feet, to
a point; thence,
5th: South 0 degrees 33'53" East 154.03 feet, more
or less, to the true point of beginning,
EXCEPTING therefrom the West 20 acres.
containing 20 acres, more or less.
Parcel A-2, all depths:
The East 750' of the North 2,100' of Lot 40,
containing 36.00 acres, more or less.
Parcel 2: A portion of Lot 40, Township 5 North, Range 190
West, S.B.B.& M., known as and called Higgins Oil
Mine, as designated and delineated on the official
plat of the survey of said land returned to the
General Land Office by the Surveyor General, from a
depth of one thousand one hundred fifteen (1,115')
feet below the surface thereof down to the base of
the Lower Sespe Formation as defined by four thousand
three hundred sixty seven (4,367') feet measured
depth in the initial test well, as set forth in that
certain document recorded October 26, 1992 as
Instrument No. 92-189156, described as follows:
Parcel A:
Beginning at the corner common to Sections 20, 21, 28
and 29, Township 5 North, Range 19 West, S.B.B. & M.,
thence North 0 degrees 30'38" East 791.71 feet to a
point; thence South 89 degrees 32'54" East 553.61
feet to a point; thence South 0 degrees 22'53" East
1,528.88 feet to the true point of beginning; thence
1st: South 88 degrees 54'20" East 1,255.29 feet to
a point; thence
2nd: North 0 degrees 39'29" East 1,374.43 feet to
a point; thence
3rd: North 88 degrees 54'20" West 1,280.23 feet,
more or less, to a point, thence
4th: South 0 degrees 22'53" East 1,374.85 feet,
more or less, to the true point of beginning.
Parcel B:
Beginning at the corner common to Sections 20, 21, 28
and 29, Township 5 North, Range 19 West, S.B.B. & M.,
thence North 0 degrees 30'38" East 791.71 feet to a
point; thence South 89 degrees 32;54" East 553.61
feet to a point; thence South 0 degrees 22'53" East
154.03 feet to the true point of beginning; thence
1st: South 88 degrees 54'20" East 1,280.23 feet to
a point; thence
2nd: North 0 degrees 39'29" East 1,358.25 feet to
a point; thence
3rd: North 88 degrees 54'20" West 1,283.02 feet to
a point; thence
4th: South 0 degrees 39'29" West 1,204.27 feet to
a point; thence
5th: South 0 degrees 22'53" East 154.03 feet, more
or less, to the true point of beginning,
EXCEPTING THEREFROM the East 20 acres, and
containing 20 acres more or less.
<PAGE> 15
<TABLE>
<CAPTION>
Well Name Working Interest Net Revenue Interest
(No Less Than)
<S> <C> <C> <C>
(1) Higgins 2 100% 70.0%
(5) Higgins 11X-28 100% 70.0%
(5) Higgins 12-28 100% 70.0%
(2)(5) Higgins U76-28 100% 70.0%
(5) Higgins 129-21 100% 70.0%
(5) Ireland 186-20 100% 70.0%
(5) Ireland 197-20 100% 70.0%
(3) Twilight 2 100% --
(4) Twilight 3 100% 70.0%
(1) Shut-in in Vaqueros formation (Possible backup water disposal well)
(2) Horizontal Completion
(3) Active waste water disposal well
(4) Shut-in in Vaqueros formation
(5) Active producing well in Basal Sespe formation
</TABLE>
<PAGE> 16
[MAP]
Assessor's Map Bk.16-Pg.
County of Ventura, Calif.
Exhibit "A-1"
Outline of a portion of Lots No. 40, 43 & 44, Township 5
North, Range 19 West, S.B.B. & M., known as and called
Higgins Oil Mine, Ireland Placer Claim and Twilight Placer
Claim, more particularly described in Exhibit "A" hereto.
<PAGE> 17
Recording Requested By and Return To:
Seneca Resources Corporation
1201 Louisiana, Suite 400
Houston, TX 77002
EXHIBIT "B"
ASSIGNMENT, CONVEYANCE AND BILL OF SALE
STATE OF CALIFORNIA )
) KNOW ALL MEN BY THESE PRESENTS
COUNTY OF VENTURA )
THIS ASSIGNMENT, CONVEYANCE AND BILL OF SALE entered into this 1st day
of April, 1996, by and between FORTUNE PETROLEUM CORPORATION, 30101 Agoura
Court, Suite 110, Agoura Hills, California 91301 ("ASSIGNOR") and SENECA
RESOURCES CORPORATION, a Pennsylvania corporation, whose address is 1201
Louisiana, Suite 400, Houston, Texas 77002, ("ASSIGNEE");
WITNESSETH:
THAT ASSIGNOR for and in consideration of the sum of Ten Dollars
($10.00), and other good and valuable consideration, in hand paid, the receipt
and sufficiency of which is hereby acknowledged, does hereby, effective as of
7:00 a.m., Pacific Standard Time, December 1, 1995 ("Effective Date"), grant,
bargain, sell, assign, transfer, set over, and convey unto ASSIGNEE, it
successors and assigns:
1. All of ASSIGNOR's undivided interest in and to the oil and gas
leases described in Exhibit "A" attached hereto (the "Leases"),
insofar as the Leases cover and relate to the land described
in Exhibit "A" (the "Lands"), together with all of ASSIGNOR's
interests in and to all the property and rights incident
thereto, including all rights of ASSIGNOR in, to and under all
operating agreements, exploration agreements, pooling or
unitization agreements, farmout agreements, product purchase
and sale contracts, leases, permits, right-of-ways, easements,
licenses, options, orders, contracts and instruments in any
way relating to the Leases and the Lands.
2. All of ASSIGNOR's undivided interest in and to all of the
wells situated on the Lands or on land spaced, pooled or
unitized therewith together with the personal property,
fixtures and improvements on, appurtenant to, or used or
obtained by ASSIGNOR in connection with the Lands or wells or
with the production, treatment, sale or disposal of
hydrocarbons or water produced therefrom or attributable
thereto, including without limitation well equipment, casing,
tubing, tanks, crude oil, condensate and products placed into
storage or into pipelines after December 1, 1995, at 7:00
a.m., Pacific Standard Time, boilers, buildings, pumps,
motors, machinery, pipelines, gathering systems, power lines,
roads, and field processing plants, and all other
appurtenances thereunto belonging.
3. At ASSIGNEE's sole cost, risk and expense ASSIGNOR also hereby
grants and transfers to ASSIGNEE, its successors and assigns,
to the extent so transferable, the benefit of and the right to
enforce the covenants and warranties, if any, which ASSIGNOR
is entitled to enforce with respect to the Leases, Lands, and
wells against ASSIGNOR's predecessors in title to same.
4. All other leasehold interest, overriding royalty interests,
mineral and royalty interest and other interests, if any,
owned by ASSIGNOR, in and to the Land and the Leases and in or
attributable to production therefrom.
<PAGE> 18
THERE IS SAVED AND EXCEPTED FROM THIS ASSIGNMENT, CONVEYANCE AND BILL
OF THE FOLLOWING:
A. A reservation by ASSIGNOR of any accounts receivable relating
to operations on the Leases prior to the Effective Date.
B. A reservation by ASSIGNOR of all liquid hydrocarbons in
storage on the Leases on the Effective Date.
TO HAVE AND TO HOLD UNTO ASSIGNEE, its successors and assigns, forever
subject to the following:
A. The provisions of paragraphs 9., 10., 14., and 17. of the
Purchase and Sale Agreement between the parties hereto dated
March 4, 1996. The terms of those paragraphs shall prevail in
the event of a conflict between their provisions and the terms
of this Assignment.
B. A post closing adjustment within sixty (60) days of closing to
account for all costs, expenses and income attributable to the
Properties after the Effective Date and borne or enjoyed by
ASSIGNOR and for all costs, expenses and income attributable
to the properties, before the Effective Date and borne or
enjoyed by ASSIGNEE and not included on the Closing Statement
executed at Closing by ASSIGNOR and ASSIGNEE.
C. ASSIGNEE shall accept full responsibility for any and all
costs associated with plugging and abandoning of all existing
wells listed on Exhibit "A" and subsequently drilled wells.
Buyer is also responsible for abandoning all production
facilities on the Properties and the restoration of the
surface in compliance with the provisions of the Leases and
all rules and regulations of the governmental agency having
jurisdiction over the Properties.
D. This instrument is made upon the understanding and agreement
that, all personal property and equipment conveyed hereby is
sold, assigned and accepted by ASSIGNEE in its "where is, as
is" condition without any warranties whatsoever, express or
implied or statutory, of marketability, quality condition,
merchantability and/or fitness for a particular purpose or
use, all of which is expressly disclaimed.
IN WITNESS WHEREOF, this instrument is executed as of the day and year
first written above.
ASSIGNOR
FORTUNE PETROLEUM CORPORATION
By:
--------------------------------
Tyrone J. Fairbanks
President
ASSIGNEE
SENECA RESOURCES CORPORATION
By:
--------------------------------
James A. Beck
Executive Vice President
<PAGE> 1
EXHIBIT 10.3
ONE COMMERCE GREEN
OFFICE LEASE AGREEMENT
----------------------
THIS LEASE AGREEMENT ("Lease"), made and entered into on this the 4th
day of January, 1996, between BROOKDALE INVESTORS, L.P., a Delaware limited
partnership ("Landlord"), and FORTUNE PETROLEUM CORPORATION, a Delaware
corporation ("Tenant").
W I T N E S S E T H :
- - - - - - - - - - -
1. Definitions:
(a) The "Building" shall mean the office building located
upon the real property ("Property") described in Exhibit "A" attached hereto
and incorporated herein. The address of the "Building" is 515 W. Greens Road,
Houston, Texas 77067.
(b) "Premises" shall mean the suite of offices, located on
the seventh (7th) floor, known as Suite 720, located within the Building and
outlined on the floor plans attached to this lease as Exhibit "B", and
incorporated herein. The Premises are stipulated for all purposes to contain
approximately 5,427 square feet of "Rentable Area" (as defined below), being
approximately 4,774 square feet of "Usable Area" (as defined below).
(c) "Base Rental" shall mean the sum of $15.45 per square
foot of Rentable Area within the Premises per annum as adjusted pursuant to
Exhibit "C", attached hereto and incorporated herein. The Base Rental due for
the fifth (5th) month during the "Lease Term" (hereinafter defined) has been
deposited with Landlord by Tenant contemporaneously with the execution hereof.
"Rent" shall mean, collectively, the Base Rental and other sums of money
becoming due and payable to Landlord hereunder. Notwithstanding anything
seemingly to the contrary herein, no Base Rental shall be due and owing for the
first (1st), second (2nd), third (3rd) and fourth (4th) months of the Lease
Term.
(d) "Commencement Date" shall mean the earlier of the date that
Tenant actually occupies the Premises or February 1, 1996 (except as the same
may be delayed pursuant to Paragraph 30 hereof).
(e) "Lease Term" shall mean a term commencing on the
Commencement Date and continuing for sixty-four (64) full calendar months (plus
any partial calendar month in which the Commencement Date falls).
(f) "Security Deposit" shall mean the sum of $21,312.00.
Provided that Tenant is then not in default under this Lease, at the end of the
sixteenth (16th) month of the Lease Term, Landlord shall refund to Tenant
$7,104.00. Furthermore, if Tenant is then not in default under this Lease, at
the end of the twenty-eighth (28th) month of the Lease Term, Landlord shall
refund to Tenant an additional $7,104.00.
(g) "Expense Stop" shall mean the Basic Costs (as defined
in this Lease) per square foot of Rentable Area in the Building for the
calendar year 1996.
(h) "Allowance" shall mean an amount equal to the product
of $16.00 times the number of square feet of Rentable Area included in the
Premises, unless (i) a Turn Key Work Letter is attached hereto as Exhibit "E",
in which event the Allowance shall equal the Turn Key Cost, or (ii) no Work
Letter is attached to this Lease, in which event no Allowance exists and Tenant
is taking the Premises "as is" in its current condition and without benefit of
further improvements.
(i) "Shell Improvements" shall mean (i) lay-in acoustical
ceiling grid with acoustical ceiling tile inventory stored on the floor on
which the Premises are located; (ii) central air conditioning and heating ducts
and diffusers in a placement deemed typical by Landlord and (iii) lay-in
fluorescent light fixtures in a placement deemed typical by Landlord.
(j) "Common Areas" shall mean those areas devoted to
corridors, elevator foyers, restrooms, mechanical rooms, elevator mechanical
rooms, janitorial closets, electrical and telephone closets, vending areas, and
lobby areas (whether at ground level or otherwise), and other similar facilities
provided for the common use or benefit of tenants generally and/or the public.
(k) "Service Areas" shall mean those areas within the
outside walls used for building stairs, elevator shafts, flues, vents, stacks,
pipe shafts and other vertical penetrations (but shall not include any such
areas for the exclusive use of a particular tenant).
(l) "Rentable Area" of the Premises shall mean (1) the
"Usable Area" within the Premises (i.e., the gross area enclosed by the surface
of the exterior glass walls, the mid-point of any walls separating portions of
the Premises from those of adjacent tenants, the slab penetration line of all
walls separating the Premises from Service Areas and the corridor side of walls
separating the Premises from Common Areas) plus (2) a pro rata part of the
Common Areas within the Building, such proration based upon the ratio of the
Usable Area within the Premises to the total Usable Area within the Building
existing as of the date of this Lease, including the area encompassed by any
columns or other structural elements which provide support to the Premises
and/or the Building. Rentable Area shall not include any Service Areas. The
Rentable Area in the Building existing as of the date of this Lease is 339,592
square feet. The estimate of Rentable Area within the Premises and in the
Building set forth above may be revised at Landlord's election if Landlord's
architect determines such estimate to be inaccurate in any material degree
after examination of the final "as built" drawings of the Premises and the
Building, and the Base Rental shall be adjusted accordingly, based upon the
rate per square foot of Rentable Area specified in Paragraph 10 hereof. For the
purposes of this Lease, the factor used to convert usable to rentable shall be
1.1368 for the seventh (7th) floor.
(m) "Normal Business Hours" for the Building shall mean
7 a.m. to 6 p.m. Mondays through Fridays, and 8 a.m. to 1 p.m. on Saturdays,
exclusive of normal business holidays.
(n) "Initial Improvements", when used herein, shall mean
those improvements or remodeling to the Premises, if any, which Landlord shall
agree to provide according to the Work Letter attached hereto as Exhibit "E"
and incorporated herein for all purposes. If no Work Letter is attached hereto,
no Initial Improvements are being provided; and Tenant is taking the Premises
"as is".
(o) "Building Standard" shall mean the type, brand and/or
quality of materials Landlord designates from time to time to be the minimum
quality to be used in the Building or the exclusive type, grade or quality of
material to be used in the Building.
OFFICE LEASE AGREEMENT - Page 1
<PAGE> 2
(p) "Basic Costs" shall mean all direct and indirect costs
and expenses of operating, maintaining, repairing, managing, and owning the
Building and the Property, as well as the "Exterior Common Area" (as defined in
Exhibit "C" hereto), which are incurred by Landlord in each calendar year.
Basic Costs are more fully described in Exhibit "C" hereto.
(q) "Ready for Occupancy" shall mean that either (i) a
Certificate of Occupancy (or its equivalent) has been issued for the Premises
if Initial Improvements are to be provided, or (ii) if no Initial Improvements
are to be provided the Premises are unoccupied.
2. Lease Grant. Subject to and upon the terms herein set forth,
Landlord leases to Tenant and Tenant leases from Landlord the Premises.
3. Lease Term.
(a) This Lease shall continue in force during a period
beginning on the Commencement Date and continuing until the expiration of the
Lease Term, unless this Lease is sooner terminated or extended to a later date
under any other term or provision hereof.
(b) If the Premises are not available and Ready for
Occupancy by the date specified in Paragraph 1(d) hereof due to omission, delay
or default by Tenant or anyone acting under or for Tenant, Landlord shall have
no liability; and the obligations of Tenant under this Lease (including,
without limitation, the obligation to pay Rent) shall nonetheless commence as
of the Commencement Date.
(c) If, however, this Lease is executed before the Premises
become vacant or otherwise available and Ready for Occupancy and/or any present
tenant or occupant of the Premises holds over and/or Landlord cannot deliver
possession of the Premises prior to the date specified in Paragraph 1(d) hereof
due to default on the part of Landlord, then, as Tenant's sole remedy for the
delay in Tenant's occupancy of the Premises, the Commencement Date shall be
delayed and the Rent herein provided shall not commence until the earlier to
occur of the date of actual occupancy by Tenant or the date on which the
Premises are available and Ready for Occupancy.
4. Use. The Premises shall be used for office purposes and for
no other purpose. Tenant agrees not to use or permit the use of the Premises
for any purpose which is illegal, dangerous to life, limb or property or which,
in Landlord's opinion, creates a nuisance or which would increase the cost of
insurance coverage with respect to the Building.
5. Base Rental.
(a) Tenant agrees to pay the Rent to Landlord during the
Lease Term, without any setoff or deduction whatsoever, for the nonpayment of
which Landlord shall be entitled to exercise all such rights and remedies as
are herein provided in the case of the non-payment of Base Rental. Except as
otherwise provided herein, the annual Base Rental for each calendar year or
portion thereof during the Lease Term, together with any estimated adjustment
thereto pursuant to Exhibit "C" hereof then in effect, shall be due and payable
in advance in twelve (12) equal installments on the first day of each calendar
month during the Lease Term; and Tenant hereby agrees to pay such Base Rental
and any adjustments thereto to Landlord at Landlord's address provided herein
(or such other address as may be designated by Landlord in writing from time to
time) monthly, in advance, and without demand. If the Lease Term commences on a
day other than the first day of a month or terminates on a day other than the
last day of a month, then (i) the installments of Base Rental for such month or
months shall be prorated, based on the number of days in such month, and (ii)
Tenant's share of Basic Costs shall be prorated as specified in Exhibit "C"
hereto.
(b) All installments of Rent not paid within ten (10) days
of the date when due and payable shall bear interest at the maximum lawful rate
until paid.
(c) The Base Rental payable hereunder shall be adjusted
from time to time in accordance with the provisions of Exhibit "C" attached
hereto and incorporated herein for all purposes.
6. Services to be Furnished by Landlord. Landlord agrees to
furnish Tenant the following:
(a) Facilities for hot and cold water at those points of
supply provided for general use of other tenants in the Building, central heat
and air conditioning in season, at such temperatures and in such amounts as are
considered by Landlord to be standard or as required by governmental authority;
provided, however, heating and air conditioning service at times other than for
Normal Business Hours for the Building shall be furnished only upon the written
request of Tenant delivered to Landlord prior to 3:00 p.m. at least one (1)
business days in advance of the date for which such usage is requested. Tenant
shall bear the entire cost of additional service, as such costs are determined
by Landlord from time to time, and shall pay the same as additional Rent upon
presentation of a statement therefor by Landlord.
(b) Routine maintenance and electric lighting service for
all Common Areas and Service Areas of the Building in the manner and to the
extent deemed by Landlord to be standard.
(c) Janitor service, five (5) days per week, exclusive of
normal business holidays; provided, however, if Tenant's floor covering or
other improvements require special treatment, Tenant shall pay the additional
cleaning cost attributable thereto as additional Rent upon presentation of a
statement therefor by Landlord.
(d) Subject to the provisions of Paragraph 12, facilities
to provide all electrical current required by Tenant in its use and occupancy
of the Premises.
(e) All Building Standard fluorescent bulb replacement in
the Premises necessary to maintain the lighting provided as a part of the Shell
Improvements and fluorescent and incandescent bulb replacement in the Common
Areas and Service Areas.
(f) Landlord shall provide limited access to the Building
before and after Normal Business Hours in the form of special limited access
entry cards ("Entry Cards") for Tenant and its employees. An Entry Card shall
not automatically qualify Tenant or any of its employees for an access card to
the "Parking Garage" as defined in and pursuant to the terms of Exhibit "F".
Landlord agrees to provide Tenant with up to, but not in excess of, sixteen
(16) Entry Cards for a refundable deposit of $15.00 per card. However, Tenant
shall pay Landlord for any additional or replacement cards, in such amount as
Landlord shall, from time to time, determine. The current cost required for a
replacement card is $15.00 per card. Landlord shall be entitled to cancel (by
computer entry) any lost or stolen cards of which it becomes aware. Tenant
shall promptly notify Landlord of any lost or stolen cards. Landlord shall have
no liability to Tenant, its employees, agents,
OFFICE LEASE AGREEMENT - Page 2
<PAGE> 3
invitees, or licensees for losses due to theft or burglary, or for damages
committed by unauthorized persons on the Premises; and neither shall Landlord
be required to insure against any such losses. Tenant shall cooperate fully in
Landlord's efforts to maintain security in the Building and shall follow all
regulations promulgated by Landlord with respect thereto. Tenant further agrees
to surrender all Entry Cards in its possession upon the expiration or earlier
termination of this Lease.
No interruption or malfunction of any utility service shall constitute
an eviction or disturbance of Tenant's use or possession of the Premises or a
breach by Landlord of any of Landlord's obligations hereunder or render
Landlord liable or responsible to Tenant for any loss or damage which Tenant
may sustain or incur if either the quantity or character of any utility service
is changed or is no longer available to or is no longer suitable for Tenant's
requirements or entitle Tenant to be relieved from any of Tenant's obligations
hereunder, including, without limitation, the obligation to pay Rent, or grant
Tenant any right to set-off, abatement, or recoupment. At any time when
Landlord is making such facilities for such utility services available to the
Premises, Landlord may, at Landlord's option, upon not less than thirty (30)
days prior written notice to Tenant, discontinue the availability of any such
utility service. If Landlord gives any such notice of discontinuance, Landlord
shall make all the necessary arrangements with the public utility service
supplying the utility to the area in which the Building is located with respect
to obtaining such utility service to the Premises; but Tenant will contract
directly with such public utility service for the supplying of such utility
services to the Premises. Failure to any extent to make available, or any
slowdown, stoppage, or interruption of, the specified utility services resulting
from any cause, including, without limitation, Landlord's compliance with any
voluntary or similar governmental or business guidelines now or hereafter
published or any requirements now or hereafter established by any governmental
agency, board, or bureau having jurisdiction over the operation of the Building
shall not render Landlord liable in any respect for damages to either persons,
property, or business, nor be construed as an eviction of Tenant or work an
abatement of Rent, nor relieve Tenant of Tenant's obligations for fulfillment
of any covenant or agreement hereof. Should any equipment or machinery
furnished by Landlord breakdown or for any cause cease to function properly,
Landlord shall use reasonable diligence to repair some promptly, but Tenant
shall have no claim for abatement of Rent or damages on account of any
interruption of service occasioned thereby or resulting therefrom.
Notwithstanding the foregoing, in the event that Tenant shall give notice to
Landlord stating correctly that any cessation of a service described in
Subparagraphs 6(a) or 6(d) above (not caused by Tenant, its agents, customers,
servants, contractors, employees, or invitees) shall have rendered all or any
portion of the Premises untenantable, and in the event that such cessation
continues for a period of five (5) or more consecutive days after Landlord
receives such notice from Tenant, and in the further event that Tenant ceases
occupying such portion of the Premises solely on account of such cessation,
then rent shall abate as to such portion of the Premises from and after the
later to occur of (i) the sixth (6th) day following the day Tenant gave such
notice, or (ii) the date Tenant so ceases occupancy, until such service is
restored or Tenant reoccupies such portion of the Premises (whichever date is
earlier).
7. Improvements to be Made by Landlord. Except as otherwise
provided in the Work Letter attached hereto as Exhibit "E", all installations
and improvements now or hereafter placed on the Premises, other than Shell
Improvements, shall be for Tenant's account and at Tenant's cost (and Tenant
shall pay ad valorem taxes and increased insurance thereon or attributable
thereto), which cost shall be payable by Tenant to Landlord upon demand as
additional Rent.
8. Maintenance and Repair of Premises by Landlord. Except as
otherwise expressly provided herein, Landlord shall not be required to make any
repairs to the Premises other than repairs to exterior and load-bearing wells,
floors (but not floor coverings) and the roof of the Building, which may be
required from time to time but only after such required repairs have been
requested by Tenant in writing. In no event shall Landlord be responsible for
the maintenance or repair of improvements which are not composed of Building
Standard materials.
9. Graphics. Landlord shall provide and install, at
Landlord's cost, identification graphics on the exterior of the Premises and a
directory strip on the Building directory board. Any other signage related to
Tenant's occupancy shall require Landlord's prior written consent and shall be
installed at Tenant's cost. All such letters and numerals shall be in the
standard graphics for the Building and no others shall be used or permitted on
the Premises without Landlord's prior written consent.
10. Care of the Premises by Tenant. Tenant shall, at its own cost
and expense, reasonably maintain and repair the Premises, and shall not commit
or allow any waste to be committed on any portion of the Premises, and at the
termination of this Lease to deliver up the Premises to Landlord in as good
condition as at the date of the commencement of the term of this Lease,
ordinary wear and tear excepted.
11. Repairs and Alterations by Tenant. Landlord shall have the
right, at its option, at Tenant's own cost and expense, to repair or replace
any damage done to the Building, or any part thereof, caused by Tenant or
Tenant's agents, employees, invitees, or visitors, and Tenant shall pay the
cost thereof to the Landlord on demand as additional Rent. Tenant agrees with
Landlord not to make or allow to be made any alterations to the Premises,
install any vending machines on the Premises, or place signs on the Premises
which are visible from outside the Premises, without first obtaining the prior
written consent of Landlord in each such instance, which consent may be given
or withheld on such conditions as Landlord may elect. Any and all alterations
to the Premises shall become the property of Landlord upon termination of this
Lease (except for movable equipment or furniture owned by Tenant). Landlord
may, nonetheless, require Tenant to remove any and all fixtures, equipment and
other improvements installed on the Premises or the Building ("Additional
Improvements") beyond the Shell Improvements and Initial Improvements. Tenant
shall be responsible for repairing any damage to the Premises or the Building
resulting from the removal of any Additional Improvements or Tenant's personal
property and for restoring the Premises or the Building, as applicable, to
Building Standard condition. In the event that Landlord so elects, and Tenant
fails to remove the Additional Improvements, Landlord may remove the Additional
Improvements at Tenant's cost, and Tenant shall pay Landlord on demand all
costs incurred in removing the Additional Improvements.
12. Use of Electrical Services by Tenant. Tenant's use of
electrical services furnished by Landlord shall be subject to the following:
(a) Landlord will provide the necessary facilities to
supply (i) two (2) watts per square foot of Usable Area within the Premises, at
277 volts, for Tenant's fluorescent lighting and (ii) three (3) watts per
square foot of Usable Area within the Premises, at 120 volts, for Tenant's
receptacle/equipment loads (including Tenant's dedicated circuits).
Collectively, Tenant's lighting and receptable/equipment shall not have an
electrical design load greater than an average of five (5) watts per square
foot of Usable Area within the Premises ("Standard Building Capacity"). The
electrical costs component of Basic Costs is calculated on the basis of the
Standard Building Capacity.
(b) The electrical facilities in the Building available for
Tenant's use are (i) 277/480 volts, 3 phase, for large equipment loads and
fluorescent lighting; and (ii) 120/208 volts, 3 phase, for small
OFFICE LEASE AGREEMENT - Page 3
<PAGE> 4
equipment loans and incandescent lighting. Tenant shall notify Landlord, in
writing, of any equipment that has a rated electrical load greater than 500
watts and/or that requires a service voltage other than 120 volts, and
Landlord's written approval shall be required with respect to the installation
of any such high electrical consumption equipment in the Premises.
Notwithstanding the foregoing, Tenant shall be permitted to install a copier
requiring a service voltage of 220 volts.
c. Tenant shall pay for all costs of meters, submeters,
wiring, risers, transformers, electrical panels, air conditioning and other
items required by Landlord, in Landlord's discretion, to accommodate Tenant's
design loads and capacities that exceed Standard Building Capacity, including,
without limitation, the installation and maintenance thereof. Notwithstanding
the foregoing, Landlord may refuse to install and withhold consent for Tenant's
installation of any wiring, risers, transformers, electrical panels, or air
conditioning if, in Landlord's sole judgment, the same are not necessary or
would cause damage or injury to the Building or the Premises or cause or create
a dangerous or hazardous condition or entail excessive or unreasonable
alterations or repairs to the Building or the Premises, or would interfere with
or create or constitute a disturbance to other tenants or occupants of the
Building. In no event shall Landlord incur any liability for Landlord's refusal
to install, or the withholding of consent for Tenant's installation of, any
such electrical facility or equipment.
(d) Tenant shall pay to Landlord, upon demand, the cost of
the consumption of electrical service in excess of the Standard Building
Capacity at rates determined by Landlord which shall be in accordance with any
applicable laws.
(e) Landlord may, at its option, upon not less than thirty
(30) days' prior written notice to Tenant, discontinue the availability of such
extraordinary electrical service. If Landlord gives any such notice, Tenant
will contract directly with the applicable public utility for the supplying of
such electrical service to the Premises.
13. Laws and Regulations. Tenant agrees to comply with
all applicable laws, ordinances, rules and regulations of any governmental
entity or agency having jurisdiction with respect to the Premises.
14. Building Rules: No Smoking. Tenant will comply with the
rules and regulations of the Building as adopted and altered by Landlord from
time to time and will cause all of its agents, employees, invitees and visitors
to do so. All changes to such rules will be sent by Landlord to Tenant in
writing. The current rules and regulations for the Building are attached hereto
as Exhibit "D". In addition to the foregoing and without limitation thereof,
Tenant expressly acknowledges that the Premises, the Common Areas and all other
portions of the Building shall be and remain during the entire Term "smoke
free" and, accordingly, Tenant shall not permit any of its employees, invitees
or others entering into the Premises, to smoke cigars, cigarettes, tobacco or
any other tobacco product in the Premises, Common Areas and other portions of
the Building, all of which are expressly prohibited by this Lease. Landlord
shall not have any liability to Tenant for any failure of any other tenants of
the Building to comply with such rules and regulations. In the event of any
conflict between the rules of the Building and the express terms of this Lease,
the terms of the Lease shall control.
15. Entry by Landlord. Tenant agrees to permit Landlord or its
employees, agents or representatives to enter into and upon any part of the
Premises at all reasonable hours (and in emergencies at all times) to inspect
the same, or to show the Premises to prospective purchasers, mortgagees,
tenants or insurers, to clean or make repairs, alterations or additions
thereto, and Tenant shall not be entitled to any abatement or reduction of Rent
by reason thereof.
16. Assignment and Subletting.
(a) Tenant shall not (i) assign this Lease or any interest
therein, or (ii) sublease the Premises or any portion thereof without the prior
written consent of Landlord, which consent shall not be unreasonably withheld.
Any attempted assignment or sublease by Tenant in violation of the terms and
covenants of this paragraph shall be void. Notwithstanding the foregoing,
Tenant may, upon notice to Landlord but without the necessity of obtaining
Landlord's prior consent thereto, assign, this Lease or sublet the Premises to
an "Affiliate." As used herein, the term "Affiliate" shall mean any entity
under common control of a person or entity which controls Fortune Petroleum
Corporation or which is controlled by Fortune Petroleum Corporation. If Tenant
is not a natural person, the acquisition of a controlling interest in Tenant
shall be deemed to be an assignment for purposes hereof. As used herein, the
phrase "controlling interest" shall mean ownership of in excess of forty-nine
percent (49%) of the voting interest in Tenant. With respect to a request for
Landlord's consent to any assignment or sublease the following reasons for
denial shall, without limitation, be deemed to be reasonable:
i) the proposed assignee or subtenant is a tenant
in the Building; or
ii) any proposed assignment appears to be an
assignment of less than the entire Lease or less than Tenant's entire
interest herein; or
iii) any proposed assignee's or subtenant's use of
the premises in Landlord's opinion might violate the Use clause of the
Lease; or
iv) the proposed assignee or subtenant is either a
governmental agency, a school or similar operation or a medical-related
practice; or
v) in Landlord's judgment, the proposed assignee or
subtenant would diminish the value or reputation of the Building; or
vi) the occupancy of the Premises by the proposed
subtenant or assignee would require substantial alterations to the
Premises or the applicable portion thereof; or
vii) the proposed subtenant's or assignee's use of
the Premises would conflict with any other Building tenants' exclusive
rights; or
viii) the occupancy of the Premises by the proposed
subtenant or assignee would cause Landlord's fire and extended coverage
insurance to be canceled or the rate therefor to be increased; or
ix) an event of default at such time exists; or
x) the proposed assignment or sublease is for any
period other than any period during the initial Term hereof.
OFFICE LEASE AGREEMENT - Page 4
<PAGE> 5
(b) If Tenant requests Landlord's consent to an assignment
of the Lease or subletting of all or part of the Premises, Landlord shall
either (i) approve or deny such sublease or assignment within fifteen (15) days
after receipt of Tenant's request (but no approval of an assignment or sublease
shall relieve Tenant of any liability hereunder), or (ii) negotiate directly
with the proposed subtenant or assignee and (in the event Landlord is able to
reach agreement with such proposed subtenant or assignee) upon execution of a
lease with such proposed subtenant or assignee, terminate this Lease (in part
or in whole, as appropriate) upon thirty (30) days' notice.
(c) All cash or other proceeds of any assignment, sale or
sublease of Tenant's interest in the Lease and/or the Premises, whether
consented to by Landlord or not, shall be paid to Landlord notwithstanding the
fact that such proceeds exceed the Rental called for hereunder, unless
Landlord agrees to the contrary in writing, and Tenant hereby assigns all
rights it might have or ever acquire in any such proceeds to Landlord. This
covenant and assignment shall benefit Landlord and its successors in ownership
of the Building and shall bind Tenant and Tenant's heirs, executors,
administrators, personal representatives, successors and assigns. Any
assignee, sublessee or purchaser of Tenant's interest in this Lease (all such
assignees, sublessees or purchasers being hereinafter referred to as
"Successors"), by occupying the Premises and/or assuming Tenant's obligations
hereunder, shall be deemed to have assumed liability to Landlord for all
amounts paid to persons other than Landlord by such Successor in consideration
of any such sale, assignment or subletting, in violation of the provision
hereof. No assignment or subletting, whether or not with Landlord's consent,
shall ever relieve Tenant of any liability hereunder.
17. Mechanic's Liens. Tenant will not permit any mechanic's
liens or other liens to be placed upon the Premises or the Building and
nothing in this Lease shall be deemed or construed in any way as constituting
the consent or request of Landlord, express or implied, by inference or
otherwise, to any person for the performance of any labor or the furnishing of
any materials to the Premises, or any part thereof, nor as giving Tenant any
right, power, or authority to contract for or permit the rendering of any
services or the furnishing of any materials that would give rise to any
mechanic's or other liens against the Premises. In the event any such lien is
attached to the Premises, then, in addition to any other right or remedy of
Landlord, Landlord may, but shall not be obligated to, discharge the same. Any
amount paid by Landlord for any of the aforesaid purposes shall be paid by
Tenant to Landlord on demand as additional Rent.
18. Property Insurance. In the event that Landlord has placed
or hereafter places a mortgage, deed of trust or other lien on the Building,
then during the existence thereof, Landlord shall maintain such fire and
extended coverage insurance on the Building and the Premises as Landlord's
mortgagees shall require thereunder, and in all other instances Landlord shall
maintain such fire and extended coverage insurance on the Building and the
Premises as Landlord desires in its sole discretion. Such insurance shall be
maintained at the expense of Landlord (as a part of the Basic Costs), and
payments for losses thereunder shall be made solely to Landlord or the
mortgagees of Landlord as their interests shall appear. Tenant shall maintain at
its expense, in an amount equal to full replacement cost, fire and extended
coverage insurance on all of its personal property, including removable trade
fixtures, located on the Premises and in such additional amounts as are
required to meet Tenant's obligations pursuant to Paragraph 22 hereof. Tenant
shall, at Landlord's request from time to time, provide Landlord with a current
certificate of insurance evidencing Tenant's compliance with this Paragraph
18 and Paragraphs 19 and 21 hereof. Tenant shall obtain the agreement of
Tenant's insurers to notify Landlord that a policy is due to expire at least
thirty (30) days prior to such expiration.
19. Liability Insurance. Tenant and Landlord shall (Landlord as
a part of Basic Costs and Tenant at its own expense) maintain a policy or
policies of comprehensive general liability insurance with respect to the
respective activities of each in the Building and on the Property, with the
premiums thereon fully paid on or before the due date, issued by and binding
upon an insurance company approved by Landlord, such insurance to afford
minimum protection of not less than $3,000,000 combined single limit coverage
of bodily injury, property damage or combination thereof. In addition, Tenant
agrees to obtain a fire legal liability endorsement, or other coverage
satisfactory to Landlord which removes the "leased or occupied" property
exclusion from Tenant's liability policy. Landlord shall not be required to
maintain insurance against thefts within the Premises or the Building or the
Property. Tenant's insurance shall contain a provision naming Landlord as an
additional insured and include coverage for the contractual liability of
Tenant to indemnify Landlord pursuant to Paragraph 20 below. Tenant shall
obtain the agreement of Tenant's insurers to notify Landlord that policy is
due to expire at least thirty (30) days prior to such expiration.
20. Indemnity. Landlord shall not be liable to Tenant, or to
Tenant's agents, servants, employees, customers, or invitees for any injury to
person or damage to property caused by any act, omission, or neglect of Tenant,
its agents, servants, employees, invitees, licensees or any other person
entering the Building under the invitation of Tenant or arising out of the
use of the Premises by Tenant and the conduct of its business or out of a
default by Tenant in the performance of its obligations hereunder. Tenant
hereby indemnifies and holds Landlord harmless from all liability and claims
for any such damage or injury.
21. Waiver of Subrogation Rights. Subject to the conditions
hereinafter specified in this Paragraph 21 and only to the extent that and so
long as the same is permitted under the laws and regulations governing the
writing of insurance within the State of Texas with respect to the respective
insurance that is to be carried by either Landlord or Tenant covering losses
arising out of the destruction or damage to the Premises or its contents or
to other portions of the Building or to Tenant's occupancy and operation of
the Premises without invalidating or nullifying any such policy, or providing a
defense to the applicable insurance carrier with respect to the coverage of any
such policy, all such insurance carried by either Landlord or Tenant shall
provide for a waiver of rights of subrogation against Landlord and Tenant on
the part of the insurance carrier. Notwithstanding the foregoing, nothing
contained herein shall require either party to obtain the inclusion of such a
waiver of rights of subrogation in the event that, because of the cost or
premium attributable to such waiver, the obtaining of such waiver is not
feasible and reasonable. Unless such waivers contemplated by this sentence will
invalidate, nullify, or provide a defense to coverage under any such insurance
policy or are not obtainable for the reasons described in this Paragraph 21,
Landlord and Tenant each hereby waive any and all rights of recovery, claims,
actions or causes of action against the other, its agents, officers, or
employees, for any loss or damage that may occur to the Premises or the
Building, or any improvements thereto, which loss or damage is covered by valid
and collectible insurance policies, to the extent that such loss and damage is
actually recovered under such insurance policy. The waivers set forth in the
immediately preceding sentence shall be in addition to, and not substitution
for, any other waivers, indemnities, or exclusions of liabilities as set forth
in this Lease. Notwithstanding the foregoing, the failure of Tenant to take out
or maintain any insurance policy required under Paragraph 18 hereof shall be a
defense to any claim asserted by Tenant against Landlord by reason of any loss
sustained by Tenant that would have been covered by any such required policy.
22. Casualty Damage. If the Premises or any part thereof
shall be damaged by fire or other casualty, Tenant shall give prompt written
notice thereof to Landlord. In case the Building shall be damaged such that
substantial alteration or reconstruction of the Building shell, in Landlord's
sole opinion, is
OFFICE LEASE AGREEMENT - Page 5
<PAGE> 6
required (whether or not the Premises shall have been damaged by such casualty)
or in the event any mortgagee of Landlord's should require that the insurance
proceeds payable as a result of a casualty be applied to the payment of the
mortgage debt or in the event of any material uninsured loss to the Building,
Landlord may, at its option, terminate this Lease by notifying Tenant in
writing of such termination within ninety (90) days after the date of such
casualty. If Landlord does not thus elect to terminate this Lease, Landlord
shall commence and proceed with reasonable diligence to restore the Building
shell and Shell Improvements located on the Premises; except that Landlord's
obligation to restore shall not require Landlord to spend for such work an
amount in excess of the insurance proceeds actually received by Landlord as a
result of the casualty. When the repairs described in the preceding sentence
have been completed by Landlord, Landlord shall then complete the restoration
of all improvements in excess of the Shell Improvements which are necessary to
permit Tenant's reoccupancy of the Premises (including the installation of
acoustical ceiling tile) pursuant to the final working drawings and
specifications approved by Landlord pursuant to the Work Letter ("Improvements
Restoration"). Landlord shall not be obligated to expend for the completion of
the Improvements Restoration a sum in excess of a dollar amount equal to the
dollar amount, if any, of the "Allowance" ("Reconstruction Allowance"). Except
for the Reconstruction Allowance, all costs and expense of completing the
Improvements Restoration shall be borne by Tenant and the amount of such
excess, as determined by Landlord, is herein referred to as the "Reconstruction
Excess". Fifty percent (50%) of the Reconstruction Excess (as then estimated by
Landlord) shall be paid by Tenant to Landlord, in cash, prior to commencement
of the Improvements Restoration. After substantial completion of the
Improvements Restoration, but prior to reoccupancy of the Premises by Tenant,
Tenant shall pay Landlord, in cash, an amount equal to ninety percent (90%) of
the then unpaid balance of the Reconstruction Excess (as then estimated by
Landlord). As soon as a final accounting can be prepared and submitted to
Tenant, Tenant shall pay Landlord, in cash, the entire unpaid balance of the
Reconstruction Excess, based on Landlord's final cost. Each increment of
the Reconstruction Excess payable by Tenant to Landlord shall be paid by Tenant
within ten (10) days after a written request therefor by Landlord to Tenant.
Tenant shall not be entitled to receive any credit or payment with respect to
any portion of the Reconstruction Allowance not actually spent upon restoration
of the Premises. Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting in any way
from such damage or the repair thereof, except that, subject to the provisions
of the next sentence, and provided that cash in the amount of each increment of
the Reconstruction Excess shall have been paid to Landlord by Tenant within ten
(10) days after a written request therefor by Landlord to Tenant, Landlord
shall allow Tenant a fair abatement of Rent during the time and to the extent
the Premises are unfit for occupancy (based upon that portion of Base Rental
applicable to the portion of the Premises subject to such casualty); provided,
however, the Premises shall not be considered unfit for occupancy at any time
that (1) such of the Improvements Restoration has been completed so as to
permit occupancy as evidenced by the issuance of a Certificate of Occupancy or
its equivalent for the Premises by the appropriate governmental entity having
jurisdiction over the Premises for the purpose of issuing such certificate, or
(ii) if no such certificate can be issued by any appropriate governmental
entity under applicable laws, ordinances, or regulations, at such time as the
Improvements Restoration have been substantially completed and tendered to
Tenant.
23. Condemnation. If the whole or substantially the whole of the
Building or the Premises should be taken for any public or quasi-public use, by
right of eminent domain or otherwise or should be sold in lieu of condemnation,
then this lease shall terminate as of the date when physical possession of the
Building or the Premises are taken by the condemning authority. If less than
the whole or substantially the whole of the Building or the Premises are thus
taken or sold, Landlord (whether or not the Premises are affected thereby) may
terminate this Lease by giving written notice thereof to Tenant; in which event
this Lease shall terminate as of the date when physical possession of such
portion of the Building or Premises are taken by the condemning authority. If
this Lease is not so terminated upon any such taking or sale, the Base Rental
payable hereunder shall be diminished by an amount representing that portion
of Base Rental applicable to the portion of the Premises subject to such taking
or sale, and Landlord shall, to the extent Landlord deems feasible, restore the
Building and the Premises to substantially their former condition, but such
work shall not exceed the scope of the work done by Landlord in originally
constructing the Building and installing Shell Improvements in the Premises,
not shall Landlord in any event be required to spend for such work an amount in
excess of the amount received by Landlord as compensation for such taking. All
amounts awarded upon a taking of any part or all of the Property, Building or
the Premises shall belong to Landlord, and Tenant shall not be entitled to and
expressly waives all claims to any such compensation.
24. Damages from Certain Causes. Landlord shall not be liable to
Tenant for any loss or damage to any property or person occasioned by theft,
fire, act of God, public enemy, injunction, riot, strike, insurrection, war,
court order, requisition, or order of governmental body or authority or by any
other cause, except as specifically provided in paragraph 33 hereof. Nor shall
Landlord be liable for any damage or inconvenience which may arise through (a)
the leasing of other space within the Building to whomsoever Landlord chooses
for whatever use is allowed by Landlord or (b) repair or alteration of any
part of the Building or Premises or to the construction of leasehold
improvements for other tenants in the Building, it being specifically
acknowledged and agreed by Tenant that Tenant is leasing space in a Building
which is not fully occupied and that Landlord will, as a part of Landlord's
leasing of other space within the Building, be conducting construction work in
order to prepare other space in the Building, from time to time, for other
tenants.
25. Events of Default/Remedies.
(a) The following events shall be deemed to be events of
default by Tenant under this Lease: (i) Tenant shall fail to pay any Rent or
other sum of money due hereunder and such failure shall continue for a period
of ten (10) days after the date such sum is due; (ii) Tenant shall fail to
comply with any provision of this Lease or any other agreement between Landlord
and Tenant (including the Work Letter) not requiring the payment of money, all
of which terms, provisions and covenants shall be deemed material and such
failure shall continue for a period of ten (10) days after written notice of
such default is delivered to Tenant; (iii) the leasehold hereunder demised
shall be taken on execution or other process of law in any action against
Tenant; (iv) Tenant notifies Landlord, at any time prior to the Commencement
Date, that Tenant does not intend to take occupancy of the Premises upon the
commencement of the Lease Term; or Tenant shall fail to promptly move into and
take possession of the Premises when the Premises are Ready for Occupancy or
shall cease to do business in or abandon any portion of the Premises; (v)
Tenant shall become insolvent or unable to pay its debts as they become due, or
Tenant notifies Landlord that it anticipates either condition; (vi) Tenant
takes any action to, or notifies Landlord that Tenant intends to file a
petition under any section or chapter of the Bankruptcy Code, as amended from
time to time, or under any similar law or statute of the United States or any
State thereof; or a petition shall be filed against Tenant under any such
statute; or Tenant or any creditor of Tenant notifies Landlord that it knows
such a petition will be filed; or Tenant notifies Landlord that it expects such
a petition to be filed; or (vii) a receiver or trustee shall be appointed for
Tenant's leasehold interest in the Premises or for all of a substantial part of
the assets of Tenant.
(b) Upon the occurrence of any event or events of default
by Tenant, whether enumerated in this Paragraph or not, Landlord shall have the
option to pursue any one or more of the following remedies without any notice
[except for such notice expressly required by Subparagraph 25(a)(ii)] or demand
for
OFFICE LEASE AGREEMENT - Page 6
<PAGE> 7
possession whatsoever (and without limiting the generality of the foregoing,
Tenant hereby specifically waives notice and demand for payment of Rent or other
obligations due and waives any and all other notices or demand requirements
imposed by applicable law); (i) terminate this Lease in which event Tenant
shall immediately surrender the Premises of Landlord; (ii) terminate Tenant's
right to occupy the Premises and re-enter and take possession of the Premises
(without terminating this Lease); (iii) enter upon the Premises and do whatever
Tenant is obligated to do under the terms of this Lease; and Tenant agrees to
reimburse Landlord on demand for any expenses which Landlord may incur in
effecting compliance with Tenant's obligations under this Lease, and Tenant
further agrees that Landlord shall not be liable for any damages resulting to
the Tenant from such action; and (iv) exercise all other remedies available to
Landlord at law or in equity, including, without limitation, injunctive relief
of all varieties.
(c) In the event Landlord elects to re-enter or take
possession of the Premises after Tenant's default, Tenant hereby waives notice
of such re-entry or repossession and of Landlord's intent to re-enter or retake
possession. Landlord may, without prejudice to any other remedy which it may
have for possession or arrearages in or future Rent, expel or remove Tenant and
any other person who may be occupying said Premises or any part thereof. In
addition, the provisions of Paragraph 27 hereof shall apply with respect to the
period from and after the giving of notice of such repossession by Landlord. In
addition, Landlord may change or alter the locks and other security devices on
the doors to the Premises and/or remove Tenant's master entry cards from the
security and master entry card system; and Tenant hereby waives, to the fullest
extent allowed by law, any requirement that notice be posted on the Premises as
to the location of a key to such new locks and any right to obtain such a key.
All Landlord's remedies shall be cumulative and not exclusive. Forbearance by
Landlord to enforce one or more of the remedies herein provided upon an event
of default shall not be deemed or construed to constitute a waiver of such
default. Tenant hereby expressly waives all rights under Section 93.002 of the
Texas Property Code (Commercial Lockout Statute).
(d) In the event that Landlord elects to terminate this
Lease, then, notwithstanding such termination, Tenant shall be liable for and
shall pay to Landlord the sum of all Rents and other indebtedness accrued to
the date of such termination, plus, as damages, an amount equal to the total of
(i) the cost of recovering the Premises, (ii) the cost of removing and storing
Tenant's and other occupant's property located therein, (iii) the costs of
reletting the Premises, or portion thereof (including, without limitation,
brokerage commissions, (iv) the cost of decorations, repairs, changes,
alterations, and additions to the Premises whether accomplished in one or more
steps or phases, (v) the cost of collecting such amounts from Tenant hereunder,
and (vi) any other sums of money or damages that may be owed to Landlord as the
result of default by tenant or the exercise of Landlord's rights at law or in
equity.
(e) In the event that Landlord elects to take possession of
the Premises and terminate Tenant's right to occupy the Premises without
terminating this Lease, Tenant shall remain liable, and shall pay to Landlord,
from time to time, on demand, any deficiency between the total Base Rental due
under this Lease for the remainder of the Lease Term and rents, if any, which
Landlord is able to collect from another tenant(s) for the Premises, or portion
thereof, during the remainder of the Lease Term ("Rental Deficiency"). In
addition, Tenant shall be liable for and shall pay to Landlord, on demand, an
amount equal to (i) the cost of recovering possession of the Premises, (ii) the
cost of removing and storing Tenant's or any other occupant's property located
therein, (iii) the costs of reletting the Premises, or applicable portion
thereof, and whether accomplished in one or more phases (including, without
limitation, brokerage commissions), (iv) the cost of decorations, changes,
alterations, and additions to the Premises, or applicable portion thereof, and
whether accomplished in one or more phases, (v) the cost of collection of the
rent accruing from any such reletting, (vi) the cost of collecting any sums
billable to Tenant by Landlord hereunder, and (vii) any other sum of money or
damages that may be owed to Landlord as a result of Tenant's default or the
exercise of Landlord's rights at law or in equity. Landlord may file suit to
recover any sums falling due under the terms hereof from time to time, and no
delivery to or recovery by Landlord of any portion of the sums due Landlord
hereunder shall be any defense in any action to recover any amount not
theretofore reduced to judgment in favor of Landlord. Nothing contained herein
shall be deemed to require Landlord to relet the Premises. Any sums received by
Landlord through reletting shall reduce the sums owing by Tenant to Landlord
hereunder, but in no event shall Tenant be entitled to any excess of any sums
obtained by reletting over and above the Base Rental provided in this Lease to
be paid by Tenant to Landlord. For the purpose of such reletting, Landlord is
authorized to decorate or to make any repairs, changes, alterations, or
additions in and to the Premises or applicable portion thereof, that Landlord
may deem necessary or advisable. No reletting shall be construed as an election
on the part of Landlord to terminate this Lease unless a written notice of such
intention is given to Tenant by Landlord. Notwithstanding any such reletting
without termination, Landlord may at any time thereafter elect to terminate this
Lease for such previous default. In the alternative (but only in the event that
Tenant's default constitutes a material breach), Landlord may elect to terminate
Tenant's right to occupy the Premises and to immediately recover as damages, in
lieu of the Rental Deficiency, a sum equal to the difference between (i) the
total Base Rental due under this Lease for the remainder of the Lease term and
(ii) the then fair market rental value of the Premises during such period,
discounted to represent value at a rate determined by Landlord, in it sole
discretion ("Discounted Future Rent"). In such event, Landlord shall have no
responsibility to attempt to relet the Premises or to apply any rentals received
by Landlord as a result of any such reletting to Tenant's obligations hereunder;
and the aggregate amount of all damages due to Landlord, including the
Discounted Future Rent hereunder, shall be immediately due and payable to
Landlord upon demand. To the extent Landlord is obligated by law to mitigate its
damages, mitigation for these purposes shall only mean that Landlord agrees to
list or advertise the Premises for rent in accordance with Landlord's standard
advertising and rental policies, and to rent the Premises to prospective tenants
only if there are no other comparable available leasehold premises in the
Building or in other projects of Landlord or its affiliates in the vicinity of
the Building.
(f) In addition to the remedies set forth in Paragraph 25(b)
of the Lease, upon the occurrence of any event or events of default by tenant
under the Lease with respect to which Landlord elects to either terminate the
Lease, or without terminating the Lease, to terminate Tenant's possession of the
Premises, Landlord shall be entitled to (i) receive a cash payment from Tenant
on demand in an amount equal to all "Reimbursable Costs" (as defined below)
which have not yet vested in Tenant, (ii) terminate any remaining lease
concessions which have not yet accrued under the Lease, and (iii) terminate all
of Tenant's parking and signage rights under the Lease. As used herein, the term
"Reimbursable Costs" shall mean the total of (i) the difference between the
average monthly Base Rental payable by Tenant over the entire Lease Term and the
average monthly Base Rental payable by Tenant from the Commencement Date to the
date of default multiplied by the number of months from the Commencement Date
through the date of default; and (ii) the aggregate dollar amount which has been
paid and/or is payable by Landlord to or on behalf of Tenant under the Lease,
including, without limitation, (x) any brokerage commissions in connection with
the execution of the Lease, and (y) any allowances (for leasehold improvements
or otherwise). Since the Reimbursable Costs were incurred by Landlord in
reliance upon Tenant fully performing Tenant's obligations under the Lease,
Tenant hereby acknowledges that Landlord will be damaged, upon a default by
Tenant, in an amount equal to the aggregate dollar value of the Reimbursable
Costs which have not yet vested in Tenant. Reimbursable Costs shall be deemed to
be vested in Tenant on a pro rata basis for each calendar month during the Lease
Term for which Tenant has paid rent and is not otherwise in default hereunder.
No vesting shall occur with respect to any month for which Tenant has not paid
rent or in
OFFICE LEASE AGREEMENT - Page 7
<PAGE> 8
which Tenant is otherwise in default hereunder.
(g) This Paragraph 25 shall be enforceable to the maximum
extent not prohibited by applicable law, and the unenforceability of any
portion thereof shall not thereby render unenforceable any other portion. No
act or thing done by Landlord or its agents during the Lease Term shall be
deemed an acceptance of an attempted surrender of the Premises, and no
agreement to accept a surrender of the Premises shall be valid unless made in
writing and signed by Landlord. No re-entry or taking of possession of the
Premises by Landlord shall be construed as an election on Landlord's part to
terminate this Lease unless a written notice of such termination is given to
Tenant.
(h) Landlord shall be in default hereunder in the event
Landlord has not begun and pursued with reasonable diligence the cure of any
failure of Landlord to meet its obligations hereunder within thirty (30) days
of the receipt by Landlord of written notice from Tenant of the alleged failure
to perform. In no event shall Tenant have the right to terminate or rescind
this Lease as a result of Landlord's default as to any covenant or agreement
contained in this Lease. Tenant hereby waives such remedies of termination and
rescission and hereby agrees that Tenant's remedies for default hereunder and
for breach of any promise or inducement shall be limited to a suit for damages
and/or injunction. In addition, Tenant hereby covenants that, prior to the
exercise of any such remedies, it will give the mortgagees holding mortgages on
the Building notice and a reasonable time to cure any default by Landlord.
26. Peaceful Enjoyment. Tenant shall, and may peacefully have,
hold, and enjoy the Premises, subject to the other terms hereof, provided that
Tenant pays the Rent and other sums herein recited to be paid by Tenant and
performs all of Tenant's covenants and agreements herein contained. This
covenant and any and all other covenants of Landlord shall be binding upon
Landlord and its successors only with respect to breaches occurring during its
or their respective periods of ownership of the Landlord's interest hereunder.
Landlord shall be entitled to cause Tenant to relocate from the Premises to a
comparable space (a "Relocation Space") within the Building at any time upon
ninety (90) days written notice to Tenant. Landlord shall pay all reasonable
costs of accomplishing such relocation. Such a relocation shall not terminate
or otherwise affect or modify this Lease except that from and after the date of
such relocation, "Premises" shall refer to the Relocation Space into which
Tenant has been moved, rather than the original Premises as herein defined.
27. Holding Over. In the event of holding over by Tenant after
expiration or other termination of this Lease or in the event Tenant continues
to occupy the Premises after the termination of Tenant's right of possession
pursuant to Paragraph 25(b) hereof, Tenant shall, throughout the entire
holdover period, pay Rent equal to one hundred fifty percent (150%) of the Base
Rental and additional Base Rental which would have been applicable had the term
of this Lease continued through the period of such holding over by Tenant. No
holding over by Tenant after the expiration of the term of this Lease shall be
construed to extend the term of this Lease.
28. Subordination to Mortgage. Tenant accepts this Lease subject
and subordinate to any mortgage, deed of trust or other lien presently existing
or hereafter arising upon the Premises, or upon the Building and/or the
Property and to any renewals, modifications, consolidations, refinancing, and
extensions thereof, but Tenant agrees that any such mortgagee shall have the
right at any time to subordinate such mortgage, deed of trust or other lien to
this Lease on such terms and subject to such conditions as such mortgagee may
deem appropriate in its discretion. Landlord is hereby irrevocably vested with
full power and authority to subordinate this Lease to any mortgage, deed of
trust or other lien now existing or hereafter placed upon the Premises, or the
Building and/or the Property and Tenant agrees upon demand to execute such
further instruments subordinating this Lease or attorning to the holder of any
such liens as Landlord may request. The terms of this Lease are subject to
approval by the Landlord's permanent lender(s), and such approval is a
condition precedent to Landlord's obligations hereunder. In the event that
Tenant should fail to execute any subordination or other agreement required by
this Paragraph promptly as requested, Tenant hereby irrevocably constitutes
Landlord as its attorney-in-fact to execute such instrument in Tenant's name,
place and stead, it being agreed that such power is one coupled with an
interest. Tenant agrees that it will from time to time upon request by Landlord
execute and deliver to such persons as Landlord shall request a statement in
recordable form certifying that this Lease is unmodified and in full force and
effect (or if there have been modifications, that the same is in full force and
effect as so modified), stating the dates to which Rent and other charges
payable under this Lease have been paid, stating the Landlord is not in default
hereunder (or if Tenant alleges a default stating the nature of such alleged
default) and further stating such other matters as Landlord shall reasonably
require.
29. Estoppel Certificates. Tenant agrees that it will from time
to time upon request by Landlord execute and deliver to such persons as
Landlord shall request a statement in recordable form certifying that this
Lease is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as so modified),
stating the dates to which rental and other charges payable under this Lease
have been paid, stating that the Landlord is not in default hereunder (or if
Tenant alleges a default stating the nature of such alleged default in
particularity) and further stating such other matters as Landlord shall
reasonably require. Tenant agrees to deliver such statement within ten (10)
business days after written request from Landlord. Failure to timely deliver
such estoppel certificate shall be a default under this Lease and shall entitle
Landlord to pursue any and all remedies it deems appropriate, including the
levying of a $1,000.00 per day fine for each day that such estoppel certificate
is not furnished after the tenth (10th) business day. The parties acknowledge
that such a fine is reasonable under the circumstances, represents a reasonable
estimate of Landlord's probable loss, based upon the anticipated harm to
Landlord from a delay in Tenant's furnishing such an estoppel certificate; such
fine amount is also reasonable in light of the difficulties of proof of loss
and the inconvenience and/or nonfeasibility of Landlord obtaining other
appropriate relief upon such default.
30. Landlord's Lien. Tenant hereby grants to Landlord a lien and
security interest on all property of Tenant now or hereafter placed in or upon
the Premises and such property shall be and remain subject to such lien and
security interest of Landlord for payment of all Rent and other sums agreed to
be paid by Tenant herein. The provisions of this Paragraph relating to such
lien and security interest shall constitute a security agreement under and
subject to the Texas Business and Commerce Code so that Landlord shall have and
may enforce a security interest on all property of Tenant now or hereafter
placed in or on the Premises, in addition to and cumulative of the Landlord's
liens and rights provided by law or by the other terms and provisions of this
Lease. Tenant agrees to execute as debtor such financing statement or
statements as Landlord may now or hereafter request. Landlord may at its
election at any time file a copy of this Lease as a financing statement.
Notwithstanding the above, Landlord shall neither sell nor withhold from
Tenant, Tenant's business records. Tenant hereby waives its lien rights under
Section 91.004 of the Texas Property Code.
31. Attorney's Fees. In the event either party files suit to
enforce the performance of or obtain damages caused by a default under any of
the terms of this Lease, the party against whom a judgment is rendered shall
pay the prevailing party's reasonable costs and attorneys' fees. The
reasonableness of such costs and
OFFICE LEASE AGREEMENT - Page 8
<PAGE> 9
attorneys' fees shall be determined by the court and not the jury. With
respect to any monetary claim, in order for a party to prevail, such party must
be awarded at least fifty percent (50%) of the highest amount which such party
claimed at any time in such suit.
32. No Implied Waiver. The failure of Landlord to insist at
any time upon the strict performance of any covenant or agreement herein or to
exercise any option, right, power or remedy contained in this Lease shall not
be construed as a waiver or a relinquishment thereof for the future. No payment
by Tenant or receipt by Landlord of a lesser amount than the monthly
installment of Rent due under this Lease shall be deemed to be other than on
account of the earliest Rent due hereunder, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment as Rent
be deemed an accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
Rent or pursue any other remedy in this Lease provided.
33. Personal Liability. In no event shall Landlord be liable to
Tenant either for (a) any loss or damage that may be occasioned by or through
the acts or omissions of other tenants of the Building or of any other persons
whomsoever or (b) any consequential damages regardless of causation. With
respect to tort claims against Landlord, Landlord shall not be liable to
Tenant or to any other person for any act or omission of Landlord or of its
agents or employees, negligent or otherwise, except for actual damages or costs
incurred as a direct result of and caused directly by the willful misconduct or
gross negligence of Landlord (or of Landlord's agents or employees) in
circumstances in which Landlord is deemed to be liable at law for such acts
or omissions and such liability cannot be waived by Tenant. Nothing contained
in the immediately preceding sentence shall ever be construed as creating
liability in excess of that existing at law or, in any event, increasing the
liability of Landlord, under any theory or cause of action, however
denominated, from that existing at law. Further, the liability of Landlord to
Tenant for (a) any default by Landlord under the terms of this Lease, (b) for
any tort liability of Landlord to Tenant or (c) in any other circumstance in
which Landlord is judicially determined to have some liability to Tenant, for
whatever reason, shall, in each such instance, be limited to the interest of
Landlord in the Building and Property and Tenant agrees to look solely to
Landlord's interest in the Building and the Property for the recovery of any
judgment from the Landlord, it being intended that Landlord shall never be
personally liable for any judgment or deficiency.
34. Security Deposit. The Security Deposit shall be held by
Landlord without liability for interest and as security for the performance
by Tenant of Tenant's covenants and obligations under this Lease, it being
expressly understood that the Security Deposit shall not be considered an
advance payment of Rental or a measure of Tenant's liability for damages in
case of default by Tenant. Landlord may commingle the Security Deposit with
Landlord's other funds. Landlord may, from time to time, without prejudice to
any other remedy, use the Security Deposit to the extent necessary to make good
any arrearages of Rent or to satisfy any other covenant or obligation of Tenant
hereunder. Following any such application of the Security Deposit, Tenant shall
pay to Landlord on demand the amount so applied in order to restore the
Security Deposit to its original amount. If Tenant is not in default at the
termination of this Lease, the balance of the Security Deposit remaining after
any such application shall be returned by Landlord to Tenant. If Landlord
transfers its interest in the Premises during the term of this Lease, Landlord
may assign the Security Deposit to the transferee and thereafter shall have no
further liability for the return of such Security Deposit.
35. Notice. Any notice in the Lease provided for must,
unless otherwise expressly provided herein, be in writing, and may, unless
otherwise in this Lease expressly provided, be given or be served by depositing
the same in the United States mail, postage prepaid and certified and addressed
to the party to be notified, with return receipt requested, or by prepaid
telegram, when appropriate, addressed to the party to be notified at the address
stated in this Lease or such other address notice of which has been given to the
other party. Notice deposited in the mail in the manner hereinabove described
shall be effective from and after the expiration of three (3) calendar days
after it is so deposited.
36. Severability. If any term or provision of this Lease, or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Lease shall be valid and enforced to the fullest
extent permitted by law.
37. Recordation. Tenant agrees not to record this Lease or any
memorandum hereof.
38. Governing Law. This Lease and the rights and obligations of
the parties hereto shall be interpreted, construed, and enforced in accordance
with the laws of the State of Texas.
39. Force Majeure. Whenever a period of time is herein prescribed
for the taking of any action by Landlord, Landlord shall not be liable or
responsible for, and there shall be excluded from the computation of such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations or restrictions,
litigation brought by third parties to enjoin Landlord's activities at the
Building, or any other cause whatsoever beyond the control of Landlord.
40. Time of Performance. Except as expressly otherwise herein
provided, with respect to all required acts of Tenant, time is of the essence
of this Lease.
41. Transfers by Landlord. Landlord shall have the right to
transfer and assign, in whole or in part, all its rights and obligations
hereunder and in the Building and Property referred to herein, and in such
event and upon such transfer Landlord shall be released form any further
obligations hereunder, and Tenant agrees to look solely to such successor in
interest of Landlord for the performance of such obligations.
42. Transfers by Tenant. Tenant shall not transfer, convey,
mortgage, pledge, hypothecate, or encumber Tenant's leasehold interest
hereunder or grant any license, concession, or other right to occupancy of any
portion of the Premises without the prior written consent of Landlord, which
may be granted or withheld in Landlord's sole discretion. The prohibitions
specified in this Paragraph 42 shall be in addition to, and independent of,
the provisions of Paragraph 16 hereof and shall be construed to include,
without limitation, any such prohibited transfers occurring by operation of
law. Any attempt by Tenant to accomplish a transfer prohibited by the
provisions of this Lease, without having obtained the prior written consent of
Landlord thereto shall be void and of no force or effect and may, at the option
of Landlord, constitute a material default hereunder.
43. Brokerage Fees and Commissions. Tenant represents that it has
dealt with no broker, agent or other person in connection with this Lease other
than CB Commercial Real Estate Group, Inc. and Landlord's Broker ("Brokers")
and that no broker, agent or other person brought about this Lease (except
Broker), and Tenant shall indemnify and hold Landlord harmless from and against
any and all claims, losses, costs or expenses (including attorney's fees and
expenses) by any broker (except those of Brokers), agent, or other person
claiming a commission or other form of compensation by virtue of having dealt
with Tenant with regard to the
OFFICE LEASE AGREEMENT - Page 9
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transaction contemplated by this Lease. The provisions of this Paragraph 43
shall survive the expiration of the Lease Term or any renewal or extension
thereof.
44. Effect of Delivery of This Lease. Landlord has delivered
a copy of this Lease to Tenant for Tenant's review only, and the delivery
hereof does not constitute an offer to Tenant or option. This Lease shall not
be effective until a copy executed by both Landlord and Tenant is delivered to
and accepted by Landlord, and this Lease has been approved by Landlord's
mortgagee.
45. Entire Agreement. This Lease embodies the entire
agreement between the parties hereto with relation to the transaction
contemplated hereby, and there have been and are no covenants, agreements,
representations, warranties or restrictions between the parties hereto with
regard thereto other than those specifically set forth herein.
46. Receipt of Premises. The occupancy of the Premises by Tenant
shall constitute the acknowledgment and agreement of Tenant that Tenant is
fully familiar with the physical condition of the Premises, that Tenant has
received the same in good order and condition, and that the Premises comply in
all respects with the requirements of this Lease and are suitable for the
purposes for which the Premises are hereby Leased. In that regard, Landlord
hereby disclaims, and Tenant hereby waives, any warranty of suitability with
respect to the Premises.
47. Merger of Estates. The voluntary or other surrender of
this Lease by Tenant or a mutual cancellation thereof, shall not constitute a
merger; and upon such surrender or cancellation of this Lease, Landlord shall
have the option, in Landlord's sole discretion, to (i) either terminate all or
any existing subleases or subtenancies, or (ii) assume Tenant's interest in any
or all subleases or subtenancies.
48. Waste Management. Without limiting its obligations under
Paragraph 14 (and the rules and regulations attached to this Lease as Exhibit
"D"), Tenant covenants and agrees to comply with all laws, rules, regulations
and guidelines now or hereafter made applicable to the Premises respecting the
disposal of waste, trash, garbage and other matter a (Liquid or solid),
generated by Tenant, the disposal of which is not otherwise the express
obligation of Landlord under this Lease (it is expressly understood that the
provision of janitorial services by Landlord is not an express obligation of
Landlord under this Lease for the purpose of this Paragraph 48), including, but
not limited to, laws, rules, regulations and guidelines respecting recycling
and other forms of reclamation (all of which are herein collectively referred to
as "Waste Management Requirements"). Tenant covenants and agrees to comply
with Waste Management Requirements applicable to Landlord (i) as owner of the
Premises and (ii) in performing Landlord's obligations under this Lease, if
any. Tenant further covenants and agrees to comply with all rules and
regulations established by Landlord to enable Landlord from time to time to
avail itself of the lowest rate available for the disposal of waste, trash,
garbage and other matter (liquid or solid), generated by Tenant. Tenant
covenants and agrees to indemnify, defend, protect and hold landlord harmless
[in accordance with Paragraph 20] from and against all liability (including
costs, expenses and attorneys fees) that Landlord may sustain by reason of
Tenant's breach of its obligations under this Paragraph 48. Tenant's
obligations under this Paragraph 48 shall survive the termination of this Lease.
49. Americans with Disabilities Act and Texas Architectural
Barriers Act. Tenant agrees to comply with all requirements of the Americans
with Disabilities Act [Public Law 101-336 (July 26, 1990) ("ADA")] and the
Texas Architectural Barriers Act [Article 9102, Tex. Rev. Civ. St. (1991)]
applicable to the Premises, Building and Property to accommodate its employees,
invitees and customers in accordance with the provisions of this paragraph.
Tenant acknowledges that it shall be wholly responsible for any accommodations
or alterations which need to be made to the Premises to accommodate Tenant's
employees, customers and invitees, but Tenant shall not be responsible for
making any additional accommodations or alterations to the Building or the
Property except those accommodations or alterations (i) which need to be made
solely and uniquely to accommodate Tenant's employees, customers and/or
invitees and/or (ii) which are to accommodate Tenant's employees, customers
and/or invitees and which exceed standard ADA requirements for the Building
and/or the Property. Tenant shall be solely responsible for requirements under
Title I of the ADA relating to Tenant's employees. Tenant agrees to indemnify
and hold Landlord harmless from any and all expenses, liabilities, costs or
damage suffered by Landlord as a result of Tenant's failure to fulfill its
aforesaid responsibilities regarding making such accommodations and alterations
referenced in the preceding sentences. No provision in this Lease should be
construed in any manner as permitting, consenting to or authorizing Tenant to
violate requirements under such Act and any provision of the Lease which could
arguably be construed as authorizing a violation of either Act shall be
interpreted in a manner which permits compliance with such Act and is hereby
amended to permit such compliance.
50. Exhibits. The following numbered exhibits are attached
hereto and incorporated herein and made a part of this Lease for all purposes:
Exhibit "A" - Legal Description
Exhibit "B" - Floor Plan
Exhibit "C" - Payment of Excess Basic Costs
Exhibit "D" - Rules and Regulations
Exhibit "E" - Work Letter
Exhibit "F" - Parking
Exhibit "G" - Renewal Option
Exhibit "H" - Right of First Refusal
NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS LEASE HEREBY ACKNOWLEDGE
AND AGREE THAT THIS LEASE (AND ATTACHED EXHIBITS) CONTAINS CERTAIN
INDEMNIFICATION PROVISIONS.
OFFICE LEASE AGREEMENT - Page 10
<PAGE> 11
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in
multiple original counterparts as of the day and year first above written.
LANDLORD:
Address: BROOKDALE INVESTORS, L.P.,
A Delaware limited partnership
515 W. Greens Road
Suite 110
Houston, Texas 77067 BY: Brookdale Partners, LLC,
Attn: Property Manager a Georgia limited liability company,
its sole General Partner
by:
-----------------------------------
its Manager
TENANT:
Address Prior to FORTUNE PETROLEUM CORPORATION,
Commencement Date: a Delaware corporation
30101 Agoura Ct.
Suite 110 By: TYRONE J. FAIRBANKS
Agoura Hills, CA 91301 ----------------------------------
Attn: Tyrone J. Fairbanks Name: Tyrone J. Fairbanks
Title: President & CEO
Address Subsequent to
Commencement Date:
515 W. Greens Road
Suite 720
Houston, Texas 77067
Attn: Tyrone J. Fairbanks
<PAGE> 12
EXHIBIT "A"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
LEGAL DESCRIPTION
-----------------
Tract I: The full fee simple estate in and to the real property
described on Schedule 1 attached hereto and made a part hereof.
Tract II: The certain easement interest and estate appurtenant to the
real property described on Schedule 1 attached hereto and made
a part hereof and all rights, powers and privileges in
connection therewith granted and demised to One Commerce Green,
Ltd. and Friendswood Development Company, their successors and
assigns, pursuant to that certain instrument recorded in the
Office of the County Clerk of Norris County, Texas under
Clerk's File No. J266607, including a non-exclusive storm
sewer easement on, over, under, across, along and through the
real property described in Schedule 2 attached hereto and made
a part hereof, said real property described in Schedule 2
attached hereto being owned of record by Paul E. Austin,
Trustee.
<PAGE> 13
SCHEDULE 1
TO
EXHIBIT "A"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION
AS TENANT
METES AND BOUNDS DESCRIPTION FOR 5.9267 ACRES OF LAND BEING ALL OF RESTRICTED
RESERVE "G", GREENS CROSSING, SECTION FOUR, A SUBDIVISION RECORDED IN VOLUME
308, PAGE 2, HARRIS COUNTY MAP RECORDS, IN THE W.C.R.R. CO. SURVEY, SECTION 17,
A-889, HARRIS COUNTY, TEXAS.
BEGINNING: At a found 5/8-inch iron rod in the west line of Greens Parkway, a
90-foot right-of-way, said point also being the most easterly northeast corner
of Restricted Reserve "G";
THENCE: S02 degrees 34' 47'' E, along the west line of Greens Parkway, 249.00
feet to a found 5/8-inch iron rod for the southeast corner of the herein
described tract of land;
THENCE: Departing said right-of-way line at a right angle of S87 degrees
25' 13'' W, 103.91 feet to a found 5/8-inch iron rod for corner;
THENCE: S61 degrees 51' 29'' W, 124.20 feet to a found 5/8-inch iron rod for
corner;
THENCE: S87 degrees 25' 13'' W, 73.87 feet to a found 5/8-inch iron rod for
corner;
THENCE: S02 degrees 34' 47'' E, 176.50 feet to a found 5/8-inch iron rod for
corner;
THENCE: S87 degrees 25' 13'' W, 322.75 fee to a found 5/8-inch iron rod for
the southwest corner of the herein described tract of land;
THENCE: N02 degrees 34' 47'' W, 186.50 feet to a found 5/8-inch iron rod for
corner;
THENCE: N87 degrees 25' 13'' E, 16.75 feet to a found 5/8-inch iron rod for
corner;
THENCE: N02 degrees 34' 47'' W, 121.97 feet to a found 5/8-inch iron rod for
corner;
THENCE: N28 degrees 08' 31'' W, 108.90 feet to a found 5/8-inch iron rod for
corner;
THENCE: N02 degrees 34' 47'' W, 112.38 feet to a found 5/8-inch iron rod for
corner in the southerly right-of-way line of West Greens Road, a 100-foot
right-of-way, the northwest corner of the herein described tract of land;
THENCE: N87 degrees 25' 13'' E, along the south line of West Greens Road,
401.74 feet to a found 5/8-inch iron rod being the beginning of a tangent
curve to the right;
THENCE: 70.77 feet along the arc of said curve and right-of-way line (radius
equals 500.00 feet, central angle equals 08 degrees 06' 35'', chord distance
equals 70.71 feet and chord bearing equals S88 degrees 31' 30'' E) to a found
5/8-inch iron rod for a point of reverse curvature;
THENCE: 70.77 feet along the arc of a reverse curve to the left and said
right-of-way line (radius equals 500.00 feet, central angle equals 08 degrees
06' 35'', chord distance equals 70.71 feet, and chord bearing equals S88 degrees
31' 30'' E) to a found 5/8-inch iron rod for a point of tangency;
THENCE: N87 degrees 25' 13'' E, continue along the south line of West Greens
Road, 80.00 feet to a found 5/8-inch iron rod for the most northerly northeast
corner;
THENCE: S02 degrees 34' 47'' E, 10.00 feet to a found 5/8-inch iron rod for
corner;
THENCE: S47 degrees 34' 47'' E, 28.28 feet to the point of BEGINNING and
containing 5.9267 acres of land.
SCHEDULE 1 TO EXHIBIT ''A'' TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 14
SCHEDULE 2
TO
EXHIBIT "A"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
METES AND BOUNDS DESCRIPTION OF 0.0565 ACRE (2460 SQUARE FEET) OF LAND OUT OF
RESTRICTED RESERVE "C", GREENS CROSSING, SECTION FOUR, A SUBDIVISION RECORDED
IN VOLUME 308, PAGE 2, HARRIS COUNTY MAP RECORDS, ALSO BEING OUT OF W.C.R.R.
AND COMPANY SURVEY, SECTION 17, A-889, HARRIS COUNTY, TEXAS:
COMMENCING: At a found 5/8-inch iron rod in the west line of Greens Parkway, a
90-foot right-of-way, said iron rod also being the most easterly northeast
corner of Restricted Reserve "C" and the easterly southeast corner of
Restricted Reserve "G";
THENCE: Departing said Greens Parkway in a westerly direction at right angle,
S87 degrees 25 feet 13 inches W, along the common north boundary line of
Restricted Reserve "C" and the south boundary line of Restricted Reserve "G",
20.00 feet to the point of BEGINNING;
THENCE: Departing said common boundary line of Restricted Reserves "C" and "G"
at right angle, and west of end parallel with said Greens Parkway right-of-way,
S02 degrees 34 feet 47 inches E, 216.00 feet for a corner;
THENCE: Departing said parallel line, N87 degrees 25 feet 13 inches E, 20.00
feet for a corner on the west line of said Greens Parkway, same being the east
line of Restricted Reserve "C";
THENCE: Along said common line of Greens Parkway and Restricted Reserve "C",
S02 degrees 34 feet 47 inches E, 10.00 feet for a corner;
THENCE: Departing said common line at right angle, S87 Degrees 25 feet 13
inches W, 30.00 feet for a corner;
THENCE: Departing said corner, west of and parallel with said Greens Parkway,
N02 degrees 34 feet 47 inches W, 226.00 feet for a corner on the common
boundary line of Restricted Reserves "C" and "G";
THENCE: Along said common boundary line of Restricted Reserves "C" and "G",
N87 degrees 25 feet 13 inches E, 10.00 feet to the point of BEGINNING and
containing 0.0565 acre (2,460 square feet) of land.
SHCEDULE 2 TO EXHIBIT "A" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE> 15
EXHIBIT "B"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
FLOOR PLAN
[ONE COMMERCE GREEN
ARCHITECTURAL PLAN
HOUSTON, TEXAS
ART]
EXHIBIT "B" TO OFFICE LEASE AGREEMENT -- PAGE SOLO
<PAGE> 16
EXHIBIT "C"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
PAYMENT OF EXCESS BASIC COSTS
1. BASIC COSTS. The Base Rental payable hereunder shall be adjusted from
time to time in accordance with the following provision:
(a) Tenant's Base Rental is based, in part, upon the estimate that
annual "Basic Costs" (as hereinafter defined) will be equal to the "Expense
Stop". During the Lease Term, Tenant shall pay as an adjustment to Base
Rental hereunder an amount (per each square foot of Rentable Area within the
Premises) equal to the excess ("Excess") from time to time of Basic Costs
per square foot of Rentable Area in the Building over the Expense Stop.
Landlord may collect such additional Base Rental in arrears on a yearly
basis. Landlord shall also have the option to make a good faith estimate of
the Excess from time to time for each upcoming calendar year (or remainder
thereof, if applicable) and, upon thirty (30) days' written notice to
Tenant, may require the monthly payment of Base Rental to be adjusted in
accordance with such estimate. Any amounts paid based on such an estimate
shall be subject to adjustment pursuant to Paragraph 2 below when Basic
Costs are available for such calendar year.
(b) "Basic Costs" shall mean all direct and indirect costs and expenses
in each calendar year of operating, maintaining, repairing, managing and
owning the Building and the Property plus all operating costs of the
Exterior Common Area (below defined). Basic Costs shall not include the cost
of capital improvements, depreciation, interest, lease commissions, and
principal payments on mortgage and other non-operating debts of Landlord.
Basic Costs shall, however, include the amortization of capital improvements
which are primarily for the purpose of reducing Basic Costs, or which are
required by governmental authorities. "Exterior Common Areas" shall mean
that portion of the Property (and other tracts of real property comprising
the multi-building project in the event the Building is located in such a
project) which are not located within the Building (or other building in a
multi-building project) and which are provided and maintained for the common
use and benefit of Landlord and Tenants of the Building (or multi-building
project) generally and the employees, invitees and licensees of Landlord and
such tenants; including without limitation, all parking areas (enclosed or
otherwise) and all streets, sidewalks, walkways, and landscaped areas.
2. PROCEDURE. The following additional provisions shall apply to Paragraph
1 of this EXHIBIT "C":
(a) By April 1 of each calendar year during Tenant's occupancy, or as
soon thereafter as practical, Landlord shall furnish to Tenant a statement
of Landlord's Basic Costs for the previous calendar year. If for any
calendar year additional Base Rental was collected for the prior year, as a
result of Landlord's estimate of Basic Costs, in excess of the additional
Base Rental due during such prior year, then Landlord shall refund to Tenant
any over payment (or at Landlord's option, apply such amount against rentals
due or to become due hereunder). Likewise, Tenant shall pay to Landlord, on
demand, any underpayment with respect to the prior year. In no event shall
Basic Costs per square foot of Rentable Area within the Building be deemed
to be less than the Expense Stop, it being the intent of Landlord and Tenant
that Tenant shall at all times be responsible for the payment of, and shall
pay, not less than the amount of Base Rental for the applicable period
(before adjustment) specified in this Lease.
(b) Tenant or a duly authorized and qualified representative of Tenant,
at its expense, shall have the right no more frequently than once per
calendar year and within one hundred and twenty (120) days after the receipt
of Landlord's statement of Basic Costs to perform, at Tenant's expense, an
in-house audit ("Audit") of Landlord's books and records relating to Basic
Costs for the immediately preceding calendar year. Tenant shall not be
entitled to exercise its audit rights under this subparagraph if it is then
in default under this Lease. Tenant acknowledges and agrees that any records
reviewed under this paragraph constitute confidential information of
Landlord, which shall not be disclosed to anyone other than the accountants
performing the review and the principals of Tenant who receive the results
of the review. The disclosure of such information to any other person,
whether or not caused by the conduct of Tenant, shall constitute a material
breach of this Lease. If it is determined as the result of Tenant's in-house
Audit that Basic Costs were overstated by five percent (5.0%) or more and
Landlord does not disagree with such determination then Landlord shall
reimburse Tenant for the reasonable costs of such Audit. If, however,
Landlord disagrees with such determination, then Landlord shall be entitled
to arrange for a second audit ("Second Audit") by an independent certified
public accountant, chosen by Landlord, in its sole discretion, from among
the "Big Six" accounting firms. If it is determined as the result of any
such Second Audit that Basic Costs were overstated by five percent (5.0%) or
more, or by an amount which is at least as great as the amount determined by
the Audit, then Landlord shall pay the costs of the Second Audit; otherwise
Tenant shall reimburse Landlord for the reasonable costs of the Second
Audit. In either event, Landlord or Tenant, as the case may be, shall
reimburse the other party for the amount, if any, of the disputed items
which were incorrectly stated, overstated or understated by Landlord.
(c) Notwithstanding any language in the Lease or in this Exhibit "C"
seemingly to the contrary, Landlord may, at Landlord's sole election,
determine and estimate Basic Costs for any calendar year within the Lease
Term by increasing the variable components of Basic Costs to the amount
which Landlord projects would have been incurred had the Building been
occupied to the extent of ninety-five percent (95%) of the Rentable Area
therein during all of the applicable calendar year. In such event, the term
"Basic Costs", as used in this Exhibit "C" and in the Lease, shall include
(i) the actual Basic Cost incurred during any portion of such calendar year
in which the Building is occupied to the extent of ninety-five percent (95%)
or more of the Rentable Area therein plus (ii) the Basic Costs which would
have been incurred had the Building been occupied to the extent of
ninety-five percent (95%) of the Rentable Area thereof during the portion of
that calendar year in which the actual occupancy of the Building is less
than ninety-five percent (95%) of the Rentable Area therein; and Landlord
shall have the option of making such estimate in advance for any upcoming
calendar year.
(d) In the event that the Lease Term commences on a day other than
January 1 or terminates on a day other than December 31, the Excess for that
part of the first (1st) calendar year or last calendar year during the Lease
Term shall be determined as follows:
EXHIBIT "C" TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 17
(i) The Expense Stop shall be prorated based upon the number of
months in such partial calendar year. With respect to any partial
calendar month occurring during such partial calendar year, the Expense
Stop shall also be prorated based upon the number of days in that
partial calendar month.
(ii) The Excess, if any, for the applicable partial calendar year
shall then be the amount by which (A) actual Basic Costs per square foot
of Rentable Area in the Building for such calendar year, prorated based
upon the number of months and days in the applicable partial calendar
year, exceed (B) the Expense Stop, as prorated pursuant to the
provisions of this Subparagraph 2(d).
(iii) With respect to a proration for the first (1st) calendar year
and in the event that Landlord's estimate of the Basic Costs to be
incurred during such partial calendar year exceeds the Expense Stop, as
prorated pursuant to the provisions of this Subparagraph 2(d), Landlord
may, upon thirty (30) days prior written notice to Tenant, require the
monthly payments of Base Rental occurring during such partial calendar
year to be adjusted in accordance with such estimate.
(iv) The provisions of this Exhibit "C" shall survive the
termination of the Lease Term.
EXHIBIT "C" TO OFFICE LEASE AGREEMENT--Page 2
<PAGE> 18
EXHIBIT "D"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways, and similar areas
shall not be obstructed nor shall refuse, furniture, boxes or other items be
placed therein by Tenant or its officers, agents, servants, and employees, or
used for any purpose other than ingress and egress to and from the leased
premises, or for going from one part of the Building to another part of the
Building. Canvassing, soliciting and peddling in the Building are prohibited.
2. Plumbing fixtures and appliances shall be used only for the
purposes for which constructed, and no unsuitable material shall be placed
therein.
3. No signs directories, posters, advertisements, or notices shall be
painted or affixed on or to any of the windows or doors, or in corridors or
other parts of the Building, except in such color, size, and style, and in
such places, as shall be first approved in writing by Landlord in its
discretion. Building standard suite identification signs will be prepared by
Landlord at Tenant's expense. Landlord shall have the right to remove all
unapproved signs without notice to Tenant, at the expense of Tenant.
4. Tenants shall not do, or permit anything to be done in or about the
Building, or bring or keep anything therein, that will in any way increase the
rate of fire or other insurance on the Building, or on property kept therein or
otherwise increase the possibility of fire or other casualty.
5. Landlord shall have the power to prescribe the weight and position
of heavy equipment or objects which may overstress any portion of the floor. All
damage done to the Building by the improper placing of such heavy items will be
repaired at the sole expense of the responsible Tenant.
6. A Tenant shall notify the Building manager when safes or other
heavy equipment are to be taken in or out of the Building, and the moving shall
be done after written permission is obtained from Landlord on such conditions as
Landlord shall require.
7. Corridor doors, when not in use, shall be kept closed.
8. All deliveries must be made via the service entrance and service
elevator, when provided, during normal working hours.
Landlord's written approval must be obtained for any delivery after normal
working hours.
9. Each Tenant shall cooperate with Landlord's employees in keeping
their leased premises neat and clean.
10. Tenants shall not cause or permit any improper noises in the
Building, or allow any unpleasant odors to emanate from the leased premises, or
otherwise interfere, injure or annoy in any way other tenants, or persons having
business with them.
11. No animals shall be brought into or kept in or about the Building,
except guide dogs or similar support animals accompanying persons who are
physically disabled.
12. When conditions are such that Tenant must dispose of crates,
boxes, etc., it will be the responsibility of Tenant to dispose of same prior
to, or after the hours of 7:30 a.m. and 5:30 p.m., respectively.
13. No machinery of any kind, other than ordinary office machines such
as typewriters and calculators, shall be operated on the leased premises
without the prior written consent of Landlord, nor shall a tenant use or keep
in the Building any inflammable or explosive fluid or substance (including
Christmas trees and ornaments), or any illuminating materials, except candles.
No space heaters or fans shall be operated in the Building.
14. No bicycles, motorcycles or similar vehicles will be allowed in
the Building.
15. No nails, hooks, or screws shall be driven into or inserted in any
part of the Building except as approved by Landlord.
16. Landlord has the right to evacuate the Building in the event of an
emergency or catastrophe.
17. No food and/or beverages shall be distributed from Tenant's office
without the prior written approval the Building Manager.
18. No additional locks shall be placed upon any doors without the
prior written consent of Landlord. All necessary keys shall be furnished by
Landlord, and the same shall be surrendered upon termination of this lease, and
Tenant shall then give Landlord or his agent an explanation of the combination
of all locks on the doors or vaults. Tenant shall initially be given two (2)
keys to the leased premises by Landlord. No duplicates of such keys shall be
made by Tenants. Additional keys shall be obtained only from Landlord, at a
fee to be determined by Landlord.
19. Tenants will not locate furnishings or cabinets adjacent to
mechanical or electrical access panels or over air conditioning outlets so as
to prevent operating personnel from servicing such units as routine or
emergency access may require. Cost of moving such furnishings for Landlord's
access will be for Tenant's account. The lighting and air conditioning
equipment of the Building will remain the exclusive charge of the Building
designated personnel.
20. Tenant shall comply with parking rules and regulations as may be
posted or distributed from time to time.
EXHIBIT "D" TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 19
21. No portion of the Building shall be used for the purpose of lodging
rooms.
22. Vending machines or dispensing machines of any kind will not be placed
in the leased premises by a Tenant.
23. Prior written approval, which shall be at Landlord's sole discretion,
must be obtained for installation of window shades, blinds, drapes or any other
window treatment of any kind whatsoever. Landlord will control all internal
lighting that may be visible from the exterior of the Building and shall have
the right to change any unapproved lighting, without notice to Tenant, at
Tenant's expense.
24. No Tenant shall make any changes or alterations to any portion of the
Building without Landlord's prior written approval, which may be given on such
conditions as Landlord may elect. All such work shall be done by Landlord or by
contractors and/or workmen approved by landlord, working under Landlord's
supervision.
25. Tenants shall provide plexiglas or other pads for all chairs mounted
on rollers or casters.
26. Landlord reserves the right to rescind any of these rules and make such
other and further rules and regulations as in its judgment shall from time to
time be necessary or advisable for the operation of the Building, which rules
shall be binding upon each Tenant upon delivery to such Tenant of notice
thereof in writing.
27. No tenant, and no employee, invitee or other person entering the
Building to visit a tenant, shall be permitted to smoke cigars, cigarettes,
tobacco or any other tobacco product on the Premises or in any other part of
the Building or the Parking Garage, all of which are expressly prohibited.
<PAGE> 20
SCHEDULE "D-1"
TO
EXHIBIT "D"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
INTERPRETATION OF RULES AND REGULATIONS
1. With respect to Rule #18 of Exhibit "D", Tenant shall be permitted
sixteen (16) keys.
2. With respect to Rule #25 of Exhibit "D", Tenant shall not be required to
provide plexi-glas or other pads for all chairs mounted on rollers and
casters which have been designed to be utilized on carpet.
EXHIBIT "D" TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 21
EXHIBIT "E"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
WORK LETTER
(Allowance)
This Work Letter ("Work Letter") describes and specifies the rights and
obligations of Landlord and Tenant with respect to certain allowances granted
to Tenant hereunder and rights and responsibilities of Landlord and Tenant with
respect to the design, construction and payment for the completion of the
initial Improvements within the Premises.
1. Definitions. Terms which are defined in the Lease shall have the
same meaning in this Work Letter. Additionally, as used in this Work Letter,
the following terms (when delineated with initial capital letters) shall have
the respective meaning indicated for each as follows:
(a) Basic Construction of the Building shall mean the structure
of the Building as built on the date of this Work Letter, the Shell
Improvements, and all other improvements, fixtures and facilities constituting
a part of the Project, as these exist on the date of this Work Letter if the
Building is complete, or as provided for in Landlord's plans and specifications
for the Building if prior to completion.
(b) Landlord's Architect shall mean the architect designated
by Landlord as its architect, from time to time, to perform the functions of
Landlord's Architect hereunder.
(c) Plans and Specifications shall mean collectively, the
plans, specifications and other information prepared or to be prepared by
Tenant's Architect and, where necessary, by Landlord's electrical, mechanical
and structural engineers, all at Tenant's expense, which shall detail the Work
required by Tenant in the Premises and which shall be approved in writing by
both Tenant and Landlord prior to the commencement of such Work.
(d) Tenant's Architect shall mean Kirksey and Partners who is
an architect licensed to practice in the State of Texas.
(e) Work shall mean all materials and labor to be added to the
Basic Construction of the Building and the Shell Improvements in order to
complete the installation of the Initial Improvements within the Premises for
Tenant in accordance with the Plans and Specifications, including, without
limitation any modification to Basic Construction of the Building or to the
Shell Improvements, any structural modifications to the Building, any
electrical or plumbing work required to meet Tenant's electrical and plumbing
requirements, and any special air conditioning work required to be performed in
the Premises.
(f) Cost of the Work shall mean the cost of all materials and
labor to be added to the Basic Construction of the Building and the Shell
Improvements in order to complete the installation of the Initial Improvements
within the Premises in accordance with the Plans and Specifications.
(g) Landlord's Costs shall mean the sum of (i) the cost of the
Shell Improvements and (ii) that portion of the Cost of the Work up to, but not
in excess of, the aggregate amount of the Allowance.
(h) Tenant's Costs shall mean that portion of the Cost of the
Work in excess of Landlord's Costs.
(i) Change Costs shall mean all costs or expenses
attributable to any change in the Plans and Specifications which, when added to
other costs and expenses incurred in completing the Work, exceed Landlord's
Costs, including, without limitation, (i) any cost caused by direction of
Tenant to omit any item of Work contained in the Plans and Specifications, (ii)
any additional architectural or engineering services, (iii) any changes to
materials in the process of fabrication, (iv) the cancellation or modification
of supply or fabricating contracts, (v) the removal or alteration of any Work
or any plans completed or in process, or (vi) delays affecting the schedule of
the Work.
(j) Working Days shall mean all days of the week other than
Saturday, Sunday, and legal holidays.
2. Procedure and Schedules for the Completion of Plans and
Specifications. The Plans and Specifications shall be completed in accordance
with the following procedure and time schedules:
(a) Design Drawings. Within ten (10) Working Days from
execution of the Lease, Tenant shall submit to Landlord four (4) sets of prints
of design drawings, specifying the intended design, character and finishing of
the Initial Improvements within the Premises. Such package shall include
separate drawings for signs in accordance with Landlord's sign criteria. The
design drawings shall set forth the requirements of Tenant with respect to the
installation of the Initial Improvements within the Premises, and such drawings
shall include, without limiting their scope, a Tenant approved space plan,
architectural design of the space, including office front, plans, elevations,
sections, and renderings indicating materials, color selections and finishes.
(i) After receipt of design drawings, Landlord shall return to
Tenant one set of prints of design drawings with Landlord's suggested
modifications and/or approval.
(ii) If design drawings are returned to Tenant with comments,
but not bearing approval of Landlord, the design drawings shall be immediately
revised by Tenant and resubmitted to Landlord for approval within ten (10)
Working Days of their receipt by Tenant. Unless such action is taken, Tenant
will be deemed to have accepted and approved all of Landlord's comments on the
design drawings.
(b) Completion of Plans and Specifications. All Plans and
Specifications shall be prepared
EXHIBIT "E" TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 22
in strict compliance with applicable Building standards and requirements
as set forth in the Lease, this Work Letter and otherwise, and shall
also adhere to the design drawings approved by Landlord. In order to
assure the compatibility of Tenant's electrical and mechanical systems
and the compatibility of Tenant's structural requirements with the
existing Building and in order to expedite the preparation of Tenant's
electrical, mechanical and structural drawings, Tenant or Tenant's
Architect shall deliver to Landlord's Architect, not later than ten (10)
Working Days from the date of Landlords' approval of design drawings, a
detailed plan setting forth any and all electrical, mechanical and
structural requirements, and Landlord's Architect shall retain, at
Tenant's expense, Landlord's electrical, mechanical and structural
engineerings to prepare all necessary electrical, mechanical and
structural construction drawings which shall be included as a part of
the Plans and Specifications. All construction documents and
calculations prepared by Tenant's Architect shall be submitted by
Tenant, in the form of four (4) sets of blueline prints, to Landlord for
approval within ten (10) Working Days after the date of receipt by
Tenant of Landlord's approval of design drawings. If the Plans and
Specifications are returned to Tenant with comments, but not bearing
approval of Landlord, the Plans and Specifications shall be immediately
revised by Tenant and resubmitted to Landlord for approval within ten
(10) Working Days of their receipt by Tenant.
(i) The fees for Tenant's Architect and any
consultants or engineers retained by or on behalf of Tenant or
Tenant's Architect (including, but not limited to, the
electrical, mechanical and structural engineers required to be
retained under this paragraph) shall be paid by Tenant. Tenant
shall also pay for any preliminary drawings by Landlord's
Architect for review of the design drawings, the Plans and
Specifications, and any revisions to such documents, and the
fees and expenses of Landlord's Architect for inspection of the
Work, as required by Landlord.
(ii) Tenant shall have the sole responsibility for
compliance of the Plans and Specifications with all applicable
statutes, codes, ordinances and other regulations, and the
approval of the Plans and Specifications or calculations
included therein by Landlord shall not constitute an indication,
representation or certification by Landlord that such Plans and
Specifications or calculations are in compliance with said
statutes, codes, ordinances and other regulations. In instances
where several sets of requirements must be met, the requirements
of Landlord's insurance underwriter or the strictest applicable
requirements shall apply where not prohibited by applicable
codes.
Upon completion of the initial improvements, Tenant shall
deliver to Landlord an "as-built" set of Plans and Specifications for
the Premises, together with such other information required by Landlord
to place the information from the "as-built" Plans and Specifications on
to Landlord's data base; the cost of providing the "as-built" Plans and
Specifications and other information, together with Landlord's cost to
place the information on to Landlord's data base, shall be borne solely
by Tenant.
3. Pricing. On or before the date which is ten (10) Working Days
after finalization of the Plans and Specifications, as evidenced by Landlord's
written approval thereof, Landlord shall notify Tenant in writing of the Cost
of the Work. The contract for the Work shall obligate the contractor to
purchase from Landlord all materials and supplies which are held in "stock" by
Landlord and which are required for the Work by the Plans and Specifications.
Within ten (10) Working Days after its receipt of Landlord's written notice
identifying the Cost of the Work, Tenant shall either approve such Cost of the
Work in writing or cause the Plans and Specifications to be revised and
resubmitted to Landlord for Approval. On or before the date which is ten (10)
Working Days from Landlord's receipt of such revised Plans and Specifications,
Landlord shall either approve the revised Plans and Specifications and give to
Tenant a revised Cost of the Work or give to Tenant Landlord's comments on such
revised Plans and Specifications. If for any reason Landlord and Tenant have
not agreed in writing upon final Plans and Specifications and/or the Tenant has
not approved in writing the Cost of the Work on or before the date which is ten
(10) Working Days from the date hereof, then Landlord shall have the right to
terminate the Lease and this Work Letter, without further obligation.
4. Payments. Tenant may use up to $1.00 per square foot of the
Allowance for the payment of fees and expenses payable by Tenant under the
terms of Paragraph 2(b)(i) of this Work Letter. Tenant shall pay the aggregate
amount of Tenant's Costs to Landlord upon demand. Landlord shall determine the
percentage of the Cost of the Work which is allocable to Landlord and the
percentage of the Cost of the Work which is allocable to Tenant. Landlord shall
also revise its determination of such percentages based on any changes in the
Cost of the Work due to change orders affecting the Plans and Specifications.
Within ten (10) days after Tenant's receipt of an invoice from Landlord which
identifies that portion of the Cost of the Work to be incurred, respectively,
by Landlord and Tenant, Tenant shall pay to Landlord the percentage of the Cost
of the Work allocable to Tenant, as Tenant's Costs, as determined by Landlord
from time to time. Landlord's obligation for payment with respect to the Work
shall not exceed the aggregate amount of Landlord's Costs; and after Landlord
has paid Landlord's Costs, Tenant shall thereafter pay all Cost of the Work as
and when invoiced to Tenant by Landlord, including, without limitation, any
Change Costs. The amounts payable to Landlord hereunder shall constitute Rent
due pursuant to the Lease, and failure to make any such payment when due shall
constitute a default under the Lease, entitling Landlord to exercise any or all
of its remedies hereunder, as well as all remedies otherwise available to
Landlord. Any cost savings achieved after completion of the Work shall be
solely the property of Landlord, not Tenant.
5. Performance of Work and Delays. Landlord shall cause the
Contractor to perform the Work in substantial accordance with the Plans and
Specifications. In that regard, Landlord shall perform as construction manager
for the construction of the Initial Improvements in accordance with the Plans
and Specifications; and the Cost of the Work shall include a management fee
payable to Landlord in the amount of five percent (5%) of the cost of the
materials and labor constituting the Work. If a delay shall occur in the
completion of the Work by Landlord as the probable result of (i) any failure to
furnish when due Tenant's design drawings, Tenant's electrical, mechanical
and/or structural requirements, Tenant's Plans and Specifications or any
revision to any such documents, (ii) any change by Tenant in any of the Plans
and Specifications, (iii) any state of facts which gives rise to a change
referred to in the definition of Change Costs or any changes resulting in a
Change Cost, (iv) the fact that materials to be incorporated into the Work
which are non-Building Grade require a lead time (not due to Landlord default
or error) to obtain or construction time to perform, in excess of that required
for Work which is Building Grade, as determined by Landlord, or (v) any other
act or omission of Tenant, its agents or employees, including any violation of
the provisions of the Lease or any delay in giving authorizations or approvals
pursuant to this Work Letter, then any such delay shall not justify any
extension of the Commencement Date of the Lease.
6. Change Orders. All changes and modifications in the Work from
that contemplated in the Plans and Specifications, whether or not such change
or modification gives rise to a Change Cost, must be evidenced by a written
Change Order executed by both Landlord and Tenant. In that regard, Tenant shall
submit to Landlord such information as Landlord shall require with respect to
any Change Order requested by Tenant. After receipt
EXHIBIT "E" TO OFFICE LEASE AGREEMENT - Page 2
<PAGE> 23
of requested Change Order, together with such information as Landlord shall
require with respect thereto, Landlord shall return to Tenant either the
executed Change Order, which will evidence Landlord's approval thereof, or the
Plans and Specifications with respect thereto with Landlord's suggested
modification.
7. Punchlist. Within thirty (30) days after the Commencement Date,
Tenant shall give Landlord written notice specifying any details of
construction, decoration or mechanical adjustment which remain to be performed
by Landlord with respect to any Work; and except for the details contained in
such written notice form Tenant, all obligations of Landlord in regard to the
Work shall be deemed to have been satisfied. Landlord shall have the right to
enter the Premises to complete any such unfinished details, and entry by
Landlord, its agents, servants, employee or contractors for such purpose shall
not relieve Tenant of any of its obligations under the Lease or impose any
liability on Landlord or its agents, servants, employees or contractors.
8. Whole Agreement; No Oral Modification. This Work Letter embodies
all representations, warranties and agreements of Landlord and Tenant with
respect to the matter described herein, and this Work Letter may not be altered
or modified except by an agreement in writing signed by the parties.
9. Paragraph Headlines. The paragraph headings contained in this Work
Letter are for convenient reference only and shall not in any way affect the
meaning or interpretation of such paragraphs.
10. Notices. All Notices required or contemplated hereunder shall be
given to the parties in the manner specified for giving notices under the
Lease.
11. Binding Effect. This Work Letter shall be construed under the laws
of the State of Texas and shall be binding upon and shall inure to the benefit
of the parties hereto and their respective permitted successors and assigns.
12. Conflict. In the event of conflict between this Work Letter and
any other exhibits or addends to this Lease, this Work letter shall prevail.
EXHIBIT "E" TO OFFICE LEASE AGREEMENT - Page 3
<PAGE> 24
EXHIBIT "F"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
PARKING
This EXHIBIT "F" ("Parking Exhibit") describes and specifies Tenant's
non-exclusive right to use twelve (12) unreserved parking spaces ("Unreserved
Spaces") and the exclusive right to use four (4) reserved spaces ("Reserved
Spaces") located inside the Building's parking garage ("Parking Garage") upon
the terms and conditions set forth below.
1. Definitions. The terms which are defined in the Lease shall have the
same meaning in this Parking Exhibit.
2. Grant and Rental Fee. Provided no event of default has occurred and
is continuing under the Lease, Tenant shall be permitted the non-exclusive use
of the Unreserved Spaces and the exclusive use of the Reserved Spaces during
the Lease Term at no charge subject to such terms, conditions, and regulations
as are, from time to time, promulgated by Landlord or the manager of the
Parking Garage, as applicable, or applicable to patrons of the Parking Garage
for spaces similarly situated therein.
3. Tenant's Failure to Use Spaces. In the event that Tenant (after the
Commencement Date and at any time during the Lease Term) fails to utilize all
or any of the Spaces, Landlord shall have no further obligation to make
available to Tenant the Spaces not utilized, until and unless Tenant notifies
Landlord in writing at least thirty (30) days prior to the first (1st) day of
any month, of its preference to again use such Space or Spaces beginning on
such month. The failure, for any reason, of Landlord to provide or make
available such Spaces to Tenant or the inability of Tenant to utilize all or any
portion of the Spaces shall under no circumstances be deemed a default by
Landlord under the Lease so as to permit Tenant to terminate the Lease, in whole
or in part.
4. Risk. All motor vehicles (including all contents thereof) shall be
parked in the Spaces at the sole risk of Tenant, its employees, agents,
invitees and licensees, it being expressly agreed and understood that Landlord
has no duty to insure any of said motor vehicles (including the contents
thereof), and that Landlord is not responsible for the protection and security
of such vehicles. Landlord shall have no liability whatsoever for any property
damage and/or personal injury which might occur as a result of or in connection
with the parking of said motor vehicles in any of the Spaces, and Tenant hereby
agrees to indemnify and hold Landlord harmless from and against any and all
costs, claims, expenses, and/or causes of action which Landlord may incur in
connection with or arising out of Tenant's use of the Spaces pursuant to this
Agreement.
5. No Bailment. It is further agreed that this parking Exhibit shall
not be deemed to create a bailment between the parties hereto, it being
expressly agreed and understood that the only relationship created between
Landlord and Tenant hereby is that of licensor and licensee, respectively.
6. Rules and Regulations. In its use of the Spaces, Tenant shall follow
all of the Rules and Regulations of the Building (attached to the Lease as
Exhibit "D") applicable thereto, any rules and regulations promulgated by
Landlord or the manager of the Parking Garage, as applicable, as the same may
be amended from time to time. Upon the occurrence of any breach of such rules,
or default by Tenant under the Lease, Landlord shall be entitled to terminate
this Parking Exhibit, in which event Tenant's right to utilize the Spaces shall
thereupon automatically cease.
7. Access. Landlord shall be entitled to utilize whatever access device
Landlord deems necessary (including but not limited to the issuance of parking
stickers or access cards), to assure that only those persons who have contracted
to use spaces in the Parking Garage are using the parking spaces therein.
Landlord currently limits access to the Parking Garage through the use of a
parking entry card system, the cards for which shall be provided by Landlord.
Landlord agrees to provide to Tenant sixteen (16) parking entry cards for a
refundable deposit of $10.00 per card. Tenant further agrees to surrender all
parking entry cards in its possession upon the expiration or earlier termination
of this Lease. Landlord shall be entitled to cancel any lost or stolen cards of
which it becomes aware. Tenant shall promptly notify Landlord of any lost or
stolen cards. Tenant shall pay Landlord for each additional card(s) or for each
replacement card(s) for any card(s) lost by or stolen from Tenant, in such
amount as Landlord shall, from time to time determine, the present charge for
such lost or stolen cards being $100.00 per card. Tenant acknowledges that the
parking entry card may also be the same as the master entry card used for access
to the Building during other than normal business hours, and to the extent the
cards are the same, agrees that the provisions of Paragraph 6(f) of the Lease
shall also be applicable and in the event of a conflict with the provisions of
this Parking Exhibit, the provisions of Paragraph 6(f) shall control. In the
event Tenant, its agents or employees wrongfully park in any of the Parking
Garage's spaces, Landlord shall be entitled and is hereby authorized to have any
such vehicle towed away, at Tenant's sole risk and expense, and Landlord is
further authorized to impose upon Tenant a penalty of $25.00 for each such
occurrence. Tenant hereby agrees to pay all amounts falling due hereunder upon
demand therefor, and the failure to pay any such amount shall additionally be
deemed an event of default hereunder and under the Lease, entitling Landlord to
all of its rights and remedies hereunder and thereunder.
EXHIBIT "F" TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 25
EXHIBIT "G"
-----------
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD, AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
RENEWAL OPTION
--------------
This Exhibit "G" ("Renewal Exhibit") describes and specifies the
option, granted by Landlord to Tenant to extend and renew this Lease. Provided
that, at the time in question, this Lease is then in full force and effect and
there is no uncured event of default under this Lease, Tenant shall have the
option ("Option") to renew this Lease as follows:
1. Defined Terms. For purposes of this Renewal Exhibit, all terms
defined in the Lease will be utilized herein without further definition. Terms
specifically applicable to this Renewal Exhibit shall have the meaning
specified in this Renewal Exhibit and shall be delineated by initial capital
letters.
2. Exercise of Option. Tenant may, by notifying Landlord of its
election in writing not less than nine (9) months nor more than twelve (12)
months prior to the end of the Lease Term, renew this Lease for an additional
term ("Second Lease Term") beginning on the date next following the expiration
date of the Lease Term and continuing for sixty (60) months thereafter. The
renewal of this Lease will be upon the same terms, covenants, and conditions
applicable during the Lease Term, as provided in the Lease, except that (a) the
Base Rental payable during the Second Lease Term shall be an amount equal to
the existing "market rental rate" (as defined below) as of the date on which
the Second Lease Term commences, (b) the defined term "Lease Term" shall be
deemed to include the "Second Lease Term". In addition, Base Rental shall
continue to be adjusted as provided in Exhibit "C" to the Lease, but the
Expense Stop shall be adjusted to reflect market conditions. As used herein,
the phrase "market rental rate" shall mean the rate of base rental being
charged by Landlord to new tenants having a financial condition comparable to
that of Tenant for comparable space within the Building for a term comparable
to the Second Lease Term (but not less than the Base Rental payable with
respect to the final year of the Lease Term).
3. Termination of Option. The failure of Tenant to exercise the
Option herein granted within the time period set forth herein shall constitute
a waiver and termination of such Option. In addition, any termination of this
Lease during the Lease Term or any assignment, subletting, or other transfer by
Tenant, whether or not with the approval of Landlord, shall terminate the
Option contained in this Renewal Exhibit.
EXHIBIT "G" TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 26
EXHIBIT "H"
-----------
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
RIGHT OF FIRST REFUSAL
----------------------
This Exhibit "H" ("Refusal Exhibit") describes and specifies the right
of first refusal hereby granted by Landlord to Tenant with respect to the space
within the Building described below, which right of first refusal is being
granted upon the following terms and conditions:
1. Defined Terms. For purposes of this Refusal Exhibit, all terms
defined in the Lease will be utilized herein without further definition. Terms
specifically applicable to this Refusal Exhibit shall have the meanings
specified in this Refusal Exhibit and shall be delineated by initial capital
letters.
2. Grant of Right of First Refusal. Landlord hereby grants to Tenant
a continuous and recurring right of first refusal ("Refusal Right") with
respect to approximately 4451 square feet of Rentable Area contiguous to the
Premises in the Building which is described on Schedule 1 attached hereto and
incorporated herein by reference for all purposes ("Refusal Space") during the
period commencing on the Commencement Date and ending as of the end of the
Lease Term. Notwithstanding the foregoing, the Refusal Right shall not be
applicable during any time when there is an uncured event of default under the
Lease. Notwithstanding anything to the contrary in the foregoing, the Refusal
Right shall be subject to the rights of any tenants presently occupying space
in the Building.
3. Exercise of Refusal Right. In the event that Refusal Space in the
Building becomes available, availability, for purposes hereof, to be at the
sole determination of Landlord, and Landlord receives a bona fide offer from a
third party to lease all or a part of the Refusal Space which Landlord desires
to accept, Landlord shall so notify Tenant and shall include in such notice the
rental rate for the subject Refusal Space, expense stop, term of the proposed
Lease (together with any renewal rights being granted), and any lease
concessions to be granted. Tenant shall have five (5) days from the receipt of
such notice to notify Landlord in writing of the exercise by Tenant of Tenant's
Refusal Right with respect to the subject Refusal Space, which shall be on the
same terms and with respect to the entire space specified in Landlord's notice.
If the Right of First Refusal is exercised prior to November 1, 1996 then the
Commencement Date for the Refusal Space shall be within six (6) months of
exercise, but in no event later than December 31, 1996. If Tenant exercises
this Right of First Refusal after November 1, 1996, however, then the
Commencement Date shall be the same as proposed to the third party tenant. In
the event that Tenant fails to so notify Landlord within such five (5) day
period, Tenant shall be deemed to have irrevocably waived its Refusal Right
with respect to the subject Refusal Space, unless and until Landlord has
another offer to lease said space, and Landlord shall have the right to enter
into a lease with the third party with respect to that Refusal Space. In the
event that Tenant elects to exercise its Refusal Right with respect to the
subject Refusal Space and does in fact exercise such Refusal Right in the
manner and within the time period specified herein, Landlord and Tenant shall,
within thirty (30) days after Tenant delivers to Landlord notice of its
election, enter into a written amendment modifying and supplementing the Lease
and containing such other terms and provisions as Landlord may deem
appropriate. In the event that Tenant fails to enter into said amendment within
such thirty (30) day period, Tenant shall be deemed to have irrevocably waived
its Refusal Right unless and until Landlord has another offer to lease said
space with respect to the subject Refusal Space; and Landlord shall have the
right to enter into a lease with the third party with respect to that Refusal
Space. Except as may be specifically modified in such amendment and except with
respect to the rental, expense stop, lease term, and lease concessions
applicable to the subject Refusal Space, as herein specified, the terms and
provisions of the Lease shall, on the day of delivery of the subject Refusal
Space to Tenant, automatically apply and become applicable to the subject
Refusal Space; and the subject Refusal Space, as of the date of such delivery,
shall automatically and without the necessity of further documentation, become
and be deemed to be a part of the Premises. Effective as of the date of
delivery of the subject Refusal Space to Tenant, the Rentable Area within the
subject Refusal Space shall be included within the determination of Tenant's
prorata share of Basic Costs, as provided in Exhibit "C" to this Lease.
4. Delivery of Refusal Space. Any refusal Space shall be delivered to
Tenant vacant and unoccupied and "as is" without benefit of improvements
(except Shell Improvements, if any) unless the refusal notice specifies that an
allowance is to be granted for the improvement or refurbishment of the subject
Refusal Space, in which event Tenant will receive the allowance specified in
Landlord's notice. In the event that any improvements or restoration work is to
be incorporated into the Premises, the amendment shall contain provisions
reflecting the agreement of Landlord and Tenant with respect thereto. Landlord
shall use reasonable diligence to deliver the subject Refusal Space on the date
specified in Landlord's notice of its availability, but in no event shall
Landlord have any liability for the failure to deliver the subject Refusal
Space to Tenant on such date, nor shall any such failure impair the validity of
the Lease, extend the Lease Term (except with respect to the subject Refusal
Space, which shall be the term specified in Landlord's notice irrespective of
the Lease Term specified in Paragraph 1 of the Lease), or impair any
obligations of Tenant under the Lease, it being understood that the Rent
applicable to the subject Refusal Space shall be abated until possession is
delivered to Tenant in full settlement of all claims that Tenant might
otherwise have against Landlord by reason of the failure to deliver possession
of the subject Refusal Space to Tenant.
5. Termination of Refusal Right. The Refusal Right shall automatically
terminate upon (a) the termination of the Lease Term, whether by Landlord upon
the occurrence of an Event of Default or otherwise, (b) the expiration of the
time period specified in Paragraph 2 above, (c) the failure of Tenant to
exercise the Refusal Right with respect to any Refusal Space as and within the
time period specified in Paragraph 3 above, but only with respect to the
subject Refusal Space, and (d) upon the assignment, subletting, or other
transfer by Tenant, whether or not with the approval of Landlord.
EXHIBIT "H" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE> 27
SCHEDULE 1
TO
EXHIBIT "H"
TO
OFFICE LEASE AGREEMENT BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD,
AND
FORTUNE PETROLEUM CORPORATION
AS TENANT
REFUSAL SPACE
[ONE COMMERCE GREEN ARCHITECTURAL PLAN]
SCHEDULE 1 TO EXHIBIT "H" TO OFFICE LEASE AGREEMENT -- Page Solo
<PAGE> 28
==============================================
* * * * * *
ONE COMMERCE GREEN
OFFICE LEASE AGREEMENT
BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD,
AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
DATED 1/4 , 1996
---------- --
* * * * * *
==============================================
<PAGE> 29
TABLE OF CONTENTS
OFFICE LEASE AGREEMENT
BETWEEN
BROOKDALE INVESTORS, L.P.,
AS LANDLORD
AND
FORTUNE PETROLEUM CORPORATION,
AS TENANT
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
1. Definitions: ..................................................... 1
(a) "Building" ............................................... 1
(b) "Premises" ............................................... 1
(c) "Base Rental" ............................................ 1
(d) "Commencement Date" ...................................... 1
(e) "Lease Term" ............................................ 1
(f) "Security Deposit" ....................................... 1
(g) "Expense Stop" ........................................... 1
(h) "Allowance" .............................................. 1
(i) "Shell Improvements" ..................................... 1
(j) "Common Areas" ........................................... 1
(k) "Service Areas" .......................................... 1
(l) "Rentable Area" .......................................... 1
(m) "Normal Business Hours" .................................. 1
(n) "Initial Improvements" ................................... 1
(o) "Building Standard" ...................................... 1
(p) "Basic Costs" ............................................ 1
(q) "Ready for Occupancy" .................................... 1
2. Lease Grant ...................................................... 2
3. Lease Term ....................................................... 2
4. Use .............................................................. 2
5. Base Rental ...................................................... 2
6. Services to be Furnished by Landlord ............................. 2
7. Improvements to be Made by Landlord .............................. 3
8. Maintenance and Repair of Premises by Landlord ................... 3
9. Graphics ......................................................... 3
10. Care of the Premises by Tenant ................................... 3
11. Repairs and Alterations by Tenant ................................ 3
12. Use of Electrical Services by Tenant ............................. 3
13. Laws and Regulations ............................................. 4
14. Building Rules; No Smoking ....................................... 4
15. Entry by Landlord ................................................ 4
16. Assignment and Subletting ........................................ 4
17. Mechanic's Liens ................................................. 4
18. Property Insurance ............................................... 4
19. Liability Insurance .............................................. 4
20. Indemnity ........................................................ 5
21. Waiver of Subrogation Rights ..................................... 5
22. Casualty Damage .................................................. 5
23. Condemnation ..................................................... 5
24. Damages from Certain Causes ...................................... 6
25. Events of Default/Remedies ....................................... 6
26. Peaceful Enjoyment ............................................... 7
27. Holding Over ..................................................... 7
28. Subordination to Mortgage ........................................ 7
29. Estoppel Certificates ............................................ 8
30. Landlord's Lien .................................................. 8
</TABLE>
i
<PAGE> 30
31. Attorney's Fees .............................................. 8
32. No Implied Waiver ............................................ 8
33. Personal Liability ........................................... 8
34. Security Deposit ............................................. 8
35. Notice ....................................................... 8
36. Severability ................................................. 8
37. Recordation .................................................. 8
38. Governing Law ................................................ 9
39. Force Majeure ................................................ 9
40. Time of Performance .......................................... 9
41. Transfers by Landlord ........................................ 9
42. Transfers by Tenant .......................................... 9
43. Commissions .................................................. 9
44. Effect of Delivery of This Lease ............................. 9
45. Entire Agreement ............................................. 9
46. Receipt of Premises .......................................... 9
47. Merger of Estates ............................................ 9
48. Waste Management ............................................. 9
49. Americans with Disabilities Act and Texas
Architectural Barriers Act ................................... 9
50. Exhibits ..................................................... 9
<PAGE> 1
EXHIBIT 10.4
[LOGO] STANDARD SUBLESSOR-AGENCY AGEEMENT
FOR SUBLEASE OF REAL PROPERTY
(Non-Residential)
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Sublessor-Agency Agreement ("Agreement"), dated for
reference purposes only February 15, 1996 is made by and between Animation
Magazine/Fortune Petoleum, whose address is 28024 Dorothy Drive/515 W. Greens
Road, Houston, TX 77067, telephone number (818) 991-2884/(713)872-1170, Fax
No. (818) 991-3773/(713)872-1213, ("Sublessor"), and TOLD Partners Inc., whose
address is 5940 Variel Avenue, Woodland Hills, CA 91367, Telephone number (818)
593-3800, Fax No. (818) 593-3850, ("Agent").
1.2 MASTER LEASE: That certain lease dated ______________________________,
which lease was amended on the following dates _______________________________
______________________________________________________________________________
(it will be assumed no amendments exist unless the amendments are specified
here) ("Master Lease"), entered into by and between __________________________
___________________________________________________________________, as lessor
("Master Lessor") and Animation Magazine, as lessee.
(See Paragraph 3 for further provisions.)
1.3 PROPERTY: The real property which is the subject of this Agreement,
which consists of (check the appropriate box) X all or __ a part of the
premises leased to Sublessor under the Master Lease, is commonly known by the
street address of 28024 Dorothy Drive, Suite 200, located in the City of Agoura
Hills, County of Los Angeles, State of California, and generally described as
(describe briefly the nature of the property):
office suite of approximately 3,000 square feet.
("Property"). (See Paragraph 3 for further provisions.)
1.4 TERM OF AGREEMENT: The term of this Agreement shall commence on
February 15, 1996 and expire at 5:00 p.m. on August 31, 1996, except as it may
be extended ("Term").
1.5 SUBLEASE RENTAL AND TERMS: Agent is employed to sublese all or a
portion of the Property on the following rental and terms: $3,307.50 per month
modified gross
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
or such other rental and terms agreeable to Sublessor.
1.6 ADDITIONAL PROVISIONS: Additional provisions of this Agreement are set
forth in the following blank lines or in an addendeum attached hereto and made
a part hereof consisting of paragraphs 1.7 through ____ (it will be assumed no
additional provisions exist unless thay are specified here): _________________
1.7 Animation Magazine's committment to be the responsibility of Fortune
Petroleum Corporation. Any dollars derived from sublessee to be paid to Fortune
Petroleum Corp.
2. EXCLUSIVE EMPLOYMENT AND RIGHTS.
2.1 Sublessor hereby employs Agent as Sublessor's sole and exclusive agent
to represent Sublessor in subleasing the Property and in all other matters
relating to the Master Lease, and to find sublesses for the Property on the
terms stated in Paragraph 1.5. Agent shall use reasonably diligent efforts to
find such sublessees. Except as otherwise provided herein, Sublessor shall pay
the Commission (as hereafter defined) to Agent for a sublease of the Property,
whether such sublease is consummated as a result of the efforts of Agent,
Sublessor or other persons or entities. Except as otherwise provided herein,
all negotiations and discussions for a sublease of the Property or relating
to the Master Lease shall be conducted by Agent on behalf of Sublessor.
Sublessor shall promptly disclose and refer to Agent all written or oral
inquiries or contacts received by Sublessor from any source regarding a
possible sublease of the Property.
2.2 Sublessor authorizes Agent to perform all or any of the following acts:
(a) Place advertising signs on the Property;
(b) Place a lock box on the Property if the Property is vacant;
(c) Accept deposits from potential sublessees; and
(d) Except as othersie provided herein communicate the availability of
the Property for sublease and distribute all documents and information
regarding the Property to participants of the multiple ("Multiple") subsidiary
of the American Industrial Real Estate Association ("AIK"), to other brokers,
and to potential sublessees. Agent shall not, without Sublessor's consent,
disclose to anyone the monetary terms of the Master Lease. Unless Sublessor
instructs Agent otherwise, Agent shall censor the Master Lease's monetary terms
prior to distribution of the Master Lease. Sublessor shall identify to Agent as
"confidential" any communication or information provided to Agent that
Sublessor considers confidential and desires not to be disclosed by Agent. All
other communication and information provided by Sublessor may be disclosed by
Agent as Agent may deem appropriate or necessary. After consummation of a
sublease of the Property, Agent may publicize the terms of such sublease.
2.3 Agent shall comply with the Rules of Professional Conduct ("Rules") of
AIR, as they may exist from time to time, and shall submit the Property as
available for sublease to the Multiple, if and as required by the Rules. Agent
shall cooperate with participants in the Multiple and may, at Agent's election,
cooperate with other real estate brokers (collectively "Cooperating Broker"). A
Cooperating Broker may, as a third-party beneficiary hereof, enforce the terms
of this Agreement against Sublessor or Agent.
1990, American Industrial Real Estate Association Page 1 November, 1990
<PAGE> 2
2.4 If Agent finds a sublessee or a prospective sublessee for all or a part
of the Property, Sublessor hereby authorizes Agent also to represent and act as
the agent for such sublessee and Sublessor consents to such dual agency. If a
Cooperating Broker finds such a sublessee, then Agent shall act as agent for
Sublessor only, the Cooperating Broker shall act as agent for the sublessee
only, and the Cooperating Broker shall not be Sublessor's agent, even though
the Cooperating Broker's compensation for services rendered is paid by
Sublessor because the Cooperating Broker may share Agent's commission. A
Cooperating Broker shall not be an agent or subagent of Sublessor or Agent.
Sublessor hereby agrees that Agent may represent and act as the agent for the
Master Lessor, and Sublessor consents to such multiple agency.
3. PROPERTY; MASTER LEASE.
3.1 The term "Property" shall include all of the following presently
located in the Property which are owned by Sublessor and permitted to be
transferred under the Master Lease: permanent improvements (including those
items which the laws of the state in which the Property is located consider
part of the Property), electrical distribution systems, power panels, buss
ducting, conduits, disconnects, lighting fixtures, telephone distribution
systems (lines, jacks and connections), space heaters, air conditioning
equipment, air lines, carpets, window coverings, wall coverings, partitions,
doors, suspended ceiling and built-ins, such as cabinets.
3.2 Sublessor shall fully and timely perform all of Sublessor's obligations
under the Master Lease and maintain the Master Lease in good standing.
3.3 Within five (5) business days after the commencement of the Term hereof,
Sublessor shall provide Agent with the following:
(a) A true, correct and complete copy of the Master Lease and the
amendments or prior assignments, if any, of the Master Lease;
(b) A Standard Tenancy Statement on the most current form published by
the AIR duly completed and executed by Sublessor;
(c) A Property Information Sheet on the most current form published by
the AIR (modified by changing the reference to "Owner" in such form to
Sublessor), duly completed and executed by Sublessor;
(d) Copies of other documents containing any limitations on Sublessor's
right, ability and capacity to consummate a sublease; and
(e) To the extent available to Sublessor, copies of building plans for
the Property.
3.4 Agent shall have no responsibility for maintenance, repair,
replacement, operation or security of the Property, all of which shall be
Sublessor's sole responsibility. Except as may be caused by Agent's negligent
acts or omissions, Agent shall not be liable for any loss, damage, or injury to
the person or property of Sublessor anyone in possession of the Property or
any sublessee or prospective sublessee, including, but not limited to, those
which may occur as a result of Agent's use of lock boxes.
4. COMMISSION.
4.1 Except as otherwise provided herein, Sublessor shall pay Agent a
commission ("Commission") in accordance with the commission schedule attached
hereto ("Commission Schedule"), upon the occurrence of the first of any of the
following events:
(a) Agent, Cooperating Broker, Sublessor or anyone else procures a
sublessee who is ready, willing and able to sublease the Property or a portion
thereof at the rental and on the terms stated herein, or on any other rental
and terms agreeable to Sublessor; or
(b) Sublessor executes a sublease of the Property, or a portion
thereof; or
(c) The Master Lease is, voluntarily or involuntarily, terminated or
Sublessor is relieved of future liability for rent under the Master Lease,
whether by cancellation, Master Lessor's exercise of any of its rights under
the Master Lease or otherwise; or
(d) Sublessor (i) removes or withdraws the Property from a sublease or
the market; (ii) acts as if the Property is not available for a sublease; (iii)
treats the Property as not available for a sublease; (iv) breaches, terminates,
cancels or repudiates this Agreement; (v) renders the Property unmarketable;
(vi) changes the Master Lease (including, without limitation, reduction of the
term of the Master Lease) or changes the physical condition of the Property,
which changes adversely impact the value, use, desirability, leasability or
marketability of the Property; or (vii) terminates, cancels, repudiates,
surrenders, breaches or defaults of its obligations under the Master Lease.
4.2 If the Master Lease requires Master Lessor's consent to or approval of
a sublease, the Sublessor shall, at Sublessor's sole cost and expense, use
Sublessor's reasonable best efforts to obtain such consent or approval, and
Agent shall not be entitled to the Commission for such sublease unless Master
Lessor's consent or approval is obtained or waived by Sublessor and sublessee.
4.3 The Agent's Commission for Sublessor's release from future rent
liability under the Master Lease shall be calculated on the basis of the total
base rent which otherwise would have been due from Sublessor for the remaining
term of the Master Lease ("Base Rent"). In calculating the Agent's Commission,
all forms of consideration paid by a sublessee or by Master Lessor to Sublessor
shall be considered, including, without limitation, rent, good will and key
money, all of which amounts shall be deemed included in the Base Rent.
5. ALTERNATIVE TRANSACTION. Agent shall, without the necessity of any further
acts by Sublessor or Agent or an amendment to this Agreement, also be
Sublessor's sole and exclusive Agent for an assignment of Sublessor's interest
in the Master Lease ("Alternative Transaction") and represent Sublessor in such
Alternative Transaction, under the terms and conditions of this Agreement. If,
during the Term hereof, an Alternative Transaction is entered into, then
Sublessor shall pay Agent a commission for the Alternative Transaction in
accordance with the Commission Schedule.
6. EXCLUDED AND REGISTERED PERSONS.
6.1 Sublessor shall, within five (5) business days after the date hereof,
provide Agent, in writing, with the names of those persons or entities
registered with Sublessor by any other broker under any prior sublessor-agency
or listing agreements concerning subleasing of the Property ("Excluded
Persons"). If Sublessor timely provides Agent with the names of the Excluded
Persons, then Agent shall not be entitled to a Commission with respect to
consummation of a sublease of the Property with an Excluded Person. If
Sublessor fails to so notify Agent of the existence of any Excluded Persons,
then it shall be conclusively deemed that there are no Excluded Persons.
6.2 Agent shall, within five (5) business days after the expiration of the
Term hereof, provide Sublessor, in writing, with the names of those persons or
entities with whom Agent either directly or through another broker had
negotiated for a sublease of the Property during the term hereof ("Registered
Persons"). Those persons or entities from whom Sublessor during the Term hereof
received written offers or letters of intent for a sublease of the Property
automatically shall be deemed to be Registered Persons, without the necessity
of any notice by Agent. If Agent fails to timely notify Sublessor of the
existence of any other Registered Persons, then it shall be conclusively deemed
that there are no other Registered Persons.
6.3 If, within one hundred eighty (180) days after the expiration of the
Term hereof, Sublessor enters into a contract with a Registered Person for
consummation of a sublease of the Property, then Sublessor shall pay Agent a
commission for such sublease in accordance with the Commission Schedule upon
the earlier of (i) consummation of such sublease; (ii) termination of the
Master Lease; or (iii) release of Sublessor from future liability for rent
under the Master Lease, whether by cancellation, Master Lessor's exercise of
any of its rights under the Master Lease or otherwise.
6.4 If, within one hundred eighty (180) days after the expiration of the
Term hereof, Sublessor enters into another sublessor-agency or listing agreement
with a broker other than Agent for any transaction concerning the Property,
then Sublessor shall provide to Sublessor's new broker the names of the
Registered Persons, and provide in such new agreement that the new broker shall
not be entitled to receive any of the compensation payable to Agent hereunder
for consummation of a sublease of the Property with a Registered Person.
7. SUBLESSOR'S REPRESENTATIONS.
7.1 Sublessor represents and warrants to Agent and Cooperating Broker as
follows:
(a) Each person executing this Agreement on behalf of Sublessor has the
full right, power and authority to execute this Agreement as or on behalf of
Sublessor;
(b) Sublessor has the full right, power and authority to execute and
deliver this Agreement, to consummate a sublease of the Property and to perform
Sublessor's obligations hereunder;
(c) The execution, delivery and performance of this Agreement by
Sublessor or Agent will not breach any provision of the Master Lease;
(d) Sublessor is not the subject of a bankruptcy, insolvency, probate
or conservatorship proceeding;
(e) There are no effective, valid or enforceable option rights, rights
of first refusal, rights of first offer or any other restrictions, impediments
or limitations on Sublessor's right, ability and capacity to consummate a
sublease of the Property, except as disclosed in writing by Sublessor to Agent
under Paragraph 3.3(d) above.
1990, American Industrial Real Estate Association PAGE 2 November, 1990
<PAGE> 3
9. SUBLESSOR'S ACKNOWLEDGEMENTS. Sublessor acknowledges that Sublessor has
been and is now advised by Agent to consult and retain Sublessor's own experts
to advise and represent Sublessor concerning the legal and tax effects of this
Agreement and consummation of a sublease of the Property, as well as the
condition and/or legality of the Property, including, but not limited to, the
Property's improvements, equipment, soil, tenancies, title and environmental
aspects. Agent shall have no obligation to investigate any such matters unless
expressly otherwise agreed to in writing by Sublessor and Agent. Sublessor
further acknowledges that in determining the financial soundness of any
prospective sublessee or security offered, Sublessor will rely solely upon
Sublessor's own investigation, notwithstanding Agent's assistance in gathering
such information.
9. MISCELLANEOUS.
9.1 This Agreement shall not be construed either for or against
Sublessor or Agent, but shall be interpreted, construed and enforced in
accordance with the mutual intent of the parties ascertainable from the
language of this Agreement.
9.2 All payments by Sublessor to Agent shall be made in lawful United
States currency. If Sublessor fails to pay to Agent any amount when due under
this Agreement, then such amount shall bear interest at the rate of 15% per
annum or the maximum rate allowed by law, whichever is less.
9.3 In the event of litigation or arbitration between or among
Sublessor, Agent, a Cooperating Broker, a sublessee or prospective sublessee of
the Property, or any of them, arising under or relating to this Agreement, the
prevailing party shall be paid its attorney's fees and costs by the losing
party. The attorney's fees award shall not be computed in accordance with any
court fee schedule, but shall be in an amount to fully reimburse all attorney's
fees reasonably incurred in good faith.
9.4 Sublessor hereby releases and relieves Agent, and waives
Sublessor's entire right of recovery against Agent, for direct or consequential
loss or damage arising out of or incident to the perils covered by the property
insurance carried by Sublessor, whether or not due to the negligence of Agent.
10. ARBITRATION OF DISPUTES.
10.1 ANY CONTROVERSY BETWEEN OR AMONG SUBLESSOR, AGENT AND COOPERATING
BROKER, OR ANY OF THEM, ARISING UNDER OR RELATING TO THIS AGREEMENT SHALL BE
DETERMINED BY BINDING ARBITRATION TO BE CONDUCTED BY THE AMERICAN ARBITRATION
ASSOCIATION UNDER AND IN ACCORDANCE WITH THE COMMERCIAL RULES OF SUCH
ASSOCIATION. HEARINGS ON SUCH ARBITRATION SHALL BE HELD IN THE COUNTY WHERE THE
PROPERTY IS LOCATED.
10.2 NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE
ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF
DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA
LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE
LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE
GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE
SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE
TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED
TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE.
YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
10.3 WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT
DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION TO NEUTRAL ARBITRATION.
T.J.F. W.L.B.
- ----------------- ----------------------- -----------------
Tyrone J. Fairbanks William L. Buck Agent's Initials
Fortune Petroleum Sublessor's Initials
Corporation
Sublessor hereby acknowledges receipt of a copy of this Agreement,
including the Commission Schedule.
"SUBLESSOR" "AGENT"
Animation Magazine TOLD Partners Inc.
- ---------------------------------- ----------------------------------
- ---------------------------------- ----------------------------------
By: WILLIAM L. BUCK By:
------------------------------ ------------------------------
Brian Lebow
Name Printed: William L. Buck
--------------------
Title: General Manager
---------------------------
By: ------------------------------
Date: February 16, 1996 Date: February , 1996
---------------------------- ----------------------------
Fortune Petroleum Corp.
By: TYRONE J. FAIRBANKS
-----------------------------
Name Printed: Tyrone J. Fairbanks
-------------------
Title: President & CEO
--------------------------
Date: February 16, 1996
---------------------------
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345 South
Figueroa Street, Suite M-1, Los Angeles, CA 90071. Telephone No.: (213)
687-8777. Fax No.: (213) 687-8616.
PAGE 3
Copyright 1990, American Industrial Real Estate Association November, 1990
<PAGE> 4
[TOLD PARTNERS INC. LETTERHEAD]
SCHEDULE OF SALE AND LEASE COMMISSIONS
A. SALES
As to all sales of improved real property, the commission shall be six percent
(6%) of the gross sales price. As to all sales of unimproved real property,
business opportunities and personal property the commission shall be ten
percent (10%) of the gross sales price. Gross sales price shall include all
consideration to be received by the Seller, including, without limitation,
relief from liability. The commission shall be paid upon close of escrow or, if
there is no escrow, then upon recordation of the deed to TOLD Partners Inc.,
provided that if the transaction calls for a land sale contract, then upon
execution of said contract. If, However, the Owner conveys the property or any
interest therein to a joint venture or partnership, the commission shall be
calculated on the basis of the fair market value of that interest in the
property which is transferred. The commission shall be paid upon contribution
or transfer by agreement or deed, as the case may be. If the Owner is a
partnership, corporation or other business entity, and an interest in the
partnership, corporation or the business entity is transferred, whether by
merger, outright purchase, or otherwise, in lieu of a sale of the property, and
applicable law does not prohibit the payment of a commission in connection with
such sale or transfer, the commission shall be calculated on the fair market
value of the property rather than the gross sales price, multiplied by the
percentage of interest so transferred, and shall be paid at the time of the
transfer.
B. LEASES
Net Leases Gross Leases
TERM OF LESS THAN 5 YEARS TERM OF LESS THAN 5 YEARS
7% of the total base rental for the 6% of the total base rental for the
first 24 months in which rent is to first 24 months in which rent is to
be paid, plus be paid, plus
6% of the total base rental for the 5% of the total base rental for the
next 12 months in which rent is to need 12 months in which rent is to
be paid, plus be paid, plus
5% of the total base rental for the 4% of the total base rental for the
remainder of the lease term. remainder of the lease term.
TERM 5 YEARS THROUGH 25 YEARS TERM 5 YEARS THROUGH 25 YEARS
6% of the total base rental for the 5% of the total base rental for the
first 60 months in which rent is to first 60 months in which rent is to
be paid, plus be paid, plus
3.5% of the total base rental for 2.5% of the total base rental for
the next 60 months in which rent the next 60 months in which rent
is to be paid, plus is to be paid, plus
2.5% of the total base rental for 1.5% of the total base rental for
the remainder of the lease term. the remainder of the lease term.
1. Payment of Lease Commissions.
Commissions shall be due and payable to TOLD Partners Inc. upon
execution of a lease by the Owner and a tenant. Commissions shall be
computed in accordance with the above rates based upon the aggregate
rental set forth in the lease, excluding any additional rent payable
pursuant to tax, operating and cost of living escalation provisions. If
a rental concession is made by the Owner allowing a tenant not to pay
rent for any months or partial months during the lease term, then the
commission shall be calculated on the gross rental that is to actually
be paid for the entire term. If the rental concession is granted to
tenant whether in the form of a credit against rent, construction,
decoration or otherwise, there shall be no deduction from the aggregate
rental set forth in the lease.
In the course of a surrender, buyout, cancellation, assignment or sale
of a lease, the commission shall be based upon the aggregate rental for
the remaining unexpired term of the lease, plus any consideration paid
to the Owner or any other party for such surrender, cancellation,
assignment, or sale of a lease.
2. Month-to-Month Tenancy.
The minimum commission for a month-to-month tenancy, tenancy-at-will, or
occupancy by a tenant without a written Lease shall be fifty (50%)
percent of the first month's rent, plus six percent (6%) of each month's
rent thereafter. The minimum fee shall be Five Hundred Dollars
($500.00), payable upon tenant occupancy. In the event the parties enter
into a lease or leases, then additional leasing commission(s) shall be
paid as provided for herein.
3. Extension of Lease or Additional Space Taken.
If, by virtue of provisions in the lease, or through subsequent
modification of such provisions (a) the term of a lease is extended or
(b) the tenant occupies additional space or if the tenant extends the
lease term or takes additional space during the first half of the
original lease term, then a leasing commission shall be paid at such
time as said term is extended or said additional space is occupied. Said
leasing commission shall be computed in accordance with the provisions
for this Schedule and by using the rates applicable as if the initial
term of the lease had included said extension period or the promises
initially leased had included said additional space.
<PAGE> 5
4. Purchase of Property By Tenant or Related Entity.
Should a tenant, its successors or assignees, or any entity owned or
controlled by a tenant, or any agent, officer, employee or shareholder of a
tenant purchase the property or contract to purchase the property during the
term of the lease or any extension thereof or within ninety (90) days after
the expiration thereof pursuant to provisions contained in the lease or
through subsequent modification of such provisions, then a sales commission
shall be paid at the time said purchase is consummated in accordance with
the provisions of this Schedule. Said sales commission shall be computed at
the rate set forth hereinabove for sales, less the amount of lease
commissions previously paid to the broker relating to that portion of the
lease term which is canceled by reason of such sale. In no event shall such
credit exceed the amount of the sales commission.
5. Percentage Rental.
If a lease contains a percentage rent clause, the Owner shall pay a
commission on the percentage rent at the same rate as applicable for the
minimum guaranteed rent as above provided. This commission shall be due and
payable within fifteen (15) days after the tenant's final payment and
accounting of percentage rent for the preceding lease year. At the end of
the third full lease year, the Owner shall pay a commission on percentage
rent for the remainder of the original term of the lease calculated upon the
assumption that the percentage rent for each year of the remainder of the
lease term will be the same as the percentage rent for the third full lease
year.
6. Tenant's Right to Cancel.
In the event a tenant has the right to cancel the lease at any time
subsequent to the commencement of the term, but prior to the expiration
date set forth in the lease, Broker shall be paid a commission based on the
aggregate rental for the uncancellable portion of the term, plus any
cancellation penalty or fee payable by tenant pursuant to the lease;
thereafter, if the lease is not canceled or if the right of cancellation is
exercisable by the Owner only. Broker shall be paid the balance of the
commission based on the aggregate rental for the remaining portion of the
lease term, less any cancellation penalty or fee. If the right of
cancellation is by mutual agreement, not pursuant to a provision contained
in the lease, or if the right of cancellation is contingent on the Owner's
acts or failure to act or otherwise within the Owner's control, Broker shall
be paid a full commission for the entire lease term. A lease shall not be
deemed canceled within the meaning of this paragraph unless the tenant
vacates the premises.
7. Minimum Commission.
Except for month-to-month rentals, Broker's minimum commission is One
Thousand Dollars ($1,000.00) per transaction.
8. Default.
In the event the Owner/Seller fails to make timely payments hereunder, any
delinquent amounts shall bear interest at the maximum legal rate of the
state of residence of the TOLD Partners Inc. office executing this Schedule
form the date due until paid.
9. Attorney's Fees and Costs.
In the event of any action at law or in equity between the parties hereto to
enforce any of the provisions hereof, the unsuccessful party or parties to
such litigation shall pay to the successful party or parties all costs and
expenses, including reasonable attorney's fees, incurred therein by such
successful party or parties, and if such successful party or parties shall
recover judgment in any such motion or proceeding, such costs, expenses and
attorney's fees may be included in and as part of such judgment. The
successful party shall be the party who is entitled to recover his costs of
suit, whether or not the suit proceeds to final judgment. If no costs are
awarded, the successful party shall be determined by the court.
10. Dispute resolution.
Any controversy, dispute or claim arising out of, in connection with or in
relation to the interpretation, performance or breach of this commission
agreement shall be finally determined, at the request of either party, by
arbitration conducted in Los Angeles, California, in accordance with the
then existing rules for commercial arbitration of the American Arbitration
Association, and judgment upon any award rendered by the arbitrator(s) may
be entered by any State or federal Court having jurisdiction thereof. Our
signatures to this Schedule shall reflect our intent that this agreement to
arbitrate be valid, enforceable and irrevocable.
The undersigned Owner/Seller hereby acknowledges receipt of a copy of this
Schedule and further agrees that it shall be binding upon the heirs, successors
and assigns of the undersigned. The term "Owner" when used herein shall be
deemed to mean the owner of a property, a tenant under a ground lease, and/or
any tenant desiring to effect subleases. The term "Seller" when used herein
shall mean the owner of real property, a seller of a leasehold interest, and/or
a seller of a business. The terms "Owner" and "tenant", when used herein, shall
be deemed to mean the same as landlord and tenant.
Additional Terms and Conditions: All compensation to brokers are responsibility
of Fortune Petroleum Corporation
Approved this 16 day of February, 1996 Accepted this __ day of February, 1996
TOLD Partners, Inc.
By: /s/ Tyrone J. Fairbanks By
-------------------------------- -----------------------------------
President and CEO Brian Lebow
Animation Magazine
By: /s/ William D. Buck
--------------------------------
<PAGE> 1
EXHIBIT 10.5
NON-RECOURSE PROMISSORY NOTE
$ 80,000 January 2, 1996
Los Angeles, California
1. Principal and Interest. For value received, Tyrone J. Fairbanks
(hereinafter referred to as "Maker"), HEREBY PROMISES TO PAY to the order of
Fortune Petroleum Corporation (hereinafter referred to as "Payee"), at its
place of business located at 30101 Agoura Ct., Suite 110, Agoura Hills,
California 91301, or at such other place as the Payee may designate in writing,
the aggregate principal amount of EIGHTY THOUSAND DOLLARS ($80,000),
together with interest thereon at the rate of six percent (6%) per annum.
2. Payment. The principal amount due under this Promissory Note shall
be paid in four equal annual installments of $20,000 which may be paid or
forgiven as provided below, no later than the last calendar day of each year
beginning in 1996. All accrued interest shall be due and payable with each
annual principal installment. All payments hereunder shall be in lawful money
of the United States of America. Payment shall be deemed made at the time the
Payee receives such payment subject to the condition subsequent that any check
or similar instrument is honored as drawn on sufficient funds. Notwithstanding
the foregoing, however, each installment provided for herein shall be forgiven
by the Payee without obligation to Maker provided Maker is employed by Payee at
the time of payment or has been terminated by Payee without cause. All payments
due hereunder shall be forgiven upon the death or permanent disability of Maker.
3. Prepayment. This Promissory Note may be voluntarily prepaid, in
whole or in part, without premium or penalty.
4. Non-Waiver. Maker, for himself and his legal representatives,
successors, and assigns, expressly waived presentment, protest and demand,
notice of protest, demand, dishonor, maturity, presentment, and nonpayment,
presentment for the purpose of accelerating maturity, and diligence in
collection of this Promissory Note. Neither the failure, nor any delay on the
part of the Payee to exercise any right, remedy, power or privilege hereunder
shall operate as a waiver or modification thereof. All rights and remedies of
the Payee are cumulative and concurrent and no single or partial exercise of
any power or privilege shall preclude any other or further exercise of any
right, power or privilege.
5. Payment of Fees and Expenses. Maker agrees to pay the reasonable
costs and expenses (including, without limitation, reasonable attorneys fees)
incurred by the Payee in connection with or related to any action taken to
collect the principal amount due hereunder, whether or not suit is brought to
enforce the rights of Payee.
6. Modifications in Writing. No consent, waiver, or modification of
the terms or provisions of this Promissory Note shall be effective, valid, or
binding unless set forth in writing signed by Maker and Payee, and then only to
the extent specifically set forth therein.
<PAGE> 2
7. Severability. The unenforceability or invalidity of any
provision or provisions of this Promissory Note as to any persons or
circumstances shall not render that provision or those provisions unenforceable
or invalid as to any other persons or circumstances, and all provisions hereof,
in all other respects, shall remain valid and enforceable.
8. Governing Law. This Promissory Note and all rights and
obligations hereunder shall be governed, construed, and interpreted in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the
date first hereinabove written.
/s/ TYRONE J. FAIRBANKS
- -------------------------
TYRONE J. FAIRBANKS
2
<PAGE> 3
PROMISSORY NOTE
$70,000 January 2, 1996
Los Angeles, California
1. Principal and Interest. For value received, Tyrone J. Fairbanks
(hereinafter referred to as "Maker"), HEREBY UNCONDITIONALLY PROMISES TO PAY to
the order of Fortune Petroleum Corporation (hereinafter referred to as
"Payee"), at its place of business located at 30101 Agoura Ct., Suite 110,
Agoura Hills, California 91301, or at such other place as the Payee may
designate in writing, the aggregate principal amount of SEVENTY THOUSAND
DOLLARS ($70,000), together with interest thereon at the rate of six percent
(6%) per annum. Interest shall be paid monthly in arrears commencing on the
first day of the first calendar month following the date hereof and continuing
thereafter on the 1st day of each month until the principal balance is paid in
full.
2. Payment. The principal amount due under this Promissory Note
shall be paid in two installments, with $35,000 due on January 2, 1998 and all
remaining principal and interest due on January 2, 1999. All payments hereunder
shall be in lawful money of the United States of America. Payment shall be
deemed made at the time the Payee receives such payment subject to the
condition subsequent that any check or similar instrument is honored as drawn
on sufficient funds.
3. Prepayment. This Promissory Note may be voluntarily prepaid, in
whole or in part, without premium or penalty.
4. Non-Waiver. Maker, for himself and his legal representatives,
successors, and assigns, expressly waived presentment, protest and demand,
notice of protest, demand, dishonor, maturity, presentment, and nonpayment,
presentment for the purpose of accelerating maturity, and diligence in
collection of this Promissory Note. Neither the failure, nor any delay on the
part of the Payee to exercise any right, remedy, power or privilege hereunder
shall operate as a waiver or modification thereof. All rights and remedies of
the Payee are cumulative and concurrent and no single or partial exercise of any
power or privilege shall preclude any other or further exercise of any right,
power or privilege.
5. Collateral. To secure payment of this Promissory Note, Maker has
granted and does hereby grant unto Payee a security interest in and to a
sufficient number of (a) shares of common stock of Payee and/or (b) common stock
purchase options of Payee owned by Maker and equal to one hundred fifty percent
(150%) of the cash value of the outstanding principal balance of this Note, as
hereinafter determined from time to time. The initial number of shares and/or
options to be held by Payee as collateral shall be determined as of the date
hereof based upon the market value of the common stock of Payee on that date.
The number of shares and/or options to be held as collateral hereunder shall be
adjusted on each anniversary date hereof to ensure that the collateral held by
Payee is sufficient to maintain an equivalent level of security. In the event
such adjustment results in more or fewer shares being required as collateral,
Maker shall pledge or Payee shall release, as appropriate, a sufficient number
of shares and/or options to provide Payee with collateral equal to one hundred
fifty percent (150%) of the outstanding principal balance of this Note on the
date of such readjustment.
<PAGE> 4
Notwithstanding any provisions hereof to the contrary, however, the shares
and/or common stock purchase options to be pledged by Maker as collateral
shall not exceed the number of such shares and options owned by Maker. Maker
covenants and agrees that he will, from time to time, execute such financing
statements as may be requested by Payee to reflect the security interest
granted herein.
6. Payment of Fees and Expenses. Maker agrees to pay the reasonable
costs and expenses (including, without limitation, reasonable attorneys fees)
incurred by the Payee in connection with or related to any action taken to
collect the principal amount due hereunder, whether or not suit is brought to
enforce the rights of Payee.
7. Modifications in Writing. No consent, waiver, or modification of
the terms or provisions of this Promissory Note shall be effective, valid, or
binding unless set forth in writing signed by Maker and Payee, and then only to
the extent specifically set forth therein.
8. Severability. The enforceability or invalidity of any provision or
provisions of this Promissory Note as to any persons or circumstances shall not
render that provision or those provisions unenforceable or invalid as to any
other persons or circumstances, and all provisions hereof, in all other
respects, shall remain valid and enforceable.
9. Governing Law. This Promissory Note and all rights and obligations
hereunder shall be governed, construed, and interpreted in accordance with the
laws of the State of California.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the
date first hereinabove written.
/s/ Tyrone J. Fairbanks
- -----------------------------
TYRONE J. FAIRBANKS
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fortune Petroleum Corporation
We consent to incorporation by reference in the registration statement No.
33-58790 on Form S-8 of Fortune Petroleum Corporation of our report dated March
15, 1996, relating to the balance sheets of Fortune Petroleum Corporation as of
December 31, 1995, and 1994, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995, which report appears in the December 31, 1995
annual report on Form 10-K of Fortune Petroleum Corporation.
Our report dated March 15, 1996, refers to the adoption of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of", as of December 31,
1995.
March 15, 1996
Houston, Texas
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ENGINEER
March 18, 1996
Fortune Petroleum Corporation
515 W. Greens Road, Suite 720
Houston, Texas 77067
Dear Sirs:
We hereby consent to the filing of this consent as an exhibit to the Annual
Report on Form 10-KSB of Fortune Petroleum Corporation to be filed with the
Securities and Exchange Commission on or about March 22, 1996, to the use of our
name herein, and to the inclusions of or reference to our report of estimated
future reserves and revenues effective December 31, 1995 and December 31, 1994,
and the information contained therein on "Item 2. Properties - Reserves and
Future Net Cash Flows" in the Annual Report on Form 10-KSB.
HUDDLESTON & CO., INC.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ENGINEER
March 14, 1996
Fortune Petroleum Corporation
515 W. Greens Rd., Suite 720
Houston, Texas 77067
RE: Consent of Independent Petroleum Engineer
Gentlemen:
I hereby consent to the incorporation of my January 1, 1995, Annual Reserve
Report of the oil and gas reserves of Fortune Petroleum Corporation dated
February 27, 1995 in the Company's annual report on Form 10-KSB to be filed with
the Securities and Exchange Commission on or about March 22, 1996.
Respectfully,
Sherwin D. Yoelin
Registered Petroleum Engineer
State of California
Certificate No. P 1241
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1995 OF FORTUNE PETROLEUM
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 1,888,000
<SECURITIES> 0
<RECEIVABLES> 1,035,000
<ALLOWANCES> 0
<INVENTORY> 127,000
<CURRENT-ASSETS> 4,230,000
<PP&E> 19,187,000
<DEPRECIATION> 7,821,000
<TOTAL-ASSETS> 18,997,000
<CURRENT-LIABILITIES> 3,797,000
<BONDS> 1,689,000
0
0
<COMMON> 111,000
<OTHER-SE> 13,400,000
<TOTAL-LIABILITY-AND-EQUITY> 18,997,000
<SALES> 2,959,000
<TOTAL-REVENUES> 3,193,000
<CGS> 1,514,000
<TOTAL-COSTS> 1,514,000
<OTHER-EXPENSES> 7,023,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 870,000
<INCOME-PRETAX> (6,214,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,214,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,214,000)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
</TABLE>
